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Nepal and India must keep energy sector away from their geopolitical calculations and cooperate for an energy sufficient future.

Pramod Rijal

Senior Economist,IIDS

Kathmandu, June 25,2017: There has been much written and said about Nepal's rich water resources and its potential for harnessing electricity. Hundreds of rivers flowing down from the Himalayas can produce upto 83 GW, which not only fulfill the national energy needs but can also help in meeting the demand of neighboring nations. However, given the disappointing generation capacity of the country over last two decades, Nepal has had to import nearly 50% of the electricity from India, instead.    

 
In the last two years alone, Nepal imported a significant amount of electricity from India to overcome 12-16 hours of power-shortages which had brought the industries to a grinding halt, contributing to unemployment, inflation and mass exodus of skilled workforce to other countries. Dramatically, in the last 12 months industrial output has increased and the costs in the service sector has gone down. This has significantly cut the inflation rate and contributed to creation of new jobs in the economy, especially the industrial sector.
 
The industrial output is estimated to increase by 9.7% in the current fiscal year, according to the survey report released by Ministry of Finance of Nepal. Additionally, availability of electricity has played a key role in promoting entrepreneurship and business activities with the surge in registration of productive and energy depended industries. This shows growing confidence of private sector in the economy and has contributed to healthy economic growth rate projection of 6.79% for the current fiscal year.
 
The demand for electricity in a growing economy like Nepal varies from hour to hour and month to month due to shifting pattern in electricity consumption for households and industrial needs. Similarly, the availability of electricity from various sources such as hydro, wind and solar plants also depends on seasonal changes due to availability of water in the rivers, flow of wind and number of sunlight hours respectively. Until we attain a stable and surplus supply of electricity from bigger projects in the pipeline, such variations and gaps between demand and supply side could have significant impact in our resurgent economy.   
 
An analytical study, Economic Benefits from Nepal-India Electricity Trade, by Integrated Research and Action for Development (IRADe) has taken this into account and suggests, Cross Border Electricity Trade (CBET) between Nepal and India can benefit both countries as Nepal can import electricity from India until it can overcome the deficit, and can export the electricity back to India when the construction of its ongoing mega projects from public and private sectors will be completed, as projected by 2025. This is a mutually beneficial arrangement for the two neighbors who have lot to depend on each other for.
 
For India, an economically strong Nepal will not only create a viable market for its goods, it will also be an attractive destination for shifting its industries which consume large amount of electricity and require competitive workforce. Importing surplus electricity from Nepal will also further help to relieve pressure on its energy hungry economy.     
 
For Nepal, the money earned from energy trade as well as hosting Indian industries not only helps in decreasing trade deficit and improving balance of payments, but also in increasing gross domestic product (GDP) and creating new jobs in the economy, which will help to reverse migration of skilled manpower.
 
The energy cooperation between the two countries will help India in meeting its demand in the peak hours, once Nepal starts exporting the electricity. India can then balance its energy generation in favor of renewable sources, reducing dependence on huge thermal and nuclear power plants. This will significantly cut down carbon emission and contribute to India's international commitments on Nationally Determined Contributions (NDCs), including Paris Accord. 
 
However, to realize the boundless possibilities in energy cooperation between Nepal and India, crucial steps must be undertaken. The most prominent being, a political consensus at the domestic front within both the countries, and at the bilateral level. This means, keeping energy trade away from immediate diplomatic and geopolitical calculations. The conventional understanding that Indian interest in Nepal's hydro-power sector is guided by its strategic needs rather than energy requirements, must change for better. India can demonstrate this by investing in cross-border transmission lines and reaching out to Nepal's private power producers. 
 
Lack of transmission system has been one of the biggest bottleneck in facilitating cross-border electricity trade, and it is more expensive and challenging than the construction of a hydropower project due to its linear nature. Nepal and India have planned to build three different cross-border transmission lines, but have only managed to complete only one, which stretches from Dhalkebar to Muzzafarpur. Other transmission projects such as Butwal-Gorakhpur and Lumki-Bareli have remained stagnant due to land acquisition, right of the way and environmental and social concerns on both Indian and Nepali side. Both countries need to step up efforts to effectively deal with these issues without further delay.
 
Nepal must do its homework sincerely by expediting necessary policy reforms in the energy sector to attract both public, private and international investments. The government formulated New Hydropower Policy in 2001 to address some policy related issues, but it has yet to formulate a New Hydropower Act. As a result, we have several constraints like, a state monopoly in the construction of transmission lines in Nepal. It is necessary to have a multi-buyer/seller model to create level playing fields for all and increase efficiency in the supply chain, for both domestic consumption as well as for exports. 
 
Secondly, it is utmost necessary to harmonize policy, the legal and regulatory framework as the current policy and legal frameworks are primarily designed with the objective of utilizing domestic resources. As a result, they have limited provision for utilization of resources at the regional level. It causes significant challenges for financial institutions, developers for making the investment in the regional utilization of energy resources. 
 
At the regional level, both India and Nepal should lobby to form a competitive power market in South Asia for power trading, instead of participating governments dictating their terms, which is often guided by their geopolitical interests rather than market rationale.  A regional power sector master plan could prove very effective in ensuring energy security in South Asia, by bringing together countries that have potential for surplus generation but lack sufficient investment capacity, and the growing energy hungry nations that can help boost production in these countries and benefit from energy trade. A smart energy diplomacy is the future.
 
(This article was originally published in The Himalayan Times in June 25, 2017, and can be reached at http://epaper.thehimalayantimes.com/detailimageviewer.php?id=2487&boxid…)