Pump water, store energy

Rethinking future energy development in Nepal by combining solar and hydro energy

Dipak Gyawali Sudhindra SharmaFeb 8, 2025News

1,772MW La Muela PSH in Spain. Photo: ENGINEERING NEWS RECORD, IDA

Context matters for enterprises, especially if it changes dramatically, and this is what is happening in Nepal’s hydropower sector. It is primarily about economics.

The price of electricity generated by what are called Variable Renewable Energy (VRE) sources, primarily solar photovoltaics (PV) and wind that are intermittent, have come down spectacularly, from 46¢ per unit (kWh) in 2010 to 4¢ for solar PV today.

India’s energy think tank TERI estimates that it will drop to as low as 2.2¢ by 2030. In contrast, hydropower cost is at 6¢ and not expected to decrease much despite improvements in construction technologies.

There is increased awareness of the social and environmental costs of dam building: displacement, submergence of farms and forest, impact on riverine ecology, risks from climate change etc.

Hydropower, though a clean energy source, is not as clean socially or environmentally. It is also inflexible, unlike solar which can be dismantled and taken elsewhere, with a very long construction time (five years or more) compared to solar PV which can be set up in a few months. Climate change is adding new uncertainties, and costs, with both increased flood intensity and reduced dry season discharge when hydroelectricity is most needed.

Pump water, store energy NT — Adapted from the Australian National University presentation and NSW Climate and Energy Action.

Traditional electricity grids in Nepal and elsewhere have been conceptualised as one-way linear systems from the producer-generator via high voltage transmission lines to the distributor and finally the consumer. The advent of cheaper VRE sources has now made the grid a two-way street with consumers also spread out as multiple small-scale producers.

This, and advances in electronics technology, have led to ‘smart inverters’ that figure out how much sunshine there is and maximise solar PV consumption, allowing grid supplied electricity to be imported only to the minimum needed to meet the balance.

These developments have also led to technologies such as time-of-day digital metering and innovative means such as net metering that allow selling to as well as buying from the grid.

Does this mean that hydropower will be consigned to obsolescence? Yes, if the conventional approach is blindly pursued, but not if a different line is taken. The usual method has been to build a spree of run-of-river hydro plants, which entails damming a river and diverting water via a tunnel and a penstock pipe to run turbines further below the river utilising the height difference.

Nepal has almost 3,000MW of such systems currently, and that figure is slated to double in the next few years if all the projects under construction come on line. The problem with such systems, besides the long gestation period and high costs, is that with the decline in river flow in the dry season, their output dwindles to a third of the installed capacity when power is most needed. It has necessitated importing massive amounts of high-cost, dirty coaxl-fired electricity from India, leading to a nine-billion rupees trade deficit in 2022-23.

However, if a new approach – Pump Storage Hydro (PSH) in tandem with solar PV – is pursued, it promises hydro development a new and more productive life in the years ahead. Such a strategy also promises to quickly and more economically reverse the current situation of poor electricity quality that is hampering increased electricity use in Nepal.

Despite almost 98% electricity coverage in Nepal, it is one of the world’s lowest electricity consuming countries. Based on research on PSH done with Australian National University together with partners in Sikkim and Bhutan, as well as on energy transition in households and industry with Sweden’s Lund University Center for Sustainable Studies, this essay will explore what issues such an innovative approach faces from technological to social and legal angles.

Prisoners of the Past

History shapes institutions, their genetic origin as well as the trajectory of their subsequent development; and ignoring it not only leads one to unwarranted expectations from them but also opens up the dangers of repeating the earlier mistakes in attempting reforms.

There are four clear stages in the development of Nepal’s electricity sector institutions:

The Rana period from 1911 till the post-Rana interregnum that saw electricity managed by the Bijuli Adda mainly for Kathmandu Valley and its vicinity.
Panchayat period with the Electricity Department (ED) building hydropower plants and Nepal Electricity Corporation (NEC) responsible for distribution.
These two were merged to create the vertically integrated government monopoly Nepal Electricity Authority (NEA) in 1985.
The demise of the expensive World Bank-led Arun III in 1995 and the subsequent entry of private developers, community electricity users’ groups and other overlapping government bodies along the way till today.

