IMAGE: REUTERS
IT WAS A small step but it carried real significance. In 2024 for the first time, Nepal exported more electricity than it imported. The power flowed south, across a carefully managed grid connection into India. This event crowned years of effort and billions of rupees in investment, much of it from Nepal’s own private sector. It seemed to validate a long-held national vision: that the country’s raging Himalayan rivers could be harnessed to fuel its economy and win it strategic leverage.
The celebration, however, was premature. For every watt of power Nepal dreams of generating, it must deal with competing pressures from India and China. The country’s energy future is not just a matter of engineering and finance. It is a careful diplomatic balancing act.
The raw potential is undeniably there. Nepal’s theoretical hydropower capacity is an estimated 83,000 megawatts. Only about 4% of this is tapped. The government wants to install 28,500 MW by 2035, a near tenfold increase from today. The bill for this transformation comes to around $46.5bn. The financing gap is cavernous, and foreign investment is essential. This is where geography asserts itself. Nepal sits sandwiched between the world’s two most populous nations, both energy-hungry and wielding immense influence. Their competing interests do not align with Nepal’s ambitions: they constrain them.
India’s role is that of the inescapable partner. It is the logical, indeed the only initial market for Nepal’s power exports. The grids are connected. India’s northern states need power. Diplomatically, Delhi has long considered Nepal within its sphere of influence, a relationship forged by open borders, deep cultural ties and often fraught politics. Indian public-sector companies and banks are the biggest foreign investors in Nepal’s hydropower sector, financing and building flagship export projects like the 900 MW Arun 3. India wants Nepali power but on terms that secure its own interests.
Those terms were crystallised in India’s 2018 guidelines on cross-border electricity trade. The rules contain a critical clause: India will import power from generation projects in neighbouring countries only if they are developed by the local government or by an Indian entity, or through a government-to-government agreement. The provision effectively blocks Nepal from using investment from a third country, like China, to build projects intended at the Indian market. For Delhi, this is a matter of energy security and strategic oversight. For Kathmandu, it is a severe constraint. It limits the pool of potential financiers and grants India a veto over which projects get built.
China meanwhile watches from across the Himalayan roof. Its interest in Nepal has deepened markedly in the past decade, framed by its Belt and Road Initiative. Chinese firms have built roads, airports and telecommunications networks. In hydropower, Chinese companies account for nearly a third of the foreign direct investment stock, focusing on projects for Nepal’s domestic market. They are keen to do more. The allure of Chinese state-backed finance and engineering is strong for a capital-starved Nepal.
But the Indian gatekeeper stands in the way. A Chinese-built dam whose power cannot be sold to India is a far less attractive proposition. That dynamic creates a perverse stasis. Nepal cannot easily bring in Chinese capital to build for the Indian market, and its own domestic market is too small to justify the largest, most export-focused dams without a guaranteed Indian offtake agreement.
The resulting paralysis is visible in the stalled fate of major reservoir projects. Run-of-river plants, which dominate Nepal’s current fleet, are cheaper but seasonal. Their output soars during the summer monsoon but plummets in the dry winter, precisely when demand peaks. Large storage projects, with reservoirs to hold water back, provide steady, year-round power and are essential for a reliable export business. Projects like the 1,200 MW Budhi Gandaki have been on the drawing board for years, caught in a cycle of political wrangling and uncertain financing. No foreign investor, whether Indian, Chinese or other, will commit billions without clarity on who will buy the power and at what price. The state-owned Nepal Electricity Authority, the sole buyer domestically, is a wary negotiator, reluctant to sign long-term “take or pay” contracts for power it may not be able to sell on.
The grid itself is a geopolitical instrument. Nepal’s ability to export is physically limited by the capacity of its cross-border transmission lines, which India controls and expands at a pace of its own choosing. Current capacity is about 1,000 MW. Exporting ten times that amount, as the 2035 target would require, means building a massive new network of high-voltage lines. That will take Indian cooperation every step of the way. Even Nepal’s other potential customer, Bangladesh, is accessible only through India. A trilateral deal is needed. India holds the pass.
That is not to say India is solely an obstructionist force. Its investment has been crucial. Its grid provides stability to Nepal’s network. An energy-sufficient Nepal is in India’s interest. But the relationship is inherently asymmetrical. Delhi’s priority is to manage its northern frontier, secure its own energy needs and limit Chinese influence. Nepal’s priority is to develop its economy and maximise its strategic autonomy. These goals are not perfectly aligned. The 2018 guidelines are a clear expression of Indian policy: you can develop your hydropower but we will shape how and with whom.
Nepal’s room for manoeuvre is therefore narrow. Its leaders talk of “equi-proximity” between India and China, a balancing act. In the energy sector, the physics of power transmission and the economics of project finance make true balance impossible. The market is south. The grid leads south. The dependency is entrenched. Chinese investment can help build projects for domestic use, easing Nepal’s own chronic power shortages and, perhaps one day, supporting energy-intensive industries. But the dream of hydropower as a giant export earner—a “water tower” for South Asia—remains hostage to Indian consent.
The tragedy for Nepal is that this geopolitical contest exacerbates its internal weaknesses. The bureaucratic delays, the outdated Electricity Act of 1992, the weak capital markets: all these domestic hurdles become taller when foreign investors sniff political risk alongside commercial risk. Why would a pension fund in London or a sovereign wealth fund in Abu Dhabi dive into a $2bn dam project when the offtake agreement depends on the whims of regional politics?
The country may have become a net exporter of electrons, but it is a net importer of constraints. Its hydropower potential is a geopolitical puzzle where the most important pieces are held in capitals far from Kathmandu. ■
