Nepal’s Hydropower Expansion Faces Policy, Regulatory, and Land Bottlenecks: Officials Call for Urgent Reforms

Nepal’s ambition to accelerate hydropower investment continues to face significant policy and regulatory hurdles, despite rising domestic and regional demand for clean energy. Government officials and energy sector leaders warn that unless these structural constraints are resolved, Nepal risks slowing down a sector that has the potential to transform the national economy.

A major concern in the industry is the uncertainty created by the government’s decision to restrict Power Purchase Agreements (PPAs) for run-of-the-river projects to a “take-and-pay” model. Developers argue that without a guaranteed market—ensured only through “take-or-pay” PPAs—banks are reluctant to finance large hydropower projects. The proposed policy has effectively stalled new investments, prompting the Ministry of Energy to prepare a Cabinet agenda seeking its reversal.

Foreign investment has also been affected by currency risks. Developers working with international partners want PPAs denominated in U.S. dollars. However, the government is reluctant to take on the exchange rate volatility that such arrangements would entail. Nepal Rastra Bank and the energy ministry have held multiple discussions on a hedging mechanism, but no functional system has yet been implemented. As long as currency fluctuations remain unaddressed, investors fear absorbing unpredictable losses.

The hydropower sector is further constrained by Nepal’s stringent forest and conservation laws. Officials highlight that almost every major river corridor touches forest or protected land, making project approval extremely slow. In some cases, the clearance to cut even a single tree has taken several years. The Supreme Court’s decision to invalidate the government’s previous amendment allowing hydropower development in protected areas has placed dozens of ongoing and planned projects in limbo.

Land acquisition presents another formidable obstacle. Hydropower developers frequently face demands for exorbitant compensation—sometimes up to ten times the market value. Disputes over land valuation and lengthy administrative procedures delay project timelines and inflate construction costs. The government is exploring a clearer land acquisition framework and amendments to existing laws, but meaningful reform has yet to take shape.

Transmission infrastructure remains a critical bottleneck for energy evacuation and export. Although Nepal has completed the 400 kV Dhalkebar–Muzaffarpur line and is progressing on the Butwal–Gorakhpur corridor, many strategic cross-border and domestic lines are still under negotiation or construction. Discussions with India and Bangladesh now include plans for direct transmission routes that would enable Nepal to sell up to 15,000–16,000 MW of power to the region.

Energy officials argue that Nepal’s long-term prosperity hinges on resolving these systemic issues. With abundant renewable energy potential, the country could replace billions of rupees worth of fossil-fuel imports, significantly cut the trade deficit, and earn more than Rs. 500 billion annually from electricity exports alone. In the next 30 years, privately built hydropower plants will transfer ownership to the government—potentially enabling free electricity for citizens and massive reinvestment in healthcare, education, transport, and national infrastructure.

Nepal’s energy transition—from fossil fuels to electricity—has already begun, with rising usage of electric vehicles, induction cooking, and data centers. But policymakers caution that without stable PPAs, simplified forest and land regulations, functioning hedging mechanisms, and high-capacity transmission lines, the hydropower boom may not reach its full economic promise.