MCC Halt Shall Not Impact Nepal: Hydropower Potential Remains Strong

Kathmandu, February 19, 2025 – The recent suspension of Millennium Challenge Corporation (MCC) funding by the United States, announced on February 18, 2025, will not derail Nepal’s ambitious hydropower development plans, experts and officials assert. The halt, triggered by a 90-day funding freeze under a U.S. presidential executive order dated January 20, 2025, pauses payments for Nepal’s MCC Compact projects, including a 315-km, 400kV transmission line critical for enhancing electricity infrastructure. However, Nepal’s strategic position in the regional energy market, bolstered by India’s continued reliance on coal and growing energy demand, ensures that its hydropower export potential remains robust, with opportunities to pivot to alternative funding models like Public-Private Partnerships (PPP).

India, Nepal’s largest energy trading partner, currently boasts a total installed electricity capacity of 454,459 MW (454.45 GW) as of October 31, 2024. Coal dominates at 205,235 MW (45.2%), followed by solar at 92,112 MW (20.3%), wind at 47,716 MW (10.5%), large hydro at 46,960 MW (10.3%), and natural gas at 24,897 MW (5.5%). In FY 2023, India’s electricity consumption surged to 171,649 MW, a 9.5% jump from the previous year, underscoring its escalating energy needs. While India has committed to reducing emissions intensity by 2030 and achieving net zero by 2070, it has no firm deadline to phase out coal production. On the contrary, coal output is set to increase to meet demand, with production targets extending beyond 2030.

This reliance on coal presents a golden opportunity for Nepal, which aims to generate 28,500 MW of hydroelectricity by 2035. “India’s coal-heavy energy mix and lack of a near-term plan to reduce production mean Nepal’s clean hydropower can fill a critical gap,” said Deepak Khadka, Nepal’s Minister for Energy, Water Resources, and Irrigation. “The MCC halt is a setback, but it won’t stop us. We can sustain our projects through domestic resources and PPP models, ensuring we capitalize on India’s demand.”

The MCC Compact, signed in September 2017 and ratified by Nepal’s parliament in February 2022, provided $500 million from the U.S., with Nepal contributing $197 million. The funding freeze raises concerns about delays in the five-year timeline that began in August 2023. However, Nepal’s existing hydropower capacity—approximately 3,000 MW, 95% of which is hydro—along with recent export agreements, demonstrates resilience. In November 2024, Nepal began exporting 40 MW of surplus hydroelectricity to Bangladesh via India, a tripartite deal signaling its growing role in South Asian energy trade. Additionally, Nepal exports 2,070 MW to India, a figure set to rise as new projects come online.

Analysts suggest that Nepal can mitigate the MCC suspension by leveraging PPP frameworks, which have gained traction globally for infrastructure development. “With India’s coal production not tapering off until at least 2030, Nepal has a decade-long window to scale up hydro exports,” noted energy expert Dr. Anil Sharma. “PPP models can attract private investment from within Nepal and abroad, reducing reliance on foreign grants.”

Nepal’s government is already exploring this shift. “We’re assessing the impact of the MCC halt and engaging stakeholders to ensure continuity,” said an official from the Ministry of Energy. Projects like the Arun-3 Hydroelectric Project, developed by an Indian company, and stalled initiatives like the Pancheshwar Multipurpose Project, could benefit from accelerated PPP investments. Meanwhile, the transmission line—an MCC flagship—may require re-prioritization of domestic funds or new partnerships.

India’s energy strategy aligns with Nepal’s goals. While renewable sources like solar and wind are growing, coal’s dominance ensures a steady demand for imported hydropower, especially during peak seasons. “Nepal’s surplus power, available from June to November, complements India’s needs,” Khadka added, referencing the Bangladesh export deal as a model for future expansion.

As Nepal navigates the MCC suspension, its hydropower vision remains intact. By doubling down on PPP funding and tapping into India’s coal-driven energy market, Nepal is poised to transform its abundant water resources into economic prosperity, independent of U.S. aid uncertainties.