Nepal’s Hydropower Paradox: Is Climate-Dependent Power a Viable Source of Economic Growth?

Water. Fundamental to all life, but equally destructive in its own right. The basis of Nepal’s economic potential, but increasingly the source of its greatest macroeconomic plights.

The tragedy of the 2026 Nepal-China floods has not been lost upon even the most unperturbed reader, with over 1,300 people dead and thousands more still missing.¹

The floods not only tore apart families, but also resulted in devastating economic losses, particularly for the private sector. Among the industries affected was hydropower. Thirteen hydropower projects and five solar plants were hit, and the damage and losses to hydropower and its transmission lines are estimated at Rs. 151 billion (about $990 million).²

In just one flood, those losses alone came to the equivalent of about 2.3% of Nepal’s GDP,³ and the damage and losses across the economy, estimated at Rs. 408 billion, to about 6%.²

But this is not even the first time. In 2015, an earthquake meant that Nepal immediately lost around 15% of its electricity production.⁴ In 2016, a glacial lake outburst flood swept away an entire hydropower plant.⁵ So why does Nepal continue to invest so heavily in this seemingly fragile source of energy?

And, in light of this, an even more important question arises: is hydropower even the right way forward for Nepal?

What Lends Itself to the Hydropower Craze?

Nepal’s geography gives it a considerable advantage. Its proximity to the Himalayas has created a dense river network: the range is drained by 19 major rivers, and Nepal’s largest, the Kosi, the Gandak and the Karnali, rise north of its highest peaks and cut south through them in deep gorges. In fact, many of the major Himalayan rivers are probably older than the mountains themselves.⁶ More importantly, the rivers provide substantial hydropower potential, although their flow varies seasonally with monsoon rainfall, snowmelt and glacier melt.⁷

In fact, it could even be argued that global warming initially benefits Nepal’s hydropower industry. Over the last decade, Himalayan glaciers have lost mass 65% faster than in the decade before.⁸ In the short term, increased meltwater can contribute to river flows, supporting run-of-river hydroelectricity. However, this presents a potentially misleading advantage: accelerated glacier loss cannot guarantee a dependable long-term water supply, while increasing the risks of glacial lake outburst floods and other climate-related disasters.

But the fruits of this investment have been borne. In the 2025/26 fiscal year, Nepal’s National Statistics Office reported that electricity and gas were the country’s fastest-growing sector, growing by approximately 20.93%. Although the sector accounts for only around 2.08% of total GDP, it represents more than its direct contribution to national output.³ Reliable and affordable electricity can generate multiplier effects across manufacturing, transport and other industries by reducing production costs and encouraging investment. Furthermore, the growing demand for electric vehicles, which can use domestically generated electricity instead of imported petroleum, could reduce Nepal’s dependence on foreign fuel and make it less vulnerable to global supply disruptions, such as those affecting the Strait of Hormuz.⁹ However, for these benefits to translate into sustained economic development, Nepal must be able to generate and deliver electricity reliably.

The industry also employs more than 300,000 people, according to the president of the Independent Power Producers’ Association of Nepal.¹⁰ Beyond domestic economic benefits, Nepal’s focus on renewable energy has attracted international support, including funding and grants from countries such as Austria, Norway and the UK.¹¹

As a net exporter of hydropower, Nepal’s economic growth may seem like it is going swimmingly.⁵ However, it is impossible to ignore concerns over its exponentially growing obstacles.

The Other Side of the Coin

The Himalayan region is warming at approximately twice the global rate, reflecting the effects of climate change.¹² Rising temperatures can alter river flows and glacier dynamics, while increasing the risk of floods and landslides that threaten both communities and hydropower infrastructure. The economic stakes are considerable: the potential returns from well-positioned hydropower plants must be weighed against the risks of infrastructure damage, prolonged shutdowns and losses to surrounding communities. To assess whether the benefits justify these risks, it is necessary to examine the financial evidence.

