Arya News - Despite deals for seven major hydropower projects, only one is under construction, raising questions about Nepal’s export ambitions and the benefits of its power agreements with India.
KATHMANDU – In January 2024, Nepal signed an agreement with India to export 10,000 megawatts of electricity over the next 10 years. For India, a country long regarded as one of the world’s major coal-dependent economies, importing electricity from Nepal is part of its broader effort to decarbonise its power grid.
For Nepal, electricity exports are expected to generate substantial revenue and help narrow its ballooning trade deficit with India. Industry insiders view the arrangement as a win-win for both countries. Nepal has awarded several hydropower projects to Indian developers, some through negotiated agreements, while Indian energy giants have secured major investments. Nepal is also expanding cross-border transmission infrastructure to facilitate electricity trade.
Yet the projected gains are far from guaranteed.
Among the Indian government-owned and private companies that have secured seven major hydropower projects in Nepal, with a combined capacity of around 4,700 megawatts, only one project is currently under construction.
The delays in starting construction raise questions about Nepal’s ability to capitalise on its electricity export potential within the agreed timeframe. They are also likely to push back the revenue Nepal expects to earn from electricity exports.
But former energy secretary Anup Upadhyay says the delays should not be viewed solely as a lack of initiative on the part of developers. Government agencies responsible for facilitating the projects have also failed to complete necessary decisions and procedures on time, he says.
Hydropower diplomacy and India’s growing footprint
In April 2023, weeks ahead of a proposed visit to India by then prime minister Pushpa Kamal Dahal, the Investment Board Nepal approved the 669MW Lower Arun Hydroelectric Project to the southern neighbour.
The 53rd meeting of the Investment Board, chaired by the prime minister, approved an investment proposal worth Rs92.68 billion from India’s state-owned Satluj Jal Vidyut Nigam (SJVN) to develop the project.
This was the third project on the Arun river, following the 900MW Arun-III, and 695MW Arun-IV hydropower projects.
Together, the three projects are expected to generate nearly 2,300 megawatts of electricity from the Arun river in Sankhuwasabha district.
The Investment Board and SJVN signed an agreement to develop the Arun-III hydropower project in November 2014. Nepal is expected to receive Rs348 billion over 25 years from the project. The developer will also provide Nepal 21.9 percent of the electricity worth an estimated Rs155 billion free of cost, along with another Rs107 billion in royalties.
In May 2022, Kulman Ghising, then managing director of the Nepal Electricity Authority, and Nandalal Sharma, then chairman of SJVN, signed an agreement to develop Arun-IV on behalf of their respective organisations.
Under the agreement, Nepal will receive 21.9 percent, or 152 megawatts, of the electricity generated by Arun-IV free of cost.
In July 2021, Nepal also signed a deal with SJVN to develop the 679MW Lower Arun project.
The Lower Arun project will not have a reservoir or dam. Instead, it will be developed as a tailrace project of Arun-III, allowing water discharged from the latter’s powerhouse to be used for electricity generation at Lower Arun.
SJVN aims to develop projects with a combined capacity of 5,000 megawatts in Nepal by 2030.
Before the Gen Z movement in September 2025, which triggered violent protests against a political system plagued by corruption and scandals, hydropower diplomacy with India and China had also served as a tool for Nepali politicians to maintain cordial relations with New Delhi and Beijing.
Successive governments repeatedly shifted their diplomatic focus between the two neighbours, seeking to woo New Delhi or Beijing depending on the political circumstances.
In August 2022, Nepal formally awarded the much-touted West Seti Hydropower Project and Seti River-6 project in western Nepal to India through a negotiated process, nearly four years after China withdrew from the projects.
The Investment Board signed a memorandum of understanding with India’s state-owned NHPC Limited to develop the two joint-storage projects, West Seti and Seti River-6, with a combined capacity of 1,250 megawatts. Here ‘joint-storage projects’ means they are being planned, studied, and developed as an interconnected, coordinated ecosystem.
