In today’s Finshots, we talk about how India trades power with its neighbouring Himalayan country Nepal, and whether it makes economic sense to do so.
But here’s a quick sidenote before we begin. We’re on the lookout for enthusiastic Insurance Advisors to join our team at Ditto Insurance! No finance or insurance background? No worries. We’ll train you from the ground up. Click here to apply.
With that out of the way, let’s get on to today’s story.
The Story
Imagine this: Nepal, a country once grappling with blackouts, flips the switch and becomes a key electricity exporter to its neighbour, India.
Sounds like a plot twist, right? Well, it’s happening right now!
The Himalayan country is going to supply an additional 251 megawatts (MW) of power to India, particularly through Bihar, thanks to a medium-term sales agreement involving 12 hydropower projects. This is expected to bring Nepal’s total power exports to India to an impressive 941 MW. To put that in perspective, one megawatt can power roughly 750 to 1,000 homes for a year. So, when Nepal exports 251 megawatts, it’s sending enough electricity to keep nearly 190,000 homes fully powered for an entire year.
That’s impressive and this isn’t just some new development. The groundwork for this was laid back in 2014 when India and Nepal signed a Power Trading Agreement. This agreement set the rules for how these two nations exchange electricity, enabling Nepal to sell its surplus power to India through platforms like the Indian Energy Exchange (IEX) – which is a real-time marketplace for buying and selling electricity. And it allowed Nepal to tap into India’s growing appetite for clean energy.
So how did Nepal, once heavily reliant on India for electricity during peak times, achieve this remarkable turnaround?
The secret lies in its strategic generation and use of hydropower.
Nestled in the Himalayas, Nepal is blessed with a subtropical monsoon climate and is crisscrossed by rivers that are perfect for hydropower generation. But having the capacity for hydropower generation doesn’t just mean that you can spin off power from water overnight. The costs of building the necessary infrastructure are sky-high, and navigating bureaucratic hurdles can feel like running a marathon. Plus, managing electricity production and distribution can be tricky.
So for years, these challenges kept Nepal’s hydropower potential largely untapped. It even led to power shortages and a heavy reliance on power imports. In fact, during peak demand in 2019, Nepal relied on India for more than half of its electricity needs.
But fast forward to today, the story is dramatically different. A wave of strategic investments and major hydropower projects has transformed Nepal’s energy landscape. And the government’s bold move to attract foreign direct investment (FDI) in hydropower was a big catalyst for this shift.
It introduced a 100% tax exemption on income from hydroelectricity projects for the first 15 years, slashed the customs duties and taxes on imports of hydropower machinery, and streamlined the licensing process through a “one-window policy”. Today it even promotes public-private partnerships (PPPs) in the energy sector, which allow companies to build, own and operate transmission lines and power distribution networks.
And the efforts paid off handsomely. Between 2018 and 2023, Nepal attracted nearly $2 billion in foreign investment for its hydropower sector. India and China were the first set of investors, and Indian companies like Satluj Jal Vidyut Nigam Limited (SJVN) and the GMR (India) Group poured resources into these hydropower projects.
However, the real game changer was the launch of the 456 MW Upper Tamakoshi Hydropower Project in 2021. This project boosted Nepal’s generation capacity, especially during the monsoon season when river flows are strongest. And as a result, power exports from Nepal to India skyrocketed from a modest 39 MW in 2021 to nearly 1,000 MW by mid-2024.
That’s a 25-fold increase in 3 years, and surely a leap hard to ignore!
But while all this sounds promising, you might wonder: Why is Nepal exporting power to India instead of saving it for the dry season? And why is India – a country that exports power to other nations – importing electricity from Nepal?
The answer is simple: Countries trade energy to make the most of their available resources. And no country can balance their energy supply just enough to match their demand at all times. Seasonal changes, variations in industrial activity, and regional demands create surpluses in some areas and deficits in others.
So for Nepal, the monsoon season brings a significant surplus when rivers are full and generation is at its peak. But during the dry season, river levels drop, and hydroelectric capacity takes a hit. And storing all that excess energy isn’t feasible either, as managing a large surplus can be a challenge without adequate storage facilities or immediate demand.
So, instead of letting all that surplus power go to waste, Nepal exports it to India. With a border stretching over 1,850 kilometres and sharing ties with five Indian states—Sikkim, West Bengal, Bihar, Uttar Pradesh, and Uttarakhand—this trade seems logical.
And hey, by exporting electricity, Nepal not only prevents waste but also generates significant revenue that can be reinvested further into expanding its hydropower capacity. Last fiscal, it earned the title of ‘net electricity exporter’, and exported electricity worth Rs 16.93 billion to India.
Now, let’s turn to India. Importing power, especially from a renewable source like Nepal’s hydropower, helps India with its sustainability efforts. Also, while India has substantial generation capacity, it also faces regional imbalances and peak demand periods that can strain its power grid. So, by bringing in electricity from Nepal, India can tackle shortfalls in certain regions, reduce its reliance on fossil fuels, and work more swiftly towards its renewable energy targets.
But here’s the last bit of the puzzle: Does this energy trade make economic sense for both countries?
Well, let’s look at the costs and benefits involved.
See, the cost of power varies by region due to factors like energy sources and infrastructure efficiency. For example, areas with less efficient infrastructure or higher power transmission losses often face higher costs.
Nepal’s hydropower generation is particularly cost-effective during the monsoon, averaging around ₹2.5 to ₹3.1 per unit (in Indian rupees). When exported to India, the electricity is sold at ₹8.40 per unit, which is competitive compared to India’s domestic generation costs, especially for coal-fired power. To put this in perspective, the average cost of electricity supplied in India is around ₹7 to ₹8 per kilowatt-hour (kWh), with Bihar facing even higher rates of about ₹8 to ₹9 per unit for electricity imports. In fact, during the winter season, the average price of imported electricity in India is over ₹9 per unit.
So this pricing could be a win for India, as it often falls below the cost of generating power from more expensive and less environmentally friendly sources. In fact, it could be a boon as India strives for carbon neutrality by 2070 and importing clean hydropower from Nepal could be a step in the right direction. Plus, this partnership comes at a crucial point, as India witnesses rising coal prices and increasing energy demands post-pandemic. So, tapping into Nepal’s hydropower not only diversifies India’s energy sources but also helps reduce its carbon footprint.
Granted, the final price for electricity in India is shaped by more than just the initial cost of import. Transmission and distribution expenses, state-level taxes, and subsidies all play a significant role. And while imported electricity might start off cheaper, the final cost to consumers can vary widely, especially in regions like Bihar, where the infrastructure may not be as robust.
But it’s still a good start.
And with both countries having recently signed a 10-year agreement to supply 10,000 MW from Nepal to India, we will have a front-row seat to see how this energy saga unfolds and whether this will translate to meaningful savings for the consumers.
Until then…
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