What is remarkable in this near ‘institutional anarchy’ is that, except for the Alternative Energy Promotion Center (AEPC) which is like a poor cousin, all others are conventional hydropower dominated.

It is this institutional mindset that any rethinking of hydropower development away from the conventional has to contend with. The 1985 merging of NEC and ED into the NEA was not an internal Nepali initiative but pushed by foreign donors funding large hydro developments who wanted one entity to deal with, and which would be responsible for loan repayments.

After 10 years of single-minded focus on promoting the expensive Arun III under this arrangement, a period of panic in the officialdom set in once the World Bank pulled out in 1995.

Ironically, it opened the door for private sector participation in hydropower development, first with foreign investment in the 36MW Bhote Kosi and 60MW Khimti, and after 1998 with Nepali developers through the policy initiative of late deputy prime minister Sailaja Acharya.

Currently, the private sector has more installed capacity and more projects spread across the country than the NEA, and it is expected to more than double in the coming years.

The private sector’s capacity to implement bigger projects has also improved significantly. The negative side is that they are all run-of-river (RoR) projects with no seasonal storage.

This situation arose because, following the collapse of Arun III, strictly optimised ‘generation expansion planning’ that was practiced during the Panchayat period in selecting projects for development was done away with and licenses to develop any project was indiscriminately given to anyone asking for it.

The result is the licensing away of entire river stretches across the country to different developers, making any comprehensive river basin planning, not just for hydropower but for overall water resources development, near impossible.

What is ironic in this spree of development is that the private sector has stampeded into making investments and building hydro plants without a careful analysis of the power sector’s real demand and market conditions.

The focus has been more on construction and less on kilowatt-hours generated, resulting in a massive generation surplus during the monsoon months and debilitating deficit during the winter and spring dry seasons.

Private developers are pleading to have their rainy season surplus exported to India, forgetting that for India, water and electricity are not marketable private but strategic commodities.

While India has huge demand for power, ironically there is effectively no market for Nepal’s electricity as producers and consumers cannot freely enter and exit the Indian grid. What and how much India will import from Nepal is determined not by supply and demand but by security-obsessed bureaucrats that want to make sure no major Chinese investment enters Nepal’s hydropower sector.

The Nepal government is not blameless, having self-hypnotised itself over the last half century into believing that with its theoretically economic potential of 42,000MW, it is rich in hydropower and can export to the Indian ‘market’ to earn ‘hydro dollars’.

The truth is that even if all of that potential was developed (as opposed to the approximately 3,000MW so far), it pales into insignificance against India’s year 2023’s installed capacity of 426,000MW, to say nothing of China’s 3,349,000MW.

If exploited for Nepal’s own development needs, however, it would be sufficient and significant. But as a South Asian market-commanding export commodity, Nepal’s hydroelectricity potential makes little sense, more so since it is not hydroelectricity but Nepal’s water that semi-arid India is really interested in.

This delusion has distorted energy policy-making in Nepal over the past decades. Nepal has entered a dangerous electricity trading scheme such as spot-market pricing with India that it has little understanding of, or control over.

The result has been Nepal’s kilowatt-hour exports have been at a third or less of the price than at which it imports the same units from India during the dry season, resulting in a net loss of Rs9 billion in 2022/23.

Policy makers have chosen to ignore a critical USAID study in 2003 that showed that if Nepal exported electricity it would earn only 6¢/kWh whereas if it used that electricity within Nepal itself for its commerce and industry, its value added would be 86¢/kWh. And to get those benefits, it would not only have to rethink its power export policy but also its grid expansion philosophy: currently almost 98% of Nepal’s households have access to electricity.

