The Battery of South Asia? The Potential for India-Nepal Hydropower Cooperation

Via Future Directions International, a look at potential for hydropower cooperation in south Asia:

Key Points

  • Regional leaders have appealed to Nepal to strengthen hydropower cooperation with India, to address Nepal’s domestic economic and energy crises.
  • The close proximity and economic strength of India have made it the best candidate to boost Nepal’s hydropower potential.
  • Historical relations between India and Nepal have been characterised by political mistrust and tension.
  • Nepalese leaders have raised concerns about the one-sided benefits obtained by India in previous hydropower projects. 
  • The success of the partnership could determine the willingness of other South Asian countries to engage in future regional hydropower initiatives. 


Despite possessing the potential to produce huge quantities of hydroelectricity, Nepal has failed to capitalise on these abundant resources. The lack of hydropower development in Nepal has contributed to chronic power shortages, which are affecting the country’s economic development. Experts have indicated that Nepal needs to improve cooperation with technologically advanced countries like India to capitalise on its hydrological reserves. While India is regarded as the main candidate to improve Nepal’s hydropower capacity, cooperation between them has been constrained by historical and political antagonism. The purpose of this paper is to examine the likelihood that Nepal and India will strengthen hydropower cooperation; the benefits of such cooperation; and the obstacles to future cooperation. The paper will conclude by discussing the prospects for regional hydropower cooperation.


Nepal’s huge hydropower potential stems from the abundance of steep Himalayan ranges, which cover 24% of the country. These mountainous regions discharge large quantities of runoff during the monsoon season. Experts have estimated that Nepal could generate 42,000 MW of power by converting these water resources into electricity. Recent government studies have revealed that Nepal only generates 650MW of power from hydroelectricity. This shortfall has contributed to Nepal’s severe energy shortages; nearly 60% of the Nepalese population do not have access to electricity. The majority of these people are located in rural regions, away from Nepal’s major power grids in the south of the country. In the Nepalese capital of Kathmandu, it is common for people to experience daily blackouts, which can last more than 18 hours during summer. Nepal’s energy crisis has been compounded by population growth, with energy demand increasing at a rate of 10% every year.

Although Nepal possesses significant natural advantages, hydroelectricity only accounts for 1% of its energy supplies. Nepal’s energy sector is dominated by wood (68%), agricultural waste (15%), animal dung (8%) and imported fossil fuels (8%). The problem with resources like wood and fossil fuels is that they are non-renewable. A shortage of wood in rural areas near Kathmandu is forcing some farmers to burn animal dung to produce power. This trend is having an adverse impact on the productivity of the land, because animal dung is required by many farmers to boost the fertility of the soil. 

Nepal’s energy concerns were addressed by global leaders at the two-day Power Summit in Kathmandu on 25-26 August 2013. Attendees at the conference declared that Nepal should strengthen cooperation with countries like India to improve domestic hydropower production. Nepal would benefit substantially from association with India’s more advanced hydro power capabilities. The fact that India is the seventh largest global producer of hydroelectric power, means that it has the economic and technical resources to improve Nepal’s hydropower capacity.

The Importance of India

The close proximity of India to Nepal means that the potential to strengthen their hydropower cooperation is significant. India’s interest in improving hydropower cooperation has been driven by its reliance on the Himalayan water resources that flow from Nepal; Northern India has a power shortage of 50,000MW. Because Northern India is so close to Nepal’s major power grids in the south, India is ideally located to benefit from future power trading agreements.

Nepal does not possess the technical capacity to develop large-scale hydropower developments. The decade-long Maoist insurgency, which lasted until 2006, had a detrimental impact on Nepal’s economy. The Maoist government stalled discussions with foreign investors on hydropower proposals, by expressing concern about the negative impacts of the projects on Nepalese society and the environment.

