Geopolitics of Nepal’s rivers

India edges China out of Nepal’s river projects as water becomes a strategic commodity

TUNNEL VISION: The headrace tunnel of the 900MW Arun 3 project in eastern Nepal.

At the annual Nepal Power Summit in Kathmandu on 18-19 April, officials called on India to allow Nepal to export power at real-time prices, not just in the day-ahead market. Also discussed was a need for more flexible guidelines on market access for Nepal’s electricity to India which currently buys power on a project-to-project basis, pointedly boycotting those built by Chinese investment or contractors.

India’s interest in regulating Nepal’s rivers is not new, but with the Himalaya becoming a geopolitical and climate hotspot, its strategic interest in regulating river flow has grown. 

Climate models show that the hydrology of Himalayan rivers will change dramatically in the coming decades, with peak water in the 2030s, and low flow levels in the dry season thereafter. With 70% of the annual discharge on the Ganga flowing down from rivers in Nepal, 75% of it in the four monsoon months, storage projects in the mountains will be ever more important.

Because of this, New Delhi would like pliant politicians in place in Kathmandu that will not obstruct its plans to ensure future water supply, and given current geopolitical tensions, this also means keeping the Chinese out. 

Ever since Sher Bahadur Deuba became prime minister for the fifth time in 2021, he has fast-tracked a slew of projects in which Indian companies are involved, including the West Seti reservoir project that has languished for 20 years mainly because of Indian objections to Australian and Chinese investment.

Most recently, Indian National Hydroelectricity Power Corporation (NHPC) Limited is in talks to be awarded the 480MW Phukot Karnali Hydroelectric Project in Kalikot jointly with Nepal’s state-owned Vidyut Utpadan Company Limited with a share ratio of 51% to 49%. The project will likely be launched during Prime Minister Pushpa Kamal Dahal’s state visit to India in May.

India’s NHPC has already been granted licenses for West Seti and Seti River-6 projects, and is also eyeing another 1,902MW megaproject on the Karnali. 

West Seti
Sushil Bhatta of Investment Board Nepal and Abhay Kumar Singh of India's NHPC, after signing an agreement to develop the 760MW West Seti and 460MW Seti River 6 projects in 2022.

In fact, across Nepal, Indian companies are building hydropower projects which will add a combined total of 4,000MW to the grid, three of which were rushed through only in the past year. Three more Indian projects are in the pipeline. 

Why the sudden renewed Indian interest in Nepal’s rivers? And what is the hurry? The answer lies in the need to plan for the decades ahead when water is going to be an even scarcer commodity in the Indo-Gangetic plains than it is now because of climate change, increased industrial, agricultural and household consumption.

Energy analysts say that although India’s interest seems to be in renewable energy from hydropower to fulfil its decarbonisation commitments, exports of power from Nepal is only projected at $800 million in the next three years, which will only be a tiny percentage of the 1,600 billion kWh that India generated in the last fiscal year. 

And although power demand is expected to rise with rising incomes, industrialisation and increasingly intense summer heat waves in the plains, India’s long-term interest is in reservoir projects to store monsoon water in Nepal’s rivers to reduce monsoon flood risk and keep rivers flowing in the dry season. And New Delhi has not tried to hide its distaste for any Chinese involvement in these projects. 

Hydropower Investment and Development Company Nepal (HIDCL) in which the government is a majority shareholder informed the Investment Board Nepal in February that it was withdrawing from the export-oriented 762MW Tamor Hydropower project. 

CEO Arjun Kumar Gautam is upfront about why: “We cannot sell electricity generated with Chinese involvement in the Indian market.”

Tamor was one of the two projects agreed upon during Chinese President Xi Jinping’s visit to Nepal in October 2019. Soon after, Investment Board Nepal (IBN) signed up China Construction to build the project after completing a feasibility study.

The HIDCL now wants to null the agreement with the Chinese contractor and bring in a new contractor more amenable to the Indians. Meanwhile, India’s state-owned Satluj Jal Vidyut Nigam, which is involved in a cascade of projects on the adjoining Arun River to generate a total of 2,000MW, is said to be aggressively lobbying top Nepali officials to also build Tamor.

Besides the 900MW Arun 3, Satluj was awarded the Lower Arun by the K P Oli-led government in 2021 without competitive bidding. Then in May 2022, the Sher Bahadur Deuba-led government suddenly awarded Arun 4 to Satluj (with a 51% share) during Indian Prime Minister Narendra Modi’s visit to Lumbini. 

