Nepal Rules out Chinese Investment in Arun River Hydropower Projects

The government has decided to build the 454-megawatt Kimathanka–Arun Hydropower Project with domestic investment, effectively ruling out Chinese involvement in hydropower projects identified so far on the Arun River.

The decision marks a policy shift, as Nepal had earlier requested China to develop the Kimathanka–Arun project. The government has already announced that the 1,063-megawatt Upper Arun project, located downstream, will also be developed using domestic capital. Further downstream, three projects—proposed Arun-4, Arun-3 and Lower Arun—will be constructed by India’s state-owned SJVN Limited.

With these decisions, Chinese investment will not feature in any of the identified hydropower projects along the Arun River. Earlier, Nepal had planned to allow China to develop the border-area Kimathanka–Arun project, build Upper Arun on its own, and assign the lower projects to India—positioning Nepal as a buffer between the two geopolitical rivals, according to Energy Ministry officials.

A senior government official said the absence of a formal power trade agreement between Nepal and China, coupled with India’s reluctance to purchase electricity generated from Chinese-funded projects, made it impractical to hand the Kimathanka–Arun project to China.

“Since India does not buy electricity produced by projects with Chinese investment, Nepal has decided to build the project on its own,” the official said.

Nepal had formally requested China to construct the project during then Prime Minister KP Sharma Oli’s visit to China in 2016. However, little progress followed in subsequent years, and Nepal has since stopped pursuing Chinese involvement. Last year, government-owned Vidyut Utpadan Company Limited (VUCL) sought proposals to develop the Kimathanka–Arun project in collaboration between domestic and foreign investors, but the process courted controversy for the short notice and was later dropped.

The company had bundled Kimathanka–Arun with the 1,902-megawatt Mugu Karnali project in a single call for proposals. Only CG Energo Pvt Ltd, under the Chaudhary Group, submitted a proposal, prompting criticism and the eventual scrapping of the process.

Project manager Ashok Pandit said the government decided to develop Kimathanka–Arun on its own as it is a relatively cost-effective and financially attractive project.

“Given the projected returns relative to the investment, it makes sense to build the project using internal resources,” he said. “If we fail to mobilise funds in the future, other options will still remain.”

About two years ago, several Chinese companies, including Power Construction Corporation of China, had expressed interest in developing the project.

Investment modality

The Kimathanka–Arun project has an estimated cost of Rs 97.94 billion, including interest during construction. VUCL—promoted by the government and public institutions—plans to finance 70 percent of the cost, or Rs 68.55 billion, through loans and the remaining 30 percent, or Rs 29.38 billion, through equity.

Proposed lenders include the Hydroelectricity Investment and Development Company Limited (HIDCL), Employees Provident Fund, Citizen Investment Trust, Social Security Fund, insurance companies, and banks and financial institutions through co-financing arrangements.

The equity portion will be raised from the company’s promoters, non-resident Nepalis and Nepalis working abroad, local residents of project-affected districts, members of marginalised households, and the general public through share issuance.

Minister for Energy, Water Resources and Irrigation, Physical Infrastructure and Transport, and Urban Development Kulman Ghising has directed officials to update the project’s cost estimates and immediately proceed with financial closure. He said VUCL must develop the project itself to ensure long-term income and sustainability, noting that the company holds licences for several projects but has yet to begin construction on any.

The company has already spent Rs 731.4 million on studies and pre-construction works. Land acquisition for the project office and staff camp has been completed, while compensation for land required for dams, reservoirs and powerhouses has been fixed at around Rs 450 million.

The project is expected to generate 2.69 billion units (2,690.97 GWh) of electricity annually. This includes 473.1 million units of peak winter energy, 353.3 million units of off-peak winter energy, and 1.8646 billion units during the monsoon season. Annual revenue from electricity sales is estimated at Rs 16.91 billion.

In VUCL, the government holds a 30 percent stake, while the Nepal Electricity Authority, Employees Provident Fund and Nepal Telecom each own 10 percent. The Citizen Investment Trust holds 5 percent, HIDCL 4 percent and Rastriya Beema Company 2 percent. The remaining 29 percent has been allocated for public share issuance.