India is Nepal’s principal buyer of electricity. Indian companies are also developing several of the country’s major hydropower projects. More importantly, India determines which projects are permitted to sell electricity across the border.
In January 2022, India’s Central Electricity Authority issued the Procedure for Approval and Facilitation of Import/Export (Cross-Border) of Electricity by the Designated Authority. The procedure prohibits electricity trading from projects involving investment from a third country that shares a land border with India but does not have a bilateral cooperation agreement with India in the power sector.
The provision directly affects projects involving Chinese investment, meaning India will not purchase electricity generated by such projects.
India has not granted Nepal permission to export electricity from projects in which Chinese companies secured construction contracts through international competitive bidding. The 456MW Tamakoshi Hydropower Project, Nepal’s largest hydropower project, is one example.
Although Indian companies secured contracts for the project’s hydromechanical, electromechanical and transmission line works, a Chinese company undertook the civil construction. India has therefore not granted export approval so far.
Nepal has repeatedly raised the issue during energy mechanism meetings between the two countries, but the matter remains unresolved.
As a result, exporting electricity from projects developed by companies from other countries has become difficult.
Apart from the three projects in the Arun river basin, Indian companies have secured the 900MW Upper Karnali and the 480MW Phukot Karnali projects, the latter under the Electricity Generation Company.
Upadhyay says the court case delayed the Upper Karnali project.
The government and India’s GMR signed a memorandum of understanding on January 24, 2008, for a survey of the Upper Karnali project and the development of a 300-megawatt hydropower plant. The government awarded the project to GMR under the build-own-operate-transfer model.
An international competitive bidding process was conducted, and the government selected GMR’s proposal as the best. The two sides signed an MoU for project development in 2008.
On December 21, 2009, GMR applied to the Department of Electricity Development to increase the project’s capacity from 300 megawatts to 900 megawatts.
After the Investment Board was established in 2011 under the Investment Board Act, 2011, the project was brought under the board following a Cabinet decision. The Investment Board and GMR signed the project development agreement on September 19, 2014.
However, the project remained stalled for years over several issues, including financial closure.
A meeting of the Investment Board’s 68th meeting, held last month, decided to facilitate the immediate commencement of construction in accordance with the project development agreement.
This means the developer’s documents submitted for financial closure have been accepted, allowing it to move ahead with the construction process.
GMR had submitted the documents on January 15, 2025.
The company had presented a letter to the Investment Board Office showing a positive response for a loan of INR65 billion from the Indian Renewable Energy Development Agency (IREDA) and an in-principle agreement for Rs20 billion from a consortium of Nepali banks.
The board accepted these documents and cleared the way for construction to move forward.
Initially, GMR held a 73 percent stake in the project, while the Nepal Electricity Authority held 27 percent. To mobilise investment, GMR has also brought IREDA and SJVN into the shareholding structure.
The Investment Board’s 60th meeting had already approved a revised shareholding structure under which GMR and SJVN would each hold 34 percent, IREDA 5 percent and the NEA 27 percent.
Under the project development agreement, Nepal will receive 12 percent of the electricity generated by the project free of cost.
Transmission lines advance as projects remain stalled
Despite delays in hydropower projects, work on cross-border transmission infrastructure between Nepal and India has been progressing.
Electricity is currently being imported and exported through the 400kV Dhalkebar-Muzaffarpur transmission line, which has a capacity of 1,000 megawatts, as well as other 132kV transmission lines.
The two countries have already agreed to increase the import capacity to 1,400 megawatts and the export capacity to 1,650 megawatts through the under-construction 400kV Dhalkebar-Sitamarhi transmission line. The line will evacuate electricity from the Dhalkebar-Muzaffarpur corridor and the Arun-III project.
Construction of the Nepal section of the Butwal-Gorakhpur transmission line is targeted for completion by next August, while the substation is expected to be completed by December 2027.
