Nepal, a landlocked country flanked by India and China, is yet to reach a gigawatt of installed capacity, though it has managed to improve its power supply position somewhat. It ended years of power cuts (load shedding) lasting for more than 10 hours per day by increasing its electricity imports from India to over 400MW, and nudging its industry to draw electricity during non-peak hours. The long-term sustainability of these management solutions may be limited however. A combination of slow bureaucracy, limited financial resources and specific setbacks mean the country only has about 850MW of grid-connected capacity installed (excluding imports), according to the 2016 annual report of the Nepal Electricity Authority (NEA).

While 85% of Nepal still relies on traditional biomass for energy, hydro plants built by the NEA – the government-run electricity generator, transmitter, and distributor – and independent power producers, comprise nearly all of Nepal’s grid-connected electricity generation. Most of these projects (over 80) are under 25MW in size, but five are in the “large” category. The NEA also has 53MW of grid-connected fuel oil capacity – much of which goes unused due to the high cost of fuel. Supplemented by over 400MW of electricity imported from India, the NEA delivers over 1,250MW to meet an estimated peak demand of 1,385MW.

The NEA offers feed-in tariffs for small grid-connected hydro plants of up to 100MW. The power purchase agreements (PPAs) are signed for 35 years from the date the generation license is granted to the plants. PPA rates start at an offered tariff of 8.4 Nepalese rupees per kilowatt-hour in the dry season and 4.8 rupees per kilowatt-hour in the wet season. The NEA has made recent efforts to increase this tariff, by increasing the number of months in the dry season from four to six, and by offering higher tariffs for peaking and storage projects. Tariffs for reservoir projects are now 12.40 rupees and 7.10 rupees, and tariffs for peaking run-of-river projects are now 10.55 rupees and 4.80 rupees per kilowatt-hour in the dry and wet seasons, respectively. Larger hydro project developers can negotiate a project-specific tariff.

The National Rural Renewable Energy Program (NRREP) of the Alternative Energy Promotion Centre (AEPC) is helping to improve energy access through off-grid solar, hydro and biogas systems by offering capital subsidies funded by the Central Renewable Energy Fund or CREF. About 30MW of hydro has been installed off-grid. The other technology seeing significant deployment to aid energy access is small-scale off-grid solar. AEPC claims to have facilitated the sale of roughly 700,000 systems amounting to 15MW. The NRREP program, which was launched in July 2012, was expected to expire in 2017.

The country has over 40GW of estimated economic hydropower potential. In its climate action plan submitted to the UNFCCC in early 2016, Nepal commits to 12GW of hydro capacity by 2030, along with 2.1GW of solar power. The NEA expects 1GW of capacity to be added to the system in the “immediate future” – with roughly 1GW of hydro under construction, and 2.2GW of further hydro projects in different stages of development. It is unclear how the solar target, which is much higher than those previously announced, will be completely implemented, but for a first step the government plans to issue a request for proposal (RFP) in August 2017 for 22 projects representing 61MW of capacity. Base tariff rates for these projects are posted at 9.61 rupees per unit – higher than recent tariffs in neighboring India – and PPAs are expected to be signed for 25 years.

In December 2014, the World Bank approved a loan of $130 million to develop Nepal’s first large grid-connected solar PV plant of 25MW and to pilot a program to reduce the distribution losses in the country. Project development was held back by the earthquakes of 2015, but there was progress in 2016. To help wind development in Nepal reach beyond its cumulative installed capacity of roughly 0.1MW, the World Bank is currently assisting with efforts to map wind resource data for potential future build.

The government, through Investment Board Nepal (IBN), has a range of financial incentives to attract foreign direct investment, particularly in the hydro sector. It has also published a handbook on Nepal’s waterways, and reports highlighting hydropower investment opportunities.

Nepal has seen some financial innovation. In its hydro sector, several Nepali hydro developers have taken advantage of a government policy change in 2010 which allowed hydro projects to make an initial public offer (IPO) in the construction phase. Api Power, Hydroelectricity Investment & Development Company and Ngadi Power have all had highly oversubscribed offers in recent years. The Ministry of Energy has also started trying to set up community-based hydro projects of up to 25MW.

The country’s energy sector however faces serious challenges. NEA’s financial situation is precarious, with an estimated 2016 net loss of 12 billion Nepalese rupees, which risks its ability to pay for Indian imports. There is lack of clear communication between where NEA expects transmission to be built, and where AEPC selects projects to provide subsidies to. Damages and delays caused by two disastrous earthquakes and flooding continue to cast a shadow on the sector. Many of the multi-year licenses for a potential hydro site have been hoarded for future gain, instead of being used to actually build projects. Investors also highlight the difficulties encountered in receiving the renewable energy subsidy.