A fierce public debate has erupted about the $500 million grant offered by the United States Millennium Challenge Corporation (MCC) to Nepal for construction of power transmission lines and strategic roads.
Every person in Nepal now has a story on the MCC. This is mine.
It begins in 2007. At the time, Nepal had just signed an agreement with an Indian infrastructure investment firm to build four cross-border transmission lines. The electricity crisis (load-shedding) in Nepal was deepening. Cross-border lines would enable Indian electricity imports and provide much needed relief.
Nepal was pursuing these lines with urgency. The first line (Dhalkebar-Muzaffarpur) was to be ready by 2010. Shortly after the agreement was signed, India changed its rules, calling for majority state-ownership in the project. Further complications came when Nepal had to sign an agreement to purchase electricity from India on that line for 25 years. The line finally came into operation in 2016, thus ending Nepal’s load-shedding.
Cross-border transmission lines integrate power markets. Once integrated, Nepal will have to compete against Indian power markets. This would mean, I argued at the Nepal Power Summit in 2007, that cheaper Indian power would displace newly added Nepali hydropower in the long run.
New hydropower may not be able to compete in the Indian power market in a way that allows Nepali hydro plants to secure long-term power purchase agreements. Without this security, new Nepali hydro plants cannot be commercially financed only with short-term trading contracts.
Nepal’s strategy of using cross-border lines for imports in the short term and exports in the long term was a high-stakes gamble. That gamble is now a bedrock of Nepal’s power sector strategy.
A precondition to the MCC grant was that Nepal sign an agreement with India for the Butwal-Gorakhpur cross-border line. It was an odd condition, I thought, requiring Nepal to sign an agreement with India without Nepal having any real control on building the lines on India’s side of the border.
For over 10 years, Nepal had been trying to secure an agreement on that line. India hadn’t agreed. But as in love, nothing is impossible in bilateral government relations.
In October 2019, India suddenly dropped its objections without explanation. It agreed to finance the cross-border line on Nepal’s terms, on a government-to- government basis. This meant there would be no consideration for the financial viability of the transmission line; it would simply be built.
India’s decision to reverse course was a dramatic shift, contrary to the spirit of its power market that is pushing for financially viable, commercially-led investments. MCC in Nepal became real at that point.
A few months later, a fierce debate on the MCC swept across Nepal like an inferno, scorching everything in its path, tearing apart friends from friends, husbands from wives, brothers from sisters, and two key political personalities clearly vying for power.
The funny thing is that none of this may matter anymore.
Earlier this week, in keeping with the India-Nepal understanding on the Butwal-Gorakhpur line, Nepal Electricity Authority (NEA) and Power Grid Corporation of India (India’s state-owned transmission utility) agreed to move things forward. With or without the MCC, Nepal will be building the cross-border line.
Without a single penny from the MCC, Nepal is rapidly integrating with Indian power markets. When the cross-border line will be built doesn’t matter. Government announcements have already shaped expectations and market fundamentals.
Only one of two outcomes is now possible.
Possibility 1: Cheaper electricity prices in India will displace new hydro capacity of Nepal. We remain reliant on Indian electricity imports.
Possibility 2: Nepal will generate thousands of megawatts in new hydro and sell all its excess generation to India, earning enormous revenues in the process.
I worry this high-stake gamble is one we have not fully thought through.
In those moments of worry, I return to the reassuring comfort of what the US ambassador to Nepal promised to the people of Nepal in his 3 October 2019 article in Republica.
“The MCC project focuses on constructing lines that will bring Nepal’s power to the consumers who will pay Nepal good money for it. It is a simple fact of geography and economics that means India.”
I shudder to think, what if it isn’t “simple” or if it isn’t a “fact.”