A Nepal-India secretary-level meeting has decided to advance the project with an initial capacity to import up to 130 megawatts and export up to 200 megawatts.
The combined export capacity of the two transmission lines will reach around 1,850 megawatts—1,650 megawatts through Dhalkebar-Sitamarhi and 200 megawatts through Butwal-Gorakhpur.
In addition, the new Butwal-Gorakhpur cross-border transmission line is under construction. The two countries have agreed to initially allow electricity imports of up to 130 megawatts and exports of up to 200 megawatts through the line.
According to the Ministry of Energy, efforts are also being accelerated to advance the construction of the 400kV Inaruwa-New Purnea and Dododhara (New Lamki)-Bareilly cross-border transmission lines.
The Indian companies that have secured these hydropower projects will also be responsible for finding markets for the electricity they generate. Therefore, India will be the principal market for their power.
However, the 10,000MW electricity export agreement between Nepal and India does not specify whether electricity generated by these particular projects will be exported under the agreement.
Once the projects come into operation, the Nepal government will benefit from free electricity, royalties, and other benefits.
Former energy minister Pampha Bhusal says there has long been dissatisfaction on the Nepali side that India has secured major hydropower projects in Nepal but has failed to make progress on their construction.
She says she raised the issue with Indian officials and urged them to prioritise the projects.
“Arun-III was already under construction before I became minister. During my tenure, we emphasised policy decisions, including those related to land, to ensure that it was completed by 2026. Now, I hear that completion has been pushed back to 2028,” she said. “The incumbent authorities should be asked what policy or technical issues have stalled projects such as Lower Arun and Upper Karnali.”
Arun-III advances, but deadlines keep slipping
Among the projects awarded to Indian companies, the 900MW Arun-III Hydropower Project is currently under construction.
The project is being developed by SJVN Arun-3 Power Development Company, a subsidiary of India’s state-owned SJVN Limited. So far, 77.5 percent of the power generation component and 60 percent of the transmission line component have been completed.
Construction began in 2018, with a target of completing the project within five years. However, the deadline has been repeatedly extended due to factors including the Covid pandemic.
The project was initially scheduled to begin commercial production by mid-April 2025. Its latest completion deadline has been pushed back to mid-March 2028.
The total estimated cost of the project is Rs144 billion.
Alongside the hydropower project, a 253-kilometre-long 400kV cross-border transmission line connecting the powerhouse to Sitamarhi in India is also under construction.
The developer has already signed an agreement with India’s state-owned Damodar Valley Corporation to sell 200 megawatts of electricity generated by the Arun-III project.
Nepal will receive 21.9 percent of the electricity generated by the project free of cost.
In addition, the government will receive a capacity royalty of Rs400 per kilowatt and an energy royalty of 7.5 percent for the first 15 years of electricity generation. After 15 years, the capacity royalty will increase to Rs1,800 per kilowatt and the energy royalty to 12 percent.
The 490MW Arun-4 is a semi-reservoir-type hydropower project to be developed in Sankhuwasabha district.
The project was planned to move forward under a memorandum of understanding signed between the Nepal Electricity Authority and SJVN on May 16, 2022.
Its estimated cost is Rs79.12 billion.
According to NEA Managing Director Dirghayu Kumar Shrestha, the memorandum of understanding has expired, and the process of extending its validity has been initiated.
The project will be developed by a joint venture company established by the NEA and SJVN, with the two partners holding 49 percent and 51 percent shares, respectively.
Nepal will get 21.9 percent of the electricity generated free of cost.
A project development agreement for Arun-4 is yet to be signed.
The 679MW Lower Arun project was awarded to SJVN through competitive bidding on January 29, 2021.
A memorandum of understanding was signed on July 11, 2021, followed by a project development agreement on June 1, 2023.
The estimated project cost is Rs92.67 billion.
Nepal will receive 21 percent of the electricity generated by Lower Arun free of cost.