Away from the megawatts, and instead towards balance sheets, profitability varies considerably between projects. Established hydropower companies can report substantial profit margins once their construction costs have been recovered. However, newer projects, particularly those burdened by debt, can experience much lower profits due to high interest payments, construction delays and cost overruns. Consequently, the profitability of hydropower depends not only on its generating potential, but also on financing costs, operating conditions and the ability to maintain production.

The September 2024 floods exposed the financial vulnerability of Nepal’s hydropower industry. Upper Tamakoshi Hydropower Limited, whose 456 MW plant was shut down by heavy rain and then damaged by landslides, experienced a prolonged interruption to electricity generation, resuming partial operations only after 88 days.¹³ The disruption raised concerns about the company’s future earnings and investment risk, illustrating how climate-related disasters can directly undermine the financial performance of hydropower assets.

Surprisingly, Upper Tamakoshi Hydropower Limited (UPPER) shares fell by only 3.41% between the closing price before the weekend of the floods and the first trading session afterwards. This appears modest compared with the company’s annual revenue decline of approximately 20.2%.

However, it is important to point out that these figures measure different things over different periods: the share-price movement reflects a single trading session, whereas annual revenue covers an entire fiscal year.¹⁴

The relatively small immediate decline in share prices could reflect investors’ expectations that the plant would recover and resume generation. Share prices reflect anticipated future earnings rather than simply the damage a company has already suffered. Nevertheless, this explanation remains a hypothesis, and broader stock-market movements may also have influenced the share price. Furthermore, the annual revenue decline cannot be attributed entirely to the floods without examining other factors affecting the company’s financial performance.

Beyond Profitability

It is also important to understand whether Nepal’s growing hydropower capacity translates into higher revenues from domestic consumption and international trade. Installed capacity alone does not guarantee economic returns; three valves must remain open in order for the money to flow in: the electricity must be generated when water is available, transmitted to consumers efficiently and sold at a viable price.⁷

For example, Nepal began regular exports of 40 MW of electricity to Bangladesh in June 2025, using India’s transmission network.¹⁵ This demonstrates that exporting electricity requires cooperation and infrastructure beyond Nepal’s own borders. Furthermore, seasonal oversupply during the monsoon can create an opportunity cost when transmission constraints prevent surplus electricity from reaching domestic consumers or export markets. Nepal may therefore invest in generating capacity without being able to capture the full potential revenue from that investment. This raises the question of whether expanding transmission networks and cross-border connections could generate greater returns than constructing additional power plants alone.

Employment presents another consideration. Although the industry reportedly employs more than 300,000 people, this figure does not necessarily represent permanent employment. Hydropower construction can generate substantial short-term demand for labour, but considerably fewer workers may be needed once a plant becomes operational. The long-term economic benefits therefore depend partly on whether the electricity generated creates additional employment and productivity gains across the wider economy, particularly in manufacturing and other electricity-intensive industries.

So, What’s Next?

Ultimately, Nepal’s hydropower paradox is not whether its rivers can generate wealth, but whether that wealth can be sustained. Hydropower offers the country a significant geographical advantage, with the potential to generate export earnings, support industrial productivity and reduce dependence on imported fossil fuels. However, the experience of Upper Tamakoshi demonstrates that installed generating capacity does not guarantee uninterrupted revenue, while seasonal oversupply and transmission constraints can prevent electricity from reaching its most valuable markets.

The opportunity cost of continued expansion may therefore be considerable. Capital directed towards new generating projects is capital unavailable for transmission infrastructure, energy storage, climate adaptation or alternative energy sources. Conversely, abandoning hydropower would sacrifice a significant source of domestic electricity and potential export income. The relevant question is not whether hydropower is inherently good or bad, but whether its expected long-term economic and social returns justify the financial and environmental risks when compared to alternative investments.

Consequently, Nepal’s future should not depend on maximising hydropower capacity alone. Investment must be accompanied by climate-resilient infrastructure, stronger transmission networks, diversified energy sources and measures that allow the benefits of electricity generation to extend beyond the construction phase. Hydropower can remain a central pillar of Nepal’s economic development, as it once again picks up the pieces that remain after the floods, but its contribution will depend mainly on the country’s ability to manage the environmental and structural risks that threaten its returns.