Roadblocks to Cooperation

Nepal has struggled to contain political corruption and infighting since the end of the Maoist regime. Internal political division means that Nepal’s ruling government is a coalition of small political parties, which has made the task of approving hydropower proposals very difficult. The Nepalese constitution requires foreign agreements on natural resources like water to be approved by a two-thirds majority in parliament. This provision has caused Nepal’s energy sector to become extremely politicised and disjointed.

Experts at the Energy Summit in Kathmandu in 2013, acknowledged the negative impact of politicisation on foreign investment in Nepal’s hydropower sector. According to Narendra Prajapati, treasurer of the Independent Power Producers’ Association of Nepal (IPPAN): “The [foreign] power developers have to approach as many as 10 [Nepalese] government agencies, along with abiding by 15 national laws, for registration, licence procuring and development of hydropower projects.”

It is unclear whether technically advanced countries like India will be able to overcome Nepal’s political roadblocks to strengthen hydropower cooperation. The extensive history of hydrological cooperation between India and Nepal indicates that India could play a major role in advancing Nepal’s hydropower industry, if Nepal can create a more investment-friendly environment.  Hydrological cooperation between Nepal and India dates back to the early 1900s. The construction of the Sarada barrage on the Mahakahli River was their first joint project. In exchange for funding and building the barrage, the Indian government was provided with land in South Nepal. Nepal’s main benefit from the barrage was its entitlement to a specified supply of water for farming irrigation. Examples of other hydropower projects constructed in Nepal with Indian assistance include the Devighat and Phewa hydropower projects, which are located near Kathmandu.

Opinion in Nepal is that the results of projects like the Sarada Barrage have been unfavourable to Nepal. India’s financial power gave it leverage to determine how those projects could best satisfy its own social and economic needs. India’s primary interest has been to establish run-of-the-river hydropower projects, which do not impede the downstream flow of water into India. This means that Nepal only benefits from sufficient electricity and irrigation supplies during peak periods of river flow, in the monsoon season. It is well known that storage hydropower dam structures would be more beneficial for Nepal; because hydropower can be generated more consistently throughout the year from a stored water source. The fact that Nepal continues to suffer from chronic power shortages has caused many Nepalese to question the benefits of India’s assistance.

Drawbacks of Hydroelectricity

Civil groups in Nepal have expressed concern about the environmental and social impacts of future hydropower projects. The environmental degradation caused by large-scale projects has been a major concern. The blasting and tunnelling of hillsides during the construction phase of hydropower dams, causes significant deforestation and degradation. This process can exacerbate the severity of natural disasters, like landslides, by destabilising the soil surface.Social displacement is another negative impact of hydropower projects. People living near the proposed sites for hydropower dams in Nepal have, in the past, been forced by the government to relocate to other areas. A lack of sufficient government compensation means that the displaced people are often forced to migrate to urban areas, where they lack suitable housing and employment opportunities.

These concerns have caused the Nepalese government to come under significant pressure from domestic civil groups. The protests and threat campaigns carried out by civil groups like the UCPN Cadres, forced the Nepalese government to postpone the development of the Upper Karnali and Arun III hydropower projects in 2011. This decision was made, although the government had signed a Memorandum of Understanding (MOU) with India in 2008. Ongoing socialinstability has caused many of Nepal’s existing hydropower facilities to deteriorate – due to declining maintenance standards anda lack of foreign investment.

The Indian government’s ambition to create an electricity trading agreement with Nepal has provoked widespread scepticism. History has shown that mutual electricity trading agreements can create a ‘single-option buyer dilemma.’ Unlike resources like oil and gas, electricity cannot readily be exported in a competitive global market – as it is limited to the proximity of the power grid. India has the potential to act as a single-option buyer, by determining the price and quantity of electricity being exported from Nepal.