The government will also receive a capacity royalty of Rs400 per kilowatt and an energy royalty of 7.5 percent for the first 15 years of electricity generation. After 15 years, the capacity royalty will increase to Rs1,800 per kilowatt, and the energy royalty to 12 percent.
The contract for Package 1, covering the main tunnel, spillway tunnel, adit facilities and access roads, has been awarded to Dineshchandra R Agrawal Infracon for Rs11.4921 billion.
According to India’s Economic Times newspaper, Patel Engineering has secured the Package 2 contract for 15.93 billion Indian rupees. However, the project development company has not officially disclosed the contractor’s details.
Investment Board spokesperson and joint secretary Bhupendra Thapa said the financial management process and construction contract procedures were being advanced simultaneously.
“The company has already acquired the land required for Lower Arun using its own funds. Financial management on the one hand and the bidding process for construction on the other are being advanced simultaneously,” he said.
Financial viability and free-power disputes hold back other projects
The 900MW Upper Karnali project is being developed by GMR. The company was selected through international competitive bidding. A memorandum of understanding was signed with the company in 2008, followed by a project development agreement on September 19, 2014.
The 800MW West Seti project, initially designed for 750MW, and the 450MW Seti River-6 project have been awarded to India’s state-owned National Hydroelectric Power Corporation (NHPC).
After the agreement with China Three Gorges International was terminated, the government had presented both projects for investment at the Investment Summit in March 2019. NHPC has already submitted the detailed project reports, which are currently being studied by the Investment Board.
Board spokesperson Thapa said negotiations for project development agreements were underway.
The Investment Board’s 64th meeting had decided to conduct further studies on the detailed project report for West Seti.
At its meeting on September 22, 2025, the board decided to form a negotiation committee under the coordination of the Investment Board’s chief executive officer. The committee was tasked with preparing a draft project development agreement and discussing the financial structure and other issues with the developer before submitting a proposal to the board.
The Investment Board has not made any further decisions since then.
West Seti is estimated to cost Rs172.51 billion, while Seti River-6 is estimated to cost Rs98.22 billion.
Under the memorandum of understanding signed between NHPC and the Investment Board Office on August 18, 2022, Nepal will receive 21.9 percent of the electricity generated by each project free of cost once commercial production begins.
However, former energy secretary Upadhyay says the financial viability of the projects must also be considered when deciding the share of free electricity Nepal should receive.
“On the one hand, Chinese companies walked away from the projects saying they were not financially viable. On the other hand, we are demanding free electricity from the same projects. We need to think about that as well. At the same time, delays in decisions by government agencies must also be examined,” he said.
Pradip Rana, an adviser to NHPC, said the company had informed the government that providing free electricity from all three projects—West Seti, Seti-6 and Phukot Karnali—would make them financially unviable.
Therefore, the company has requested viability gap funding from the government.
He said no further decisions had been taken on the matter.
Rana also said the memorandums of understanding for West Seti, Seti-6 and Phukot Karnali had expired.
The 480MW Phukot Karnali project has been awarded to NHPC.
Under the memorandum of understanding signed between the Electricity Generation Company and NHPC on May 31, 2023, NHPC will hold a 51 percent stake in the joint venture company, while the Electricity Generation Company will hold the remaining 49 percent.
The project is estimated to cost Rs100 billion.
Clause 5.1 of the memorandum of understanding provides for Nepal to receive 21.9 percent of the electricity generated free of cost. However, uncertainty has emerged over the project’s development after the Supreme Court last September, acting on a writ petition by two Kalikot district residents, directed the government to increase Nepal’s share of free electricity.
The developer company has maintained that increasing Nepal’s share could make construction difficult.
Former energy secretary Chiranjibi Chataut, meanwhile, says delays in major hydropower projects are caused by multiple factors, including investment, certainty of the electricity market and administrative sluggishness.
“There is no single reason why large hydropower projects awarded to Indian companies have not moved forward,” he said. “The factors include the consequences of our failure to make decisions on time, investment challenges and uncertainty over the market for electricity.”