On the eve of August 19 2024, India-Nepal energy relations achieved a significant milestone when Nepal agreed to export nearly 1,000 MW of electricity to India to India for the first time in history. Interestingly, despite possessing huge hydropower potential, Nepal had been grappling with acute power shortages and frequent blackouts until a few years ago and was dependent on power imports from India. The previously slackening hydropower sector has transformed remarkably, leading to record energy production levels. This turnaround has also rejuvenated the Indo-Nepal energy ties, which had historically lagged behind expectations, signalling a new phase of enhanced collaboration, making it necessary to dive into the details of energy ties between both countries to understand the significance and challenges of this promising sector in their bilateral relationship.
Imperative behind the energy cooperation: Why it’s a win-win for both counties?
Though Nepal is a small landlocked country occupying only a minuscule portion of the Earth’s surface, it has vast natural resources regarding freshwater. According to the International Institute of Water Management, Kathmandu, Nepal is home to the second largest freshwater resources on the earth, owing to nearly 6000 rivers and rivulets. This presents Nepal with significant opportunities for the development of hydropower projects. Various studies clock Nepal’s theoretical electricity generation potential to be around 93000MW, while 43000MW is technologically and economically feasible. However, the lack of economy and technology coupled with unstable governments are major roadblocks for the country to utilize its natural resources to its full potential, making it dependent on other energy sources. In the present energy mix of Nepal, hydropower makes up less than one percent of the total. Financial aid and technical expertise of India could help Nepal to use its resources, while energy from Nepal will help India achieve its energy security and new investment opportunities for its fast-growing economy. Also, most of the existing hydroelectric projects in Nepal are run-off river projects, and the availability of electricity in dry seasons is difficult, making Nepal a net power importer from India. Thus, cooperation between both countries is essential for the best use of hydro resources for mutual benefit.
Evolution of treaties and agreements..
Sarada River Treaty-1920
Recognizing the complementarities in energy cooperation, both countries have engaged in cooperative ventures in shared water resources as early as August 20, 1920, when they exchanged a letter of understanding for the construction of Banbassa Barrage on the Mahakali-Sharada river (Source: “Water cooperation between India and Nepal by Monika Mandal). Hydropower generation was not directly a component of this treaty. Instead, it dealt with using shared water resources of the Sarada River. It intended to set up a barrage in the United Provinces for irrigation and flood control in the Indian region. Nepal too occupied the rights to use 4.25 cumecs of water in the dry season and 13 cumecs in the wet season, which could be increased to 28.34 cumecs if water were available.
However, Nepali scholars like Dipak Gyawali argue that the quantum of water that India could withdraw is left unspecified in this treaty, and Nepali dissatisfaction has grown over the years, terming the treaty as “unequal”.
After independence, multipurpose projects were implemented under bilateral treaties between both nations: This section will shed lights on the important treaties between India and Nepal.
Kosi Treaty
Both countries signed the Koshi Agreement on April 25 1954. Like other early treaties between India and Nepal dealing with hydro cooperation, the preamble of the Kosi agreement states that the primary purpose of this treaty is flood protection and irrigation with the construction of a barrage. A barrage was constructed at Bhimnagar, Bihar and extending to Hanuman Nagar in Nepal for irrigation and flood control in both Nepal and Indian sides. Power generation was a small component of this project to utilize the canal head. Nepal was entitled to use 50 percent of the power generated within a 10 mile radius of the Kosi barrage at a mutually agreed rate.
Following the Kosi treaty provisions, a hydroelectric power plant of 14MW installed capacity was built at Kataiya(India). India has laid transmission lines to Nepal for power supply from the plant. However, this plant has faced siltation and technical problems ever since its inception and could only run at a partial capacity. Power supply to Nepal was thus irregular. Nevertheless, it was agreed to supply power to Nepal from India, not necessarily the power generated in the plant, but from the Indian grid at the powerhouse. This marked the beginning of power import from India to Nepal.
Gandak Treaty
Gandak treaty was signed in December 1959 for irrigation and flood control in both countries. India constructed a barrage and a powerhouse with a goal of 15000KW installed capacity in Nepal, and after a year, it was handed over to Nepal. After achieving a 60 percent load factor target, Nepal started supplying power to border villages in India. Thus, power exports from Nepal to India commenced for the first time under the Gandak project.
Both the above treaties were criticised heavily in Nepal. Opposition political parties claimed the projects did not benefit Nepal while heavily favouring India. Submergence of scarce agricultural lands in border areas made the residents of border areas resentful. India, on the other hand, felt Nepal was accruing irrigation, flood control and power at concessional rates with no significant financial investments.
A separate bilateral agreement was signed in 1991 for Tanakpur barrage construction. That, too, saw several protests in Nepal.
Mahakali Treaty
A treaty was signed in 1996 to replace the Sarada treaty and Tanakpur arrangement. It provided a larger framework for using water from the Sarada River and hydropower projects, including those in pipelines like Pancheswhar multipurpose projects.
