The Energy Sector in Nepal: Economic Potential and Financial Challenges of Renewable Energy Transition

Nepal’s commitment to harness its vast renewable potential under the Third Nationally Determined Contribution (NDC 3.0) presents a transformative opportunity with economic and environmental benefits. It aims to capitalize on domestic hydropower and solar potential to ensure energy security, achieve higher economic growth, and reduce reliance on traditional biomass and petroleum imports. In this brief, we utilize IFPRI’s dynamic Computable General Equilibrium (CGE) model calibrated to the 2022 Nepal’s Social Accounting Matrix to measure the economic benefits of achieving the NDC 3.0 electricity capacity targets through a diversified renewable mix. Two scenarios were analyzed: a Business-as-Usual (BAU) scenario and an ambitious renewable expansion scenario aligned with NDC 3.0 goals but with accelerated emphasis on solar power, modeled at 15,000 MW from solar and other renewables, with the remainder from hydroelectricity. Integrating solar with hydropower emerges as a highly promising scenario for Nepal’s energy landscape, leveraging the country’s vast solar potential while building resilience against climate-related risks to hydroelectricity. This integrated approach represents a strategic and effective pathway toward achieving Net-zero. Model results indicate that such renewable transition generates substantial macroeconomic and welfare benefits. Achieving the NDC 3.0 aligned targets would expand the Nepal’s economy by 2.2% by 2035 over the BAU scenario, generating over 82,000 new jobs, and lifting more than 36,000 people from poverty. Although renewable energy transition presents a huge economic opportunity, its benefits hinges on the country’s ability to secure financing, implement policy reforms, and ensure equitable distribution. Without strategic financial planning and coordinated policy reforms, Nepal risks replacing existing energy dependencies with new vulnerabilities even as it pursues long-term sustainability. 

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