Nepal, blessed with abundant water resources due to its unique mountainous terrain, is actively seeking to establish itself as a significant player in the regional energy market of South Asia. Hydropower is seen not only as the key to economic prosperity and self-sufficiency, but also as an important source of export revenues capable of transforming the national economy. However, despite the enormous potential, the implementation of ambitious plans to build large hydropower projects (HPPs) faces numerous and multifaceted challenges.

The central question facing Nepal and its international partners is the viability of these capital-intensive megaprojects. This article offers an in-depth analysis of this question through the lens of three interrelated and critical factors: Nepal’s own internal challenges and barriers to hydropower development; the rapidly changing energy needs and import policies of neighboring countries, most notably India and Bangladesh; and, importantly, the often cautious and selective attitude of foreign investors weighing the potential benefits against the significant risks.

To provide a comprehensive coverage of the topic, the paper is structured by providing an overview of Nepal’s current hydropower landscape, a detailed analysis of key mega-projects under construction and planned, an assessment of the prospects and conditions of regional power markets, and an examination of the investment climate, associated risks, and lessons learned. The paper concludes with a comprehensive assessment of the factors affecting project viability and a strategic outlook for sustainable hydropower development in Nepal.

1. Nepal’s Hydropower Landscape: Untapped Potential and Current Realities

1.1 Resource assessment: theoretical and economically feasible potential

Nepal has one of the largest hydroelectric potentials in the world. Theoretical estimates of this potential reach 83,000 MW.¹Of this colossal volume, approximately 42,000 – 43,000 MW is considered economically feasible for development.¹However, a later study conducted by the Water and Energy Commission Secretariat of Nepal (WECS) in 2019 presents a slightly more conservative estimate of the techno-economic potential at 32,700 MW, with the total installed potential of storage-type projects estimated at 48,100 MW.³These differences in estimates, although not dramatic, can influence long-term sector development strategies and investor expectations, as differences of even a few thousand megawatts represent significant amounts of potential investment and future generation. Accuracy and consistency of such baseline data are critical for strategic planning and capital raising.

1.2. Current state of development and structure of the energy balance

Despite the impressive potential figures, Nepal has only tapped a small portion of it to date. As of 2022, the country’s total installed hydropower capacity was 2,219 MW.⁴This represents about 5% of the more optimistic estimate of economically viable potential of 43,000 MW.¹ or about 6.8% of WECS grades.

Nepal’s energy mix has historically been heavily dependent on traditional fuels such as firewood and biomass, which accounted for 68% of total energy consumption as of 2021. Commercial fossil fuels (petroleum products, coal) accounted for another 23%, and only 9% came from renewable energy sources, the largest share of which is hydropower.¹

Until recently, the country was experiencing a serious energy crisis, accompanied by regular rolling blackouts, which at times lasted 16-18 hours a day.¹Although the domestic supply situation has improved significantly due to new capacity additions and better grid management, Nepal still relies on electricity imports to cover peak loads and dry season shortages. By some estimates, the country imports about 33% of its electricity from India.⁵This fact highlights the huge gap between the available potential and the current level of its utilization, as well as the country’s continuing energy security vulnerability, which Nepal seeks to overcome by actively developing its own hydropower resources.

1.3. Domestic Demand Forecasts and Energy Security

Projections for Nepal’s economy and living standards point to significant growth in domestic electricity demand in the coming decades. According to one scenario, which takes into account active policy intervention and economic growth, demand could rise to 41,264 GWh by 2030 and reach 115,294 GWh by 2040.³Meeting this growing demand is a priority for the energy sector.

One of the characteristic problems of Nepal’s energy system is a pronounced seasonal imbalance: excess electricity generation during the monsoon rains, when rivers are at their highest, and a significant deficit during the dry winter period. This is due to the predominance of run-of-river hydroelectric power plants in the generating capacity structure, the generation of which directly depends on the current water flow. This circumstance emphasizes the urgent need to build storage (reservoir) hydroelectric power plants capable of accumulating water during the high-water period and ensuring stable generation throughout the year, as well as the development of “energy banking” mechanisms with neighboring countries.³

In this context, statements in some sources about the “rapid saturation of national demand¹ require careful consideration. Such statements probably relate to the current, relatively low level of electrification and industrialization of the country, and do not fully take into account the potential for consumption growth with further modernization of the economy, electrification of transport, the household sector and industry, as well as ambitious plans for electricity export. Growing domestic demand, therefore, acts both as an incentive for the development of hydropower and as a factor that must be carefully taken into account when planning the volumes and timing of implementation of export-oriented projects.

