Conversations: Sagar Prasai offers a Political Economy of Electricity Market in India and Beyond

[00:00:04] - [Speaker 0]
Namaste and welcome to PUDs by PEI, a policy discussion series brought to you by Policy Entrepreneurs Inc. My name is Shriya Rana. In today's episode, we have Samitra Nupane, Executive Director of PEI, in conversation with Sagar Prasai. Sagar is a development professional with over two decades of experience working in the areas of water, energy, climate issues and regional cooperation in South Asia. He is currently based in Nepal and provides advisory services to various organizations including the Asia Foundation, the Australian Government's DFAT.

[00:00:41] - [Speaker 0]
Previously, he served as the Asia Foundation's Country Representative in India. He has a PhD from the University of Illinois at Urbana Champaign. The two discuss how the Indian Electricity market gets featured in Nepal's hydropower imagination, the impact that this has had on Nepal's ability to exploit its hydropower potential and what differentiates the Nepali model from that of other bilateral arrangements such as those between India and Bhutan. They also examined India's policy positions in the last ten years on cross border electricity trade and how regional rivalry between India and China is complicating energy markets in South Asia. They also discussed the future market opportunities for Nepali hydropower and whether there are longer term trends that support supply signals and investor confidence for Nepali hydropower.

[00:01:31] - [Speaker 0]
They end the conversation with a discussion on the possibilities of markets beyond India, primarily Bangladesh but also China, and evaluate whether there are realistic opportunities on these fronts. We hope you enjoyed the conversation.

[00:01:50] - [Speaker 1]
Welcome to the show, Sagar.

[00:01:53] - [Speaker 2]
Thank you, Sumitra.

[00:01:54] - [Speaker 1]
I'm really excited for today's conversation. And I wanna begin by kind of unpacking the very notion of electricity markets for Nepal. This has been something very significant for Nepal, and maybe it is good for our listeners to understand the relevance of why electricity markets is such an integral part of the narrative for hydropower development in Nepal.

[00:02:18] - [Speaker 2]
So if you think about how we started to think about developing electricity in Nepal, this was a time when Nepal was predominantly quite poor, per capita income around 300, dollars. And right in front of us was this piece of data where, you know, Nepal could potentially generate 83 gigawatts of power. And there were different estimates, but everybody sort of understood that maybe half of that is actually exploitable. And so at that time when we were generating perhaps 200, 250 megawatts of power in the eighties, this point of departure was significant, that there was something in the horizon for Nepal's development and it was going to be hydropower. Naturally, the government of the day also pumped it up.

[00:03:11] - [Speaker 2]
But, it was a credible narrative and and and Nepalese took on to it.

[00:03:18] - [Speaker 1]
So you mentioned this idea of 83,000 megawatts and this has been quite central to our own understanding of Nepal's potential. In some sense, we've been indoctrinated through this idea. Maybe some have said that 43,000 has been commercially viable. But whatever be that number, if you look back fifty years our own hydropower journey, and we're barely able to harness 3,000 megawatts. So does this inability to harness hydropower potential in Nepal, how much of that is quite related to our ability to look for markets?

[00:03:50] - [Speaker 1]
What weight does electricity markets carry for Nepal?

[00:03:54] - [Speaker 2]
Well, you think about the euphoria that the the narrative around 83 gigawatts of power came about and how how how that sort of in in some ways captured our imagination. At the same time, you think about how we were doing, even twelve, thirteen, fourteen years ago in 02/1978, we were roughly around 600 megawatts. So the journey from 600 to 3,000 has been quite exciting. And in between that journey is around around 02/1516, Nepalese were finally relieved of all kinds of load shedding. So the excitement current excitement is around sort of those two issues that, you know, what what the, the ending the termination of the load shedding schedule did and also, you know, how fast things are coming up in in you know, coming in the pipeline.

[00:04:48] - [Speaker 2]
So the combination plus, you know, talk of export potential, the idea that perhaps Bangladesh is an exportable market, All of this has become very, very exciting for the Nepali population in general, but particularly for investors. I wanna step back a bit.

[00:05:06] - [Speaker 1]
I mean, I we totally get it that it's it's been an exciting time with recent developments around Nepal getting entry into India and we'll come to that, in a later sections of conversation. But stepping back 1970s, I kind of remember and have read about the conversation around things like Chisapani project over 10,000 megawatts and then Sapta Koshi, Sapta Gandaki. There were these large projects that were being discussed and central to this idea was that we would be selling this electricity to India. And the understanding on my side is that the failure for Nepal to secure that market was really something that defined our own progress towards building these projects. For example, Nepal had gone to a point that several 100 engineers were trained for the Chisapani project, etcetera, etcetera.

[00:06:01] - [Speaker 1]
How do you see these issues? Like what was the central limitation around nineteen seventies, eighties for us not to secure a market for our hydropower project in India?

[00:06:14] - [Speaker 2]
Karnali Chisapani at that time was, perhaps the largest plant in in South Asia or was to be the largest plant in South Asia. And so I think we went, you know, a little ahead of our times. To think that we would, you know, use instruments like the Colombo plant and train a 100 engineers and bring them back home and then start building the the, the Karnali Jisapani plant. And then the fact that, you know, that in a country that where there were absolutely no transmission lines of any any any capacity apart from, you know, transferring fifty, thirty, 80 megawatts of power. So in in that context, to have that kind of imagination was in some ways a folly.

[00:07:06] - [Speaker 2]
And to think that India Nepal relations would remain steady all along the development of the project and marketing of the project and so on and so forth. Given that, you know, how Nepali politics was impacted by the Koshi agreement with India, the Gandak agreement with India, and so on and so forth. If you look at all the parameters, whether it is, you know, regional, you know, bilateral relations, regional peace, the capacity of the two economies to consume that, the capacity of the two countries to build that, I think it was it was, you know, India Indo Nepal imagination going amok. And so for practical reasons, those things couldn't have happened, they didn't.

[00:07:50] - [Speaker 1]
Looking at global examples, we've we've seen that projects of similar nature quite ahead in time were developed elsewhere, around the world, big projects like the Columbia Dam, etcetera. But do you interpret this failure for Nepal to secure a market in India in around 70s, 80s more driven by the lack of political will or security interests, especially on the Indian side for procuring power from Nepal?

