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Nepal, the world's second most water‐rich country, nevertheless struggles to provide sufficient domestic electricity. Despite Nepal's potential to become the hydropower source for South Asia, it still relies heavily on importing electricity from India. This paper investigates why Nepal's hydropower capacity is inadequately utilized from both domestic and international perspectives and finds that domestic factors such as geo‐climate features, weak infrastructure, political instability, and institutional deficiencies significantly hinder Nepal's hydropower development. From an international perspective, Nepal's geopolitical bonds and energy dependency with India and the regional power‐sharing configuration have significantly influenced its hydropower policy‐making. Furthermore, this paper proposes how Nepal could sustainably develop its hydropower for self‐sufficiency by establishing better policy instruments, attracting foreign investments, and upgrading its electricity infrastructure. [ABSTRACT FROM AUTHOR]