Uncertainty in the precise figures of hydro potential and future domestic demand scenarios can create challenges for long-term strategic planning and the formulation of compelling investment proposals. If potential investors are confronted with different estimates of the scale of opportunities, this can negatively impact their perception of risks and prospects. It is therefore imperative for Nepal to harmonize official estimates of its hydro potential and clearly articulate domestic demand scenarios, differentiated by tiers (baseline, fully electrified, export-committed). This will strengthen investor confidence and ensure more sustainable and predictable planning for the entire sector. The focus should shift from simply declaring overall potential to developing phased plans for its development that are in sync with demand growth (both domestic and export) and the accelerated development of the necessary grid infrastructure.

Table 1: Hydropower potential of Nepal and its current level of utilization

This table clearly demonstrates Nepal’s enormous untapped potential. Comparing this potential with current utilization and projected growth in domestic demand highlights both the scale of the challenges facing the country and the enormous scope for development. Highlighting the discrepancies in potential estimates also highlights an area that requires further refinement for more accurate and confident planning.

2. Spotlight on megaprojects: ambitions, progress and obstacles

Realizing Nepal’s hydropower potential is largely dependent on the successful implementation of a number of large-scale projects. These mega-projects are designed not only to meet growing domestic needs but also to generate significant amounts of electricity for export. However, their journey from conception to commissioning is often thorny and fraught with numerous obstacles.

2.1 Arun River Basin Projects

The Arun River basin in eastern Nepal is home to several strategic hydropower initiatives in which Indian investors are playing a key role.

• Arun-III HPP (900 MW): This project is one of the flagship projects of the Indo-Nepal hydropower cooperation. It is being implemented by the Indian state-owned Satluj Jal Vidyut Nigam (SJVN) through its subsidiary SJVN Arun-3 Power Development Company (SAPDC).6 As of April-May 2025, most of the construction work was reported to be near completion, with physical progress for the main production facilities estimated at 75-80%, while that for transmission lines (TL) was around 30%.7 A major milestone was the completion of the 11.7 km long main diversion tunnel in June 2024.9
  However, despite the progress made, delays have emerged. The developer has requested an extension of the project’s COD date from the originally planned March 2025 to September 2026, citing issues related to transmission line construction and the land acquisition process.7 Some sources point to a later expected COD date of 2027/28.7 The total estimated cost of the project is estimated at NPR 144 billion.7 According to the Project Development Agreement (PDA), Nepal will receive 21.9% of the generated electricity (equivalent to 197 MW) free of charge, plus corresponding royalties. The project is to be handed over to the Government of Nepal 25 years after completion.7 Delays in the commissioning of Arun III could impact the economics of the project and push back the start of power exports.
• Lower Arun hydroelectric power station – 669 MW: This project is also in focus. It has been approved by the Investment Board of Nepal (IBN)¹⁰and its development is also carried out by SJVN’s subsidiary SAPDC.⁸The Lower Arun hydroelectric power station is among the priority projects planned for implementation with the assistance of India.⁶Successful and timely implementation of the Arun III project will undoubtedly have a positive impact on the prospects and investment attractiveness of the Lower Arun HPP, given that the same major state investor is behind both projects.

2.2 Karnali River Basin Projects

The Karnali River in western Nepal also has significant hydroelectric potential, which is being developed through the Upper Karnali Project.

