In today’s Finshots we talk about how India swaps electricity with its neighboring Himalayan state of Nepal and whether this makes economic sense.
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Now that that’s cleared up, let’s get to today’s story.
The story
Imagine: Nepal, a country that previously struggled with power outages, flips the switch and becomes one of the major electricity exporters to its neighbor India.
Sounds like an unexpected turn of events, right? Well, that’s exactly what’s happening!
Thanks to a medium-term purchase agreement for 12 hydropower projects, the Himalayan nation will supply an additional 251 megawatts (MW) of electricity to India, primarily through Bihar. This is expected to bring Nepal’s total electricity exports to India to an impressive 941 MW. For comparison, one megawatt can power about 750 to 1,000 households for a year. So if Nepal exports 251 megawatts, it will supply enough electricity to power nearly 190,000 households for a year.
This is impressive and not just a recent development. The groundwork for this was laid back in 2014 when India and Nepal signed a power trade agreement. This agreement set the rules for the exchange of electricity between the two countries and allowed Nepal to sell its surplus electricity to India through platforms such as the Indian Energy Exchange (IEX) – a real-time marketplace for buying and selling electricity. And it enabled Nepal to tap into India’s growing need for clean energy.
So how did Nepal, which was once heavily dependent on India for electricity at peak times, achieve this remarkable turnaround?
The secret lies in the strategic generation and use of hydropower.
Nestled in the Himalayas, Nepal has a subtropical monsoon climate and is crisscrossed by rivers that are perfect for hydroelectric power generation. But hydroelectric capacity does not mean that you can generate electricity from water overnight. The cost of building the necessary infrastructure is enormous and navigating the bureaucratic hurdles can be like running a marathon. And managing power generation and distribution can be difficult.
Due to these challenges, Nepal’s hydropower potential remained largely untapped for years, even leading to power shortages and heavy dependence on electricity imports. During peak demand in 2019, Nepal relied on India for more than half of its electricity needs.
But today, things are very different. A wave of strategic investments and large hydropower projects has transformed Nepal’s energy landscape. And the government’s bold move to attract foreign direct investment (FDI) in hydropower has been a key catalyst for this change.
It introduced a 100 percent tax exemption for the first 15 years on income from hydropower projects, drastically reduced duties and taxes on imports of hydropower machinery, and simplified the licensing process through a “one-window policy.” Today, it even encourages public-private partnerships (PPPs) in the energy sector, allowing companies to build, own and operate transmission lines and electricity distribution networks.
And the efforts have paid off. Between 2018 and 2023, Nepal was able to attract nearly $2 billion in foreign investment for its hydropower sector. India and China were the first investors, and Indian companies such as Satluj Jal Vidyut Nigam Limited (SJVN) and the GMR (India) Group poured resources into these hydropower projects.
However, the real turning point was the launch of the 456 MW Upper Tamakoshi hydropower project in 2021. This project boosted Nepal’s power generation capacity, especially during the monsoon season when the flow is strongest. As a result, Nepal’s power exports to India increased from a modest 39 MW in 2021 to nearly 1,000 MW by mid-2024.
That represents a 25-fold increase in three years and is certainly a leap that is hard to ignore!
While this all sounds promising, one might wonder: Why is Nepal exporting electricity to India instead of storing it for the dry season? And why is India, a country that exports electricity to other countries, importing electricity from Nepal?
The answer is simple: countries trade energy to make the best use of their available resources. And no country can balance its energy supply to meet its needs at all times. Seasonal fluctuations, fluctuations in industrial activity and regional demand lead to surpluses in some areas and deficits in others.
So in Nepal, the monsoon season brings a significant surplus when rivers are full and power generation is at its peak. But in the dry season, river levels drop and hydropower capacity suffers. And storing all this excess energy is not feasible either, as managing a large surplus can be challenging without adequate storage or immediate demand.
So, instead of letting the surplus electricity go to waste, Nepal exports it to India. Given a 1,850-kilometer border and relations 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 wastage but also generates significant revenue that can be further invested in expanding its hydropower capacity. In the last fiscal year, the country was declared a “net electricity exporter” and exported electricity worth Rs 16.93 billion to India.
Now let’s move on to India. Importing electricity, especially from renewable sources like Nepal’s hydropower, helps India in its sustainability efforts. While India has significant power generation capacity, it also faces regional imbalances and peak demand periods that can strain its power grid. By sourcing electricity from Nepal, India can address shortages in certain regions, reduce its dependence on fossil fuels, and move faster toward its renewable energy goals.
But here lies the final piece of the puzzle: Does this energy trade make economic sense for both countries?
Let’s take a look at the costs and benefits involved.
Electricity costs vary by region due to factors such as energy sources and infrastructure efficiency. For example, areas with less efficient infrastructure or higher power transmission losses often face higher costs.
Hydropower generation in Nepal is particularly cost-effective during the monsoon, costing on average about Rs 2.5-3.1 per unit (in Indian rupees). When exported to India, the electricity is sold at Rs 8.40 per unit, which is competitive with India’s domestic electricity generation costs, especially for coal-fired power plants. For comparison, the average cost of electricity in India is about Rs 7-8 per kilowatt hour (kWh), with Bihar paying even higher prices of about Rs 8-9 per unit when importing electricity. In fact, the average price of imported electricity in India is over Rs 9 per unit during winter.
So this pricing could be a win for India as it is often below the cost of generating electricity from more expensive and less environmentally friendly sources. In fact, it could be a boon as India aims to achieve carbon neutrality by 2070 and importing clean hydropower from Nepal could be a step in the right direction. Moreover, this partnership comes at a crucial time as India is experiencing rising coal prices and rising energy demand post-pandemic. So harnessing Nepal’s hydropower not only diversifies India’s energy sources but also helps reduce its carbon footprint.
Admittedly, the final price of electricity in India is not determined solely by the initial import cost. Transmission and distribution costs, government taxes and subsidies all play a significant role. And while imported electricity may be cheaper initially, 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 since both countries recently signed a 10-year contract to supply 10,000 MW of power from Nepal to India, we will be able to see first-hand how this energy saga unfolds and whether it translates into tangible savings for consumers.
Until then…
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