India-Bhutan: hydropower diplomacy

The Indian prime minister’s recent visit to Bhutan underlines the importance of developing good equations with our immediate neighbours; it is a reinforcement of his invitation to SAARC heads of state for his swearing-in ceremony in New Delhi in May.

Energy is Bhutan’s top export, and India is the only buyer. India and Bhutan have for long had excellent relations and India has for decades assisted Bhutan in developing its hydropower. We buy the surplus electricity—5.6 billion units during the 2014 financial year.¹

Bhutan earned Rs. 975 crores from selling power to India in 2012—that’s nearly Rs. 13,500 for every citizen of a country of 0.74 million people.² Bhutan has economically viable hydropower potential of 24,000 mw, of which it now taps only 1416 mw.³

Hydropower is the foundation of Bhutan’s long-term prosperity. Unlike the oil-rich Gulf countries, which export non-renewable petroleum, mountainous Bhutan is rich in rivers and exports renewable hydropower. The first major project, the 336 mw Chukkha dam in south Bhutan, commissioned in 1986-88, was entirely funded by India. It paved the way for further cooperation in the energy sector.

This mutually beneficial relationship is now being further strengthened. A capacity to generate an additional 2,220 mw is being currently implemented: the Punatsangchhu I and II projects in west Bhutan will be ready to deliver power by 2017. Both projects, at a total cost of Rs.7,293 crores, are also being funded by India with a mix of grants and loans. Another 720 mw project is also in the works.⁶ India will be the primary customer of subsidised power from all these projects.

The investments required in hydropower are high and varied—apart from the cost of power generation equipment, major civil works and tunnelling raise the costs. Indian public sector major SJVN’S 588 mw project on the Sutlej River, for example, is estimated to cost Rs. 7,137 crore.⁷ Hydropower projects also have long gestation periods—Tala was envisioned in 1983 and work began in 1990.

Small economies such as Bhutan are unable to mobilise such vast resources for extended periods. But Bhutan’s stable political environment has permitted large, long-term investments. By providing finance and agreeing to purchase power, India has removed most of the uncertainty over such projects in Bhutan.

Prime Minister Narendra Modi’s visit to Bhutan is signal of how friendly relations between the two countries have translated into significant, measurable economic benefits for both the sides. These signals can be directed at another neighbour of India—Modi’s early emphasis on consolidating neighbourhood relationships can also soon focus on Nepal.

A mountainous country like Bhutan, Nepal too has multiple rivers and major hydropower potential: of 43,000 mw.⁸ But the energy sector in Nepal has not matched its potential: installed power generation capacity is just 762 mw, or half of Bhutan’s, and insufficient to meet even domestic needs.  While Bhutan exports power to India, Nepal has to import electricity from India: 792 million units in 2013. ⁹ This too was not enough to meet the shortfall and Nepal faces power shortages and load-shedding.

India’s relationship with Bhutan can be a model for improving its links with Nepal. In fact, Nepal is now trying to emulate Bhutan. At least three projects, with a total capacity of 2,400 mw, are being developed jointly with India.

SJVN Limited, a joint venture of the Government of India and Himachal Pradesh, is developing the Arun-III 900 mw project in Nepal. ¹⁰ The private sector GMR Energy and GMR Infra Limited together with Nepal Electricity Authority and a third partner, have signed an agreement to develop the 900 mw Upper Karnali hydropower project.¹¹ Both MOUs were signed in 2008; it is not clear when the projects will be ready. The GMR Group has also acquired an 82% stake in the 600 mw Marsyangdi 2 Power Project; it is expected to be complete in 2021.

Given the current state of Nepal’s energy sector, India will have to assist in both building and buying, by providing financial assistance and signing long-term power purchase agreements. Nepal’s domestic politics are complicated, and India will have to ensure that the projects are not affected because of Nepal’s continuing political turbulence.

To ensure stability, Nepal can set up a politics-immune state-owned energy giant—like Bhutan’s Druk Green Power—as a partner in the projects with India. The price paid by India to Nepal for power must match the tariffs paid to Indian government-owned hydropower majors such as NHPC or SJVNL. India must ensure that it is not seen as taking advantage by offering low tariffs.

Investing in Nepal’s power sector will help India counter some of China’s considerable influence in that country. China is involved in at least two hydropower projects in Nepal—a 25 mw under-construction project, and a 750 mw project being developed by a subsidiary of the Three Gorges Corporation of China and funded by soft and commercial loans of $1.6 billion (Rs. 9,600 crore) by China’s Exim Bank.^12 & 13

While Modi’s visit to Thimphu is a continuation of a long-standing relationship with Bhutan, and an assertion of India’s neighbourhood foreign policy, Nepal may not be as immediate or evident a focus for the new Indian government. But turning to Nepal soon will add to the prime minister’s foreign policy emphasis and hydropower diplomacy.