• Upper Karnali Hydroelectric Power Station (900 MW): The project was initially planned as a joint venture between Indian Renewable Energy Development Agency (IREDA), SJVN, GMR Energy and Nepal Electricity Authority (NEA). The project was expected to be implemented under the BOOT (Build-Own-Operate-Transfer) model with a 25-year operational life.⁶However, the project faced serious funding challenges. The Reserve Bank of India (RBI) rejected IREDA’s request for an equity investment of 5% or about INR 1.7 billion in the project.¹²IREDA has indicated its intention to resubmit its request.¹²In connection with this situation, GMR has announced a possible change in the shareholder structure: it is assumed that GMR and SJVN will each own 36.5% of the shares, and NEA will own 27%, without the originally planned participation of IREDA.¹⁴The financial management report for the project was submitted by GMR to the Nepal Investment Board in January 2025.¹⁴The Upper Karnali hydropower project is considered one of the cheapest hydropower projects in the world in terms of unit cost, but due to numerous delays in the start of implementation, its estimated cost has already risen to approximately 164 billion Nepalese rupees.¹⁴The challenges of raising funding from a large government agency like IREDA highlight the regulatory and financial risks even for projects involving reputable companies and could serve as a warning sign for other potential investors.

2.3. Seti River Projects

Projects on the Seti River, also in western Nepal, have a long and complex history, illustrating the difficulties of attracting and retaining foreign investors.

• West Seti HPP – 750 MW and Seti River-6 HPP (SR6) – 450 MW (total planned capacity 1200 MW): These two projects are planned to be developed jointly. In 2022, a Memorandum of Understanding was signed with the Indian state-owned company NHPC Limited for their development.¹⁵The estimated cost of the combined project is approximately US$2.4 billion.¹⁵The Western Network project has a particularly notable history of investor changes. In 2009, China’s CMEC expressed interest but later pulled out. In 2011, the Nepalese government revoked WSHL’s license due to lack of progress. In 2012, the project was handed over to China Three Gorges International Corporation (CTGI), but it too pulled out in 2018.¹⁵The reasons cited for CTGI’s withdrawal included technical problems, lower than expected return on equity (12.5% ​​instead of the required 17%), the overall financial infeasibility of the project, and high costs for resettlement and rehabilitation of flooded areas.¹⁶As of June 2025, NHPC submitted the initial project report in 2023 and the detailed project report (DPR) is expected to be completed within 21 months of commencement of work. Exploration licenses are also to be obtained.¹⁵Nepal is expected to receive nearly 22% of the generated electricity for free, with the rest being exported to India.¹⁵The complex history of the West Seti project is a prime example of the challenges facing foreign investors in Nepal’s hydropower sector. NHPC’s success will depend largely on its ability to overcome these historical challenges and ensure effective implementation. It is important to note that this major project should be distinguished from the recently completed and commissioned 25 MW Seti River Hydropower Project, which is a separate, much smaller project.¹⁸

2.4. Budhi Gandaki Project

The Budhi Gandaki hydroelectric project is another large and strategically important project, but its history is also marked by difficulties.

• Budhi Gandaki HPP – 1200 MW: The project is planned by the Nepal Electricity Authority (NEA) as a large-scale hydroelectric power plant with storage capacity.¹⁹According to some data, construction is expected to begin in 2028 and commissioning to begin in 2082.¹⁹The long-term commissioning date of 2082 seems highly unrealistic for a modern infrastructure project and is likely a typo or requires serious clarification, as it implies a construction period of more than half a century. Earlier, in 2017, the Nepalese government revoked the license granted to the Chinese company Gezhouba Group to build the project, arguing that the license was granted without a competitive bidding process.¹⁶This project also has a complicated history with foreign participation and demonstrates problems related to investor selection procedures and long-term strategic planning. It is also necessary to distinguish this megaproject from the smaller 81 MW Budhi Gandaki Prok Khola hydropower project, which is being developed by Chilime Hydropower, with construction scheduled to begin in 2026 and commissioning in 2028.²⁰

2.5. Other planned major projects (with Indian participation)

Apart from those already mentioned, there are a number of other major hydropower projects in various stages of planning with active participation of the Indian side. These include: Pancheshwar – 5040 MW, Sapta Kosi – 3300 MW, Arun-IV – 490 MW, Phukot Karnali – 480 MW.⁶These projects demonstrate Nepal and India’s long-term ambitions to jointly develop hydropower potential, but their practical implementation will require addressing many of the sector’s ongoing challenges.

