Nepal is one of the poorest countries in the world—a quarter of its population lives on less than US$1 per day, and unemployment rates are over 40 percent. With a population of over 29 million, Nepal is facing an upward trajectory in energy demand, resulting in energy shortage situations where less than half of the nation’s electricity needs are met. In recent years, during the coldest winter months, Nepalis have experienced power cuts for over 16 hours per day. Nepal’s political and economic development has been overshadowed by its two neighboring global superpowers, China and India. The combination of poverty and political instability has stunted the growth of an otherwise vibrant and culturally rich society, endowed with the breathtaking Himalayas, rich biodiversity, and most importantly, water.

Nepal’s extensive river and waterfall systems have led energy experts to predict its feasible hydropower output to be near 43,000 megawatts (MW). However, political obstacles have stalled energy infrastructure development and investment in hydropower projects. The Nepal electricity authority reports current annual hydropower output to be at 634 MW, grossly below potential and insufficient to meet domestic energy demand. Though the government remains in gridlock over the drafting of a new constitution, Nepal’s steps for future development lie in harnessing the full potential of hydropower in socially and environmentally sensitive ways that benefit local economies.

Political uncertainty has stalled domestic reform efforts and dissuaded foreign investors from pursuing energy projects within Nepal. A recent example of an unfulfilled venture is the 750 MW West Seti hydropower project, awarded to Australian company Snowy Mountain Energy Corporation 14 years ago, shortly before the start of the decade-long civil war in 1996. Seven years ago, the power-trading company PTC India signed a deal with the Nepalese government to purchase the power produced by the West Seti facility. Though the war ended in 2006, the project’s licensing period expired in 2010 without any progress, because of opposition from the Unified Communist Party of Nepal (Maoists) to awarding economic deals to foreign companies and citizens’ anger over the export of electricity at the expense of domestic needs. While Nepal would benefit from meeting domestic energy demand, there exists a tremendous market potential in India and China.

Four years after the signing of the Comprehensive Peace accord between the Nepalese government and the Maoists, and over two years after democratic elections ended a 239 year-old monarchy, the Nepalese government remains in a state of limbo. A new prime minister, Jhala Nath Khanal of the Unified Marxist Lleninist Party (UML), was elected on February 3, 2011 after gaining last minute support from the Maoists. This election points to the potential for an increasingly left-leaning government, which could favor the Maoists’ ambitions. In the meantime, the moderate Nepali Congress Party and the Maoists continue to compete for power in a parliament that lacks both a majority party and a ruling coalition. The lack of consensus among the 28 parties represented in Parliament has resulted in a prolonged struggle to draft a constitution. The original deadline for a new constitution passed on May 28, 2010, resulting in a one-year deadline extension to May 28, 2011.

Opponents to hydropower projects point to the social and environmental impacts of dam building and river diversion in the Himalayas. Legitimate concerns about dam safety in a seismically active region, the risks of flooding, high concentrations of dams on any single water source, and potential submergence of villages underscore the importance of careful coordination between policymakers and environmental experts. As the Nepalese economy relies heavily on agriculture, projects should be designed to account for changes in river flow that may negatively affect farmers downstream. Project planners already employ field assessments and public forums to examine the social and environmental impacts of hydroelectric plants and energy transmission lines. Independent organizations like the Nepal Environmental and Scientific Services (NESS) draft reports on the impacts of projects on local communities, particularly with regards to indigenous peoples and vulnerable populations.

In addition to standard compensation for land and potential displacement of local populations, the NESS has outlined ways to better ameliorate the social and economic costs of such projects by employing local populations in the construction of projects, implementing skills-based technical training, improving local schools, and operating with deference to local authorities and laws. The long distances required for the transmission of power from plant to load centers also necessitate further investment in energy distribution technologies. Proposed projects such as the 70-km-long Kabeli transmission project, with funding from the World Bank’s International Development Association, seek to enhance the efficiency of electricity grids and transmission lines. A commitment to the development of hydropower can further the knowledge of and interest in sustainable development. In the future, this may attract increased investment and create a virtuous cycle.

In recent years, Nepal has focused on expanding tourism beyond its four percent of the country’s gross domestic product in 2011. Reliable electricity production will be a boon for the tourism industry by enhancing convenience and serving as evidence of Nepal’s sustainable development. Collaboration between energy agencies and tourism boards may be constructive in ensuring preservation of important cultural and religious sites.

While India has traditionally maintained significant influence in Nepal, recent Maoist rule has nudged Nepal ever closer to China, as both India and China recognize Nepal’s strategic potential as an economic market and political partner. Greater economic development and political stability in Nepal can provide a catalyst for negotiations with its neighbors. The precise mechanisms with which Nepal will proceed remain unclear. The absence of a prime minister or a constitution makes policy-making extremely difficult, particularly at a time when opposing political factions in parliament are determined to disagree. With its proximity to the world’s two
most populous nations, Nepal should channel its own liquid gold to support domestic electricity needs and export to energy-hungry markets.