[00:08:23] - [Speaker 2]
I am I am not entirely sure that Indian side itself was confident that it needed a hydropower plant of that size and it could actually consume productively the energy generated from a plant that size. Because India was dotted with coal plants, it was already getting into nuclear. There was an internal political economy of coal mines. India had a more of a socialist bent at that time. Indian industries and manufacturing sector was still struggling.

[00:08:56] - [Speaker 2]
They they used to talk about the Hindu rate of growth, for instance. The Hindu rate of growth was like, you know, if it grew in two or three up to 5%. And so Indian economy itself wasn't growing at that pace. Their electrification wasn't that, you know, actively invested in. And so given all those things, you know, just like what is happening to Pancheswaran, we can touch upon that later, that, you know, some projects are just too big to start and too big to operate and they end up not being built.

[00:09:27] - [Speaker 1]
This is somewhat related of a question to what you just said, Sagar. Post liberalization, you see India quite transform and its own power needs changed significantly. And in this time, we kind of see your shift in the Indian discourse where its need to secure power is tightly towards the Bhutani side than the Nepali side. How come Bhutan made that advance faster than Nepal while Nepal had been conversing around electricity markets and India for a very long time?

[00:10:01] - [Speaker 2]
So the interdependencies between India and and Bhutan are at operate at a much deeper level than they operate in Nepal. And so Bhutan was in some ways an illustration case in the sense that if if India could come up with a model that potentially works in a country of that size, perhaps it could work, you know, with Nepal as well. And what India could potentially get in terms of power security, energy security from Bhutan, if in if India could do the same with Nepal, then the scales are different. The the levels of, benefit from that relationship would have been different. So why I say this is, you know, even today, the installed capacity in Bhutan is around 2,000 megawatts.

[00:10:56] - [Speaker 2]
And the two large projects, the Pines on 21 And 2, have been, been under construction for nearly fourteen years and haven't been been built. There are a number of problems in financing, in in engineering side, so on and so forth. So even, say, in another three years' time, Bhutan might have 4,000 megawatts. Projecting further into the future, we could be talking about eight or 10,000 megawatts from Bhutan, but it'll it'll plateau somewhere there, which if you look at in in comparison the numbers, India itself has 42 gigawatts, 42,000 megawatts of power, hydropower, under construction. A lot of them are stalled.

[00:11:43] - [Speaker 2]
That's a different story. But for a country like India, which on its own accord is building around 42 gigawatts of power, two gigawatts isn't anything. So a lot of people talk about Bhutan as being a model. I have I'm a little skeptical of that. It's not quite a model.

[00:12:01] - [Speaker 2]
It it is it's a relationship that is, fairly deep in terms of geopolitics, economy, and so on and so forth. And within that relationship, they could develop a relationship where it was possible to develop, you know, up to perhaps eight or 10 gigawatts of power down the line. So I don't think all of that is applicable in Nepali case. There was a a lot of comparisons made, but the basis for comparisons were weak.

[00:12:32] - [Speaker 1]
I just wanna stick around with this question a little bit longer. What I'm trying to understand is you see Nepal and India kind of conversing large projects based on this long lasting treaty of friendship from 1950s, close neighbors, the narrative is there. But then again, when you see India moving towards securing its power needs from neighboring countries, it was not Nepal, it was Bhutan. So do you think there was this element of long standing distrust? You mentioned Kochi, etcetera, that India kind of felt that, now is not the best time to be engaging with Nepal.

[00:13:17] - [Speaker 1]
What was the case?

[00:13:18] - [Speaker 2]
Okay. So true that that, for for reasons not quite, openly discussed that India had a definite reticence, a hesitation to work as closely, in hydropower Nepal as it has done with India, there could be variety of reasons. One reason, of course, you know, that we have to admit is politically Nepal hasn't been very stable for a long, long time. So there has been, you know, in some ways the politics has been characterized by instability for a long time. In the nineteen nineties when the when democracy came to Nepal and India's trust towards, people leading Nepali politics had all of a sudden taken a leap, even then, India and Nepal were not able to come up with, significant projects.

[00:14:20] - [Speaker 2]
Of course, you know, Pancheswar is a project from, that era. And look, you know, what Pancheswar did to Nepali politics. Right? A major political party got split. You know, the there was an, you know, midterm election called and so on and so forth.

[00:14:36] - [Speaker 2]
So if one project could create that kind of an upheaval, then obviously the the attraction of you know, for doing more in Nepal would, you know, wane down. So, that must have been the story. Because if you look at India, you know, after late nineties, India did grow, at a very rapid pace. The energy planners in India got a little concerned about their energy security after around '95 onwards. And it was a good time, for Nepal to get into that bandwagon as, you know, Bhutan had already, in some ways, demonstrated that it might be possible, and fruitfully possible to collaborate with India and develop hydropower.

[00:15:24] - [Speaker 2]
But it didn't happen. But also, on the side note, you know, 1995 was also the year when the Maoist insurgency started. And so the, you know, the idea that, you know, significantly large Indian projects would be built in, remote rural areas of Nepal while the Maoist insurgency was going on was perhaps not practical too. So I I guess it is the Nepali politics more than anything else if you're talking after nineties. Before nineties, as I mentioned before, it was the Indian economy itself.

[00:15:58] - [Speaker 2]
It was too sluggish to be too ambitious around energy.

[00:16:03] - [Speaker 1]
Moving the conversation forward, fast forward to 02/2014, there was the SAC framework agreement on energy cooperation, a major achievement on non discriminatory transmission access for cross border Brexit trading, followed by the Nepal India Power Trade Agreement. And again, you see here that India is quite central to both of these agreements. Sagar, what do you say were the key drivers that facilitated India's shift in position in these two agreement? Was it merely political in the sense that it coincided with Narendra Modi coming to power in 2014 and the Indian government trying to recalibrate its neighborhood policy? Or were there other considerations at play which made India kind of shift this position towards how it views neighbors, in terms of energy?

[00:16:52] - [Speaker 2]
Yeah. So this is one of the questions where I can say all of the above. And, yes, true. Narendra Modi came to power in 02/2014. He wanted a defined departure from the governments of the past, particularly in relations to India's relationship with the neighborhood.

