Nepal's Energy Transition: Beyond Hydropower, Beyond Electricity

The global energy transition is picking up speed, driven by the Paris Agreement, Sustainable Development Goals and declining renewable energy costs. Still, in 2023, fossil fuels supplied 81.5% of the world’s energy and 60.6% of its electricity, driving nearly 75% of global emissions. Renewables made up just 14.6%.

Despite contributing only 0.027% to global emissions, Nepal ranks among the most climate-vulnerable countries. The Asian Development Bank (ADB) projects Nepal could lose 2.2% of its GDP annually by 2050 due to climate-related impacts. With major emitters like the US and China delaying their clean energy transitions, the consequences fall disproportionately on smaller, low-emission countries like Nepal. This makes Nepal’s own energy transition both more urgent and more challenging, especially when access to international climate finance remains limited.

Nepal plans to generate 28,500 MW of electricity over the next decade. But current domestic consumption is low; only about 400 kWh per capita annually. While electricity production and grid access are improving, there is still no coherent strategy to increase demand. Clean energy remains overly reliant on hydropower, even though electricity accounts for just 6.8% of Nepal’s total energy use.

The country’s reliance on fossil fuels, especially for cooking, transport, rural areas, and industry, is compounded by an unreliable grid and seasonal shortages. This complicates the path to meeting Nepal’s 2045 net-zero target. Although the 430 billion cubic meters of methane discovered in Dailekh offers energy security potential, it risks diverting focus and resources from long-term clean energy goals. To achieve decarbonization, Nepal must electrify key sectors using clean energy solutions like solar, biogas and energy storage. This also requires modernizing the grid and embracing smart technologies.

A Fossil-Fuel Heavy Mix

Nepal’s energy mix leans heavily on traditional and fossil-based sources, creating a gap between its renewable energy ambitions and current reality. Bioenergy, mostly firewood and agricultural residue, accounts for 66.7% of total energy consumption. Oil and coal make up 20.2% and 6.3%, respectively, contributing to 16.68 million tons of CO2 emissions. Modern renewables like hydropower and solar supply just 6.8%.

The residential sector uses 61.5% of total energy, mostly from biofuels, posing both health risks and signs of persistent energy poverty. Transport is almost entirely oil-dependent, responsible for over 50% of oil consumption and 37.7% of CO2 emissions. Industry, powered by coal and oil, remains the largest overall emitter.

Thinking Beyond Hydropower

Nepal’s reliance on run-of-river hydropower creates seasonal imbalances. Excess electricity during the monsoon is exported, while winter shortages force the country to import electricity from India. This seasonal cycle exposes the energy system to both climate and geopolitical risks. Political tensions, like India's unofficial blockade on Nepal, can disrupt fuel imports, highlighting the risks of overdependence on external sources.

In dry season, the Nepal Electricity Authority (NEA) generates just 1,100 MW of its 3,200 MW capacity, forcing the country to depend on expensive imports. Meanwhile, low domestic demand and transmission limitations caused a waste of Rs 4.46 billion worth of electricity during the rainy season. Nepal requires a diversified energy mix, including biogas, solar, and Peak Run of River (PRoR) and storage hydropower projects that can adapt to natural river flow fluctuations to address these imbalances.

NEA is already advancing 10,301 MW in power purchase agreements focused on PRoR and storage projects. However, climate disasters expose the system’s fragility. In September 2024, floods caused over Rs 3 billion in damages and disrupted 626 MW across 11 projects. In Rasuwa, recent floods shut down 6–7 projects with a combined capacity of over 250 MW.

Solar offers quick deployment and decreasing costs, while biogas boosts resilience and reduces fossil fuel use. Nepal has over 300 sunny days a year and 6.8 hours of sunshine per day which is enough for an estimated 432,000 MW in technical potential. However, only 142 MW has been harnessed so far. With solar PV costs dropping by 90% and improved efficiency, solar energy is well-positioned to complement hydropower, especially during dry seasons. It also offers clean, reliable electricity to remorse areas through battery storage systems.

NEA’s recent 960 MW solar tender is a step forward on harnessing the country’s solar potential. However, the complex and slow bidding process suggests reluctance to fully embrace solar development, despite private sector enthusiasm.

Biogas also holds significant promise. It can reduce emissions, improve indoor air quality, and lower dependence on liquefied petroleum gas (LPG) and other fossil fuels. One study estimates that Nepal could generate 4.4 billion cubic meters of biogas annually which is enough to replace 153 million LPG cylinders and save Rs 60 billion in imports. But outdated policies and inadequate infrastructure are holding back this potential. To unlock it, Nepal must strengthen regulatory frameworks and invest in biomass hubs.

Electrification Gaps

Electricity consumption in Nepal has surged by 175% since fiscal year 2015/16, reaching 10,227 GWh in 2023/24, with a compound annual growth rate (CAGR) of 13.5%. However, supply constraints remain. Eighteen out of 753 local units are still off-grid and only 539 are fully electrified.

Although 95% of the population has access to electricity, the quality of electricity remains uneven. Only 35.2% of the population has reliable power for high-load appliances, while 33% can use electricity for basic purposes like lighting and phone charging. Another 31.7% can operate medium-load appliances but lack sufficient power for broader domestic or productive needs. This explains that grid connection alone does not guarantee meaningful access. Transmission bottlenecks continue to limit supply, especially in remote areas.