Paraguay experienced the single-option buyer dilemma in its agreement with Brazil on the Itaipú Binational Hydropower Project. Government officials anticipated an electricity trading scheme where revenue from Brazil’s electricity purchases would pay-off Paraguay’s investment. Leaders from both countries formally agreed that Brazil would purchase electricity from Paraguay at a price of US$0.42 per unit. The estimated cost of the Itaipú project was US$2 billion, but by the time of its completion in 1991, the cost had exceeded US$16 billion. This blowout forced Paraguay to sell over 90% of the power to achieve a marginal annual profit, which compromised its entitlement to half of the power generated by the project. The marginal economic benefits of the Itaipú project, didn’t justify Paraguay’s risk in undertaking such a capital-intensive and environmentally-sensitive project.

The Paraguay-Brazil scheme illustrates the risks of transnational electricity exchanges. The risk that Nepal will be exploited in future hydropower agreements with India should be closely evaluated by the Nepalese government. While the government should be aware of these risks when dealing with countries like India, it would be unwise for it to let these risks restrict the development of its hydropower sector. A major benefit of hydropower is that it relies on water, which is a renewable resource. The abundant supply of water resources in Nepal means that hydroelectricity can be a more reliable and sustainable way of confronting Nepal’s long-term energy needs.

Benefits of Hydroelectricity

Another benefit of hydroelectricity is that water can be channelled from the dams to irrigate farmland areas. The construction of irrigation channels to farmland regions in Nepal would boost agricultural productivity and ensure the country’s long-term food security. While it might seem that the Indian government would be opposed the construction of irrigation channels, which could impede the flow of river water into India, the abundance of Nepal’s water supplies has so far prevented India from raising any concerns. On the contrary, the Indian government’s proposal to develop a hydropower dam on the Saptakoshi River, includes plans to construct irrigation channels that could provide water for 300,000 hectares of agricultural land in Nepal.

Recent events have indicated that India and Nepal will strengthen their hydropower cooperation. This was evidenced by the Nepalese government’s decision to recommence development of the 900 MW Upper Karnali project in Western Nepal, in August 2013. In April, Nepal’s Industrial Promotion Board also gave permission for a major Indian company to invest in the development of a 44 MW Super Madi Hydropower project in central Nepal. The government has revealed that 30 Indian companies have been granted licences to survey Nepal for potential hydropower sites. 

The relationship between India and Nepal in future hydropower projects will be similar to the past. India will continue to provide infrastructure and funding to develop the projects, in return for access to Nepal’s abundant water resources. It is important for the Nepalese government to stand firm when negotiating with India, to ensure that the benefits of future hydropower projects are not one-sided. It must also be transparent, when evaluating the benefits of hydropower projects against the social and environmental impacts.

Potential for Regional Collaboration?

Assuming that India and Nepal continue to strengthen their relationship, there is a possibility that neighbouring South Asian countries will also become involved in the partnership. Small Himalayan countries, like Bhutan, have an abundant supply of hydrological resources that can be converted into energy. These countries are similar to Nepal and India, in that they all suffer from chronic energy shortages. Some analysts have proposed the idea that a collective South Asian power grid could be established in the long term future.This idea was supported by India’s renewable energy minister, Farooq Abdullah, on 7 October 2013. Abdullah announced that the creation of a South Asian power grid, which allows for the free flow of electricity between producing and importing nations in South Asia, would be a top priority of the Indian government. So far, however, no extensive research has been conducted into the economic and technical viability of a South Asian power grid.

Political stability will be the major determinant of the immediate success of hydropower cooperation between India and Nepal. Nepalese leaders haveexpressed confidence that increased investment will flow from India after Nepal’s general elections in November 2013. Chief Nepalese economic adviser, Chirinjivi Nepal, recently declared that: “We [Nepal] need to create a more investment-friendly environment to invite Indian investment in various economic and infrastructure-related projects.”  It will be difficult for Nepal to harness sufficient investment without political and social stability. The decisions made by many South Asian leaders about engaging in future regional hydropower projects, will be based on the success of the partnership between India and Nepal.

This entry was posted on Thursday, October 24th, 2013 at 1:34 am and is filed under India.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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