An analysis of the megaprojects shows that most of them are experiencing or have experienced significant delays, changes in investors (as in the cases of West Seti and Budhi Gandaki), financing problems (Upper Karnali) and the need to revise the commissioning dates (Arun III). However, Indian companies, both state-owned and private, play a dominant role in ongoing and planned projects. The recurring problems point to systemic challenges in the Nepalese hydropower sector rather than isolated failures. The dominance of Indian investors, on the one hand, reflects geopolitical realities and the presence of a large, guaranteed market, but, on the other hand, may carry certain risks associated with dependence on a single key partner. Frequent changes in investors and delays in project implementation inevitably lead to an increase in their overall cost, as the case of Upper Karnali clearly demonstrates.¹⁴, and undermine Nepal’s credibility as a reliable partner for long-term investment. This creates a vicious circle: existing problems deter new investors, and a lack of quality investment and competition exacerbates these problems. To increase the profitability and overall attractiveness of megaprojects, Nepal needs not only to offer access to its hydro potential, but also to create a stable, predictable and efficient environment for their implementation. This includes simplifying administrative procedures, providing reliable guarantees for investments, promptly resolving land issues and, crucially, accelerating the development of related infrastructure, especially power transmission lines. Diversifying investment sources and export markets in the long term could also help reduce dependence and improve the overall sustainability of the sector.

Table 2: Overview of Key Hydropower Megaprojects in Nepal

Note: NPR to USD conversion is approximate based on the exchange rate at the time of analysis.

3. Regional energy hub: export opportunities and market dynamics

The profitability of Nepal’s hydropower megaprojects is inextricably linked to the ability to export electricity to markets in neighboring countries. Nepal’s geographic location between two large and energy-deficient economies – India and Bangladesh – creates unique preconditions for turning the country into a regional energy hub.

3.1 India: Key Buyer with Growing Demand

India is and has historically been the main target market for Nepalese hydropower exports. This cooperation has received a new impetus with the signing of a long-term intergovernmental agreement in 2024, envisaging India’s purchase of up to 10,000 MW of electricity from Nepal over the next 10 years.⁶Already in the first year of this agreement, the actual volume of exports from Nepal to India reached about 1000 MW.²¹, which indicates the seriousness of intentions on both sides.

India’s electricity demand is showing steady growth, with various projections suggesting it will grow by between 6-6.5% per annum over the next five years.²³up to 6.3% annually through 2030, according to estimates from the International Energy Agency (IEA).²⁴A significant contribution to the growth of peak loads, especially in the summer, is made by the widespread use of air conditioning systems.²⁴India already has experience of both importing (from Bhutan) and exporting electricity (to Nepal, Bangladesh, Myanmar)²⁵, which indicates the development of cross-border energy links and the presence of appropriate infrastructure and regulatory mechanisms.

Growing demand in India and the existence of a long-term offtake agreement provide a strong incentive and some assurance of supply for Nepalese hydropower projects. However, heavy reliance on one large buyer also carries potential risks related to possible changes in pricing policy, regulatory conditions or political environment in India.

3.2. Bangladesh: An Emerging Market for Nepalese Hydropower

Bangladesh is rapidly emerging as a second important market for Nepalese electricity exports, which will help diversify Nepal’s export flows. A key development was the entry into force in November 2024 of the trilateral agreement between Nepal, India and Bangladesh, which allows for the transit of Nepalese electricity to the Bangladesh market through India’s territory and power grid.²⁶

Initially, 40 MW of electricity will be exported to Bangladesh. This electricity will be supplied from Nepal’s Trishuli (25 MW) and Chilime (22 MW) hydroelectric power plants during the monsoon season, from June to November, when Nepal has a surplus of hydropower generation.²⁶The price at which Nepal will sell the power is 6.40 US cents per kWh. For the end consumer in Bangladesh, the price will be around 7.6 US cents per kWh, which includes the transit fee through the Indian grid and the trading margin of the Indian side.²⁶India’s transit trading margin is set at INR 0.0595 per kWh.²⁶It is important to note that the agreed import price from Nepal for Bangladesh is lower than the prices of electricity from other imported sources (such as India’s Adani Power) and from domestic private power plants in Bangladesh.²⁸, which makes Nepalese hydropower economically attractive.

