India-Nepal Hydro-energy Collaboration: Contemporary Challenges and Negotiations

Nihar R. Nayak - Research Fellow with IDSA, New Delhi

Introduction

Despite the longstanding and fruitful geo-historical, cultural, economic, security, diplomatic, and people-to-people ties between India and Nepal, which have been institutionalised since 1950, the relationship is not without its challenges. Over the years, differing perspectives on critical issues have emerged, casting a shadow on the otherwise robust connection. The hydro-energy sector, in particular, stands out as a significant point of contention, with its roots traced back to the signing of the 1950 Treaty of Peace and Friendship and the Koshi agreement in 1954, contributing to persistent strains in bilateral relations.

Early Hiccups

The perception among the Nepalese often characterises agreements and cooperation as a unilateral effort by India to exploit their natural resources, with the assumption that India stands to gain more from these projects. However, a closer examination reveals a different narrative. India's inability to execute large-scale hydro-projects in the 73 years of cooperation has fuelled interpretations by civil society, overlooking the original intent of the Koshi and Gandak barrage, primarily designed for flood control and irrigation. It's essential to note that India faced technological and financial constraints in the 1960s and 1970s, hindering the pursuit of mega projects in the Himalayas. Nevertheless, this situation has been misconstrued by some Nepalese, leading to the perception that India's interests lie solely in developing dams along the border and exploiting Nepali water resources for its advantage.

These initial challenges significantly impacted the trajectory of hydro-energy partnership in the subsequent years. 

Nepalese authorities exhibited non-cooperation with India until 1992, a turning point marked by Nepal's decision to permit private sector involvement in the hydro-energy sector through the Electricity Act.

However, India faced another setback with the onset of the Maoist insurgency in 1996, resulting in further delays for many planned Indian projects.

New Momentum

However, the collaboration gained momentum in the aftermath of the Maoist conflict. A significant turning point occurred with the signing of the Agreement on Electric Power Trade, Cross-Border Transmission Interconnections, and Grid Connectivity in October 2014. This agreement, formulated under Prime Minister Modi's HIT (Highways, I-ways, and Trans ways) initiative, marked a pivotal moment during his inaugural foreign visit to Nepal after assuming office in New Delhi. This period also coincided with Nepal enduring more than 18 hours of daily load shedding, despite possessing the potential to generate 42,000 MW of hydroelectricity, showcasing the pressing need for enhanced energy cooperation.

In response to the ongoing load shedding, the democratically elected government took decisive action by declaring the National Energy Crisis Reduction and Development Decade (2016-2026) in 2016.

This strategic initiative aimed to boost power generation capacity through the active involvement of private developers, enhance domestic transmission lines, establish power purchase agreements with independent power producers, construct additional cross-border power lines, and explore market expansion opportunities in the Bangladesh, Bhutan, India, and Nepal (BBIN) sub-region.

India’s Neighbourhood First Policy and Energy

The neighbourhood occupies a central position in India's foreign policy. India holds the conviction that political stability, economic prosperity, and strategic security in neighbouring countries are crucial. The belief is rooted in the understanding that the influence of extra-regional powers in South Asia, if unchecked, could pose challenges to India's geo-cultural advantages in the region. Former Prime Minister of India, Dr. Manmohan Singh, succinctly stated, “The real test of foreign policy is in the handling of neighbours.”¹

In the post-independence era, India actively advocated for multiparty democracy and provided extensive economic and technical support to neighbouring nations for infrastructure development and economic growth. Since the 1990s, India's overarching objective has been to foster partnerships and extend the benefits of its economic prosperity to its immediate neighbours.

Emphasising the significance of fostering partnerships with neighbouring nations, External Affairs Minister S. Jaishankar reaffirmed on July 16, 2021, that "Economic growth is universally driven by 3Cs: Connectivity, Commerce, and Contacts. All three need to come together to ensure regional cooperation and prosperity.”² In addition to addressing economic and security concerns, a notable development was the inaugural convening of the Inter-Ministerial Coordination Group (IMCG) on Neighbouring Countries at the Secretary level on April 12, where cross-border connectivity took centre stage.

