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International Relations

‘The project can also be extended to other regional partners under the Bangladesh-Bhutan-India-Nepal (BBIN) framework’ | Photo Credit: Getty Images/iStockphoto

On August 18, 2022, the Investment Board Nepal signed a Memorandum of Understanding (MoU) with India’s National Hydroelectric Power Corporation (NHPC) Limited to develop the West Seti and Seti River (SR6) projects — a total of 1,200 MW.

Interestingly, nearly four years have passed since China’s withdrawal from the project before Nepal decided to grant the project to India. Considering that hydro-power cooperation is a pillar in India-Nepal relations, there is a need to reflect on these questions: what does the decision offer to India and Nepal? What are the shared concerns and common interests? What are the options and alternatives?

Historically, the 750MW West Seti Hydroelectric Project was thought of in the early 1980s as a 37 MW run-of-the-river scheme. Nepal issued the developing licence to France’s Sogreah, which prepared a pre-feasibility study in 1987 proposing the scheme without building a dam.

With the project failing to see the light of the day, Australia’s Snowy Mountains Engineering Corporation (SMEC) acquired a majority stake in the early 1990s. Between 1997-2011, attempts to make progress were affected due to investment and environmental concerns. Consequently, the China National Machinery and Equipment Import and Export Corporation stepped in in 2009, with SMEC holding a majority stake. However, China National Machinery and Equipment Import and Export Corporation withdrew citing a poor investment environment.

In 2011 Nepal revoked the licence of the West Seti Hydropower Company Limited in which SMEC had a majority stake, and handed it over to China. In an MoU in 2012, China’s Three Gorges International Corporation was assigned to develop the project, but it withdrew in 2018, citing issues of resettlement and rehabilitation.

Subsequently, Nepal tried to develop the project by mobilising internal resources. However, increased costs resulted in further delays. Meanwhile, the project was remodelled as the West Seti and Seti River (SR6) joint storage project (1,200 MW).

The decision to involve India is a sign that Nepal is reposing its faith in India to complete the project. If completed, it is expected to provide India the much-needed leverage in future hydropower cooperation.

The NHPC has initiated a preliminary engagement of the site with an investment of over ₹18,000 crore. It has also signed an MoU with the Power Trading Corporation Limited, India for sale of power. India is already involved in the Mahakali Treaty (6,480 MW), the Upper Karnali Project (900 MW) and the Arun Three projects (900 MW) in western and eastern Nepal, respectively. This will also help India minimise the geopolitical influence of China and firm its presence in Nepal, considering that the West Seti Hydroelectric Project was a major Chinese venture under the Belt and Road Initiative. In a tilt towards India, Nepal’s Prime Minister Sher Bahadur Deuba said, “We failed to invest in this project... Since India is reluctant to purchase energy produced by Chinese companies in Nepal, we will talk with PM Modi for the engagement of Indian developers.”

The project has the potential to enhance cross-border power exchanges between the two countries.

It is ironic that despite its huge hydropower potential, Nepal experiences power shortages during peak time, increasing its dependence on India to bridge the shortfall. With an estimated potential of 83,000 MW, Nepal’s electricity exports to India are expected to increase foreign exchange and address the power shortage. It is estimated that if the hydropower potential is fully harnessed, Nepal can generate revenue to the tune of ₹310 billion in 2030 and ₹1,069 billion per year in 2045 by exporting electricity to India.

Similarly, India’s severe deficit in coal-based thermal power plants in recent years, which meet 70% of India’s electricity demand, has compelled the Government to arrange supplies through coal imports, accelerating the search for better alternatives. Given the growing energy demand, the West Seti Hydroelectric Project can provide an added alternative and viable way to address power deficits.

For the project to be successfully completed, options and alternatives need to be explored. First, the revised cost around the construction process has increased to $2.04 billion. Since investment-related constraints have delayed the project, there needs to be a careful study of investment scenarios, particularly a conducive investment environment, distribution and transmission network and cost of resettlement and rehabilitation, at the preliminary stage.

Second, Nepal is concerned that the electricity rates and supply from India is inadequate to meet the rising demands. To address these concerns, the new MoU has already revised the percentage share of energy that Nepal will receive free of cost from the generation projects to 21.9% from 10% (Section 6.1) and provides for discussion ‘in good faith for further modalities, including Section 6.1’ to make it commercially viable (Section 6.2). Further, to address domestic demand, the MoU allows Nepal to request the NHPC to sell the power generated from the projects to the domestic market before selling whole or part to the export market (Section 8.2).

Third, the project can also be extended to other regional partners under the Bangladesh-Bhutan-India-Nepal (BBIN) framework for cross-border energy cooperation. For example, if the combined estimated hydropower potential in Nepal and Bhutan, along with the potential of Northeast India, is effectively harnessed, a cross-border energy market can be created and optimally operationalised. It will be a win-win at the bilateral and regional levels.

Mukesh Kumar Srivastava is Senior Consultant, Indian Council for Cultural Relations (ICCR), Ministry of External Affairs, Government of India. The views expressed are personal

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