Projects implemented so far in Nepal with Indian aid
Initially, hydroelectric projects were implemented by the Indian government on Nepal territory on a grant aid basis. They were utterly designed, constructed and financed by India and were handed over to the Nepal government for the management.
| Projects | Description |
| Trishuli Hydroelectric Project | This project is in mid hill near Kathmandu on Trishuli River, completed in 1970. Total installed capacity-21000 kW. |
| Fewa Hydroelectric project | Built in the 1970s, overflow of water from Fewa Lake in Pokhara valley was controlled by small dam and head developed was used to develop 1000 kW small hydro project, to supply electricity to Pokhara valley. |
| Devighat | Tailrace water of Trishuli hydroelectric project was utilized to develop 14,100 kW Devighat Hydropower Project. |
Present status of the projects in the pipeline
| Project | Description |
| Pancheshwar Multipurpose Project | It is the centrepiece of the Mahakali treaty of 1996 and aims to build 2 dams, one on each side (total capacity of 6480MW) of the transboundary river Kali. Both countries have agreed to equal sharing of power. However, since India has greater area to irrigate near Kali river, both disagree over the irrigation benefits to be accrued. The date to finalise DPR(Detailed Project Report)has been extended many times, yet a breakthrough still needs to be made. |
| Sapta Kosi High Dam Project | Field studies for the project were conducted in India as early as 1981. The project is covered under the Mahakali treaty and aims to build a high dam for power generation and flood control in Bihar and Nepal areas. However, the proposal was met with protests by locals fearing inundation, and the DPR preparation agreed upon in 2004 has not been completed till today. In October 2023, both countries agreed to reduce the dam’s height and take forward the project. (Source: The Kathmandu Post) |
| Arun-3 Hydroelectric Project | With no major power projects in the 2000s in India in Nepal due to inordinate delays, the Arun-III project sought to enhance the Indian image in developmental projects in Nepal. SJVN Ltd. (Satluj Jal Vidyut Nigam), an Indian PSU, won the bid to develop the project in 2008. However, construction began only in 2018 due to environmental concerns. This 900MW project on the Arun River (touted as the largest in Nepal ) will be transmitted to India through the Muzaffarpur transmission line. The project is expected to produce production by 2025 and has been completed approximately 75 percent. |
| Lower Arun Project | No separate dam is required for this project as it is designed to use tail race water from the Arun-3 project. SJVN Ltd. (Satluj Jal Vidyut Nigam) has won the bid to develop this project in 2023. In August 2024, the Cabinet Committee on Economic Affairs recently approved SVJN’s proposal to invest in this project. It is expected to be completed within 60 months. |
| Upper Karnauli Project | The bid for this project was won by GMR group of India. SJVN and IERDA claimed minority stakes recently along with Nepal electricity authority. Project is expected to begin construction by 2027 and completion by 2031. |
| Rahughat Project | This project is developed by Nepal Electricity Authority with a soft loan availed by India through EXIM Bank of India. Almost 80 percent of the project is completed and is expected to be completed by 2025. |
| West Seti and Seti River Projects | This was a perfect example of shifting geopolitical priorities. Initially awarded to Chinese companies, Nepal investment board scrapped the deal and awarded it to Indian company NHPC citing easiness to trade with India. The project is currently in the preconstruction stage and construction is expected to begin by 2027. |
Source: Vision IAS website
Power Trade
As mentioned briefly in earlier sections, in addition to the development assistance for building dams and transmission lines, both countries engaged in power trade in border areas as early as the 1970s. Both countries reached an understanding of the exchange of power as early as the 1970s. As per this, Nepal had been importing from the Indian grid in Bihar and UP border areas. A dozen transmission lines have also been established for the same. Power exchange has proliferated from 50 to 950 MW, though progress has been slow, with the real turnaround coming from the PTA agreement of 2014 and the opening up of the Indian market for Nepal power. Under this India has agreed to purchase power to the tune of 10000MW for next 10 years. Nepal started trading power a day ahead of IEX in 2021, and India has also agreed to export electricity to Bangladesh through India. Thus, the trajectory of energy trade between both countries, which was handheld by governments and PSUs in the initial stage, has witnessed significant growth with the opening up of economies and the participation of both countries. However, some concerns remain relevent, which is important to mention.
Challenges
- Despite the complementariness in energy operations, most of the previous treaties had ended up in controversies. This is because of the mutual trust deficit on the part of both countries. India, the lower riparian country, is wary of dam constructions on upper riparian sides. Nepal, on the other hand, sees Indian intentions with suspicion due to power disparity with its neighbour. Thus, it is important to have confidence in both sides before entering into treaties.
The opening up of Nepal’s hydro sector has evoked the interests of private players across the region. Indian as well as Chinese companies compete each other in Nepal power sector. This augurs well for private investments in Nepal. However, there are concerns in India about the Chinese geopolitical interests in the area, which led India to ban the import of Nepal’s power that involves Chinese investments. The target of 10000MW power export is difficult to meet when geopolitical concerns play.
- Lack of infrastructure along border lines for transmission. Though a dozen of them are there, many cannot transmit high-voltage power.
- Cost-effectiveness of Nepali power for India: Though imported at an effective rate, imported power is still costly compared to local sources, especially with growing wind and solar alternatives in India. Thus calls will be there to switch to other sources.
Way forward.
Indian Investments in Nepal’s hydro sector and power trade have grown manifold in the last decade. Power trade has grown 25 times to 950MW within 5 years. The progress achieved so far should go unhindered of the challenges mentioned and could be expanded to include other countries in the South Asian region. Recent tripartite agreement between India, Nepal and Bangladesh to trade power of about 40MW from Nepal to Bangladesh through India is a right step in this direction. South Asia Sub regional Economic Cooperation (SASEC) program constituted under SAARC in 2001 should be revived to achieve it. After all, regional cooperation provides an ideal opportunity to enhance sustainable growth by means of sharing and developing resources as a region while minimizing suboptimal development of these resources confined to national boundaries.(Source: ADB report) growth by means of sharing and developing resources as a region while minimizing suboptimal development of these resources confined to national boundaries.(Source: ADB report)
