29 April 2025, NIICE Commentary 10775
Sumanth Goud
South Asia stands at a pivotal juncture, where the global shift towards renewable energy intersects with intricate regional competition. Nepal, a Himalayan nation endowed with 83,000 megawatts (MW) of hydropower potential, is poised to play a transformative role in supplying electricity to India, Bangladesh, and beyond. As the region pursues clean energy to meet climate commitments, Nepal’s rivers offer a pathway to economic development and energy cooperation. Yet, these ambitions unfold within a complex geopolitical landscape, shaped by the strategic interests of India and China, and challenged by infrastructure limitations, environmental vulnerabilities, and cybersecurity risks. From its strategic location between two global powers, Nepal must navigate these dynamics to harness its hydropower for regional benefit. This commentary examines Nepal’s contribution to South Asia’s energy transition, the geopolitical and practical obstacles it faces, and strategies to foster sustainable progress.
Nepal’s Hydropower Potential in Regional Energy Transition
Nepal’s 6,000 rivers, sustained by Himalayan glaciers and monsoon rains, hold an estimated hydropower capacity of 83,000 MW, with 43,000 MW deemed economically viable. Currently, Nepal produces approximately 2,800 MW, meeting 1,700 MW of domestic demand and exporting 452 MW to India, generating USD56 million in revenue in 2022. Hydropower accounts for 96.2 per cent of Nepal’s electricity, yet only 1–2 per cent of its water resources are utilised, underscoring significant untapped potential. With 200 projects under construction, Nepal aims to achieve 9,000 MW by 2033, positioning itself as a key contributor to South Asia’s energy landscape. This potential aligns seamlessly with the region’s renewable energy ambitions. India targets 500 gigawatts of renewables by 2030, Bangladesh seeks 40 per cent clean energy by 2041, and Pakistan aims for 60 per cent by 2030. Nepal’s clean hydropower provides a sustainable alternative to fossil fuels, supporting regional efforts to reduce carbon emissions. A landmark 2023 agreement to export 500 MW to Bangladesh via India’s transmission grid marks a significant step towards energy integration in South Asia. For Nepal, where exports and remittances are the economic mainstays, hydropower offers a dual opportunity: bolstering national revenue and strengthening diplomatic ties.
Foreign investment is critical to realising this vision. India’s funding of the 900 MW Arun-3 project and the 750 MW West Seti underscores its commitment to Nepal’s energy sector, however, significant challenges persist. Outdated transmission infrastructure restricts export capacity, while political instability hampers long-term planning. Climate-related disasters, such as the 2024 floods that damaged 26 hydropower projects and resulted in a loss of 1,500 MW, highlight the sector’s vulnerability to environmental risks. Nepal needs to cement its role as a regional energy hub by addressing these obstacles through resilient infrastructure and strategic foresight.
Geopolitical Dynamics and Emerging Risks
Nepal’s hydropower ambitions are intricately tied to the strategic interests of India and China, requiring careful diplomacy from its strategic location. India has been a longstanding partner, financing projects like Arun-3 and West Seti, and importing 450 MW since 2014, fostering mutual economic benefits. Since 2018, India’s policy to prioritise projects without Chinese involvement has reshaped Nepal’s energy partnerships, with contracts such as West Seti reassigned to Indian firms to secure regional energy markets. This reliance on India carries risks: in 2022, Nepal lost USD90 million when India declined to purchase 500 MW of surplus power, underscoring the need for diversified export markets. China, through the Belt and Road Initiative (BRI), seeks to expand its influence by offering funding and technical expertise for Nepal’s energy infrastructure. While these initiatives provide development opportunities, BRI loans raise concerns about debt sustainability, as observed in other partner nations, necessitating cautious financial planning. Additionally, China’s Brahmaputra dam, expected to generate 300 billion kilowatt-hours annually, could disrupt water flows, adversely affecting Nepal’s hydropower generation and agricultural productivity. This transboundary issue highlights the urgent need for cooperative water management frameworks to ensure regional stability. The United States contributes a secondary role through the USD500 million Millennium Challenge Corporation (MCC) compact, ratified in 2022, to bolster Nepal’s transmission infrastructure. However, US influence has diminished since 2025 due to reduced foreign aid commitments, leaving India and China as the primary external actors. Nepal’s non-aligned foreign policy requires astute diplomacy to leverage these partnerships while preserving strategic autonomy.
Beyond geopolitical complexities, Nepal faces practical challenges. Environmental vulnerabilities, including glacial melt, erratic monsoons, and floods, further threaten infrastructure reliability, as evidenced by the 2024 flood damages. Lessons from Bhutan and Laos, where overreliance on hydropower led to ecological and economic challenges, underscore the need for balanced development.
Nepal can adopt practical measures to address these challenges and strengthen its hydropower sector. Diversifying export markets to Bangladesh and Tibet can reduce reliance on India, boosting economic stability. Building climate-resilient infrastructure, like flood-resistant dams, and using regional climate data can mitigate environmental risks. Promoting energy cooperation through SAARC or BIMSTEC can ease geopolitical tensions and support cross-border power trade. Prioritising grants over loans ensures financial independence, while energy storage systems can manage seasonal surpluses, enhancing grid reliability and domestic supply.
Regional cooperation frameworks offer a promising avenue for progress. The Bangladesh-Bhutan-India-Nepal (BBIN) initiative exemplifies energy interdependence, with Bhutan’s hydropower exports complementing Nepal’s seasonal production. By leading SAARC or BIMSTEC energy dialogues, Nepal can facilitate discussions on water and energy management, fostering trust and collaboration among regional stakeholders. These efforts can reposition Nepal’s rivers as catalysts for unity rather than sources of contention.
Conclusion
Nepal’s hydropower potential holds the key to transforming South Asia’s energy landscape, driving economic growth and regional connectivity through clean energy. Yet, its ambitions are shaped by the strategic interplay of India and China, compounded by environmental vulnerabilities and infrastructure challenges. By fostering balanced diplomatic relations, investing in resilient systems, and spearheading regional cooperation through frameworks like SAARC and BIMSTEC, Nepal can harness its rivers to deliver shared prosperity. As South Asia navigates the complexities of its energy transition, Nepal’s ability to blend strategic foresight with sustainable development will define its legacy as a vital contributor to a greener, more cohesive region.
Sumanth Goud is a Research Intern at NIICE Nepal and currently pursuing his master's in National Security Studies at the Central University of Jammu, Jammu and Kashmir, India.
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