But the quality of the distribution system (designed for lighting) is too poor, with very frequent, unannounced outages as well as voltage fluctuations to handle industrial energy needs. Inter-Disciplinary Analysts (IDA) surveys have shown that west Nepal’s industrial and tourist hub of Kohalpur-Nepalganj suffers as much as 35 unscheduled power outages in a week, with industries suffering a loss in discarded material of up to 12%, not counting labour time loss.

Hope on the Horizon

With all these historical baggage of policies and institutional deficiencies, the future for Nepal’s hydropower development is, however, far from hopeless.

On the contrary, if a rethinking of the overall energy context is undertaken, and the ‘only hydro’ mindset is changed to give other renewable energy sources sufficient policy space, a reconceptualised hydropower sector could see much more robust and productive rejuvenation.

Its future lies not in the conventional path of more and more r-o-r development but in entering into a marriage of sorts with VREs such as solar PV, as well as other renewables such as biogas and sustainably harvested forest products in the form of firewood and briquettes.

IDA’s 2024 household survey has shown that in rural Nepal biogas, where functioning, is still the cheapest source of cooking fuel but it is used in only 2.8% of the households.

The main reason for the lack of uptake or even decline since the 2000s is the youth outmigration from rural Nepal, consequent absence of farming hands and the decline in livestock keeping.

The good news is regarding firewood: its use has come down over the last three decades from 94% to 74% even as Nepal has seen its forest coverage grow to 45.31% of its total area, a significant increase over the last decades thanks mostly through community forestry efforts.

Not all energy types are the same when it comes to use. Quality of the energy source matters, with higher quality energy such as grid electricity to be used for higher, more productive purposes.

Much of the cooking and home heating, especially in rural areas, can be sensibly done with sustainably harvested firewood and briquettes or biogas produced through recycled organic wastes with the added benefit of better hygiene.

Charging mobile phones, running TV, computers and agricultural machinery cannot be done through them but require electricity.

There is the concept of ‘energy ladder’ which says that as people get richer, they opt for higher quality energy sources, graduating from firewood to kerosene to electricity and microwave ovens.

The IDA survey indicates that even in rural areas it is not the ladder but ‘energy stacking’ that is at work. People keep multiple energy sources at home including LPG stoves (whose use has exploded to 62.4% of households) and induction cookers, but are still opting for firewood for everyday cooking needs while using cleaner sources for quick convenience or on prestige occasions.

Electricity needs of heavy industries as well as households are not being properly met by the Nepali national grid because it suffers from low voltage, frequent unannounced outages, voltage surge and spikes that damage equipment and cause production loss.

Grid electricity also suffers from unreliability in the dry season with very high dependence on import from India. That situation could have been ameliorated by building storage hydro projects, but in over three decades, multiparty democracy has not been able to repeat the Panchayat’s building of Nepal’s only storage hydropower project (60 MW Kulekhani I).

Prospective storage hydro projects such as West Seti, Upper Karnali, Budhi Gandaki and others have been mired in controversy or hived off for export to serve Indian rather than Nepali grid.

This is where pump storage hydro (PSH) promises hope for the sector. It is an old technology, just basically the same hydro with a new twist in location and style of functioning.

Some PSH units have been functioning in Europe and Japan for more than 100 years. Water is pumped from a lower reservoir or the side of river to a higher pond using cheap off-peak grid electricity or surplus solar PV power, and the stored water is then used to generate electricity during peak or no-sunlight periods.

Almost all the technology is tried and tested hydro technology with the only difference being that its turbine and generator also function as a big reversible pump to force water uphill when night-time electricity price is low or there is excess solar PV generation. With the cost of solar PV plummeting, PSH has acquired more salience as a giant storage battery.

Nepal’s transport sector is seeing a stampede towards electric vehicles driven by pure economic consideration: running vehicles with their batteries charged with grid hydroelectricity is far cheaper than with petrol or diesel.