Sector-Specific Electrification

Despite achieving a national electrification rate of 93.7%, Nepal faces stark regional disparities. In Karnali Province, access remains at just 49.6%, while Sudurpaschim fares slightly better at 81.8%. These gaps are largely due to challenging terrain and high infrastructure costs. Tailored solutions supported by the Electricity Act, such as, micro-hydropower, solar home systems, mini-grids and storage can complement grid expansion and improve resilience. In 2022 alone, 974,000 solar PV systems were installed, mainly in western regions. Nepal aims to nearly double its grid capacity by 2028, requiring $4 billion in transmission upgrades. Policy reforms are opening transmission line development to private sector participation.

Nepal’s Nationally Determined Contributions (NDC) target 90% of private and 60% of public four-wheelers to be electric by 2030. In the first half of the current fiscal year, Nepal imported 12,974 electric vehicles, including buses, microbuses and private cars. The EV sector is projected to grow at 15–20% annually, driven by lower economic costs and the replacement of fossil fuels with domestic electricity.

Chinese EVs dominate the market due to their affordability and features. Nepal can accelerate EV adoption through targeted subsidies, improving charging infrastructure and public awareness campaigns.

Industries in the Tarai region face severe, unannounced power outages, lasting 8 to 10 hours a day, despite surplus electricity during the rainy season. These outages, caused by weak transmission infrastructure and frequent monsoon-related tripping, have cut production by up to 80%, damaged equipment and led to food spoilage and other losses.

As the industrial sector is a major polluter, reliable electrification is critical for clean energy transition. Many factories still rely on costly diesel generators, undermining both economic productivity and emission reduction goals. Strengthening the grid, expanding renewables and adopting electric technologies are essential for reducing emissions and improving industrial productivity.

Nepal is promoting electric cooking to reduce emissions, improve health, lower costs and cut energy imports. Currently, 63% of households still use traditional biomass and 33% rely on imported LPG. Less than 0.5% use electric cooking appliances. However, rising imports of induction cooktops signal growing interest toward electric cooking appliances. The government aims to increase electric cooking adoption to 25% by 2030. Achieving this goal requires grid upgrades, alternative electricity generation, rural subsidies and awareness campaigns to address concerns over induction stove performance, especially in rural areas. A $49.2 million Green Climate Fund (GCF)-supported project is promoting electric and improved cook stoves and biogas in the Tarai region. These efforts will help Nepal transition to cleaner energy and improve energy security.

Institutional and Policy Reforms

Despite some progress, fragmented policies among transport, energy, and urban ministries have created uncertainty, weakened investor confidence, and slowed energy transition in Nepal. Key institutions involved include the Ministry of Physical Infrastructure and Transport, Ministry of Finance, National Planning Commission, Ministry of Forest and Environment, Ministry of Energy, Water Resources and Irrigation, Investment Board of Nepal, Nepal Electricity Authority, Department of Electricity Development and the Alternative Energy Promotion Center.

To diversify its energy mix and reduce fossil fuel dependence, the government must move beyond hydropower through coordinated action across sectors and institutions. This requires clear policies, fiscal incentives, private sector engagement and climate finance aligned with the 2045 net-zero goal. The government should focus on blended finance structures to accelerate Nepal’s clean energy transition. Blended finance combines public funds with private investments, using mechanisms like public-private partnerships, subsidized financing, equity and first-loss capital. This de-risks projects, encourages private sector participation and drives scalable, sustainable clean energy solutions. A dedicated nodal agency and better coordination among federal, provincial, and local governments are essential for effective execution, investment mobilization and an inclusive energy transition.

Role of PEVC Firms

Private equity and venture capital (PEVC) firms play a vital role in Nepal’s energy transition by addressing the capital requirements and risks of scaling renewable energy projects. Unlike traditional banks, PEVC firms provide funding where banks are reluctant due to the long-term nature of these investments. By taking equity stakes in high-potential projects, PEVC firms offer capital, strategic support, expertise and market access, making projects scalable and bankable. This approach fosters cross-sector collaboration, improves the regulatory environment, and attracts institutional capital.

PEVC is crucial for overcoming challenges in energy storage, grid modernization, and infrastructure development, supporting Nepal’s 2045 net-zero target and driving sustainable growth and energy security. Companies like TheeGo, Pashupati Renewables, GI Solar, Gham Urja, Bakas Renewables, Gandaki Urja, Saral Urja, Solar Farm Limited and Gham Power, all backed by PEVC, are leading the deployment of solar, wind, and biogas technologies across the country.

The Path Forward

Nepal’s energy transition must go beyond hydropower and fossil fuels toward a diversified, climate-resilient system. Hydropower remains crucial, but its seasonal variability calls for complementary technologies like solar, biogas, energy storage and electrification across sectors. Achieving progress requires expanding access and improving reliability, especially in rural areas and key sectors like transport and cooking. This shift demands coordinated policy reforms, strong institutional capacity and substantial investment. PEVC can help by de-risking innovation, mobilizing capital and scaling clean energy solutions.

With strategic incentives, long-term planning and public-private collaboration, Nepal can reduce import dependence, meet net-zero targets and drive sustainable growth. The transition offers a strategic opportunity to enhance resilience and foster economic and environmental benefits for the nation.

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