For the Modi government, the initiation of India's foreign policy journey begins with the neighbourhood. The invitation extended to all SAARC leaders to attend Modi's oath-taking ceremony in May 2014 distinctly conveyed the message that neighbours hold a paramount position.

Subsequently, Modi's foreign visits to the two Himalayan countries not only underscored the precedence given to neighbouring nations but also signalled a departure from the previous foreign policy focus on Pakistan. The renewed focus on neighbouring countries can be attributed to India's pursuit of development and energy requirements. Presently, India views its smaller neighbours as strategic partners in achieving its economic growth and developmental objectives. Another factor influencing this shift is the shared sphere of influence, driven by the increasing presence of external forces, notably China, in the region. China has made significant diplomatic strides in India's neighbourhood through substantial investments in infrastructure, bilateral trade enhancements, strengthened defence and cultural cooperation, and the revitalisation of maritime and land silk routes.

Furthermore, beyond establishing a prominent presence in international forums and cultivating relations with major powers, India recognises the potential to leverage platforms like SAARC and other sub-regional mechanisms to fulfil its more immediate national interests. Similarly, India is actively pursuing green energy solutions to decrease its reliance on fossil fuels. While Nepal currently relies on India for its energy needs, the long-term perspective shifts toward mutual cooperation. India seeks Nepal's collaboration to fulfil its commitments made in Paris and Glasgow regarding climate change, as well as to realise Prime Minister Modi's vision of “One Sun, One World, One Grid.”

Reflecting this commitment, two out of the four agreements signed during Prime Minister Deuba's visit to India in March 2022 were related to the energy sector. This included Nepal joining the India-led International Solar Alliance, aligning with the shared goal of sustainable energy solutions. Another significant agreement involved the exchange of terms for the supply of petroleum products between the Indian Oil Corporation (IOC) and the Nepal Oil Corporation (NOC).

The New Phase of Cooperation

In 1971, India and Nepal engaged in a Power Exchange Argument to address the power needs in the border region shared by both countries. Over twenty transmission interconnections, each with varying capacities, were established. Furthermore, a comprehensive agreement covering 'Electricity Power Trade, Cross Border Transmission Interconnections, and Grid Connectivity' was formalised on October 21, 2014, deepening the collaboration between the two nations.

A significant development occurred in November 2021 when India granted permission to Nepal to sell its surplus energy. This aligns with the Cross Border Trade of Electricity (CBTE) guidelines issued in February 2021, marking a step forward in fostering energy cooperation between the two countries. In November 2021, India endorsed Nepal's proposition to export 39 MW of electricity to the Indian market. The electricity would be transmitted through the 400 KV-Muzafarpur-Dhalkebar cross-border transmission line. Additionally, India has made commitments to develop substantial hydro projects, including Arun–III, Lower Arun, Upper Karnali, and Pancheswar, all designed to be storage-based. This strategic approach aims to assist Nepal in generating electricity during non-peak periods and exporting surplus energy to India and other nations. Honouring this commitment, the Indian Central Electricity Authority approved the Nepal Electricity Authority's proposal to sell an additional 325 MW of electricity to India in April 2022.

Advantage Nepal

Nepal stands poised to emerge as a net beneficiary in the energy trade, not only with India but also with other countries such as Bangladesh, Sri Lanka, and Myanmar. 

The earnings from electricity exports to India have shown a consistent upward trend, totalling nearly NPRs 11.8 billion until mid-October 2023. This surge in export revenue has played a crucial role in reducing the trade deficit with India, concurrently bolstering Nepal's foreign exchange reserves.

In the fiscal year 2022-23, electricity export earnings secured the third position in overall export revenues, following palm oil (NPRs 20 billion) and yarn (NPRs 20 billion). This underscores the growing significance of Nepal's electricity trade in contributing to its economic gains and trade balance.³

In response to Nepal's request, India made a significant commitment in June 2023, pledging to purchase up to 10,000 MW over the next decade. India, in support of Nepal's power export initiatives, established multiple channels, demonstrating a willingness to facilitate energy trade, albeit with a preference for controlled quantities in a single transaction. Addressing this, the Central Electricity Authority (CEA) took a noteworthy step by amending India's Cross Border Electricity Trade (CBET) rules in August 2023. This amendment specifically catered to neighbouring countries like Bhutan, Nepal, Myanmar, and Bangladesh, allowing them to engage in buying or selling electricity through India's real-time market (RTM), a departure from the previous restriction to the day-ahead market (DAM) in power exchanges.