Bangladesh has ambitious plans to increase its electricity imports from Nepal, aiming to reach 9,000 MW by 2040.²⁹This is in line with Bangladesh’s national strategy to increase the share of renewables in the energy mix to 40% by 2041.²⁶In addition, the possibility of joint development of the Sunkoshi-3 hydroelectric power station with the participation of all three countries – Nepal, India and Bangladesh – is being discussed.²⁶Opening up the Bangladesh market not only diversifies Nepal’s export opportunities but also strengthens its role as a potential regional supplier of clean and competitively priced electricity.

3.3. The role of cross-border transmission infrastructure

Realization of Nepal’s export potential directly depends on the availability and capacity of cross-border transmission infrastructure. The key elements of this infrastructure are:

• The 400 kV Dhalkebar (Nepal) – Muzaffarpur (India) transmission line is used both for export to India and for subsequent transit to Bangladesh.²⁶
• The 400 kV Baharampur (India) – Bheramara (Bangladesh) transmission line supplies electricity from the Indian system to Bangladesh.²⁶

It is obvious that increasing the export volumes to the planned 10,000 MW to India and 9,000 MW to Bangladesh will require a significant expansion of the existing infrastructure, construction of new transmission lines and strengthening of the synchronization of power systems. Problems with the timely construction of transmission lines have already been mentioned as one of the reasons for the delay in commissioning of the Arun III hydropower plant.⁷The issues of joint construction of new cross-border power transmission lines are also on the agenda of negotiations between Nepal and India.⁸Without adequate, reliable and sufficiently-capacitated transmission infrastructure, Nepal’s hydropower export potential cannot be fully realized. The development of transmission lines must be carried out in parallel and in sync with the construction of new generating capacities.

The existence of ambitious intergovernmental agreements on electricity exports is a positive sign. However, it is important to keep in mind that India is not only a key buyer, but also the only transit country for supplies to Bangladesh, receiving an appropriate margin for this. This role gives India significant leverage over Nepal’s energy trade with third countries, which may affect Nepal’s bargaining power and market access conditions. Delays in the construction of transmission lines, as is the case with the Arun III project, may become a bottleneck limiting the country’s overall export potential. In this regard, Nepal needs to build balanced energy relations with its neighbors, striving to create more diversified and, where possible, direct export channels. Strategic planning and investment in the development of cross-border transmission lines, possibly with funding from multilateral development banks, could help strengthen Nepal’s energy security and increase its independence in the long term. Successful implementation of existing agreements and projects will be a key indicator for attracting further investment in the sector.

Table 3: Nepal’s agreements and targets for electricity export to India and Bangladesh

This table clearly outlines existing and potential markets, which is a key factor in assessing the profitability of megaprojects. It demonstrates the scale of export ambitions and the presence of official support for these plans at the interstate level.

4. Navigating the investment landscape: foreign investor sentiment and challenges

Attracting foreign investment is the cornerstone of Nepal’s ambitious hydropower plans. However, despite the obvious benefits, the country’s investment climate faces a number of serious challenges that have led to cautious and sometimes skeptical attitudes among potential investors.

4.1. Attraction and concerns: why investors come and why they hesitate

Attractiveness factors for foreign investors in Nepal’s hydropower sector, the following are included:

• Enormous untapped hydro potential: As already noted, the country has significant resources capable of generating large volumes of clean energy.
• Growing regional demand: The energy-deficient economies of India and Bangladesh represent large, long-term markets.
• Government support: The Nepalese government has declared hydropower development as a national priority and is taking steps to attract investment.
• Potentially high returns: Successful implementation of large projects in the context of growing demand and competitive energy prices can provide attractive profit margins.

However, these positive aspects are often outweighed serious concerns and risks, which are noted both by investors themselves and by international organizations such as the World Bank:

• Slow progress in developing the sector: Despite decades of planning, actual development of hydro potential has been slow.³¹
• Regulatory issues and bureaucracy: Complex, lengthy and not always transparent processes of approval, obtaining licenses and permits are one of the main obstacles.²
• Insufficient infrastructure development: The lack or poor condition of access roads, and most importantly, the lack of capacity and delays in the construction of power transmission lines seriously hamper the implementation of projects and energy exports.¹
• Past political instability and current challenges: Although the civil war in Nepal has ended³³, the country is still in the process of establishing a stable political system. Nepal is classified as a least developed country³⁴, which is associated with certain political and economic risks.³⁵
• High initial investment and long payback periods: Hydropower projects require significant initial capital investment, and the return on investment can take many years.¹
• Weak competition in the logistics and transport sectors: This leads to increased costs and complications in the delivery of equipment and materials.³¹
• Insufficient absorptive capacity of the government: According to the World Bank, government structures do not always have sufficient capacity to effectively absorb large volumes of financial assistance and investment.³⁵

Investors are forced to carefully weigh potential benefits against significant risks. The negative experience of some past projects (discussed below) further increases their caution and demandingness.

