China out, India in. How power project diplomacy plays out in Nepal

Twice abandoned by China, Nepal has formally awarded the West-Seti Hydropower Project and Seti River Project (SR6)—joint storage projects totalling 1200MW—to India’s National Hydro Power Corporation (NHPC) on August 18. 

The projects will be a storage system that produces power all year round.  Through its national grid, India will receive the power, either for its own use or for export.

The Chinese CWE Investment Corporation, a subsidiary of China Three Gorges Corporation withdrew from the project in August 2018 because it was "financially unfeasible and its resettlement and rehabilitation costs were too high”.

Prior to then, Nepal did not renew China’s Snowy Mountain Engineering Corporation’s licence due to the company's inability to start the work "convincingly" for a whole decade in the mid-1990s.

Nepal has an estimated 83,000 MW power generation potential. 

But the country has a huge power shortfall and only generates around 900 MW against a capacity of nearly 2,000 MW.

And although Nepal is currently selling 364 MW of power generated by six projects to India, the country produces surplus electricity during the wet season and not enough during the dry season, so a substantial amount of electricity is imported from India.

The 750MW West Seti and 450MW SR6 projects are spread over four districts - Bajhang, Doti, Dadeldhura and Achham in far-western Nepal.

The West Seti project is designed to produce energy all year long by storing extra wet season river flows in the reservoir and utilising this water to produce energy during dry season peak demand times (December-May).

But for years, Nepal’s electricity sector has suffered, mostly from governance challenges. 

The single purchaser of electricity and the national electric utility, Nepal Electricity Authority, is regularly the target of political meddling. 

Furthermore, factors other than scientific or economic principles frequently influence electricity rates and power purchase agreements.

Thursday’s development, analysts say, is also a political decision. It is an effort made by Prime Minister Sher Bahadur Deuba to repair strained ties with India.

India imposed an unofficial blockade in 2015, stopping essential supplies to put pressure on Nepal to accept their suggestions for the new Constitution. 

Nepal sought help from China, which immediately obliged. Since then, the India-Nepal relationship has been under stress.

“Whenever India has overplayed its hand, the bilateral relationship suffers,” Praveen Donthi, Senior Analyst (India) with International Crisis Group tells TRT World. 

“The Hydroelectric Power Project will go a long way in mending the bilateral relationship,” Donthi adds. 

According to Saumitra Neupane, executive director at the Policy Entrepreneurs Inc., a Nepali think-tank, energy generated from the two projects will strengthen regional power balance and from a geostrategic angle, this also helps firmly establish India as Nepal's key partner in the energy sector.

“Expanding power trading with India is key to unlocking Nepal's aspirations of hydro-led prosperity,” he says. 

India’s collaboration with Nepal started in 2013 with two Indian companies - Satluj Jal Vidyut Nigam (SJVN) and GMR Energy - obtaining approval for the development of 900 MW projects in Nepal. 

While GMR is yet to develop the project, SJVN is close to completing the 900 MW Arun 3 Project.

Following this, in 2021 SJVN was awarded another project - the 679 MW Lower Arun.

But the largest project in the nation, situated on the Tamakoshi River in the Dolakha area of north-central Nepal, around 200 kilometres from Kathmandu, is a China-executed project.

So what does the recent MoU between India and Nepal for the hydropower project mean for China?

India’s wields enormous influence on Nepal but the MoU is no guarantee that the project will be completed by the Indian company, analysts say.

In the past, Nepal and India have signed several such agreements which have materialised. 

The case in point being the 6500 MW Pancheswor Multipurpose Project—post agreement, bilateral conversation on this project has lingered since the ’90s, Neupane, who is also currently studying the context of Infrastructure Diplomacy in Nepal, points out. 

China, on the other hand, has recently completed and delivered key infrastructure projects, such as the Pokhara International Airport, and is currently negotiating several other infrastructure projects with the Government of Nepal as part of its Belt and Road Initiative (BRI) pact, including several road and hydroelectricity projects.

But beyond the aspects of Nepal's bilateral relations with India and China, both have clearly spelled security interest in Nepal that is linked to their own national security. 

“For India, it is about the open border and terrorism, and for China, it is about Tibet more than anything else. Hence, it is in the interest of both governments to have a place in Nepal. This competition has become more visible in Nepal in the last decade, with the expansion of China's engagement  - which also mirrors China's superpower ambitions in the global political arena,” Neupane says. 

China's rise and growing influence in Nepal, in ways, erodes the power status-quo in the region that has traditionally signalled South Asia being within the Indian sphere of influence, he adds. 

Hence the race for influence in South Asia between India and China will continue, especially now since the US now looks at India as a counterweight to China in the Indo-Pacific region. 

“This regional rivalry between India and China is only bound to get more intense as it gets enmeshed with the great power rivalry between the US and China,” says Praveen Donthi the Senior Analyst (India) at the International Crisis Group. 

“While this may look like India pushing back on Chinese influence in Nepal, it is more of an illusion than reality.”