Nepal has signed a project development agreement (PDA) with India for construction of a $1.04bn Arun III hydropower plant.
The plant will have a generation capacity of 900MW, in order to meet the power shortages in the Himalayan country.
The Nepal Investment Board will sign the deal with India's Satluj Jal Vidyut Nigam (SJVN) for the power project, which is expected to be operational by 2021, reports Press Trust of India (PTI).
Nepal Law Minister Narahari Acharya was quoted by Reuters as saying: "We have passed the Arun III agreement. It will be signed this week with the Indian company."
According to the Nepal Investment Board external affairs chief Ghanashyam Ojha, the project developer SJVN will supply around 22% of the generated electricity to Nepal for free.
The plant will produce around $3.48bn as royalty, income and taxes in over 25 years for Nepal, after then the country will own the project.
Despite having potential hydropower generation capacity of 42,000MW, Nepal only produces 800MW, which is much less than the required 1,400MW for the country.
Government officials in Nepal stated that negotiations with Indian companies are underway, with an aim at setting up power plants with generation capacity of 8,250MW.
Kathmandu's hydropower industry is expected to see a $7bn investment over the next five years, reports Reuters.