Challenges in Nepal’s Hydropower Business: A Banker’s Perspective

Nepal is often hailed as a hydropower goldmine, with studies estimating a technically and financially viable capacity of over 42,000 MW. This potential could transform the nation into a regional energy hub, exporting electricity to neighboring countries like India, where demand is high, and generating trillions of Nepalese rupees in foreign currency. Hydropower could be a cornerstone of economic development, prosperity, and energy security for Nepal. The government has prioritized this sector, introducing reforms to encourage growth, but progress remains frustratingly slow—akin to a “tortoise walking.” Despite the immense potential, Nepal currently utilizes less than 3% of its capacity, importing over 400 MW from India while many regions still lack electrification. Per capita electricity consumption remains among the lowest globally.

As a professional banker with eight years of experience in hydroelectric financing, I’ve witnessed firsthand the opportunities and challenges in this sector. In this blog post, I’ll explore why Nepal’s hydropower business is struggling to take off despite its promise, delving into the key issues, challenges, and potential solutions. Let’s break it down.

Why Is Nepal’s Hydropower Sector Lagging?

Despite its potential, the hydropower sector faces systemic, structural, and operational hurdles that stifle growth. Below, I outline the major challenges based on my experience, research, and discussions with industry stakeholders.

1. Nepal Electricity Authority (NEA): Monopoly and Inefficiencies

The Nepal Electricity Authority (NEA) is the sole off-taker, monopolistic buyer, and developer of transmission lines (TL) in Nepal. While NEA plays a critical role, its inefficiencies have become a major bottleneck for hydropower development.

• Delays in Transmission Line Construction: NEA is responsible for building transmission lines, but delays are rampant due to technical, financial, social, and managerial shortcomings. Projects in corridors like Kaligandaki, Kabeli, Koshi, and Mechi are severely impacted. Many hydropower projects, despite completing construction, cannot connect to the grid due to missing transmission lines. This leads to millions of rupees in losses as companies bear interest on loans, salaries, operating expenses, and social/environmental costs while their machines sit idle, deteriorating and requiring costly repairs.
• Financial Burden on Developers: Delays often extend project timelines by 3–4 years, increasing costs by 30–40% due to capitalized interest (where interest is added to the loan principal). For instance, the cost of constructing a megawatt of hydropower has risen from NPR 100–120 million to NPR 180–200 million over the years, while the tariff rate remains static at NPR 4.80 per unit in the wet season and NPR 8.40 in the dry season—rates fixed a decade ago. Meanwhile, construction costs (labor, cement, steel, turbines) have doubled:
• Labor: NPR 200 to NPR 1,000 per day
• Cement: NPR 400 to NPR 800 per bag
• Steel: NPR 50 to NPR 80 per kg
• Monopoly and Lack of Competition: NEA’s monopoly on production, development, distribution, and regulation stifles innovation and efficiency. Private companies are barred from building transmission lines, and the fixed tariff rate makes hydropower projects financially unviable. With rising costs and static revenue, many projects struggle to service debt, let alone generate profit, making the sector unattractive to investors.
• Bureaucracy and Corruption: NEA’s government-owned structure is plagued by bureaucracy, nepotism, and reported cases of corruption. Without significant restructuring—introducing competition, floating tariff rates, and private sector involvement in transmission and distribution—NEA will continue to hinder progress.

Solution: NEA must evolve into a competitive entity, similar to how Nepal Telecom improved after NCell entered the telecommunications market. Allowing private sector participation in transmission line construction, introducing competitive bidding, and adopting a floating tariff rate could address these issues. NEA needs to hire new talent, foster a culture of efficiency, and prioritize timely project execution.

2. Promoters: Lack of Expertise and Financial Discipline

Hydropower is a capital-intensive business requiring significant upfront investment with returns realized over a long period. However, many promoters in Nepal lack the necessary expertise and commitment.

• Inexperienced Promoters: Some developers, including real estate brokers, entered the sector expecting quick profits but lacked technical knowledge and long-term commitment. This has led to poorly managed projects with low revenue generation.
• Financial Indiscipline: Many promoters exhibit financial indiscipline, with active investors reportedly siphoning off benefits upfront. In public limited companies listed on the Nepal Stock Exchange (NEPSE), poor corporate governance, mismanagement, and lack of technical know-how have resulted in dismal financial performance. Stock prices often fall below par value, eroding public investment.
• Expectations of Quick Returns: In a developing nation like Nepal, where investable funds are scarce, equity holders often expect immediate returns, which is unrealistic for hydropower projects that require long gestation periods.

Solution: Promoters need to adopt modern technology, improve corporate governance, and commit to long-term goals. Transparent equity sourcing and professional management can rebuild investor confidence.

3. Banks and Bankers: Haphazard Financing Practices

Banks play a crucial role in financing hydropower projects, but their approach in Nepal is often unscientific and risky.

• Lack of Due Diligence: Banks finance projects without proper technical expertise, relying on third-party engineers who may collude with developers. Due diligence is often superficial, focusing solely on the bank’s return on investment rather than the project’s viability.
• Regulatory Pressure: The Nepal Rastra Bank (NRB) has mandated banks to allocate a percentage of their loanable funds to hydropower (10% of total loan ). To meet these requirements, banks rush into financing without assessing technical or financial feasibility, putting approximately NPR 3.5 trillion at risk.
• Unscientific Interest Rates: Banks charge interest rates without a risk-based pricing model, treating all projects the same. This “one-size-fits-all” approach undermines the financial viability of projects, as high interest rates burden developers already struggling with low tariffs and rising costs.