[00:17:11] - [Speaker 2]
And the idea that, you know, that he would promote neighborhood first, he was also the prime minister who invited all the Sark, heads of state to his inauguration. There was a lot of hope. And, when the Sark Summit happened, you know, this optimism was carried to the to the Sark Summit. And you imagine, from the Indus to Brahmaputra, if we have a grid line, we are talking about 150 gigawatts of hydropower readily within the next ten to fifteen years. Now that kind of, grid up in the North would mean that, you know, all intermittency problems that each country is having by entering into renewables would be more or less resolved at least, you know, if not for South India, but for the rest of the subcontinent.

[00:18:06] - [Speaker 2]
And so it was a very glorious moment, I would say, that, you know, they could at least sign. But like all things, you know, imagined in South Asian relations, the practicality of the geopolitical tensions that have forever existed in this region always takes over. And so that is what happened. I mean, immediately after the, you know, the relationships between after the Uri attacks in in in Kashmir, the relationships between India and Pakistan dipped, and the talk of the South Asian grid also collapsed. And so, you know, an imagination that big was killed by a minor, you know, incident, if you could call it minor, but, you know, but, such is the nature of geopolitics in this region that, you know, really positive, really big moves can be just canceled out by tiny events.

[00:19:02] - [Speaker 1]
That seems to have kind of, projected India's movement towards creating, subregional framework. And I think BBIN is a good example of that, how Pakistan was alienated from the SAG framework agreement on energy cooperation and you see India moving towards, a more regional controlled, area of cooperation.

[00:19:26] - [Speaker 2]
Absolutely. And and India does have ambitions, global geopolitical ambitions. It being became the fifth largest economy, I think, last week or so. And so it does want to it does want to claim a, a high seat in the, global geopolitics. But it can't do that by, leading a region that is, perennially squabbling with one another.

[00:19:54] - [Speaker 2]
And so it it has to at least show leadership regionally in its own backyard before it can make taller claims. So India does realize this. And so normalizing relationship, having greater regional collaboration, both economic integration and geopolitical sort of balance is important for India. And so while it is now not possible, to be very ambitious with Pakistan or even Afghanistan now, I think BBIN is the only game left.

[00:20:28] - [Speaker 1]
Stepping back, Sagar, so, 2014, I think there was this broad understanding that there is logic for integration, for connectivity and power trade. And in two years, 2016, another important year for regional cross border power trade, India came up with guideline defining what were the norms for power trading in the region. While there was some seminal introductions which included the idea of Tripadrille agreements that would facilitate broader corporations beyond India. But there were significant concerns around some clauses in the 2016 guideline, most notably 5.2, which talked about who could enter into the Indian market. How do you see this issue around what were the key contentions?

[00:21:24] - [Speaker 1]
What stuck out in 5.2, and what was India trying to convey to its regional partners?

[00:21:32] - [Speaker 2]
So so far, we've talked about South Asia, but there's a looming presence of China in South Asia, and that that is the root cause of all of these sort of moves by India. But let's not forget how it transpired too. Just before 2016 was 2015 when Nepali political class managed to write a new constitution for Nepal after almost ten years of haggling. And it wasn't a, you know, perfect document for sure, but it was a document that could lead, you know, Nepal to a transition and end Nepal's political transition and lead it to the next phase. Around that time, India, for its own internal reasons and arguments, decided that it wanted some particular elements in Nepali constitution.

[00:22:28] - [Speaker 2]
If you look, in in the newspapers coming out of India around September time frame, whether it's Indian Express or others, Indian Express was the was the one that broke the story that Jaishankar, who was then the, secretary of ministry of external affairs in India, now he's a minister, he had, come, to Kathmandu to convince Nepali leaders that certain clauses needed to be included in the constitution. And at that time, the Nepali leaders felt that they could ignore the Indian secession. And what transpired after that was an unofficial blockade or pressure tactic that India adopted, and that, in very many ways misfired. It, ended up, sort of raising up a rather widespread anti Indian sentiment for, no particularly good reason. And there was election impending election in in Nepali political timeline, and it was perhaps expected that the then prime minister K.

[00:23:46] - [Speaker 2]
P. S. Charmawoli would do very well because he was the one who actually successfully managed to whip up the anti anti Indian sentiment in Nepali politics. And true, to the cause, it it did so happen that, you know, the Nepali Communist Party is one overwhelm overwhelmingly, and two thirds of, the parliament was won by Nepali polit communist parties. And there was suspicion now in India then at that point that Chinese influence in Nepal will grow.

[00:24:28] - [Speaker 2]
And so they wanted to curb Chinese engagement with Nepal in every possible sector, and hydropower also happened to be one. And so these clauses essentially say that, you know, we're okay. We'll buy electricity from you as long as it's got nothing to do with China. But that, has its own problems.

[00:24:48] - [Speaker 1]
Yeah. I think, going back to the clause itself, it was implied well, not implied in a sense, but clearly stated that 51% had to be from an Indian firm making an investment into hydropower or it should have been a 100% government entity company investing in the hydro space. Quite conversely, you see what is happening on the Nepali side is where there's a lot of private sector engagement. I recall that, Bhutan and Nepal were quite vocal, on this immediately after India released that 2016 guideline. Why was it so important, these two clauses around entry into the Indian market, that both Nepal and Bhutan had to raise their voice against India?

[00:25:35] - [Speaker 2]
Well, nobody likes monopoly sellers and monopoly buyers. And the situation was so turning that in the end, it looked from both Thimphu and Kathmandu that India is orchestrating the entire, regulatory, platform, in such a way that India would end up becoming a monopoly buyer. And not only a monopoly buyer but a monopoly investor in these two countries. Now that obviously doesn't sit well with anybody, who is also parallelly investing in. And in Nepal's case, it's slightly different because there's private sector investment, there is government investment, and there are other investors that we hope to tap in future.

[00:26:28] - [Speaker 2]
So it would it would essentially be unfair to all of these investors if we have a system where only Indian investments are welcome and only Indian purchases of Nepali electricity is welcome. So that's not that's not how markets are meant to operate.

[00:26:46] - [Speaker 1]
Just trying to understand, this particular, event from, the relationship between Nepal, Bhutan, and, India power relations. What was so pivotal that India considered this to be a strong objection and went on to revise this in 02/2018? I mean, we have a history of relations in the, subcontinent where India has put a deaf ear to a lot of things. Why couldn't India put a deaf ear to this and why did it go on to revise this particular clause in the 2018 iteration of the cross border, guidelines?