4.2. Key risks: political, regulatory, financial and operational

The range of risks faced by investors in Nepal’s hydropower sector is wide:

• Political risks: Possibility of changing state policy and priorities when the government changes, general political instability. Although the acute phase of the internal conflict is behind us³³, the political system may still be subject to significant fluctuations that affect long-term investment projects.
• Regulatory risks: Lack of transparency and excessive length of administrative procedures, the risk of retroactive changes to existing legislation, difficulties in renewing licenses, coordinating electricity tariffs and terms of power purchase agreements (PPA). The World Bank has consistently emphasized the need to strengthen the legal framework and significantly reduce bureaucratic barriers.³²
• Financial risks: Difficulties in attracting long-term debt and equity capital (a striking example is the problems of the Upper Karnali project with investments from IREDA¹²), currency risks (since export revenues are often denominated in foreign currency, while some costs are in local currency), ensuring the financial sustainability and profitability of the PPA. Problems with financial reporting, internal control and asset management at the state-owned Nepal Electricity Corporation (NEA), noted in audit reports³⁶, may indirectly undermine confidence in the entire sector.
• Operational risks: Complex geological and climatic conditions in mountainous areas¹, problems with acquiring land plots and resettling the population, logistical difficulties, a shortage of qualified local labor to carry out complex construction and installation work, the risk of delays at the construction stage and commissioning of facilities.

These risks are closely interrelated and their cumulative impact can seriously affect the economic viability and attractiveness of projects.

4.3. Lessons from past experience: investors leaving

Nepal’s hydropower history has seen several notable cases of foreign investors pulling out of major projects, which serves as a serious warning to potential followers:

• Exit of Chinese investors:

• In 2018, China Three Gorges International Corporation (CTGI) withdrew from the West Seti hydroelectric power station (750 MW) construction project. The main reasons cited were financial considerations (insufficient return on investment, high costs of resettling residents) and a number of unresolved technical issues.¹⁵
• Earlier, in 2017, the license issued to another Chinese company, Gezhouba Group, for the construction of the Budhi Gandaki hydroelectric power station (1,200 MW) was cancelled. The official reason was that the license was granted without an open tender.¹⁶

• Limited participation of Russian investors: Despite a certain interest, large Russian businesses have not yet been able to make significant progress in Nepalese hydropower, limiting themselves, according to available data, to participation in the construction of one hydroelectric power station on the Likhu River.³⁷
• Problems with Indian Investments: Even projects implemented with the participation of large Indian state and private companies are not immune to problems. Delays in construction and commissioning (Arun-III hydroelectric power station⁷) and difficulties with organizing financing (Upper Karnali hydroelectric power station¹²) are proof of this.

These cases set a negative precedent and increase the caution of other potential investors. They highlight the critical importance of thorough preliminary study of projects, ensuring full transparency of all investor selection and contracting procedures, and developing realistic financial models that take into account all possible risks.

Despite its huge hydro potential and the demand in regional markets, Nepal faces a serious lack of confidence among many foreign investors. This is due to a complex combination of political, regulatory, infrastructure and financial risks, which are exacerbated by negative experiences of past projects, especially the withdrawal of major Chinese investors from such landmark projects as Western Seti and Budhi Gandaki. There is a clear gap between the Nepalese government’s stated goals for attracting foreign investment and the country’s real investment attractiveness on the ground. World Bank Recommendations³¹year after year point to the same structural problems that require a systemic solution. Investor caution means that Nepal may be forced to agree to less favourable terms in power purchase agreements or provide extended government guarantees, which in turn reduces the overall profitability of projects for the country itself and increases fiscal risks. It may also lead to increased dependence on a limited circle of investors (for example, Indian state-owned companies), which may pursue their own strategic interests that do not always fully coincide with Nepal’s long-term national interests. To overcome this situation, Nepal needs to take decisive and consistent steps to fundamentally improve the investment climate, going far beyond simple declarations of intent. This includes the creation of a truly independent, competent and effective energy market regulator, radical simplification and acceleration of all permitting procedures, ensuring the inviolability and predictability of contract terms, as well as proactively and proactively addressing infrastructure bottlenecks, especially in the construction of power transmission lines. Without these systemic changes, attracting diverse and high-quality foreign investment into hydropower will remain an extremely difficult task, and the profitability of many promising projects will be in constant question due to the high risk premiums included by investors.

