India’s state-owned power utility NHPC Limited has sought Rs 40 billion in Viability Gap Funding (VGF) from Nepal’s Investment Board, citing financial non-viability of the West Seti hydropower project and the mandatory provision of free electricity to Nepal.

NHPC, which was awarded the West Seti and Seti River-6 (SR-6) hydropower projects without a competitive bidding process, has requested the VGF support for the 800-megawatt reservoir-based West Seti project. According to officials, the request has been submitted based on the project’s Detailed Project Report (DPR), which concludes that the project is not financially viable under existing conditions.

VGF is a globally used mechanism through which governments provide financial support to economically important but financially weak infrastructure projects. Nepal’s Public–Private Partnership and Investment Act, 2019, and its regulations allow the government to provide such funding. However, Nepal has not yet implemented any project using VGF despite having a legal framework in place.

Earlier, Budhigandaki Hydropower Company, a government-owned entity, had prepared alternative investment models with and without VGF support, but the proposal did not move forward due to lack of approval from the Ministry of Finance.

Investment Board Nepal has confirmed that NHPC’s VGF request is under review. Chief Executive Officer Sushil Gyawali said no final decision has been made. “NHPC has said around Rs 40 billion is required as VGF. How and whether this will be addressed has not been decided,” he said. Gyawali noted that the project’s reservoir nature and the obligation to provide 21.9 percent free electricity after commercial operation have significantly affected its financial viability.

The 64th meeting of the Investment Board decided to conduct further studies on the DPR of the West Seti project, which carries an estimated investment of Rs 160 billion. A technical team is currently reviewing the proposal. In December 2024, the board approved increasing the project capacity from 750 MW to 800 MW.

The West Seti project was earlier assigned to China Three Gorges International Corporation, but the agreement was terminated after prolonged delays. The project was later showcased during the 2019 Investment Summit and linked with the SR-6 project.

On September 18, 2022, the Investment Board and NHPC signed an agreement in the presence of then Prime Minister Sher Bahadur Deuba, formally assigning NHPC responsibility for developing both projects. Survey licenses were issued in November 2022, with NHPC required to submit DPRs within two years.

While the legal provisions allow VGF support for technically sound but financially weak projects, the government’s decision on NHPC’s request is expected to set a critical precedent for large-scale hydropower financing in Nepal.