[00:27:29] - [Speaker 2]
So there is an in very interesting aspect in India Nepal relationship. You know, a lot of people call it very unique for a variety of reasons. I call it unique for our mutual inability to remember bad patches in our relationships. Because if you think about, you know, what happened after the, you know, the the writing of the the promulgation of the constitution, and and, you know, the unofficial blockade and the and the the bittering of the relationship and so on and so forth. Now, you know, that episode is no longer in any of the backdrops of India Nepal negotiations.

[00:28:09] - [Speaker 2]
It has been forgotten. If you think, similarly and and closer, when, two years ago when Nepal unilaterally, claimed a piece of territory in Western, Nepal that is under dispute and included that in the official map of Nepal, Obviously, the Indian establishment was livid. But, you know, right now, as Indians and Nepalese sit down across the table in bilateral talks, that no longer forms the backdrop. And so, you know, India Nepal relations are unique in variety of ways, but in my mind, it's unique in the sense that we we very easily forget the bad patches in our relationship, and it's it's a good thing. And that is why, you know, when surplus electricity was becoming a problem in Nepal, there was a lot of, peace sent to India, and India sort of agreed.

[00:29:07] - [Speaker 2]
And in the end, how much did it agree to? Around 350 MW, which is nothing for India. Right? And so it's just a very narrow, North Indian, UP, Bihar grid intermittency problem that gets resolved through 350 megawatts. If it wants to go anything higher, we should be talking in terms of at least two to 3,000 megawatts.

[00:29:35] - [Speaker 2]
So it wasn't a very big concession for India to relent to, and it hasn't been very generous either. It is still, it is objecting to the Upper Tamakosi, you know, 465, I think, megawatt planned because Chinese contractors built them. Now the problem with this is, you know, these have to go through global tenders and you have to give it to the lowest bidder, you know, provided all things remaining equal. And so, you know, Chinese tend to win a lot of contracts, not only in Nepal but also in India. And so because of that, if the Indian position is if there is an engagement of a Chinese contractor, we can't buy from that plant, That is also not sustainable over time.

[00:30:27] - [Speaker 2]
It'll it'll crumble soon.

[00:30:28] - [Speaker 1]
Yeah. You mentioned an interesting point and probably, we'll we'll get to it on Tamagoshi and what's happening, at the moment on the cross border front. But going back to the 2018 guidelines, that's kind of been formalized and in this issued its regulation, the Central New York City Authority has come up with its own regulations around entry and approval. My own reading of these policy frameworks on the Indian side, while they seem to kind of not spell out clearly the area of objections that Bhutan and Nepal had in the 2016 guidelines. But the nuts and bolts of the operational part of these frameworks still reflect the concerns of India around China.

[00:31:18] - [Speaker 1]
For example, Nepali or anybody who wanting to steal their electricity to India, they need to kind of go on to specify who built that project, where that investment came from, who's the contractor. So there are details that needs to be furnished for each projects that want to enter into the Indian market. How do you see this between this broader scope of arrangements between India and China and where they are in terms of their own geopolitical rivalry in the region?

[00:31:51] - [Speaker 2]
So if you if you looked at it from the Indian, sort of perspective, absurd as the position might appear, it is doing what it is meant to do, which is to hassle Chinese investors to a point where they can't be significant players in Nepal. And that is what the the the clauses are intended to do, and they are doing precisely that. If you think about, has there been any significant Chinese, investor companies coming to Nepal and and and talking about producing electricity in Nepal? At this point, no. There are none.

[00:32:30] - [Speaker 2]
And so from the Indian point of view, I am sure they are a little embarrassed by saying that, you know, India will be able to tag every electron and import it, you know, China free into India. Absurd, it surely is, but it is doing the trick.

[00:32:51] - [Speaker 1]
And Nepal and Bhutan seem to have no objections on on the revisions, though, despite the logic remaining the same and the premise remaining the same. Is that a fair estimate?

[00:33:04] - [Speaker 2]
It's a fair estimate in the sense that, you know, both countries know that, sooner or later, these absurdities will have to go away. And it has to the grid has to operate more like a market. But at the same time, given enough time, India will come to a position where, you know, the the markets, at least for Nepal and Bhutan, will begin to operate as intended, to the benefit of the the two countries. So, you know, if you talk to, some of the negotiators from the Nepali side, for instance, their point of view is, well, it will take time, but India will do the right thing eventually.

[00:33:58] - [Speaker 0]
I am Shriarana. This is PODS by PEI. We will hear more from our guests right after this. Welcome back to PODS by PEI. I'm Shri Arana.

[00:34:13] - [Speaker 0]
Let's get back to the show.

[00:34:18] - [Speaker 1]
Moving the conversation forward, Sagar, I think we also need to discuss how the Indian logic has and will continue to drive cross border electricity trade opportunities and challenges for Nepal. And you mentioned some of the current state of affairs with India allowing around three sixty five megawatts of power to be traded. Well, the proposal it had put in was for around 1,000 megawatts, clearly demonstrating that India is taking a piecemeal approach and selective approach to entry into the Indian market. And you also mentioned key projects such as the four sixty five Upper Tamakoshi not being able to enter into the market on the Indian side because of Chinese footprints. In your 2018 research report, you noted, logic of grid integration is not market oriented.

[00:35:16] - [Speaker 1]
It is operationally too fragmented to emit reliable long term supply signals for hydropower investors in the Himalayas. Given the current state of affairs on this piecemeal approval from the Indian side, do you still hold to your 2018 opinion around markets and opportunities? Or are there other longer term or shorter term trends that are kind of influencing Nepal's own opportunities to enter into the Indian market? Let me take it this way.

[00:35:49] - [Speaker 2]
So it is the the grid is still fragmented and it's actually quite difficult to have a seamless grid, you know, unburdened by all kinds of regulations, particularly when it's a transboundary grid. One does anticipate some degree of regulation, some some degree of controls because, you know, these are, you know, sovereign systems trying to meet one another at certain point. So but then, you know, that doesn't mean that India and Nepal cannot do it because, you know, there are other examples in Europe and Africa and elsewhere where these things have been very successfully tried out and they work. The current position that India has over primarily to exclude Chinese investment in South Asia, that you would tag every plant, every, you know, source of electricity and then only trade is actually has become a burden for Indian markets themselves. Not so much of a burden today because, you know, the scales are very small, you know, around 2,000 plus megawatt from Bhutan and around 300 megawatt from, Nepal is not going to make that much of a dent to India.

