Nepal’s hydropower sector has long been dominated by run-of-the-river (RoR) projects, which have played a crucial role in expanding installed capacity. However, their inherent dependence on seasonal river flows has prevented the country from achieving true energy security. During the monsoon season, excess generation often goes underutilized, while in the dry season, the nation faces significant energy deficits. This seasonal imbalance continues to challenge the reliability and stability of Nepal’s power supply.
In response, Nepal has begun shifting its focus toward storage-type hydropower projects. These projects are designed to capture and store monsoon flows in reservoirs and release water during the dry season to generate electricity when it is most needed. Recognizing their importance, the Electricity Regulatory Commission (ERC) has recently introduced a Power Purchase Agreement (PPA) policy tailored specifically for storage projects, an important milestone that signals a strategic evolution in Nepal’s energy planning and generation mix.
Despite this progress, a critical gap remains unaddressed: the absence of a cost-benefit sharing mechanism between upstream (upper riparian) storage projects and downstream (lower riparian) hydropower plants.
Storage projects require substantial investment due to the construction of large dams, extensive land acquisition, and significant environmental and social considerations associated with reservoir inundation. However, the benefits of these projects extend beyond their immediate boundaries. Downstream projects, particularly peaking run-of-the-river (PRoR) plants, stand to gain considerably from regulated flows.
PRoR projects are typically designed based on Q40% flow conditions and are optimized for short-duration peak generation, usually between one to six hours per day. They are not equipped to store excess monsoon water and must release surplus flows without utilizing their full energy potential. In contrast, upstream storage projects regulate seasonal flows, effectively shifting water availability from the monsoon to the dry season.
This regulation significantly enhances downstream generation, particularly during the dry months when natural river flows are otherwise limited. The incremental energy produced by lower riparian projects is directly attributable to the upstream storage intervention.
For example, a storage project with a modest live storage capacity of 20 million cubic meters (MCM) upstream of the Tila belt could generate an additional 51 kWh annually within the downstream cascade, primarily during the dry season. In financial terms, this translates to an estimated additional revenue of approximately NPR 545 million per year (NPR 16.35 billion for 30 years without considering the escalation) for downstream projects.
This raises an important question of equity: should downstream beneficiaries continue to reap disproportionate gains without contributing to the costs incurred by upstream storage developers?
Given the high capital intensity and broader system benefits of storage projects, it is imperative for the ERC to establish a structured benefit-sharing mechanism. Such a framework would ensure that downstream projects contribute fairly to the value created by upstream regulation. More importantly, it would improve the financial viability of storage projects, making them more attractive to investors and accelerating their development.
A well-designed cost-benefit sharing model could serve as a catalyst for a more balanced and resilient hydropower system in Nepal. By aligning incentives across the river basin, Nepal can foster cooperation between projects, optimize resource utilization, and move closer to achieving year-round energy security.
The introduction of storage-focused PPA policies is a commendable first step. However, without addressing the economic interdependencies within river basins, the transition toward a diversified generation mix will remain incomplete. The ERC now has an opportunity, and a responsibility, to take this next step.
A forward-looking benefit-sharing mechanism is not just desirable; it is essential for the sustainable development of Nepal's hydropower sector.
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