Governance and Leadership Reform for Hydropower-Led Economic Transformation
Hydropower Development and Structural Context
Nepal’s hydropower development began with the 500 KW Pharping project during the Rana regime, which marked the country’s entry into modern energy. Subsequent projects such as the Trisuli (24 MW), Kulekhani I (60 MW), Kulekhani II (32 MW) and Marsyangdi (69 MW) demonstrated the potential of harnessing rivers for national development. As per the Economic Survey of 2082 (MOF, 2025/26), Nepal’s total installed electricity generation capacity has reached 3,602 MW, of which hydropower contributes 3,336 MW. The remaining capacity comprises solar energy (117 MW), alternative sources (90 MW), thermal plants (53.4 MW), and industrial co-generation (6 MW). This composition highlights the continued dominance of hydropower in Nepal’s energy mix, with only limited diversification into other sources. Despite this steady expansion in capacity, the sector’s development trajectory reveals a deeper structural imbalance.
Nepal has therefore struggled to realise large-scale, transformative hydropower projects. In the early 1980s, the Karnali Chisapani Multipurpose Project, with an estimated capacity of 10,800 MW, was identified as a flagship national project. Major international institutions, including the World Bank, CIDA, and JICA expressed interest in financing, and multiple feasibility studies by Nippon Koei, Snowy Mountains Hydroelectric Authority, Norconsult, and Electrowatt confirmed its technical viability. However, political transitions, including the fall of the Panchayat system and subsequent resistance to large scale projects, such as Arun disrupted momentum.
The inability to advance projects of this scale, such as Karnali Chisapani and Arun III, represents a significant lost opportunity for structural economic transformation. While electricity exports can generate revenue, the strategic utilisation of hydropower for domestic industrialisation offers far greater long-term economic value. Nepal’s abundant water resources provide strong comparative advantage, yet this potential remains under-realised due to leadership weaknesses across political and administrative leadership, as well as sectoral and project-level institutions. Fragmented decision-making and weak accountability continue to constrain large-scale project execution. Without decisive, performance-oriented leadership and sustained investment, the sector’s transformative potential will remain unrealised. These structural limitations have persisted across political cycles, making governance reform central to any meaningful sectoral transformation.
From Political Transition to Structural Reform
The conclusion of a general election on Falgun 21, 2082 and the formation of the Rastriya Swatantra Party (RSP) government often signal renewal, ambition, and policy reorientation. In Nepal, this transition once again places hydropower at the centre of the national development discourse. For decades, successive governments have framed hydropower as the backbone of economic transformation: promising energy security, export-led growth, industrial expansion, and improved balance of payments. Yet, the persistence of structural inefficiencies across the sector raises a more fundamental question: why has this promise remained only in slogan? The answer lies not in the absence of plans, policies, or political commitment. Nepal has produced comprehensive frameworks, including the Energy Development Roadmap 2081, and River Basin Plans 2081, etc. which clearly identifies sectoral bottlenecks and proposes time-bound reforms. What has been lacking is not vision, but execution. The new government therefore inherits not a blank slate, but a well-diagnosed system suffering from chronic implementation failure. The task ahead is not to generate new ideas, but to confront entrenched structural issues, particularly those related to institutional design, regulatory behaviour, and market formation.
Hydropower must now be understood not merely as an engineering and investment challenge, but as a governance challenge. The credibility of the RSP government depends on whether it can transform a system characterised by centralisation and discretion into one defined by transparency, competition, and accountability.
The Structural Paradox and Distortion from Vertical Integration
Nepal’s electricity sector embodies a paradox. On one hand, generation capacity has grown substantially, driven largely by independent power producers (IPPs). On the other, the sector remains locked within a structurally constrained framework dominated by the Nepal Electricity Authority (NEA). This hybrid model, a partial liberalisation in generation combined with monopoly control over transmission, distribution, and trading has produced inefficiencies that are increasingly difficult to ignore. Private developers assume the risks of project development, yet their commercial viability depends on a single off-taker. Market signals are weak, competition is absent, and decisions are often shaped more by administrative discretion than economic logic. The result is a sector that has expanded in scale but failed to evolve in structure.