[00:36:51] - [Speaker 2]
But India's own energy security is going through an upheaval. And that is largely because of coal prices and supply chain disruptions and so on and so forth that the pandemic brought about. What the pandemic also did was opened the eyes of the Indian energy planners saying that, you know, you've got energy in and around your neighborhood. You need to tap that instead of depending on some Australian coal and Indonesian coal and so on and so forth. Plus, you know, the the sun the noise around climate change and the the demand for faster action on climate change puts India under greater and greater pressure every year because its reliance on coal is not just letting up.

[00:37:35] - [Speaker 2]
And so it wants to be a good respectable player in the climate table. It has to do more on the climate side too. So it has to start doing something about its coal. What it did was invested heavily on renewables, But renewables introduced the kind of intermittency in the grid that, you know, for these countries, only hydropower can make up. Right?

[00:38:00] - [Speaker 2]
It is not time yet to rely on batteries, particularly when you're talking about 200 gigawatts of supply lines that India has. And it is also not possible to get into gas fired plants because India doesn't have that much natural gas. And if it does get into natural gas, again, it has to depend on Russia or somebody else. So I think there is a massive shift in the way Indian energy planners are thinking about hydropower. And part of that story is their renewed interest in Nepali hydropower.

[00:38:36] - [Speaker 2]
And that is why I earlier on also, will I was arguing that sooner or late later, India will relent and lean more towards market trade than this, you know, heavily geopolitically colored system where, you know, you know, every plant is to be tagged, every electron is to be tagged as to what the source of funds are. You know, so this is not this is not quite practical. And I think, we will see a more liberalized grid system, in near future, I would say. And I don't ask me in the number of years, but near future is all I can say.

[00:39:15] - [Speaker 1]
Bro, that's the optimism most Nepali hydropower investors would want to hear. But just trying to, understand this, very clearly. So the the the economic logic of why trade should happen with India, as you mentioned, renewable, climate change, etcetera, is clear and visible. But then again, there is a particular constituency of interest among the hydro space and policymakers in Nepal that remain a bit hesitant with India's piecemeal approach. And they tend to believe that this whole selective approval into the Indian market does not provide a stable signaling for investments in Nepali hydropower.

[00:40:06] - [Speaker 1]
And you kind of place this within how scholars and thinkers in India seem to believe. For example, I read somewhere that Mohandra Lama in one of his twenty twenty research reports said that Nepal would be the biggest beneficiary of cross border electricity trade. The logic is there very clearly. But then again, this selective process, how how do we build that confidence on on the Nepali policymakers and investors side?

[00:40:34] - [Speaker 2]
So, you know, there's a lag time. There's a lag time between it is sort of a change of strategic thinking and implementing that strategic thinking. Right? So India currently has an appearance of an extremely conservative, extremely selective kind of an import, sort of, ecosystem. But, you know, if you think about what its own economic compulsions are, it can't sustain this position for too long.

[00:41:09] - [Speaker 2]
And perhaps professor Lama was, you know, projecting things, you know, way into the future and say, you

[00:41:15] - [Speaker 1]
know,

[00:41:15] - [Speaker 2]
India was has nowhere to go, with this position. Right? So it has to, at some point, you know, adopt a more liberal both posture in in at least in terms of regulating grids, you know. At the same time, you know, is it emitting the right signals to Nepalis? No.

[00:41:38] - [Speaker 2]
Right? I mean, if you think about, sort of Nepali enthusiasm for electricity development, hydropower development, it sort of plateaus around 200 to 300 megawatts. It doesn't go beyond that. And in in some ways, when there are multiple 200 to 300 megawatt plants, you're not thinking about large export, you know, scales at an individual level. So every every investor who is producing 200 megawatt isn't thinking about large sort of export market.

[00:42:14] - [Speaker 2]
But somebody in Nepal has to think of a large export market, and that happens to be, you know, Nepal Electricity Authority at this point. And incidentally, just like Nepal and Bhutan protesting with India that you can't be a monopoly buyer of this sort. Right? Currently, the independent power producers are telling the same thing to Nepal Electricity Authority that you've you've gone amok. You're an autocratic, you know, monopoly buyer.

[00:42:48] - [Speaker 2]
And so these are trade negotiations. They will take their course. But in the end, the choice to deviate from the market always becomes expensive, and you will have to return to market. So I'm thinking our our export arrangements with India will have to turn more towards market, and our own internal arrangements of these sort of static PPAs will have to change too. Right?

[00:43:15] - [Speaker 2]
So that is for the future. Currently, you're right. It's not emitting, good signals, and therefore, you know, hydropower investment in Nepal is more or less stalled. And if you look at what is happening to the global interest rates and interest rates in Nepal, at this point, nobody wants to invest in power. Now what will happen if there is this this hiatus increases is we will again see a gap, you know, both in terms of our ability to meet domestic demands and also if there is any export commitment to meet export commitment.

[00:43:49] - [Speaker 2]
So this is a rough patch in in which the entire world is sort of struggling, to, take a call on investments, and Nepali investors are also doing that.

[00:44:01] - [Speaker 1]
Just as you were answering the question, I had a tangential thought, and this was around India's own hydropower capacity. So, like Nepal, there's several thousand megawatts that India has already produced. As India is looking towards its neighbor to secure its hydropower needs, moving forward, but there is ample amount of hydropower also available on the Indian side. What do you think is the the logic around how India should move forward with their own hydropower? And how does that correspond in terms of efficiency and cost around procuring power from Bhutan or Nepal?

[00:44:45] - [Speaker 1]
I've heard in policy corners that Nepali hydropower is quite expensive compared to that that built by Bhutan or on even in the Indian side. And I would imagine that that defines prospect and profitability around power trade.

[00:45:06] - [Speaker 2]
It does. Just, let me start with a small correction. I mean, Bhutanese power is built through concessional loans, so obviously it will be cheaper. And Nepali power is mostly built through commercial loan. And so it is slightly more expensive and and and that is, how it will be.

[00:45:25] - [Speaker 2]
But over longer term, these things will normalize. You know, Samitra, that I served in India for four years. And in my four years, I used to frequently bounce upon these sort of meetings and interlocutors who used to tell me that Nepal missed the bus Missed the bus in the sense that, you know, Nepal didn't agree, you know, with the Indian proposition of developing the way power is being developed between India and Bhutan. And now India has its own power base where it no longer leads Nepali power. Right?

