Kathmandu-As investment expansion continues in Nepal’s hydropower sector, the dispute over free power has created serious uncertainty among Indian investors. This has raised the risk of Indian investors pulling out of large hydropower projects worth hundreds of billions of rupees.

India’s state-owned company NHPC Limited, which was preparing to invest in three major hydropower projects — the 800 MW West Seti, 450 MW Seti River-6, and 480 MW Phukot Karnali projects, totaling 1,730 MW — has warned that the free power provision is affecting the projects’ financial returns and may force it to reconsider its investment plans.

According to source from the Ministry of Energy, the Indian side  has been dissatisfied after the Government of Nepal started strictly implementing the 21.9 percent  free power provision mentioned in agreements and memorandums of understanding (MoUs). The company has warned that if it is required to provide that level of free electricity, the projects may no longer remain financially viable, putting the investments at risk.

Amid this,  the situation  has become more complicated following a directive order issued by the Supreme Court (SC) regarding the Phukot Karnali Hydropower Project. The  SC  had instructed to review the free power  provision mentioned in the MoU and increase it if necessary, pushing the project’s financial structure back into reassessment.

The Indian side has maintained that the free electricity rate should not be applied uniformly across all projects. According to them, each project has a different cost structure, and applying the same percentage everywhere would create investment imbalance and reduce returns. Therefore, they have indicated that they will not proceed with large-scale investments unless there is a clear compensation model through tax, royalty, VAT, and other incentives.

The three projects were planned to be developed under the Build-Own-Operate-Transfer (BOOT) model through prior agreements between the Government of Nepal and Indian stakeholders. The Wes-Seti and Seti River-6 projects were advanced through Investment Board of Nepal in September 2022, while the Phukot Karnali project entered a joint partnership with the Vidhyut Utpadan Company Limited after 2022.

As per initial agreements, ownership of the projects would be transferred to the Government of Nepal after 25 years of operation. However, recent policy decisions, court orders, and strict enforcement of the free electricity provision have caused delays at the stages of study, DPR preparation, environmental impact assessment, and project development agreements.

Preliminary studies estimate that the West Seti and Seti River-6 projects require investments of more than $ 2 billion, while the Phukot Karnali project alone is estimated to cost around Rs 92 billion. Although the Indian company had announced major investments in these projects, current policy uncertainty and uncertain returns have reportedly forced it to reconsider.

Currently, Indian government-owned and private companies are directly or indirectly interested in hydropower projects in Nepal with a combined capacity of around 24,805 MW. Government discussions and energy-sector documents indicate the potential for investments worth trillion of rupees in the long term.

Indian government and private-sector companies have shown significant long-term interest in Nepal’s hydropower sector. Based on preliminary and formal discussions and agreements alone, Indian companies are involved or potentially interested in projects totaling approximately 24,805 MW.

The 900 MW Arun III project is being developed by SJVN Limited. The company is also expanding involvement in projects such as Lower Arun and Arun-4.

Similarly, the 900 MW Upper Karnali Hydropower Project is being advanced by GMR Group, while the 756 MW Tamor Reservoir Project is also under the group’s interest. NHPC had been preparing direct investment and development partnerships in projects including Phukot Karnali, West Seti, and Seti River-6.

In addition, Indian government and private sectors continue to show long-term interest in major multipurpose projects such as the 10,800 MW Karnali-Chisapani, 5,500 MW Pancheshwar, 1,200 MW Budhigandaki, and 1,900 MW Mugu Karnali projects.

If all these projects are fully implemented, preliminary estimates suggest Indian investment could exceed Rs 1.5 trillion. However, current policy uncertainty, disputes over free electricity provisions, and court directives have raised the possibility of delays or reconsideration of these investments.