This distortion is reinforced by NEA’s vertical integration. The NEA continues to function simultaneously as generator, transmitter, distributor, and de facto system operator. While such concentration may have been justified in the early stages of sector development, it is now incompatible with the demands of a modern, competitive electricity market. The overlap of roles creates inherent conflicts of interest: NEA competes with private producers as a generator, sets the terms of their participation as a buyer, controls dispatch as a system operator, and influences pricing as a distributor. This concentration undermines investor confidence and distorts market behaviour. International experience demonstrates that functional unbundling is a prerequisite for efficiency and transparency. Without separating these roles, Nepal cannot realistically expect to build a competitive, investment-friendly electricity market.
Power Trading: The Missing Market Layer
One of the most critical gaps in Nepal’s electricity sector is the absence of a competitive power trading framework. At present, the NEA effectively monopolises the buying and selling of electricity, functioning as the sole market entity both domestically and in cross-border transactions. To address this imbalance, Nepal must establish independent electricity trading companies with meaningful private sector participation. These entities should operate under a transparent regulatory framework that allows multiple buyers and sellers to interact within a competitive market environment. The introduction of independent traders would serve several important objectives: diversifying market risk, reducing dependence on a single off-taker, improving price discovery, and facilitating cross-border electricity trade particularly with regional markets such as India and Bangladesh; in case of sufficient surplus energy available.
While the question of ownership is significant, it should not become a barrier to reform. A hybrid model, in which trading companies operate independently but within a regulated framework that safeguards public interest, can strike the necessary balance between competition and oversight. Such an approach would strengthen investor confidence, enhance efficiency, and lay the foundation for a more dynamic and resilient electricity market in Nepal.
Private Sector Participation: From Dependency to Partnership
The private sector has played a central role in expanding Nepal’s generation capacity. However, its participation remains constrained by structural and governance limitations. Developers continue to face uncertainty in Power Purchase Agreement (PPA) approvals, grid connectivity, and payment security-challenges that reflect deeper institutional weaknesses rather than isolated operational issues. A reformed sector must reposition the private sector as a strategic partner, not just a project developer. This requires creating predictable investment conditions, ensuring contractual sanctity, and enabling participation across the value chain, including trading and distribution. Beyond operational constraints, financing dynamics further shape the effectiveness of private sector participation.
Capital Markets and Regulatory Effectiveness: The Role of SEBON
The growing reliance on domestic capital markets has become a defining feature of hydropower financing in Nepal. Many projects now depend on public equity issuance, rights offerings, and debenture instruments to mobilise resources for long-gestation investments. In this context, the effectiveness of Securities Board of Nepal (SEBON) is critical to sector performance. Delays in approvals, inconsistencies in regulatory decisions, and limited depth of capital market instruments continue to constrain timely and cost-effective capital mobilisation. Strengthening SEBON’s capacity and professional leadership, enhancing predictability in approval processes, and expanding financial instruments are essential to align capital market dynamics with the needs of infrastructure development.
Cross-Border Trade: Opportunity Without Institutional Readiness
Nepal’s geographic position offers a distinctive opportunity to serve as a hub for research, development, processing, hospitality industry and data centres for both regional partners and international firms. Yet, Nepal has often misdirected its focus toward cross-border transmission infrastructure and bilateral power agreements, an approach that risks becoming a lost opportunity. Regional energy trade dynamics suggest that Nepal must carefully balance export ambitions with domestic utilisation priorities. Nepal must therefore design a strategy that prioritises the domestic end-use of power rather than exporting raw energy at low prices. Harnessing hydropower for industrialisation, digital infrastructure, and economic diversification would yield far exponential benefits than remaining dependent on external markets.
However, institutional readiness remains insufficient. Effective participation in energy-linked development requires more than physical infrastructure; it demands coordinated policy, competitive pricing mechanisms, and credible institutions. Without these foundations, Nepal risks remaining a passive exporter of surplus electricity instead of transforming hydropower into a driver of national economic advancement.
Existing Governance and Leadership: The Foundational Constraint
Nepal’s hydropower sector is often described as suffering from policy inconsistency, financing gaps, and institutional fragmentation. While these explanations are valid, they overlook a deeper problem: weak governance and poor leadership. The sector does not lack institutions; rather, it struggles because those institutions are led by individuals often influenced by political considerations rather than consistently grounded merit, accountability, or professional expertise.
