Kathmandu — The 480 MW Phukot Karnali Hydropower Project, awarded to India’s state-owned company NHPC, has fallen into uncertainty after the Supreme Court issued a directive order to increase the share of free electricity to be received from the project. The court’s order has created further uncertainty at a time when the developer has been arguing that providing free electricity would pose challenges to the project’s construction.
The Electricity Generation Company Limited (VUCL) decided to implement the Supreme Court’s verdict and sent a letter to NHPC in the last week of mid-May. A virtual meeting was subsequently held in the last week of mid-June, but it ended without any conclusion, according to VUCL.
“We held a virtual meeting, but it remained inconclusive,” said Hiraman Waiba, acting Chief Executive Officer of the company. “During the discussions, the company stated that providing 21.9 percent free electricity would make the project financially unviable. We have asked them to submit all their concerns in writing.” However, NHPC has yet to send a written response.
NHPC has stated that it cannot provide 21.9 percent free electricity and, if it is required to do so, it has sought Rs 56 billion in Viability Gap Funding (VGF) from the government. According to sources, an environment conducive to negotiations between the two parties needs to be created, as the project would not be commercially viable under the terms set by the Supreme Court’s verdict.
The company argues that it is not feasible to provide 21.9 percent free electricity in all hydropower projects and that the Government of Nepal should seek a review of the Supreme Court’s decision in order to continue attracting foreign investment into the hydropower sector.
During the visit of then Prime Minister Pushpa Kamal Dahal to India on May 31, 2023, an investment memorandum of understanding was signed between Nepal’s Vidyut Utpadan Company Limited (VUCL) and India’s state-owned NHPC. Under the agreement, NHPC will hold a 51 percent stake in the Phukot Karnali project, while VUCL will retain the remaining 49 percent ownership.
According to Clause 5, Sub-clause 5.1 of the memorandum of understanding, the project is required to provide 21.9 percent of the electricity generated free of cost after the commencement of commercial power production. However, Sub-clause 5.2 of Clause 5 states that if the project is found to be commercially unviable, both parties may, in good faith, discuss alternative modalities—including the provision on free energy under Sub-clause 5.1—to make the project viable.
Relying on this provision, NHPC has informally been lobbying, arguing that the project would not be viable if it were required to provide 21.9 percent free electricity. However, the Supreme Court has ordered that the share of free electricity be increased beyond 21.9 percent.
Since the ruling, NHPC has not indicated that it intends to withdraw from the project, but it has remained in contact with the Nepali side, according to Waiba.
The memorandum of understanding (MoU) between NHPC and VUCL was valid for two years, and that term expired in May 2025. Since then, the MoU has not been renewed. According to Vidyut Utpadan Company Limited (VUCL), an additional six months will be added to compensate for the time lost due to the court case.
As of the end of mid-July 2025, VUCL had already spent Rs 1.54 billion (Rs 1.5399 billion) on studies and pre-construction activities for the Phukot Karnali project.
Energy Ministry Secretary Sarita Dawadi said that no discussions have so far been held regarding the Supreme Court’s verdict related to the Phukot Karnali project.
Meanwhile, NHPC has already submitted the Detailed Project Reports (DPRs) for the 800 MW West Seti Hydropower Project and the 450 MW Seti River-6 Hydropower Project to the Investment Board Nepal (IBN). The Investment Board stated that it has completed the technical review of the West Seti DPR and has already sent its feedback. However, feedback based on the financial assessment is still pending.
The survey license for the West Seti project remains valid until November 2026.
NHPC has also submitted the Detailed Project Report (DPR) for the Seti River-6 Hydropower Project. However, the technical and financial reviews of the report are yet to be completed and forwarded, according to officials.
The survey license for the Seti River-6 project expired in March/April 2026. Since the survey license has expired, the Investment Board Nepal (IBN) has asked the company to submit a request for an extension of the license period.
The validity period of a survey license can be extended in accordance with the Public-Private Partnership and Investment Regulations, 2020. Rule 29 of the regulations deals with provisions related to permits. Specifically, Sub-rule 9 of Rule 29 states that if a survey permit expires, the concerned proponent may apply for an extension within 30 days of the expiry date, stating the grounds and reasons for seeking the extension.
Sub-rule 10 states that if an application for the extension of a survey permit is received, the validity period of the permit may be extended upon payment of the prescribed fee.
According to the regulations, projects with capacities ranging from 200 MW to 500 MW are required to pay an annual fee of Rs 5 million for obtaining or renewing a permit, while projects with capacities exceeding 500 MW must pay a lump-sum annual fee of Rs 6 million. The permit can be extended upon a decision by the Board.
NHPC has already sought Rs 40 billion in Viability Gap Funding (VGF) for the West Seti Hydropower Project, arguing that the project is not financially viable and that it is also required to provide free electricity. The Public-Private Partnership and Investment Act and its regulations provide for the provision of VGF. However, the Government of Nepal has not yet implemented any project or development scheme by providing VGF.
According to the Investment Board Nepal (IBN), NHPC requested Viability Gap Funding (VGF) based on the findings of the project’s Detailed Project Report (DPR). However, despite the request, the Investment Board is still in the discussion stage and has yet to make a decision.
The 64th meeting of the Investment Board had decided to conduct further studies on the detailed report of the West Seti storage hydropower project, which is estimated to require an investment of Rs 160 billion.
At a meeting held on November 28, 2024, the Investment Board decided to increase the capacity of the West Seti project from 750 MW to 800 MW.
On August 18, 2022, in the presence of then Prime Minister Sher Bahadur Deuba, an agreement was signed between the Investment Board Nepal and NHPC Limited assigning the development of the West Seti and Seti River-6 (SR-6) hydropower projects to the Indian state-owned company.
The memorandum of understanding stipulates that 21.9 percent of the electricity generated must be provided free of cost once commercial operation begins. NHPC has been lobbying against this provision, arguing that it cannot provide free electricity at that level.
After analyzing the Detailed Project Report (DPR), a Project Development Agreement (PDA) will be signed if the parties decide to move forward with the project. The Investment Board Nepal (IBN) has already formed a committee to facilitate the PDA process.
According to earlier studies, the estimated cost of the 750 MW West Seti Hydropower Project was USD 1.32 billion, while the 450 MW Seti River-6 (SR-6) Hydropower Project was estimated to cost around USD 800 million.
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