Hydropower has long been considered one of Nepal’s most promising resources for economic prosperity. Energy is not only a basic human necessity but also a critical driver of industrial growth and economic development. Moreover, it plays a vital role in national security and societal progress. Following global trends, Nepal is gradually transitioning from traditional energy sources to modern alternatives—primarily electricity. Amid growing concerns about climate change and sustainability, the world is shifting toward renewable energy over fossil fuels. Clean energy, therefore, will be central to Nepal’s future industrialization, economic growth, human development, national security and long-term sustainability.

Nepal boasts one of the highest per capita hydropower potentials in the world. Hydropower remains a relatively mature and reliable technology. However, with technological advancements and increasing price competitiveness, solar and wind energy have become more affordable and are now leading the global renewable energy transition. Currently, fossil fuels—coal, gas and oil—account for over 75% of global energy supply, but this share is expected to decline as solar and wind adoption accelerates. Unlike these variable renewables, hydropower provides system stability, a role that will grow even more critical as solar capacity expands.

So far, Nepal has focused primarily on developing run-of-river (RoR) hydropower projects, which are easier to build, cost-effective and have lower social and environmental impacts. However, such simple RoR projects do not meet the current needs of Nepal’s power system. They lack operational flexibility, making it difficult to address dry-season shortages and peak-time demand. in managing dry-season energy deficits and peak-time demand. Additionally, without banking mechanisms, significant energy is wasted during the wet season and off-peak hours. To optimize energy use and better manage demand-supply imbalances, Nepal must shift its focus from RoR projects to more flexible alternatives, such as peaking RoR, seasonal storage and pumped storage hydropower.

The government has unveiled an ambitious Energy Development Roadmap and Action Plan, targeting 28,500 MW of generating capacity by 2035—more than seven times the current installed capacity. This includes 13,500 MW for domestic use and 15,000 MW for export, primarily to India and Bangladesh. Increased domestic energy availability could catalyze industrial growth, create jobs and spur economic progress. However, rapid industrialization will remain unrealistic unless Nepal addresses the seasonal variability of its power supply.

Nepal's export target of 15,000 MW by 2035 hinges critically on two factors: the development of robust cross-border transmission infrastructure and India’s willingness to provide unrestricted market access. So far, India has taken a cautious approach, limiting Nepal’s ability to export its growing electricity surplus. Nonetheless, the recent start of small small-scale electricity export to Bangladesh via Indian transmission lines under a trilateral agreement is a positive step forward. Still, without broader regional cooperation and full market access, Nepal's ambitious roadmap risks falling well short of its targets.

Nepal’s power grid is already overwhelmingly renewable. Hydropower accounts for approximately 94% of installed capacity and over 96% of total energy output. While solar capacity is expected to grow in the coming years, hydropower will remain the backbone of Nepal’s energy mix. However, over-reliance on solar and pure RoR hydropower projects could destabilize the energy system, especially during periods of low generation. To enhance grid resilience, the integration of dispatchable energy sources—such as storage hydropower and battery systems—is essential. Furthermore, given Nepal’s challenging geography and vulnerability to natural disasters like landslides, floods and earthquakes, promoting distributed energy like solar and wind is critical for ensuring backup power during emergencies.

In contrast, neighboring countries remain heavily dependent on fossil fuels. India derives nearly two-thirds of its energy from such sources, while Bangladesh’s dependence is even more acute. If these nations are serious about meeting their net-zero commitments, they must take bold actions, including the import of clean hydropower from Nepal at fair and competitive prices. 

As global political and trade dynamics shift, the geopolitics of South Asia and the broader Asia-Pacific may also evolve. In the past, geopolitical factors have hindered sub-regional power trade, but these barriers may ease over time. While India has cited energy security concerns regarding power imports from Nepal, its vast and resilient grid is fully capable of absorbing several thousand megawatts without compromising stability. Given Nepal’s economic and infrastructural reliance on India, these concerns should not be a major obstacle. Facilitating electricity transmission to Bangladesh via India—by applying wheeling charges—would not only enhance regional energy cooperation but also strengthen diplomatic and economic ties without threatening India’s own energy interests.