This politicisation is evident across key energy institutions such as Nepal Electricity Authority, Electricity Regulatory Commission (ERC), and Alternative Energy Promotion Centre (AEPC) as well as in cross-sector regulatory bodies like the Securities Board of Nepal, which plays a critical role in capital formation for hydropower development. This extends to state-owned and project-specific entities such as Budhi Gandaki Hydropower Company, Vidyut Utpadan Company Limited (VUCL), Hydroelectricity Investment and Development Company Limited (HIDCL), and Rastriya Prasaran Grid Company Limited (RPGCL), along with their subsidiaries, including Simbuwa Remit Hydro, Jagdulla Hydropower Company, and Nalgad Hydropower Company under the Ministry of Energy, Water Resources and Irrigation. Leadership positions are frequently filled through opaque processes, undermining credibility and eroding institutional performance.
The consequences of this governance gap are significant. Frequent leadership turnover disrupts continuity in planning and execution, while shifting priorities reflect political preferences rather than sectoral needs. Decision-making becomes inconsistent, creating bottlenecks in licensing, grid integration, and investment approvals. Over time, professionalism is displaced by patronage, accountability by informal alignment, and initiative by compliance. Institutions that should operate as stable, rule-based organisations instead become reactive and personality-driven, weakening their ability to deliver large-scale infrastructure projects.
For investors and developers, this instability translates directly into risk. Even well-designed policies lose credibility when their implementation depends on discretionary leadership. Rising costs of capital, extended project timelines, and declining confidence in the sector are the inevitable outcomes. The problem extends beyond individual agencies to the Ministry of Energy, Water Resources and Irrigation, where frequent changes in senior leadership and weak accountability structures further constrain coordination and execution. Inter-ministerial processes such as forest clearance and land acquisition also suffer from delays and overlapping mandates, not because of absent policies but because of poor institutional coordination.
Ultimately, the root challenge is not institutional absence but the absence of consistently credible leadership. Reform must therefore begin with leadership reform. Transparent, competitive, and merit-based appointments, fixed tenures linked to measurable performance, and independent evaluation mechanisms are essential. Without these changes, structural reforms will remain ineffective. Hydropower development in Nepal cannot advance meaningfully until governance is reconfigured to ensure that institutions are consistently well-led.
Sequencing Reform for Systemic Impact
Reforming Nepal’s electricity sector requires a carefully sequenced dynamic approach that matches institutional capacity with the scale of transformation. Attempting simultaneous structural reforms without adequate readiness risks policy instability and market disruption. In the short term, priority must be placed on restoring credibility and predictability through merit-based leadership appointments, transparent PPA approvals, and consistent capital market regulation under the Securities Board of Nepal. These steps are essential to rebuild investor confidence and establish rule-based governance. In the medium term, reforms should focus on institutional restructuring. The gradual unbundling of the NEA is necessary to separate generation, transmission, and distribution functions, thereby reducing conflicts of interest. Stronger coordination between the ERC and SEBON will be required to align sectoral and financial regulation.
The introduction of independent power trading companies will further enable competition, improve price discovery, and diversify risk. In the long term, the objective must be the creation of a competitive and integrated electricity market. This includes establishing an independent system operator, enabling private sector participation in distribution, and strengthening Nepal’s role in regional electricity trade. Sequencing is critical: early improvements in governance and regulatory predictability will lay the foundation for deeper structural reforms, ultimately enabling a more efficient, competitive, and investment-ready sector.
Yet, reform is not merely a technical exercise; it is fundamentally a leadership challenge. Nepal’s electricity sector stands at a decisive moment: technical potential is established, investment interest exists, and regional opportunities are expanding. Without governance and leadership reform, however, these advantages will remain underutilised. The RSP government has an opportunity to redefine the trajectory of the sector by moving beyond incremental adjustments and embracing structural reform anchored in accountability, transparency, and professional leadership. Prosperity will not be determined by installed capacity alone, but by the quality of governance, the structure of markets, and the effectiveness of leadership that guides the sector.
Krishna Neupane is a hydropower engineer with a Master’s degree in Water Engineering and Management and is a gold medalist from the Asian Institute of Technology (AIT), Thailand. He previously served as CEO/Project Director of Simbuwa Remit Hydro Ltd. Email: kneupane2081@gmail.com.
Laxman Neupane, PhD, is a resource economist and previously served as Chairman of the Nepal Stock Exchange (NEPSE).
