In the current context of climate change, where global movements towards renewable energy are gaining momentum, the world’s attention is shifting to doubling renewable energy resources. The world has witnessed a significant rise in the production of renewable resources from 941 terawatt hours in 1965 to 7,931 terawatt hours in 2021. In this context, Nepal, with more than 6,000 rivers and rivulets, can become a bedrock of energy security for South Asia. The country's untapped hydropower can play a significant role in future energy supply as it is an affordable and renewable source of electricity with few environmental effects. It can significantly reduce the carbon footprints of neighbouring giants and one of the most populous countries, Bangladesh.

Nepal has declared Energy and Water Resources Decade (2018-28) to implement the Roadmap for Energy Development. Nepal has now become self-sufficient in electricity production, producing 11,064 GWh in 2022, a significant jump from 4,258 GWh in 2013. The roadmap promotes generating and using electricity, intending to increase production, consumption and national income by selling energy. With the rise in electricity output, today, 93 percent of the population has direct access to electricity. The government has aimed for 100 percent energy access by the fiscal year 2022-23.

Arun 4 (capacity 490.2 megawatts), West Seti (750 megawatts), Arun III (900 megawatts) and Lower Arun (769 megawatts) are major hydropower projects which will start distribution between 2030 and 2035. There has been increased production and export of energy and a reduction in energy imports. Where should we use this surplus energy? The ideal answer would be using it to replace traditional or non-renewable energy. Nepal has also become the first country in South Asia to participate in the Indian Energy Exchange from which it aims to expand trading in South Asia. Today, 14.1 percent of the country’s total imports consist of petroleum products which can be easily substituted by electricity. Nepal's hydropower can convert one-third of South Asia from non-renewable to renewable energy consumption, thus reducing approximately 3.5 percent of total greenhouse gas emissions worldwide by 2040.

Nepal should focus on making the best use of hydroelectricity and possibly hydrogen energy, which has a promising comparative advantage in the energy trade. This presents an opportunity for Nepal to decarbonise the region’s major energy end-use sectors such as households (use of electric cooking stoves) and transport (battery-powered vehicles).

Climate financing

Climate change priorities and strategies are mainstreamed into government planning and budgeting procedures; however, direct government investment is significantly low. Legal and practical obstacles limit foreign direct investment, private sector investment and bilateral and multilateral support. Energy-related industries had received 59.7 percent of the investment pledges as of March of fiscal 2020-21, but actual investment came to only 35 percent. There is a need to create a favourable environment by relaxing legal obstacles to attract more foreign investment in the vibrant energy sector.

The financial requirement for meeting climate objectives is huge and needs to be better defined. Currently, the primary climate funding comes from the government, multilateral funding agencies and small private sector contributions. The climate budget has increased from $3.75 billion in 2017-18 to $4.66 billion in 2021-22. Since 2010, Nepal has received more than $300 million in international climate funds from the United Nations Framework Convention on Climate Change (UNFCC) alone. According to the most recent data, between 2015 and 2020, Nepal received over $2.59 billion in climate finance from international development banks, with $1.2 billion coming in 2020 (excluding mitigation and adaptation funds). Most domestic banks finance hydropower projects with local currency debt, but their capacity for large-scale lending is limited. Between 2017 and 2021, private independent power producers invested $400 million per year in hydropower production.

The energy sector in Nepal received investments totalling, on average, $527 million annually from 2010 to 2017. The power generation sector received most of the funds (more than 70 percent), nearly all of which went to hydropower projects. Local independent power producers and the Nepal Electricity Authority came second and third, respectively, in terms of investment in hydroelectricity generation. A total of $29-$46 billion in investments is expected to be required in the electricity sector over the period 2018-2040. Although a large sum, it is insufficient to cover the annual needs.

Energy investments

Moreover, export-focused hydropower projects would require yearly incremental investments of $0.5-$1.0 billion. Even under the most optimistic assumptions, the financial sector’s capabilities are limited and require further investment. The underlying economics of export-oriented projects and the creation of a solid institutional and regulatory environment for energy commerce will determine their success in contributing to the national economy. Development partners are already on board, note World Bank support for Nepal’s Green, Resilient and Inclusive Development approach, climate financing and the Millennium Challenge Cooperation compact (United States-Nepal partnership), and Indian and Chinese energy investments.

The government should build on the momentum and gain more support from the international community. Also, the international community should understand Nepal’s untapped energy potential that can contribute to long-term climate goals in the region. In the coming years, domestic consumption (industrial and household) alone will not be sufficient to consume the ever-increasing electricity generation. India and Bangladesh particularly seem interested in Nepal’s enormous energy potential to lift the region out of energy poverty and point it towards environmental salvation by bringing regional energy connectivity to the centre of discussion, commitments and collaborations. Energy trade can be fruitfully fostered.