[00:46:04] - [Speaker 2]
So that was that was the quip that I would get from most of the Indian interlocutors. Right? Now it looks like India has missed the bus. And it has missed the bus because between around 2004 to 02/1820, India stopped paying attention to its hydropower development. So around 40 gigawatts of power in India, most of it in the Northeast and and some of it in Himansal and Uttarakhand, were stalled because of financing reasons, cost escalations, engineering failures, and so on and so forth.

[00:46:42] - [Speaker 2]
But the Indian government was completely reluctant to come revive these projects through renegotiated, finances. And so while it ignored for those many years, the energy planners in India were completely confident that they will have enough renewables. They will have other ways of managing intermittencies and so on and so forth. Coal was becoming cheaper and cheaper and cheaper and so on and so forth across the world because a lot of the coal fired power plants were being disengaged, decommissioned elsewhere. And so this there was this kind of a false sense that India can manage without hydropower or significant investment in hydropower.

[00:47:25] - [Speaker 2]
And, so that's what happened. They realized that they've missed the bus. And so now you can't you can't pump in enough money to revive all of these projects and so on and so forth. Some of these things have the cost escalation and the time period has gone to a point where, you know, even if you build these plants, they won't be profitable plants. You know, we have one example of this in Upper Tamakosi.

[00:47:48] - [Speaker 2]
Upper Tamakosi is not likely to be profitable for a very long time because of cost escalations. So those realities are now surrounding Indian hydropower development, and that is why the openness to go out and and build more, and including in Nepal. So they signed around 2,000 megawatts recently around that logic.

[00:48:10] - [Speaker 1]
I want to engage you on another tangential but a related thought. And this being, on the idea of hydropower and its impact. So entire of South Asia, Nepal and more so on the Indian side, hydropower has been really contested for environmental and social reasons, large movements, particularly in India that have stalled hydropower processes. And we've had some on the Nepali side as well. How much of the Indian logic is kind of captured by the fact that India wants to export some of the externalities of building large hydropower or hydropower in general to its neighbor and kind of reduce that on its, own home front.

[00:48:59] - [Speaker 2]
If it was completely market, based trading, you could say that. What is happening with Indian investment is it's the Indian companies which are investing. Right? Now, there are negative external externalities in hydropower, agreed, and Nepal will have to bear with it. And India takes out, you know, you know, electricity off a grid, you know, without any environmental damage.

[00:49:30] - [Speaker 2]
That is also true. Right? But at the same time, one has to understand the scales of these problems. Now, in the field of energy, for instance, UK, Boris Johnson in his last speech to, you know, UK citizens said, we will build four nuclear plants, you know, one every year. Now what does that mean?

[00:49:55] - [Speaker 2]
That how come Europe is all of a sudden, you know, fine with nuclear energy now? Right? Because you don't have choices. Because you can't be fossil phase based all the time. You need a base energy, and that base energy has to come from source some source that is climate friendly, right, and doesn't create that kind of an environmental ruckus where it becomes politically, impossible to push.

[00:50:26] - [Speaker 2]
Right? So if you look at all of those things, the the the the impact of an of a of a hydropower plant, particularly the peaking type and the run run of river type is really nothing. You know, it's very minimal. There are issues around storage types, but you have to bear with it when you compare with the environmental damages other systems cause. Right, or the viability of other systems like wind and solar.

[00:50:53] - [Speaker 2]
So the broader conclusion is one way or the other. We we have to come back to hydropower. And remember that currently pumped hydro is around 1.5 to two times more expensive per unit, right, compared to, you know, regular, you know, run of river or other hydro systems. But people are even opting to go for pumped hydro because you need something to manage the intermittency and it can't be fossil fuel. So, you know, sooner or later, these things will you know, market has a way of finding, you know, equilibriums, and there will be an equilibrium found, even in terms of the the potential environmental damage and potential benefits to society.

[00:51:46] - [Speaker 0]
You have been listening to POTS by PEI, I'm Shri Arana and this is a quick reminder for you to do us a favour by sharing the podcast on your social media and leaving a review on Spotify, Apple Podcasts and Google Podcasts or wherever you listen to the episode. More from our guests when we return. Welcome back to PODS by PEI. I am Shriarana. Let's get back to the show.

[00:52:20] - [Speaker 1]
I was having this conversation with Satish in my previous episode, and then we were discussing that the market signals are quite clear that India needs peaking response. It needs energy to cater to a demand that is quite high during the evenings or or during the peak hours of the morning. And storage projects are well adapted to do that. And that Nepal's opportunities in the Indian market would be really defined by its capability to build storage projects and supply power to India. Do you agree?

[00:53:01] - [Speaker 2]
I agree and I disagree at the same time. That means I'm torn. What what is happening is, you know, Nepal shouldn't, just because we can sell power at a higher cost, go overwhelmingly into storage type because storage type in this geography, you know, at a time when there are, you know, glacier lake outbursts and things like that, you know, these extreme events are becoming more and more frequent. So we need to be wary of too many, storage types. We need enough storage type to ensure a base power for domestic consumption, and we need enough storage type storage type to have a credible amount that is exportable from Nepal.

[00:53:46] - [Speaker 2]
As in credible, when I say credible, credible in negotiations, reliable in operations. Right? So we need enough to negotiate a good base power price, And for that, we need to show a good storage pipeline. But at the same time, we shouldn't just, you know, throw our weight around storage just because it earns more. It is quite a risky proposition.

[00:54:11] - [Speaker 1]
Relatively, Sagar, this April 2022, Nepal and India signed a flexible agreement, as you may say, on energy cooperation kind of saying that energy, especially hydropower, is going to be the cornerstone for Nepal India partnership moving forward. And since then, you see a flurry of movement of Indian companies showing interest into the Nepali hydropower, notably NHPC as entry into the much lingered West City hydropower project, Siti River 6, both combined capacity of 1,200 megawatts. And this on top of around 2,000 megawatts that Indian companies already hold in Nepal for export purposes to India. What does this say about the model, the future model of hydropower development in Nepal? Is this a spin off of the Bhutan model?

[00:55:14] - [Speaker 1]
You had a critique on the Bhutan model, but this almost seems like a critique spin off of the Bhutan model. How are we to understand what is going to be the direction for Nepali hydropower because it wants to sell power to India?

