More than 61% of the total population of Nepal has no access to electricity. The majority is poor and live in rural areas. In recent years, rural electrification has had high priority in government policies, and micro hydro and solar PV have been the most commonly adopted off-grid technologies. The financial mix in the off-grid rural electrification is generally characterized by subsidy, equity and credit. In this paper, we analyze how rural electrification has been funded and the impact of subsidy policies on the renewable energy market, focusing on the projects implemented under the 'subsidy policy 2000'. Our study is based on official data obtained from authorities in Nepal and a survey carried out among private supply and installation companies, NGOs and financial institutions. The study shows that awareness levels in adopting RE-technologies and willingness of people to access and pay for electricity have increased significantly. However, there is a huge financial gap between the cost of electrification and the affordability. Bridging this gap is a crucial issue that needs to be addressed for the smooth expansion of rural electrification in the country. (C) 2010 Elsevier Ltd. All rights reserved.