Hydropower Development in Nepal: Opportunities, Structural Challenges, and the Road Ahead

Nepal’s hydropower sector stands at a critical juncture, marked by impressive growth potential alongside persistent structural and institutional challenges. As of mid-2024, the country’s total installed electricity capacity has crossed 3,150 megawatts, with hydropower contributing nearly 95 percent of the total. Thousands of megawatts are under construction, while several large projects remain in various stages of study. With expanding electricity markets in India and Bangladesh and a government target of producing 28,000 megawatts by 2035, hydropower is increasingly viewed as a cornerstone of Nepal’s economic transformation.

However, industry experts argue that achieving this ambition requires more than optimism and natural potential. It demands systemic reform, stronger national capacity, and coordinated governance. Without addressing long-standing procedural, financial, and institutional bottlenecks, Nepal risks turning hydropower opportunity into delayed investment and rising cost.

The Chilime Model and the Evolution of Public Hydropower Companies

The opening of Nepal’s electricity sector to private participation after the Electricity Act of 1992 marked a turning point in hydropower development. One of the most notable outcomes of this policy shift was the establishment of Chilime Hydropower Company, structured as a public company with majority ownership by the Nepal Electricity Authority and minority public shareholding. This hybrid model was intended to combine public sector stability with private sector efficiency.

Starting with the 22.1-megawatt Chilime project, the company gradually expanded its footprint by promoting subsidiary hydropower firms such as Sanjen, Rasuwagadhi, and Middle Bhotekoshi. Despite difficult terrain, earthquakes, floods, and institutional delays, several of these projects have recently begun supplying electricity to the national grid. Together, they add more than 270 megawatts to the system—an achievement that strengthens domestic supply but also exposes the high cost of prolonged construction timelines.

Dual Accountability: A Unique Burden for Government-Linked Companies

Public hydropower companies with government ownership face a distinctive operational dilemma. Although legally registered under the Company Act and expected to function autonomously, they are simultaneously treated as government-linked institutions. This dual identity subjects them to both corporate regulations and public sector compliance requirements, often resulting in overlapping obligations.

Unlike private developers, these companies must adhere to procurement laws, public audit scrutiny, and bureaucratic approval processes, while still competing in the commercial energy market. The absence of tailored legal provisions for such hybrid institutions has increased administrative burden, slowed decision-making, and reduced operational flexibility—without offering compensatory policy support.

Procedural Complexity and Institutional Overlap

One of the most persistent challenges in hydropower development lies in procedural redundancy. Even after receiving survey licenses from the electricity authority, developers must secure approvals from multiple additional agencies, including industry and investment boards. In several cases, approvals become circular—one permit requiring another that itself depends on the first—creating a regulatory deadlock.

Environmental clearance processes further compound delays. Although environmental impact assessment reports are prepared by qualified experts under prescribed guidelines, developers must undergo repeated reviews at multiple institutions. This duplication consumes time, manpower, and financial resources without proportionate improvement in environmental safeguards.

Rising Local Expectations and Social Pressure

Hydropower companies are increasingly expected to fulfill roles beyond their commercial mandate. Local communities often demand employment opportunities, infrastructure development, financial donations, and preferential access to contracts. While companies are legally obligated to pay royalties, taxes, and fulfill environmental and social commitments, many additional demands fall outside formal agreements.

Failure to meet such expectations sometimes results in construction disruptions, intimidation, or obstruction of works. Experts caution that while community engagement is essential, unstructured pressure increases project risk, raises costs, and diverts managerial focus away from core construction and operational objectives.

Financing Constraints and Dependence on Debt

Hydropower projects in Nepal are predominantly financed through a debt-equity structure, with nearly 70 percent of project cost covered by loans. Institutions such as the Employees Provident Fund have played a major role in domestic financing. However, achieving the national generation target will require investment running into trillions of rupees—far exceeding domestic capital availability.

Moreover, hydropower projects require substantial foreign currency expenditure for equipment and technical services. Without improved conditions for foreign direct investment, developers fear financing gaps could delay or derail future large-scale projects.

Geological Risk, Climate Change, and Insurance Challenges

Nepal’s fragile geology presents inherent risks for hydropower construction. Tunnels, underground powerhouses, and transmission corridors often traverse unstable terrain prone to landslides and earthquakes. Climate change has further complicated hydrological predictability, with river flows deviating from historical projections.

These uncertainties increase construction risk, disrupt generation schedules, and affect revenue forecasts. Insurance coverage has also become expensive and restrictive, as domestic insurers remain cautious about underwriting hydropower risks, further inflating project costs.

Transmission Bottlenecks and Market Access

Timely completion of transmission infrastructure remains another critical concern. In several instances, power plants are ready to generate electricity, but evacuation lines are delayed due to land acquisition, right-of-way disputes, or funding issues. Such delays force developers to bear financial losses from unsold electricity while continuing to service high-interest loans.

Industry stakeholders stress that power generation and transmission planning must progress in parallel to prevent stranded assets and financial distress.

License Duration and Commercial Viability

Under existing regulations, production licenses typically remain valid for 35 years from the date of issuance, regardless of construction delays. Given that many projects experience prolonged construction phases due to factors beyond developer control, the effective revenue-earning period is significantly reduced.

Analysts suggest recalculating license validity from the date of commercial operation, extending the license duration, or introducing separate construction and production permits to ensure financial viability and fair risk sharing.

Power Purchase Agreements and Investment Uncertainty

Power Purchase Agreements (PPAs) remain the backbone of hydropower financing. Without a confirmed PPA, projects cannot secure loans, register as industries, or proceed with construction. However, PPA approval queues remain long due to grid limitations and institutional constraints within the power utility.

Delays in PPA approval not only stall project execution but also undermine the productivity of early-stage investments such as feasibility studies and land acquisition.

The Case for National Capacity and Policy Reform

Experts emphasize that hydropower development is not solely a technical or financial challenge—it is a national capacity issue. Effective coordination among government agencies, predictable policy enforcement, timely decision-making, and trust among stakeholders are essential for progress.

Improving royalty transparency, strengthening environmental monitoring after approval, simplifying approval processes, and creating investor-friendly policies are widely seen as urgent priorities.

Rethinking Project Size and Development Strategy

While small hydropower projects once played a vital role, experts argue they can no longer meaningfully address rising electricity demand. Medium-scale projects in the range of 200 to 300 megawatts—particularly run-of-river and peaking plants—are increasingly viewed as more efficient and impactful.

Large reservoir projects, due to their complexity and long timelines, may require dedicated legal frameworks and specialized development authorities rather than conventional corporate structures.

Conclusion: From Potential to Performance

Nepal’s hydropower future remains promising, but potential alone is not enough. Without comprehensive institutional reform, enhanced national capacity, and a balanced approach to investment and governance, ambitious generation targets may remain aspirational.

The coming decade will determine whether Nepal can convert its rivers into reliable engines of growth—or continue to struggle with delays, disputes, and rising costs. The choice, experts argue, lies in policy clarity, coordination, and collective responsibility.