The same story is already playing out in Nepal with solar PV over grid supplied electricity with its lower price benefits, especially for enterprises that work mostly during daytime. The big drawback for solar PV is its intermittent nature, requiring massive electricity storage during non-sunshine hours. Even the best of batteries is good only for small businesses, not for large industries which require heavy power supplies that only PSH can provide.

PSH could therefore contribute significantly in solving the problem of low-quality electricity including frequent outages that the grid currently suffers from. If ‘married’ with solar PV development, that perfect match would balance solar PV’s cheap power with PSH’s massive electricity storage capacity to provide both economic and system stability benefits, obviating the need for imported power.

The benefits of a PSH approach to hydro development are multiple. Nepal has a plethora of heights where water storage ponds can be situated. Many existing hydropower plants of both the NEA and the private sector could be cheaply and quickly re-developed to make them PSH.

Access roads, transmission lines, staff quarters, much of the existing hydro-technical structures do not have to be replicated as they must be if new r-o-r developments are initiated. As enthusiastically supportive colleagues from Bhutan’s forest department pointed out, the upper ponds of PSH could be very useful for putting out forest fires besides providing drinking water and some small-scale vegetable growing to marginalised communities living in the high mountains.

Providing them pumped drinking water separately would be prohibitively expensive but not when done as a side benefit of PSH.

Transition Difficulties

The hurdles in making this transition to a solar PV-PSH hydro combo is more an institutional or legal problem than a technical one. Nepal’s power sector suffers from a history of policy hype and institutional mandate overlaps.

On the one hand, the private sector has emerged as a major player, contributing significantly to averting what would have been chronic rolling blackouts. But it functions within a legal and institutional terrain that is not level but stacked against it in favour of the state’s electricity monopoly, the NEA.

On the other hand, the licensing system that emerged in the wake of private sector development has not only confined electricity to the realm of private goods ignoring its public and common pool (moral, human rights) aspects, but has also partitioned rivers into ownership segments that makes water basin or even overall electricity planning near impossible. It also makes it difficult for a private developer to convert his existing r-o-r into a profitable PSH for two reasons: first, it is not clear if his neighbour developer downstream would allow sequestering the river flow in an uphill reservoir that might reduce his own power output.

Second, nearly half the license period for his r-o-r would have already expired, raising the question of uncertainty if the government would grant a longer period for it to be revamped as a PSH.

It is precisely to address these difficulties, and the creation of a level institutional playing field for not just private hydro developers but also those investing in solar PV and other VREs, that the new electricity act should be targeted.

Unfortunately, it has been floundering these last decade and a half under competing vested interests benefitting from the status quo and the hydro bias in the power establishment.

There should also be close synergy between it and the proposed new water resources act, which is not the case as the latter too is biased towards perceiving water and electricity as private commodities, both to be licensed away rather than developed as a public and common pool good with multiple uses and users requiring public custodianship.

Conceptual shifts regarding water and energy are a prerequisite to sensible legislation that would allow Nepal moving along the path of cheaper and flexible two-way energy systems with solar PVs and PSH.

Hopefully, new energy entrepreneurs, private hydro developers as well as critical academics can contribute to realising that policy shift is much needed for Nepal’s energy future and self-reliant development.

Dipak Gyawali is a hydropower energy, and political economist and academic with Nepal Academy of Science and Technology (NAST). He is a former minister of water resources. Sudhindra Sharma, PhD, is a sociologist. Both are currently with Inter-Disciplinary Analysts (IDA).

Based on research on energy transition by Inter Disciplinary Analysts (IDA) with Center for Sustainable Studies (LUKSUS), Lund University, Sweden, as well as on Pump Storage Hydro (PSH) with Australian National University and partners in Sikkim (ATREE) and Bhutan (Department of Hydropower and Power Systems and Druk Green Power Corporation). Authors would like to thank data manager Chandra Bahadur K.C., research associates Himal Khanal and Rabina Thapa, former research officer at IDA Dilasa Shretha, IT associate and designer Sandeep Thapa, and research manager Pankaj Pokhrel for their contibution to the research reports based on which this article has been prepared.