Table 4: Key Issues for Foreign Investment in Hydropower in Nepal

This table structures and summarizes the many challenges faced by investors and serves as a clear list of areas requiring major improvements by the Nepalese government.

5. Profitability assessment: finding a balance

Assessing the viability of hydropower megaprojects in Nepal is a complex task that requires consideration of many interrelated factors, ranging from capital costs to buyer reliability and regulatory stability.

5.1. Factors Affecting the Viability of Projects

The key determinants of the economic viability and profitability of megaprojects are:

• Construction costs: They are usually high due to the difficult mountainous terrain, the need for large-scale geological surveys, logistics costs and import of specialized equipment. In addition, as practice shows, initial estimates are often exceeded due to delays in implementation, project revisions and inflation (a clear example is the rising cost of the Upper Karnali hydroelectric power station¹⁴).
• Financing conditions: Availability and cost of capital play a crucial role. Problems in attracting finance, as happened with the Upper Karnali project and IREDA’s involvement¹², can not only stop the project, but also significantly increase its final cost due to more expensive alternative sources or losses from downtime.
• Tariffs and conditions of PPA (Power Purchase Agreements): The price at which the electricity will be sold is the main source of income. Export prices agreed with Bangladesh (around 6.4 US cents/kWh for Nepal²⁶), look quite competitive and attractive. The presence of long-term power purchase agreements with India (for a total volume of up to 10,000 MW⁶) is also an important factor in ensuring sales guarantees for large projects. However, the PPA conditions in the domestic market and their indexation mechanisms are also important.
• Implementation deadlines: Any delays in the design, approval, financing or construction stages directly and negatively impact key project economic indicators such as net present value (NPV) and internal rate of return (IRR).
• Reliability of regional buyers: The stability of electricity demand in India and Bangladesh, as well as their long-term solvency, are critical to ensuring cash flows for the projects.
• Government support and policy stability in Nepal: Providing government guarantees, tax incentives, and creating a predictable and stable regulatory environment can significantly reduce risks for investors and increase the attractiveness of projects.

5.2. The relationship between domestic needs, export markets and investor confidence

There is a close and critical relationship between Nepal’s domestic energy needs, its export ambitions and the level of confidence of foreign investors. Meeting Growing Domestic Demand for Electricity³can provide a certain base load for new generating capacities and increase the country’s energy security. However, the economy of large megaprojects (with a capacity of 900 MW, 1200 MW and more) is initially oriented primarily towards export, since their output significantly exceeds Nepal’s current and even medium-term domestic needs.

The presence of large and growing export markets in India and Bangladesh is the main driver and the main economic justification for attracting investment in these mega projects. Without the prospect of exports, such large-scale investments would not be feasible.

However, these export opportunities will be extremely difficult to realize without restoring and strengthening the confidence of foreign investors. And this confidence, in turn, is directly dependent on the creation of a stable, predictable and favorable investment environment within Nepal itself. Thus, a triple interdependence is formed: the profitability of Nepalese megaprojects depends on the ability to export electricity; the ability to export depends on the availability of built and functioning generating capacity, that is, on investment; and investment (especially foreign) depends on the elimination of internal Nepalese risks and barriers. Unless Nepal can ensure sufficient investor confidence by implementing the necessary reforms and creating an attractive environment, it will not be able to fully realize its export potential. Consequently, the profitability of many ambitious megaprojects will remain in great question, despite the availability of natural resources and demand in foreign markets.