Arun 4 agreement
Indian Prime Minister Narendra Modi and then Prime Minister Sher Bahadur Deuba look on as Satluj Jal Vidyut Nigam's Nanda Lal Sharma and the NEA's Kulman Ghising exchange MoUs in May 2022 in Lumbini to build the 409MW Arun 4. Photo: RATNA SHRESTHA/RSS

But even though Satluj is said to be also interested in the 1,061MW Upper Arun, Kulman Ghising of the Nepal Electricity Authority (NEA) says it is building the project. "Upper Arun is our first priority, we are planning to start the construction of the access road," Ghising told us.

Arun and Tamor are both in eastern Nepal (see map), but India is also interested in rivers in western Nepal because of the proximity of its main load centres as well as to augment the dry season flow of Nepal’s rivers that flow into the Ganga. 

There was some hue and cry last year after the Deuba-led government abruptly handed over the 750MW West Seti Dam and Seti River-6 projects to two Indian state-owned companies without competition or transparency. Experts pointed out that Nepal’s Public-Private Partnership and Investment Act 2075 states that there should be competitive bidding. 

The Seti saga is three decades long. After successive partnerships with Australian, Chinese and private Indian companies fell through, India’s state-owned NHPC finally took the lead. Since the terms of the deal are opaque, many experts question how beneficial the $1.6 billion project that involves building a high dam in the Doti district will be for Nepal. 

Indian state-owned companies appear to move faster than private Indian companies interested in river projects in Nepal. The GMR Group (Gandhi Mallikarjun Rao) obtained a permit to build the 900 MW Upper Karnali and a Project Development Agreement (PDA) was signed with the IBN in 2014 with plans to start construction in two years after securing funding. The government's latest decision to extend the deadline for the GMR by two years is being challenged in Nepal’s Supreme Court. 

Indian investment in hydropower in Nepal

Geopolitical games

The export-oriented 456MW Upper Tamakosi project finally started production in June 2021 after much delay. But because a part of the Upper Tamkosi was built by the Sino Hydro of China, India refused to buy power from the project during the monsoon surplus last year – even though it was built with NEA investment. 

One international lender told Nepali Times: “Obtaining an Indian nod before building any big hydropower project in Nepal has now become a must.” Indian pressure manifests itself in its refusal to buy only 364MW of electricity which was recently increased to 452MW. This is the sum total of generation capacity with no direct Chinese involvement.

Nepal also cannot sell its power to China as there are no trans-Himalayan transmission lines, and exporting to Bangladesh would need an Indian approval system without giving a free and open market to Nepali electricity, while also rejecting any Chinese involvement.

India’s international electricity trade procedure issued in February 2021 prohibits the import of electricity from projects invested in third countries that do not have a bilateral agreement for cooperation in the energy sector. The fact that India does not have an energy cooperation agreement with China has therefore become an excuse, not just to blacklist projects in Nepal with Chinese investment, but even Chinese contractors. India has even stopped the supply of explosives for projects like the Tanahu and Upper Trisuli-1 Schemes being built by Chinese contractors. 

"Even though there is nothing in writing, India does not want any involvement of the Chinese in any capacity in Nepal's hydropower projects, they even have details of which country is the contractor and where are the machines being used from," explains Ganesh Karki of the Independent Power Producers Association Nepal (IPPAN).

India first allowed imports of electricity only from the 24 MW Trisuli and 15 MW Devighat projects, both built by the Indian in the 1960s. But after Deuba signed an agreement on energy cooperation between the two countries in 2022, NEA was allowed to 364MW. 

Even so, Nepal must renew this export provision every year, which is a bureaucratic hassle. What this essentially means is that if Indian companies do not get licenses for new plants in Nepal, they may not renew the power-selling contract either.

Nepali officials have been trying to convince the Indian side that it is in their own best interest if Nepal has a surplus in the coming years. Based on projections of generation capacity, NEA has sent a proposal to New Delhi to export an additional 600MW. 

The installed capacity of hydropower projects in Nepal has reached 2,400MW and is expected to cross 3,000MW after the completion of more projects this monsoon. Projects with a combined capacity of 3,200MW are under construction and will be completed in the next three years. On the demand side, the average domestic consumption at present is about 1,600MW and is expected to increase only to 2,000MW next year.