Solution: Banks must adopt rigorous due diligence, employ technical experts, and implement risk-based pricing models. Financing decisions should prioritize project viability over regulatory compliance.

4. Lack of Monitoring and Supervision

Despite hydropower accounting for nearly 10% of Nepal’s GDP, the sector lacks proper regulation and oversight.

• Absence of Regulatory Framework: There are no specific policies to monitor promoters’ activities, financial modeling, or technical evaluations during project construction and operation. NEA’s role is limited to off-taking electricity, leaving a gap in supervision.
• Emerging Regulatory Body: The recently established Electricity Regulatory Authority (ERA) aims to facilitate and regulate the sector, but its scope of work is yet to be defined.

Solution: The ERA should be empowered with a clear mandate to monitor projects, enforce financial and technical standards, and ensure accountability among promoters and developers.

5. Government and Central Bank: Inconsistent Policies

Government and central bank policies often lack coherence, further hampering hydropower development.

• Haphazard Policies: The NRB’s fluctuating mandates on hydropower financing (e.g., 10% of loanable funds by 2081 BS) have led to rushed investments without considering project viability, promoter competence, or market demand. This has resulted in a high volume of non-performing loans for banks.
• Bureaucratic Delays: Delays in environmental clearances, land acquisition restrictions, and inadequate infrastructure (e.g., roads to project sites) increase costs and deter investment.
• Lack of Research: There is little investment in research and development, and hydrological data is often unreliable, leading to poor project planning.

Solution: The government and NRB should conduct thorough research, streamline policies, and ensure infrastructure development to support hydropower projects. Simplified clearance processes and reliable data can boost investor confidence.

6. Public, Environmental, and Social Challenges

Hydropower projects often face resistance from local communities and environmental concerns.

• Social Resistance: Local communities have high expectations, seeking favors regardless of the project’s scale. Lack of support from locals, combined with negativity toward projects, makes implementation challenging.
• Environmental Impact: Nepal’s young mountains and poor geological conditions lead to frequent floods and landslides, especially during the monsoon, disrupting construction and operations.

Solution: Engaging communities through education, fair compensation, and community development programs can reduce resistance. Environmental impact assessments should be thorough, and projects should incorporate disaster-resilient designs.

7. Lack of Modern Technology and Infrastructure

Nepal struggles with outdated technology and limited access to finance for modern equipment.

• Obsolete Technology: The country relies on old methods for construction, operation, and distribution, leading to inefficiencies, high costs, and revenue losses.
• Skilled Manpower Shortage: There is a lack of skilled and experienced professionals who can implement quality hydropower projects.

Solution: Investing in modern technology, training programs, and international partnerships can improve efficiency and project quality.

8. Natural Calamities and Geological Challenges

Nepal’s terrain poses unique challenges for hydropower projects.

• Poor Geology: The young Himalayan mountains are prone to landslides and floods, which damage projects during construction and operation.
• Natural Disasters: Frequent natural calamities, especially during the monsoon, disrupt timelines and increase costs.

Solution: Advanced geological surveys and disaster-resilient infrastructure can mitigate these risks.

A Snapshot of Key Challenges

Challenge	Impact	Potential Solution
NEA Monopoly & Delays	Delays in transmission lines, financial losses for developers	Allow private sector in TL construction, floating tariff rates, NEA restructuring
Inexperienced Promoters	Poor project management, financial indiscipline	Improve corporate governance, adopt modern technology, transparent equity sourcing
Haphazard Bank Financing	High-risk investments, non-performing loans	Rigorous due diligence, risk-based pricing, technical expertise in banks
Lack of Regulation	Unmonitored projects, financial mismanagement	Empower ERA to regulate and monitor projects
Inconsistent Policies	Rushed investments, bureaucratic delays	Streamlined policies, reliable data, infrastructure development
Social & Environmental Issues	Community resistance, project disruptions	Community engagement, disaster-resilient designs
Outdated Technology	Inefficiencies, high costs	Invest in modern technology, training, and international partnerships
Geological Challenges	Damage from floods, landslides	Advanced geological surveys, resilient infrastructure

The Silver Lining

Despite these challenges, there are signs of progress. The government continues to prioritize hydropower, and initiatives like the establishment of the ERA signal a move toward better regulation. Private sector engagement is slowly increasing, and some projects are beginning to show promise. With the right reforms, Nepal’s hydropower sector can overcome its hurdles and realize its immense potential.

Conclusion

Nepal’s hydropower sector holds the key to economic prosperity, but systemic challenges—ranging from NEA’s inefficiencies to outdated technology and inconsistent policies—are holding it back. As a banker with years of experience in this field, I believe that addressing these issues through competition, modern technology, and robust regulation can unlock the sector’s potential. The journey may be slow, but with concerted efforts from the government, private sector, and communities, Nepal can harness its hydropower wealth to drive sustainable development.

About the Author: The author is a professional banker with over eight years of experience in hydroelectric financing. Through Bankertrekker, he shares insights on Nepal’s financial and energy sectors, drawing from his extensive research and industry discussions.