Bhutan has increased exports of surplus hydropower generation, whereas Nepal has been suffering from domestic power shortages. Why has Bhutan successfully promoted hydropower development and exports, while Nepal has failed to do so? This paper focuses on inherent development barriers that stem from domestic power supply, internal governance systems, and indigenous societal sensitivity. There are lessons to be learned from Bhutan’s practices that could be applied in Nepal. First, hydropower development can be severely affected by electricity scarcity that arises when power export is privileged over domestic power supply. Nepal has fallen into this negative loop, whereas Bhutan has overcome it through policy interventions that ensure visible links between power exports and domestic power consumption. Second, the sector reforms in the two countries contrast in terms of institutional, operational, and financial efficiency. Without fundamental reforms, Nepal’s sector-wide inefficiency fuels a vicious circle. Third, local resource conflicts and social complexities have made Nepal’s hydropower projects more complicated than Bhutan’s. In planning hydropower projects, it is crucial to pay careful attention to domestic stakeholders and local benefits. Planners and governments must ensure that projects are designed with extensive benefit sharing mechanisms, sustainable value chains, effective sector reforms, and sufficient societal conflict management.

Clean Development Mechanism (CDM) projects are believed to be financially unviable without additional revenues from CDM in the form of saleable certified emission credits; this is an important premise to be verified in the CDM approval process. However, in financing a CDM project, it is crucial for financiers and investors to ensure that the project is viable without CDM revenues. Thus, there are clear conflicts in the processes and priorities between the CDM approval in theory, and financing and investment decisions in practice. Considering the post-CDM frameworks, this article uses a case study of Bhutan’s Dagachhu hydropower project, the world’s first cross-border CDM project, to suggest practical lessons learnt.

Bhutan benefits from surplus power generation and associated export revenues, whereas Nepal suffers from power shortages and import deficits. They have contrasting hydropower development, taking different approaches and relying on different sources of development finance in hydropower projects. This study analyzed effective financing approaches for feasible hydropower projects under geopolitical constraints. The lesson learned from their comparison is strategic prioritization to select and consolidate international funds. Bhutan has attracted external finance to large projects for power export. However, Nepal failed to plan and use external funds from donors and private investors, resulting in small projects for only domestic consumption.