This progressive move by the Indian government is poised to empower these nations, enabling them to import and export electricity more closely aligned with India's real-time market. Engaging in real-time trading offers greater flexibility to cross-border entities, allowing them to optimally utilise their resources by procuring power on a closer-to-real-time basis.⁴ On September 6, 2023, the Indian Cabinet granted approval for the purchase of 10,000 MW of electricity from Nepal over the span of ten years, marking a significant step towards a long-term inter-government power trade agreement. The formalisation of this agreement is anticipated to take place either in 2023 or early 2024. This agreement is poised to stimulate additional investments in Nepal's power sector and facilitate the export of power to the Indian market.

Major Negotiating Issues

Despite the significant strides made and financial gains for Nepal in cross-border energy trade, Nepalese stakeholders have raised concerns about the prolonged approval process for selling hydroelectricity from specific private developers. These delays are attributed to issues related to third-country investments. The apprehension stems from the procedure implemented by the Central Electricity Authority of India in February 2021, which prohibits the import of power from projects directly or indirectly involving countries with whom India lacks bilateral hydro-energy cooperation.

As of October 2023, India has granted approval for Nepal to sell 450 MW of electricity in its market. Furthermore, 520 MW has received clearance for sale in India's exchange market, encompassing both day-ahead and real-time markets.

Despite these allocations, Nepali authorities express disappointment, as India has only permitted the sale of 110 MW of electricity under a longer-term arrangement. The Nepali authorities are seeking a guaranteed, long-term commitment from India for the purchase of electricity at fixed prices exceeding INRs 4.00 per unit. Notably, Nepali developers are advocating for guaranteed fixed-price electricity sales to India, favouring this approach over engaging in transactions through the day-ahead market (DAM) and real-time market (RTM). Nepal has also articulated a demand for India to permit a higher volume of hydroelectricity exports to Bangladesh through Indian transmission lines, surpassing the current limit of 40 MW.

Conclusion 

Green energy has witnessed surging demand, particularly in the post-Paris agreement era. The disruptions in the global energy supply chain, compounded by the effects of COVID-19 and the escalation of global oil prices due to the Ukraine crisis, have intensified the call for green energy solutions. Consequently, this sector is in a state of evolution, with considerable progress yet to be made. Nepali developers are encouraged to maintain confidence in India and persist in negotiating for optimal solutions and benefits. Given the shared imperative of hydro energy, this collaboration has the potential to serve as a role model in fostering partnerships at both bilateral and regional levels. The cooperation could prove forward-looking and mutually rewarding if both countries are willing to address their sensitivities independent of regional issues and third-party influences in bilateral matters.

(Exclusive to NatStrat)

Endnotes

1. Amb (Retd). V.P. Haran (2017).  Challenges in India's Neighbourhood Policy. Lecture delivered at Central University of Tamil Nadu, 14 July, 2017, URL:  https://www.mea.gov.in/distinguished-lectures-detail.htm?674.

2. The Sentinel. (2022). India's connectivity drive in neighbourhood benefits Nepal, Bangladesh. 17 April. URL: https://www.sentinelassam.com/national-news/indias-connectivity-drive-in-neighbourhood-benefits-nepal-bangladesh-587850.

3. Prithvi Man Shrestha. (2023). Power export earns Nepal Rs12 billion this wet season. The Kathmandu Post. 19 October, URL: https://kathmandupost.com/national/2023/10/19/power-export-earns-nepal-rs12-billion-this-wet-season.

4. Sweta Goswami. (2023). Neighbouring Countries can now trade electricity in India’s real time market. Moneycontrol. 02 August. URL: https://www.moneycontrol.com/news/business/neighbouring-countries-can-now-trade-electricity-in-indias-real-time-market-11081571.html.