[00:55:29] - [Speaker 2]
Look, if we are to sell a whole lot of electricity to India, and when I say a whole lot, you know, future potential, maybe eight, ten gigawatts. Right? If we are thinking in that scale, we have to allow the Indians to take piece of the pie because they're not not going to, get into this game if their investors, their investments are not going to be welcomed here. Right? So we have to do that.

[00:55:58] - [Speaker 2]
And each project takes seven, eight, sometimes ten years to build. And so at this point, if we're talking three or 4,000 megawatts, right, it's it's fine. In fact, if they were to go to six or eight also, I wouldn't be worried. Because if we are selling overwhelmingly to them, we have to ourselves be, you know, circumspect enough, wise enough to say, okay, you can enjoy some of the benefits of

[00:56:28] - [Speaker 1]
this yourselves.

[00:56:30] - [Speaker 2]
That is a that is a good incentive for the market to flourish. That I don't have a problem with. But the the two models that we're talking about, what is happening in Nepal right now and what had has happened in in Bhutan are slightly different. They're different in the sense that Nepal is Bhutan plus. That Indian investments of a particular kind will be treated just the way, you know, Bhutan has treated, Indian investments in India.

[00:57:00] - [Speaker 2]
But we also are open. I mean, we're open if Korean companies come and build. We have already agreed to that with at least one Korean company or any other company in Japanese or any anybody in the

[00:57:11] - [Speaker 1]
Except the Chinese.

[00:57:12] - [Speaker 2]
Except except for Chinese is an Indian position. And by the same token, Chinese, if they want piece of the pie here, they need to buy some of the power. Will they do that? They haven't shown any commitment to do that. So they need to do that too.

[00:57:26] - [Speaker 2]
To make markets fair, particularly across borders, all, you know, all parties have to give some concession. If China is to buy, let's suppose, even 500 megawatt from Nepal and produce 4,500, it's not a problem. But China can't just build here, sell to India, make profit in Nepal, you know, leave all the environmental damage in Nepal, and walk free without importing a single megawatt of power. So that this is how, you know, typically

[00:57:58] - [Speaker 1]
I think they've they've understood the signaling from from the Indian side. Hence, the exit from, West CT, the Three Gorges Company exiting from West CT.

[00:58:09] - [Speaker 2]
Yeah. Absolutely. And and and and and to that an extent, if you are a buyer, you should be allowed to produce.

[00:58:17] - [Speaker 1]
Song, to understand this better, so the Nepali space is not just government building hydropower projects. There's around over 20,000 megawatts that's already been licensed to Nepali independent power producers who are looking for market signals, waiting playing the waiting game to see if there's gonna be markets where they can sell to India. What effect does the current scheme of things have on this 20,000 megawatts that possibly can come up in the future?

[00:58:52] - [Speaker 2]
See, like I said, we have to go to the first question where we talked about this whole euphoria around hydropower development, right? And so there is such an excitement that, you know, I would say, you know, there are, I think, eight lakh, investors in the stock market. And all eight lakhs of them have some investment in in hydropower, and that's eight lakh households. Right? And we're talking about close to 40 lakh people.

[00:59:23] - [Speaker 2]
And so if 40 lakh Nepalis are in some ways already invested in in let's not let's not, you know, worry about how invested, but they are already invested in hydropower. So there is the there there there is this widespread excitement, and widespread excitement sometimes creates, you know, this kind of false signaling. And, you know, 20,000 megawatts being built solely on Nepali capacity is possible, but solely on Nepali finances and Nepali banks and Nepali leverages and things like that sounds unrealistic because there are hydropower demand also doesn't grow that fast. The export markets are have their own vagaries and uncertainties, and and banks don't typically like that. So if it was entirely a domestic demand and domestic story, perhaps 20,000 was not an issue.

[01:00:15] - [Speaker 2]
But it is not just a domestic story for us now at this point. And even if we grow, you have to remember that the world is becoming more efficient in terms of electricity use. Right? I mean, you look at the average bulb today and average bulb twenty years ago, you know, there's a big difference between power consumption even even in how we light our homes. And so to to think that we will have 20,000 megawatts consumed in this country alone at this point, I don't see how.

[01:00:48] - [Speaker 2]
Let me give you a comparison. So the the national capital region in India, which sort of includes Delhi and Gurgaon and Noida and places like that, that has a population of roughly 25,000,000. The power demand there is around 8,000 megawatts. Now that's a place where it is much hotter than Nepal for more months, and it is cold for a month or two. And so the air conditioning runs many more months in India compared to Nepal.

[01:01:21] - [Speaker 2]
Right? If you think about that there are electric systems, metros, there are train systems running on electricity in that area, and they're still around 8,000 megawatts. And so for us to get to that level, also, it'll take tens of years, I would think. Right? So I won't say that there is potential for consumption of 10,000 megawatts.

[01:01:43] - [Speaker 2]
Right? But, we have a long way to get there.

[01:01:49] - [Speaker 1]
But the Indian market, if it is to open, as on the principles of market, then there is potential for that 20,000 to be built and be exported to India. With time. With time because

[01:02:04] - [Speaker 2]
yeah. The the have a feeling that as as by in the next ten years, for instance, it would be completely indefensible if India continues to produce 50% of its power from coal. Right? I mean, think about the urgency of climate change today as we are preparing for COP twenty seven and think about COP thirty seven, which country will be able to stand up and say, you know, 50% of my power generation is through coal and I'm a big climate player. You know, I want to lead this fight.

[01:02:45] - [Speaker 2]
So that doesn't become credible. So India will have to decommission a lot, which means it will have to take power from the neighborhood.

[01:02:54] - [Speaker 1]
Just trying to bring a sense of realism into this conversation around 20,000 megawatts held by IPPs, and the China factor that you mentioned. So, while there have been some projects, Chinese projects that have exited, Nepal, but China still has a very large footprint in the Nepali hydro space, be it investments, be it contractors, be it equipments that come into, the hydro space. And India seems to be averse, to all of this, looking at the Tamagoshi case. How big an impact do you think this is going to have for our future moving forward? Because, I would imagine it's not just, the Nepali government that will build projects and sell to India.

[01:03:44] - [Speaker 1]
Much of that has to come through the IPPs also. But that factor of Chinese footprints being very heavy on the IPP side beat machinery, as I mentioned, etcetera, etcetera. So what do you think are the consequences and implications as you see it now?

