Abstract
Foreign Direct Investment (FDI) has become an essential source of financing for infrastructure and energy development in Nepal, especially in the hydropower sector. Despite Nepal’s abundant hydropower potential of around 83,000 MW, only a small portion has been harnessed so far. Limited domestic capital and technical resources have made FDI indispensable for large-scale hydropower projects. This paper highlights the importance of foreign investment in Nepal’s hydropower development, discusses the government’s policies and legal frameworks governing FDI, examines the challenges faced by foreign investors, and explores potential opportunities for sustainable energy growth. The paper concludes that strengthening the investment environment, ensuring political stability, and promoting cross-border energy trade are key to maximizing Nepal’s hydropower potential through FDI.
Introduction
Hydropower holds a strategic place in Nepal’s development agenda. Blessed with around 6,000 rivers and an estimated technical potential of up to 83,000 MW (or around 42,000 MW economically viable) the country stands at the threshold of becoming a regional energy hub. By early 2025, Nepal’s installed hydropower-dominated capacity stood at approximately 3,000 MW, representing only a small fraction of its technically feasible potential (42,000 MW).Given this gap, domestic resources alone have proven insufficient to expedite large-scale hydropower development. This context makes FDI especially important: foreign investors bring not just capital but technical know-how, global project management experience, and connected export market access.
The Government of Nepal has recognized these dynamics and moved to liberalize the investment regime for hydropower with full foreign ownership permitted, incentives offered and a clear policy environment declared. Yet, the inflow of FDI into hydropower, while significant in some respects, is still hampered by structural, regulatory and market constraints. For instance, in FY 2021/22 the hydropower sector accounted for around 32.8 % of total FDI inflow in Nepal. This suggests both promise and limitations.
Current Status of FDI in Nepal’s Hydropower Sector
Nepal’s hydropower sector has gradually evolved into one of the most attractive destinations for Foreign Direct Investment (FDI) within the country’s energy landscape. Following the economic liberalization policies introduced in the early 1990s, the Government of Nepal opened the hydropower sector to private and foreign participation through frameworks such as the Hydropower Development Policy (2001), the Electricity Act (1992), and the Foreign Investment and Technology Transfer Act (FITTA, 2019). These policy reforms created a relatively open environment for foreign investors by allowing full foreign ownership, profit repatriation, and flexible power purchase arrangements. Consequently, over the past three decades, Nepal has witnessed growing international interest in developing its vast hydropower resources, which are estimated at over 83,000 MW in potential generation capacity.
Some notable projects with FDI involvement include:
Early Bilateral Projects:
India, China, and the former USSR were the main foreign investors in Nepal’s early hydropower projects. India supported Pardi (1 MW), Trishuli (21 MW), and Devighat (14.1 MW); China built Sunkoshi (10.5 MW) and Seti (1.5 MW); and the USSR financed the Panauti (2.4 MW) project.
Multilateral and Loan-Based Projects:
After the 1970s, Nepal began receiving loans for hydropower from institutions like the World Bank and Asian Development Bank. Countries such as Japan, Kuwait, Germany, China, and Korea helped develop major projects like Kulekhani I & II, Kaligandaki ‘A’, Marsyangdi, and Middle Marsyangdi.
Structural Adjustment and Private FDI:
During the 1980s and 1990s, economic reforms allowed private foreign companies to invest. GMR and Sutlej from India, Statkraft from Norway, and others contributed to projects like Bhotekosi (45 MW) and Khimti (60 MW), with both funding and technical assistance.
Recent Large-Scale FDI Projects:
Currently, major hydropower projects such as Upper Karnali (900 MW) and Arun III (900 MW) are being developed with Indian investment, while West Seti (750 MW) is backed by Chinese investment. These projects show the continuing role of FDI in Nepal’s hydropower sector.
Hydropower has consistently attracted a large share of total FDI commitments. According to data from the Department of Industry, the hydropower sector alone accounts for nearly one-third (around 30–35%) of total approved FDI in Nepal. However, the disbursement and actual utilization rate remain low, reflecting persistent procedural and logistical barriers.
