Can Nepal be a reliable energy provider?

After a gap of over two years, the Nepal-India joint steering committee (JSC) consisting of energy secretaries of Nepal and India met in Kathmandu on 23 February 2022. The meeting happened amid concerns of the Nepal Electricity Authority (NEA) and private investors over restricted electricity export to India and Bangladesh under India’s new export/import guidelines issued in February 2021. For Nepal, the meeting was crucial to clarify matters in order to enhance inter-country electricity export as Nepal will be adding 300MW by July 2022.

With the guideline as a reference for future energy cooperation, Nepal adopted a new approach of wooing India by proposing joint investment in hydro projects and transmission lines. A day before the meeting, the NEA proposed a revised list of operational hydro projects—Upper Tamakoshi (456MW), Upper Bhotekoshi (45MW), Kaligandaki (144MW), Marshyangdi 69 (MW), Middle Marshyagndi (70MW) and Chameliya (30MW)—for India to import 814MW electricity.

In July 2021, the NEA had approached the Central Electricity Authority of India (CEAI) to export its surplus electricity after the operationalization of Upper Tamakoshi. After three months, the CEAI expressed its interest in purchasing 39 MW from the 24MW Trishuli and the 15MW Devighat as only these two projects were eligible to export electricity to India as per the new guidelines.

As per the guidelines, most Nepali power projects cannot sell electricity to the southern neighbor as they have the support of the countries with no energy cooperation with India. Only the projects either developed by NEA or with India’s support qualify.

For example, out of the five NEA-proposed projects, the civil works of the Upper Tamakosi were undertaken by a Chinese company (Indian companies carried out other works). In Upper Bhotekoshi, a JV between China and Nepal, only hydro-mechanical work is done by an Indian company. More such projects are being developed by contractors from multiple countries with 100 percent domestic investment.

Apart from this, there are concerns in India that a large number of these projects have Chinese investments, like shares in electrical-mechanical units and turbines. As Nepali companies failed to secure bank loans to purchase mechanical parts and turbines, they negotiated with Chinese companies, which supplied cheaper machines on the condition of owning shares in those projects. If so, this could create misunderstanding in India-Nepal energy trade given the uncomfortable state of relationship between India and China. 

As per the press release following the JSC, the meeting was successful and both sides committed to bilateral energy cooperation for regional and mutual benefit. Both agreed to explore developing storage hydropower projects. In this regard, they agreed to constitute a Joint Hydro Development Committee (JHDC). India’s SJVN is already developing 900MW Arun III, a storage-type project. The SJVN is also developing 669MW Lower Arun.

In any important development, during the meeting, the Indian side acknowledged enhancements in Nepal’s installed power generation capacity. The two sides reaffirmed power sector cooperation as a strong pillar of India-Nepal partnership and agreed to further strengthen it by joinly developing projects and cross-border power transmissions infrastructure. But there was no mention of Nepal’s new proposal to export 814MW from the five hydro projects. The issues and contents in the press releases of India and Nepal differed slightly, indicating a degree of disagreement on energy trade cooperation.

Nepal aspires to be a regional energy hub by 2040. That won’t be easy. First, for sustainability, the hydroelectricity projects, both run-of-the-river and storage types, are highly dependent on weather, river drainage systems, connectivity, transmission lines, and markets. Several studies have found the Himalayan region vulnerable to rising global temperatures. According to the Independent Power Producers’ Association (IPPAN), floods and landslides damaged 16 under-construction projects in 2021. Ten projects generating electricity, both small and big, incurred damages worth around $83.9 million.

Apart from that, the impact of climate change will determine Nepal’s production, with a lean winter, as most of the current operationalized projects are designed as run-of-the-river. Except Arun III, other storage-based projects are yet to take off. There is also domestic resistance to the shortage-type projects on the grounds of possible earthquakes and people’s displacement.

The second challenge is marketing. Given the small market and the huge gap between domestic energy consumption and production, a guaranteed market is needed to attract investments. Nepal is perhaps motivated by growing renewable energy requirements in the region and perhaps by the prospect of trans-border energy trade under the BBIN framework and the setting up of an energy bank in South Asia. But India will purchase electricity only from those projects that are developed either with 100 percent investment of the exporting country or of Indian investors. As per the new guidelines, only a few Nepali projects are eligible. But the implementation of these guidelines will also depend on the future geopolitical situation in the sub-Himalayan region.

Lastly, domestic politics of Nepal has been a major hurdle in hydropower development. The decade-old Maoist insurgency hindered infrastructure development. And other old issues remain as they were. Despite having a constitution in 2015, political instability, policy paralysis, corruption, and bureaucratic apathy toward the energy sector continue.

Hydropower has the potential to support peak-hour demand, cheap and clean energy, and operational flexibility, which may not be possible with fossil fuels. The role of hydropower would also be critical for the stability of the national, bilateral, and sub-regional grids.

In that context, Nepal’s importance as a major energy source will only grow. Despite its potential of over 40,000MW electricity, Nepal’s energy dependence on other countries has not ended. Although there have been certain improvements in energy production, Nepal needs to devise new energy policies to address existing challenges and to project itself as a reliable and sustainable energy supplier in South Asia.

The author is a Research Fellow with MP-IDSA, New Delhi. The views are personal