6. Conclusion and strategic outlook: towards sustainable hydropower development

Nepal’s hydropower sector is on the cusp of potentially transformative change, but realizing its enormous potential comes with significant challenges. The viability of new megaprojects depends on a complex set of factors that require coordinated efforts from Nepal and its international partners.

6.1 Summary of Key Findings

The analysis conducted allows us to draw the following main conclusions:

• Enormous but under-utilized potential: Nepal has one of the world’s largest hydropower potentials, but only a small portion of it has been developed to date. Development in the sector is slow and faces systemic challenges.
• Megaprojects are the key to exports, but profitability is questionable: Large hydropower projects are critical to Nepal’s export ambitions and could become engines of economic growth. However, their viability depends on a complex balance of high capital costs, financing terms, export and domestic power prices, and the ability to deliver projects on time without significant delays and cost overruns.
• Regional markets are a source of demand, but require stable access: Neighbouring India and Bangladesh are showing growing demand for electricity and are ready to import it. Important intergovernmental agreements have been concluded. However, ensuring stable and predictable access to these markets, including the development of cross-border infrastructure and the harmonization of trade conditions, requires constant attention and effort.
• Investor caution is the main restraining factor: Despite the potential, foreign investors are very cautious. This is due to the complex political, regulatory, infrastructure and financial risks that exist in Nepal, as well as the negative experience of some projects in the past.

6.2. Recommendations for Nepal to improve project profitability and attract sustainable investment

To convert hydropower potential into real economic benefits and ensure that new mega projects are cost-effective, Nepal needs to focus on the following strategic areas:

• Radical improvement of the investment climate: This is a priority task. It is necessary to decisively reduce bureaucratic procedures, increase transparency and predictability of the regulatory environment, ensure the rule of law and guarantee the stability of contractual conditions. Recommendations of the World Bank³²in this regard, they should not only be taken into account, but also consistently implemented.
• Strategic and advanced development of infrastructure: Priority attention should be given to the construction and modernization of power transmission lines, both domestic and cross-border, as well as the development of transport and logistics infrastructure. These works should be synchronized with plans for the construction of new hydroelectric power plants, and ideally – ahead of them.
• Strengthening institutional capacity: There is a need to improve the performance of the Nepal Electricity Authority (NEA) and other relevant government agencies. This includes improving the quality of project management, financial discipline (taking into account the comments made in the NEA audit reports³⁶), as well as the development of human resources.
• Diversification of partners and markets: While India will remain a key partner, Nepal should seek to diversify its sources of investment and, where possible, export markets in the long term. This will help reduce dependence and improve the sustainability of the sector.
• Realistic planning and careful preparation of projects: Every new project should undergo a comprehensive feasibility study with a realistic assessment of costs, timeframes, risks and potential profitability. It is important to learn from past failures (for example, from the history of the Western Network project) and not repeat mistakes.
• Focus on storage hydroelectric power plants: To solve the problem of seasonal imbalance in electricity generation and improve the reliability of energy supply for both the domestic market and export supplies, it is necessary to increase the share of hydroelectric power plants with regulating reservoirs.³
• Stimulating the development of the domestic market: In parallel with the development of export potential, it is important to stimulate the growth of domestic electricity consumption through programs for the electrification of transport, industry, agriculture and the household sector. This will not only improve the quality of life of the population, but also create additional demand for generating companies.

Nepal is at a crossroads: it can either effectively use its abundant hydro potential to ensure sustainable economic growth and prosperity, or risk remaining a country with huge, but “locked-in” natural resources due to persistent internal barriers and unresolved problems. Success will largely depend on the political will and ability of the Nepalese government to implement deep and sometimes difficult internal reforms that will make the country truly attractive and reliable for long-term, capital-intensive investments, and not just the availability of water in the rivers. If the current megaprojects implemented with the active participation of Indian partners (such as Arun-III, and in the future – West Seti and Upper Karnali) are successful and demonstrate good profitability, this could be a strong positive signal for the entire international investment community. Failures, on the contrary, will only exacerbate existing concerns and may slow down the development of the entire sector for a long time. Thus, the profitability of new mega-projects in Nepal is not only a question of accurate technical calculations and availability of sales markets. It is, first of all, a question of Nepal’s ability to create and maintain a favorable, stable and predictable investment climate that will effectively transform natural resources into tangible economic benefits for the entire country.

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