Law Governing the hydropower project
The primary law governing the hydropower project are:
| Law governing hydropower | Scope |
| Electricity Act 1992 and Electricity Rules 1993 | Mainly deal with licensing of electricity project |
| Electricity Regulatory Commission Act 2017 | Established Electricity Regulatory Commission for the effective management of production, transmission, distribution and trade of electricity. |
| Nepal Electricity Authority Act 1984 | Governs Nepal Electricity authority for the management of production, transimission, distrubition, and trade of Electricity |
| Public Private Partnership and investment Act 2019 | Governs the project having capacity of more than 200MW or hydropower project having investment cost of more than 6 billion |
Governing Authority
| Authority Governing Hydropower in Nepal | Functions of the authority |
| Department of Electricity Development | Main administrative authority responsible for regulation of electricity projects -Has the authority to grant, renew, amend and revoke license of hydropower projects |
| Investment Board of Nepal | Investment approval is required from the IBN for the hydropower projects having capacity of more than 200 MW and having investment of more than 6 Billion Nepalese Rupees. |
| Electricity Regulatory Commission | Management of production, transmission, distribution and trade of electricity. |
Modes of development of hydro power project:
Hydropower projects are developed on Build Own Operate and Transfer Model. There are three modes of development of hydropower projects in Nepal:
Obtaining license pursuant to Section 3 of the Electricity Act 1992
Directly enter into an agreement with Government of Nepal
Competitive Bidding Process
Hydropower survey license:
A hydropower survey license is a legal authorization granted by the Government of Nepal that permits an individual, company, or entity to survey a specific river or site for hydropower potential. It allows the licensee to:
- Conduct field surveys
- Prepare feasibility and design studies
- Undertake hydrological, geological, and topographical analysis
- Prepare environmental impact assessments (EIA) or Initial Environmental Examination (IEE) reports
The survey license does not permit electricity generation. It is only the first step in the licensing regime for hydropower development in Nepal. After the survey is completed, the licensee may apply for a generation license based on the approved feasibility report.
Authorities Involved in Hydropower Survey License:
- Ministry of Energy, Water Resources, and Irrigation (MoEWRI) – Policy oversight and approval for large projects.
- Department of Electricity Development (DoED) – Responsible for issuing survey and generation licenses.
- Investment Board of Nepal (IBN) – Approves large-scale projects exceeding specified capacity (usually above 200 MW).
- Ministry of Forests and Environment (MoFE) – Approves Environmental Impact Assessments (EIA) and Initial Environmental Examinations (IEE).
Documents Required for Hydropower Survey License in Nepal:
The following documents must be submitted to the Department of Electricity Development (DoED):
- Application form for survey license (available from DoED)
- Certificate of Incorporation of the applicant company (issued by Office of Company Registrar)
- Memorandum of Association (MOA) and Articles of Association (AOA) of the company
- Citizenship certificate of directors and shareholders
- Board resolution authorizing submission of application
- Financial capability statement (proof of investment capacity, bank guarantees if required)
- Technical proposal with project details (location, capacity, river system, preliminary studies)
- Maps of the proposed project site (topographic and hydrological maps)
- Environmental documents (initial scoping, environmental screening if available)
- Power of Attorney if applying through a representative
- Recent audit report of the applicant company.
Step-by-Step Legal Procedure for Obtaining a Hydropower Survey License in Nepal
- Incorporate a Company
- Register the applicant entity under the Company Act, 2063 at the Office of the Company Registrar.
- Prepare MOA and AOA with hydropower development as one of the objectives.
- Prepare Application and Documents
- Collect required documents including technical and financial details.
- Prepare feasibility study concept and attach maps and project details.
- Submit Application to DoED
- File the survey license application at the Department of Electricity Development along with all required documents.
- Pay the prescribed application fee.
- Verification and Evaluation
- DoED reviews documents, technical capacity, and financial statements.
- The application may be referred to other ministries if overlapping with environmental or forest land issues.
- Publication for Objections
- The application details may be published in a national newspaper for potential objections or competing claims.
- Approval by DoED
- If no objections or issues are raised, DoED grants approval.
- Larger projects may require approval from the Ministry of Energy or Investment Board of Nepal.
- Issuance of Survey License
- Survey license is issued with defined capacity, river location, and validity period (usually 2 years, extendable as per law).
- Post-License Compliance
- Conduct surveys, feasibility studies, and environmental assessments.
- Submit reports within the validity period.
- Apply for generation license after completion of survey.
Tenure of licenses
| License for hydro power project | Tenure of license |
| Survey license | 5 years |
| License for (a) Generation, (b) Transmission and (c) Distribution of Electricity | 50 Years (In practice the government grants for 35 Years and can be extended up to 15 Years subject to the Discretion of Government) |
Agreement with the Government of Nepal under Section 35 of the Electricity Act 1992
Under Section 35 of the Electricity Act, the Government of Nepal has the authority to enter into agreements with private parties for the generation, transmission, or distribution of electricity. This provision enables the government to directly facilitate hydropower development through contractual arrangements. However, the Act does not explicitly define the extent or practical application of the rights provided under this section, which has led to some ambiguity in interpretation. In actual practice, the government typically invites competitive bids for such projects and selects a developer based on the terms outlined in the agreement, allowing the chosen company to undertake the project in accordance with specified conditions.
Conclusion
Foreign Direct Investment (FDI) has become vital for Nepal’s hydropower development, helping bridge the gap between potential and actual generation. Although Nepal has the capacity to produce over 83,000 MW of electricity, only about 3,000 MW has been harnessed so far. FDI-backed projects like Arun-3 and Upper Trishuli-1 show strong prospects, but challenges such as complex licensing, bureaucratic delays, and weak coordination still hinder progress. Streamlined procedures, transparent agreements, and stable policies are essential for Nepal to fully realize its hydropower potential and achieve sustainable economic growth.