[01:04:01] - [Speaker 2]
You see, my sense is it's it's very difficult to beat the Chinese contractors at price or at capability, because they built their own country in this fashion. Right? And so they've got a lot of experience. They've got a lot of, capacity, and and they've got a lot of, geopolitical backing to their, contractors. So I don't see why Nepalese should stop using Chinese contractors.

[01:04:34] - [Speaker 2]
But Chinese investment might begin to, slow down because of the position India has taken. And if that happens, then the, you know, some other investment will have to fill in. And, for the next, say, six to 8,000 megawatts, perhaps, if it happens slowly, then Nepali investments can stretch that far. But if we're thinking beyond that in the next ten to fifteen years, then we'll have to think of some international investments, already. And we have to think about profit repatriation systems, hedging, and so on and so forth.

[01:05:18] - [Speaker 2]
The government has just barely begun to scratch the surface on these issues, but we also need to diversify investments. We can't have just Chinese investments here.

[01:05:27] - [Speaker 1]
Absolutely. I mean, my my take on this is that the market signal from India is quite clear. And, the point of thought being that does Nepal need to formulate a strategic position, in the energy space that it says, no, we're not going to bring in Chinese investments, we're not going to bring in Chinese contractors or we're not going to bring in Chinese machinery because we clearly don't want to see a repetition of the Tamagoshi case moving forward. We don't want to build another 700 megawatt project done by the Chinese contractors and then Indians saying that, no, because we don't want to allow you've got a Chinese footprint in your project. I know that it's difficult for the Nepali government to clearly spell that out, but as a strategic position that is not spelled out, maybe that idea of diversification, that language can come.

[01:06:22] - [Speaker 1]
But do you see Nepal at this moment in time that it needs to have a strategic position of some sort?

[01:06:29] - [Speaker 2]
I think if you want a last word from me on this issue, the way I would say it is that the Indian urgencies in terms of fulfilling their power demands, particularly their intermittency coming out of their massive investment in renewables, will supersede any other consideration, including this silly point around Chinese contractors. Because, you know, a country's emergency is a country's emergency. And these little geopolitical games get submerged very easily. And so my sense is if the situation in coal, the Ukraine war continues for another year, year and a half, all of these restrictions will come down.

[01:07:11] - [Speaker 1]
Sagar, this has been an excellent conversation, and I want to end this by kind of talking about exploring markets beyond India. We know India has been central. Movement on the Bangladeshi front has has been quite optimistic, especially with Upper Kurnali and the Bangladeshi government negotiations. And there have been talks around selling power to India. You mentioned that if China is to put a position in the hydro space in Nepal, it has to buy power as well.

[01:07:40] - [Speaker 1]
Are these opportunities really, realistic opportunities? And what time horizon may they kind of be materialized?

[01:07:50] - [Speaker 2]
See, interestingly, the practicality of Nepal exporting to Bangladesh comes to Nepal I mean, the the the precedence for that kind of an arrangement comes to Nepal almost for free in the sense that there is an investor, from India currently trying to build Upper Karnali. And, you know, if if India refuses to allow this particular investor, which is GMR, to export its power through India to Bangladesh, for instance, then we'll have a live case where this problem has sort of resurfaced. Now if India allows it, then we have a precedence where it has happened. From Nepali territory, electricity has been transmitted through India to Bangladesh. Right?

[01:08:41] - [Speaker 2]
So in in that sense, we've we've got a we've got a good pawn in the system. And incidentally, it's an Indian investor. So Nepalese are sort of quietly aloof in an aloof manner looking at what how India treats its own investors. Right? If India fails to provide an evacuation plan for Upper Karnali, then we'll see.

[01:09:09] - [Speaker 1]
What if this was not a pawn and it was a night? For example, what if NHPC was coming to invest in Nepal to export to Bangladesh? That would have been a different story.

[01:09:20] - [Speaker 2]
That would have been a different story. But the the precedence is a precedence. Right? They their evacuation plan also has to come out of Nepal, go into India, and on to Bangladesh. Now once this this system is set up, you can't say I want to put more more electron on this system.

[01:09:37] - [Speaker 2]
It's not possible. What

[01:09:39] - [Speaker 1]
about on the China front? Is it a realistic opportunity that Nepal may tomorrow someday sell electricity to China?

[01:09:47] - [Speaker 2]
Perhaps not. If you look at China, a lot of people look at the Chinese prosperity and sort of project on different kinds of potential power export scenarios. But China is prosperous in the East and the South. China is not prosperous where it borders us. So China, what we actually border with is rocks and monasteries.

[01:10:10] - [Speaker 2]
We don't even border with any significant economy of China. So before we travel upwards of 1,500 kilometers, there's no significant power consumption, you know, from our northern border into China or in in Chinese cities there. They could these these are not even cities. They are largely little hamlets except for Lhasa.

[01:10:33] - [Speaker 1]
So the story of the day is look south.

[01:10:36] - [Speaker 2]
We have to because north is just mountains and rocks and stuff like that. We can't we can't transmit electricity sixteen, seventeen hundred miles. It's not possible.

[01:10:47] - [Speaker 1]
Excellent. Thank you so much, Sagar, for your time. It's been an excellent conversation. It was great having you on the show.

[01:10:54] - [Speaker 2]
Thank you, Samitra. I thoroughly enjoyed.

[01:10:59] - [Speaker 0]
Thanks for listening to Pods by PEI. I hope you enjoyed today's conversation between Samitra and Sagar on the political economy of Nepal's electricity market in India and beyond. Today's episode is part of PI's series on the past, the present and the future of Nepal's energy sector. It was produced by Nirjin Rai with support from Sarub Lama, Aparna Paudel and Khushi Hang. The episode was recorded at Mint Studio and edited by Saurabh Lama.

[01:11:26] - [Speaker 0]
Our theme music is courtesy of Sanjay Sreshra from nineteen seventy four AD If you liked today's episode please subscribe to our podcast to be informed about our latest episodes Also, you could do us a favor by sharing the podcast on your social media and by leaving us a review on Spotify, Apple Podcasts, Google Podcasts or wherever you listen to the episode. To catch the latest from us on Nepal's policy and politics please follow us on Twitter tweet2pei, that's tweet followed by the number two and PEI. You can also follow us on Facebook PolicyEntrepreneursInc or visit our website www.pei.center to learn more about our work. Thanks once again from me, Shri Arana. We'll see you soon in our next episode.