Nepal’s ambition to significantly expand its power generation hinges on the assurance of an unrestricted cross-border electricity market. Without such a guarantee, off-take arrangements will be unfeasible. Even if the Nepal Electricity Authority (NEA) signs power purchase agreements (PPAs), financing institutions may hesitate to fund projects that lack a reliable export market or guaranteed off-take. During the wet season and off-peak hours, many hydropower projects already face dispatch restrictions which have reduced their revenue and affected their ability to service debt. Continued non-dispatch instructions from NEA, in the absence of export opportunities or demand growth, could have serious financial repercussions for projects, lenders and NEA itself.

Initial Public Offerings (IPOs) have become increasingly common in Nepal's hydropower sector, as well as in other sectors. While IPOs offer a valuable mechanism for mobilizing small investments from a wide investor base and providing liquidity, a concerning trend has emerged: weaker companies have launched public offerings, and key promoters have exited after the lock-in periods with substantial profits. This has raised fears that some hydropower projects are being developed primarily for IPO gains rather than long-term profitability. More than 50% of hydropower projects fail to achieve 85% of their projected generation. This seriously affects their revenue and returns. As a result, over a half of the listed hydropower companies have been unable to distribute dividends within seven years of operation or ten years of investment. Despite these weak fundamentals, many such stocks continue to trade at inflated prices in the secondary market. While both internal and external factors affect profitability, poor corporate governance remains a widely acknowledged root cause. Immediate corrective measures, therefore, are necessary.

Nepal could capitalize on shifting global political and economic dynamics by leveraging its electricity potential to strengthen its industrial base. A reliable and affordable power supply is fundamental to improving industrial productivity and competitiveness. Enhancing electricity infrastructure and boosting dry-season supply capacity must therefore be prioritized. Over-reliance on power imports during the dry season poses serious energy security risks for the country

Developing dry-season capacity and upgrading transmission and distribution infrastructure will require massive investment, primarily from the public sector. However, the government may struggle to mobilize the necessary resources, and private investors are unlikely to step in without clear returns.

Although over 98% of households have reportedly been electrified, many still lack reliable electricity when they need it. Businesses, industries and households often depend on backup systems due to an unreliable grid, with marginalized communities, in particular, unable to afford such alternatives. As digital technologies and e-commerce expand, the need for reliable electricity is more critical than ever. The government must move beyond a narrow focus on access to electricity and work toward ensuring reliability. Investments in transmission, distribution, communication infrastructure and dry-season capacity are essential if we are to achieve this.

Electricity demand patterns in Nepal are also changing. Morning and evening peaks have flattened, and increasing remittance flows have raised living standards of our households, driving up the use of electrical appliances. The growing adoption of electric cooking and electric vehicles is reshaping energy use, and this trend is expected to continue. Electric cooking, in particular, could significantly increase electricity demand and help reduce dependence on imported LPG. Broader industrialization will also reshape demand, although it may not fully resolve seasonal supply imbalances. A well-designed electricity tariff structure is needed to support demand-side management and shift peak loads to off-peak hours.

Conclusion

Electricity has immense potential to support Nepal’s digitization and industrialization by creating jobs, boosting economic growth and generating valuable foreign exchange through power exports. To unlock this potential, the government must prioritize the development of energy storage hydropower and discourage a narrow focus on simple RoR projects. Cross-border electricity trade and power banking, especially with India, will be essential as RoR installations increase. Strategic bilateral agreements are crucial for maximizing cross-border electricity cooperation. A balanced energy mix that includes distributed solar, wind, storage hydropower, pumped storage and battery systems will ensure a robust and resilient grid. Ultimately, reliable electricity will be the foundation of Nepal’s sustainable economic and human development.

(Neupane has two decades of experience in the energy sector and in FDI. Currently, he is CEO of Simple Energy Pvt. Ltd.)

(This opinion article was originally published in   May 2025   issue of New Business Age Magazine.)