Nepal’s Hydropower at a Crossroads: Why Storage is the Missing Piece

 

Over the past 60 years, Nepal has made remarkable progress in expanding its generation capacity from just 50 MW to 3,500 MW. The private sector has played a crucial role in this growth, contributing around 80% of the total installed capacity within a short period.

Despite this significant increase in installed capacity, Nepal’s hydropower sector has now reached a complex juncture. Most of this 3,500 MW capacity comes from run-of-river (RoR) hydropower plants. These projects can operate at full capacity for about four to five months during the monsoon but produce very little electricity during the dry season. As a result, despite notable capacity expansion, the country has not achieved energy self-sufficiency and continues to face challenges in stabilizing the national grid against seasonal fluctuations. Every year during the monsoon, Nepal produces surplus electricity, which is often wasted or exported to India at low prices. Conversely, when production drops by up to 75% in the dry season, the country is forced to import expensive electricity from India. For example, in the fiscal year 2023/24 alone, Nepal exported 1,946 GWh during the wet season but imported 1,895 GWh during the dry season.

In view of the imbalance, the Government of Nepal launched the National Energy Crisis Mitigation and Electricity Development Decade (2016–2026) policy, which sets the following energy mix targets:

·       40–50%           Pumped/Storage

·       15–20%           Peaking RoR

·       25–30%           Conventional RoR

·       5–10%             Other Sources

Later, on 8th May 2018, a White Paper outlining the present situation and future roadmap of energy aimed at making the country independent with internal generation on a long-term basis proposed a generation mix of:

·       Reservoir/Pumped:                 30–35%

·       Peaking RoR:                          25–30%

·       RoR:                                        30–35%

·       Other alternative sources:       5–10%

The primary objective of this diversification policy is to make the country self-reliant in electricity and ensure energy security. However, even after seven years, the contribution of storage-type hydropower remains very low — only 3.02% of total capacity, equivalent to just 106 MW. The Kulekhani project is the only operational storage-type hydropower plant in Nepal.

Recently, recognizing the abundant hydropower potential, the government has set an ambitious target to reach 28,500 MW of generation capacity by 2035. So far, projects with a combined capacity of 19,017 MW are either in operation, have received generation licenses, or are in the generation licensing application process. This shows that Nepal is on track to meet its capacity goals, but according to the Department of Electricity Development, the project status and types reveal that the planned energy mix is not being achieved.

Status	Number of Projects	Capacity (MW)
Operational	213	3,514
Under Construction/Construction license	297	10,409
Applied for Construction License	162	5,095
Total	672	19,017

Of these, the 140 MW Tanahun Storage Hydropower Project is under construction. Additionally, seven storage projects totaling 4,147 MW are awaiting construction licenses. Besides this 19,017 MW pipeline, thousands of megawatts worth of projects are in various stages of survey and study. However, the concerning fact is that most of these projects are run-of-river types, not storage. This shows that the energy mix target is not being implemented effectively. 

This imbalance persists for two main reasons. First, nearly all large storage projects are still controlled by the state, which struggles with limited resources and competing other national priorities. Second, private investors shy away from storage because current policies and power purchase agreements (PPAs) do not fairly compensate the higher costs and risks compared to RoR projects.

The major challenge for government-led storage projects is financial management. Constructing such projects requires a huge investment. Therefore, it is unrealistic to expect government storage projects to be constructed in the near future. In contrast, if a favorable investment environment is created, there is no doubt that the private sector can complete the run-of-river projects currently in the pipeline, as most of these licenses are held by private developers. 

The private sector’s track record over the past three decades demonstrates this. The private sector currently contributes around 80% of total power generation and is efficient in financial management and timely project completion. Therefore, private sector involvement is essential for developing storage-type projects as well. However, the fact that the private sector holds no storage project licenses indicates their lack of interest in this type of project. The main reason is that storage hydropower projects are significantly costlier and riskier than run-of-river projects.

For example:

·       The 1,200 MW Budhi Gandaki Storage Hydropower Project, with an annual generation of 3,383 GWh, has a total estimated cost of USD 2.59 billion — about NPR 302.2 million per MW.

·       Similarly, the 670 MW Dudhkoshi Storage Hydropower Project, with an annual generation of 3,442 GWh, has a total estimated cost of USD 2.20 billion — about NPR 459.7 million per MW.

In comparison, a typical 100 MW RoR project costs around NPR 200 million per MW and often has a higher capacity factor—but cannot store energy for when it’s most needed.

Despite higher upfront costs, storage plants deliver benefits far beyond electricity:

1.     Reliable Supply: They can provide consistent electricity year-round.

2.     Grid Stability: Storage moderates fluctuations in supply, lowering the risk of blackouts.

3.     Multiple Uses: Reservoirs help with flood control, irrigation, tourism, and disaster management.

Run-of-river projects can only generate electricity as long as the river flows, while storage projects collect monsoon water, store it, and release it as needed to produce valuable electricity and maintain grid stability. Considering all this, to ensure Nepal’s energy security and self-reliance, private sector participation in storage projects is indispensable.

Policy reform needed

The Nepal Electricity Authority (NEA) currently purchases electricity from run-of-river (RoR) hydropower projects at Rs. 4.80 per unit during the wet season and Rs. 8.40 per unit during the dry season, with an annual 3% escalation rate for eight years. If the cost and electricity generation of storage-type projects are to be compared and brought to parity with run-of-river hydropower, then the Power Purchase Agreement (PPA) rate for the 1,200 MW Budhi Gandaki Hydropower Project should be NPR 12.64 per unit during the wet season and NPR 22.12 per unit during the dry season. Similarly, for the 670 MW Dudhkoshi Storage Hydropower Project, the PPA rate should be NPR 10.67 per unit during the wet season and NPR 18.67 per unit during the dry season. Both projects should also be provided with an annual escalation of 3% for up to eight times, similar to other hydropower projects.

This only covers the minimum required to reach cost parity in PPA rates. Beyond this, storage projects face higher risks, longer construction periods, delayed returns on investment, and higher dam construction costs needed for water storage. Additionally, expenses for land acquisition and compensation for submerged areas, extensive deforestation, large access roads, and high-capacity transmission lines make these projects costlier than run-of-river projects. Considering all these factors, offering additional provisions on top of the adjusted PPA rates could encourage private sector investment in storage-type hydropower projects.

Nepal’s ambitious targets can be met through collaboration between the private and public sectors. Installed capacity is expanding rapidly, but without storage and pumped storage projects, true energy security cannot be achieved. Providing the private sector with appropriate PPA rates and policy support will encourage investment in storage projects, freeing Nepal from seasonal electricity imports and positioning it as a regional energy exporter.

Finally, whether run-of-river or storage hydropower, all these projects ultimately become state-owned assets. Typically, after 30 years of operation, the developer must hand over the project to the government free of cost and in good operating condition. Even after transfer, such projects have a long remaining lifespan. For instance, the world-famous Hoover Dam in the United States, commissioned in 1936, is still generating electricity today while providing flood control, irrigation, and tourism benefits. Nepal’s storage projects could deliver similar enduring benefits.