Clearing Investment Uncertainty Key to Nepal’s Energy Expansion

Nepal’s hydropower sector, long regarded as the backbone of the country’s economic transformation, is facing renewed uncertainty due to policy inconsistencies, regulatory delays, and growing investment risks. Industry stakeholders argue that unless the government urgently addresses these issues, the country’s ambitious energy targets may remain out of reach despite strong private-sector interest and vast natural potential.

Small-scale hydropower development in Nepal began gaining momentum in the early 2000s, when investors struggled to secure financing, infrastructure, and construction materials. The situation gradually improved after the mid-2000s, as financial institutions became more familiar with energy projects. A major turning point came in 2015, when the government announced a target of generating 10,000 megawatts of electricity within a decade. This policy signal restored investor confidence and triggered a surge in hydropower development.

At present, Nepal produces nearly 3,200 megawatts of electricity, while projects totaling around 3,000 megawatts are under construction. Several additional projects have completed power purchase agreements (PPAs) and are preparing to enter the construction phase. However, industry representatives maintain that if the government had not restricted PPAs after 2018, the number of projects under development would have been significantly higher. Currently, projects with a combined capacity of nearly 12,000 megawatts have secured PPAs, while licenses have been issued for projects totaling more than 20,000 megawatts.

Government concerns about electricity absorption and export markets have played a role in slowing project approvals. Limited domestic transmission infrastructure and uncertainty over long-term export arrangements—particularly with India—have prompted caution. Yet private developers argue that policy hesitation has disrupted momentum. The private sector has already contributed around 2,600 megawatts of Nepal’s total electricity generation and accounts for nearly 80 percent of projects currently under construction.

Despite official recognition of energy as a pillar of national prosperity, critical infrastructure gaps remain unresolved. Transmission lines promised years ago have yet to be completed, leaving some finished projects unable to evacuate electricity to the grid. In several remote areas, private developers have constructed access roads at their own expense—roads now used by local communities—while state-led infrastructure commitments have lagged behind, further discouraging investors.

Nepal’s estimated energy potential has expanded over time, with newer assessments suggesting that combined hydropower and solar capacity could exceed 200,000 megawatts. Solar energy alone is projected to contribute up to 40,000 megawatts. However, experts stress that potential figures are meaningless without a clear national roadmap defining timelines, sectoral roles, and realistic production targets.

On the export front, Nepal has signed agreements to supply up to 10,000 megawatts of electricity to India, while a trilateral framework with India and Bangladesh has opened the door for regional power trade. Domestically, the government aims to generate 28,000 megawatts by 2035 to meet rising consumption. Yet industry leaders warn that achieving this target will be difficult unless stalled PPAs are reopened and policy bottlenecks removed.

Financing remains another major challenge. Hydropower projects typically rely on a structure in which developers invest about 20 percent equity and borrow the remaining 80 percent from banks. Regulations also require companies to allocate shares to local communities and the general public. However, delays at the capital market regulator have made public fundraising increasingly difficult, tightening liquidity for ongoing and planned projects.

Cost pressures have intensified due to rising customs duties on maintenance equipment, which have increased sharply in recent years. Developers argue that these additional costs undermine project viability, especially when combined with construction delays caused by natural disasters, global supply disruptions, and geopolitical instability. Estimates suggest that achieving the government’s 28,500-megawatt target would require investment exceeding NPR 6 trillion, yet there is no clear plan outlining how this financing will be mobilized.

Administrative hurdles further complicate project development. Lengthy approval processes for forest clearance, land acquisition, and environmental permits often delay construction by years. Developers have called for a streamlined one-stop approval system and stronger government involvement in land acquisition to reduce uncertainty and prevent cost overruns.

Policy concerns have deepened following the proposed Electricity Bill 2080, which industry groups say could discourage domestic investors. The draft legislation proposes allocating projects below a certain capacity to state-owned entities and larger projects to foreign companies, raising questions about the future role of Nepali investors. Changes to license duration and competitive PPA pricing have also alarmed existing investors who committed capital under earlier legal frameworks.

Industry representatives, including the leadership of Independent Power Producers' Association Nepal, argue that frequent policy shifts erode trust and weaken investor morale. They stress that long-term infrastructure development requires regulatory stability, predictable returns, and respect for prior commitments. Retrospective policy changes, they warn, risk driving domestic investors out of the sector.

Beyond policy and finance, the sector faces a growing shortage of skilled manpower. Engineers and technical workers are increasingly seeking employment abroad, while domestic projects rely heavily on foreign labor. Stakeholders argue that without addressing workforce retention and skill development, even well-funded projects may struggle to progress.

Energy experts emphasize that expanding electricity generation is not just about exports but also about transforming the domestic economy. Increased electricity use in industries, transport, and households—through electric vehicles, induction stoves, and irrigation systems—could reduce fuel imports and stimulate economic growth. However, seasonal imbalances persist, with surplus generation during the monsoon and shortages in winter, highlighting the need for storage projects and diversified energy planning.

As neighboring countries rapidly scale up renewable energy, Nepal risks falling behind if current challenges remain unresolved. India, for instance, has already made substantial progress in large-scale solar development. Analysts warn that if Nepal fails to deliver electricity within agreed timelines, export markets may turn elsewhere.

Ultimately, experts agree that Nepal’s energy future depends on coordinated action. Clearing policy uncertainty, accelerating infrastructure development, and restoring investor confidence will require collaboration between the government, private sector, and regulators. Without collective effort and stable long-term vision, Nepal’s vast energy potential may remain largely untapped.