Hydropower generation in Nepal



There are critics who say Nepal should not be exporting power to India at all since it will not make a big dent in the trade deficit, and the $85.8 million it earned last year is negligible compared to the $8.33 billion Nepal earned in remittances. 

They say the priority should be on increasing electricity consumption in cooking, transportation and industry. At present, 70% of Nepal’s energy is from biomass and only 5% is from electricity. 

Since most of the electricity in Nepal is from run-of-river schemes in which generation depends on the flow of water in rivers, Nepal will have to continue to import power from India during the peak winter months for the next three years. In the monsoon, though, generation is double of demand, but the Indian quota, inadequate transmission and low domestic demand mean much of this clean electricity is wasted. 

Dinesh Kumar Ghimire at the Energy Ministry says Nepal is looking to sign a 25-year export agreement with India. "We are preparing a draft for the agreement. If both sides are on board with it, there may be an agreement during the Prime Minister's visit to India.”

Edging out China

While India is awarded one hydropower project after another in Nepal, China is being edged out. Both Phukot Karnali and Tamor hydropower projects were supposed to be implemented under Beijing’s Belt Road Initiative (BRI) scheme. 

Last month, Sichuan Wangping Energy Science and Technology gave up its license to build the 235MW Humla Karnali-1 and 335MW Humla Karnali-2 in partnership with a Nepali company. The survey permit for these projects has now been granted to Ruru Hydropower, a Nepali company.

The 1,200MW Budi Gandaki reservoir project has been caught in a geopolitical tangle between India and Nepal for the past six years. In May 2017, the Pushpa Kamal Dahal government handed over the project to China’s Gezhouba Group without competition. A few months later in October, the Deuba-led government reversed the decision and said Nepal would build it. Fast forward a year later and the Oli-led government gave Budi Gandaki back to Gezhouba, only for the Deuba-led coalition government in March 2022 to reverse the decision again. Exasperated, the then-Chinese ambassador Hou Yanqi said abandoned diplomatic niceties and said publicly that it was wrong for Nepal to change its decision every time a government changed.

Says Ganesh Karki of IPPAN: “We have to conclude that because of India’s stance, it is difficult to get Chinese investment in Nepal’s hydropower. The top political leadership should lobby with India to remove this obstacle.”

The hydro of hydropower 

Nepal’s former energy secretary Dwarika Nath Dhungel is convinced India considers water a strategic commodity, and its emphasis on electricity export hides its real intention to secure water supply in the coming decades. 

“We in Nepal, on the other hand, have no idea about this, and there is no clarity about our own water and energy policy. In fact, our policymakers are not working in the national interest at all,” he adds.

Studies have shown that water scarcity in the Indo-Gangetic plains will increase as Himalayan glaciers dry up, and the groundwater level falls due to over-extraction. And in the monsoon, there is too much water, so the world’s most densely populated region is hit by destructive floods.  

Building storage dams in Nepal is a win-win-win for India, reducing flood risk, augmenting dry season flow of Nepali rivers that flow across the border, and generating electricity. Nepal will get some export income, but will not benefit much from irrigation since it only has a narrow strip of land in the Tarai, and large tracts of its fertile mountain valleys will be inundated by future reservoirs.

“Nepal’s export of a few thousand megawatts will not mean much for India's huge power system with a capacity of around 400,000MW,” adds Dhungel. “What India is fixated on is our water. And that is why it does not want any third parties involved, especially not China.”

Former secretary at the Ministry of Energy Anup Kumar Upadhyay on the other hand is all for more Indian investment in Nepal’s hydropower, and does not think there is any ulterior motive. He argues that the model in which Nepal is allowing Indian companies to build projects is beneficial to Nepal in the long term.

At present, Indian companies that have received permission to build hydropower plants have agreed to provide about 22% of electricity to the Nepal government for free. And after 25 years, these projects will be fully owned by Nepal.

Says Upadhyay: "Whatever projects we are giving to India now, India does not even have the benefit of regular water flow from them, so there is no reason to be suspicious that India has a grand design to control our rivers."

Indeed, there are many in Nepal, even those critical of Indian behaviour, who say Nepal cannot choose its neighbours and it might as well keep India happy by ensuring that the river agreements are fair to Nepal as well.

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