To generate investment and fully realize her energy potential, Nepal must step outside its borders and set up shop in India
It may have been ‘the handshake’ that salvaged the summit. But it was the drama in the closing minutes that could have the most enduring impact.
As it wound down, leaders at the 18th South Asian Association for Regional Cooperation (SAARC) summit held in Kathmandu on November 2014 signed the framework agreement for regional energy cooperation (electricity). The agreement offers a vision that seizes on the “common benefits of cross border electricity exchange and trade,” though it says little about how it will be achieved.
Regional energy cooperation is a bit like seeing God. Everyone talks about it, everyone prays to it, everyone wishes for it but no one has quite seen it or expects to see it in their lifetime.
Cross border electricity trade, particularly with India, has become the centerpiece of Nepal’s energy strategy. In the short term, Nepal wants to export excess generation during the wet months when its hydro plants are producing plenty. It wants to import in the dry winter months to supplement the drop in domestic hydro generation.
In the long term, Nepal believes its hydro generation (for example with 10,000-MW plants) cannot be absorbed by domestic markets alone and so it seeks external markets, such as India. Bangladesh has also recently emerged as a potential market, if there is a right of way via India.
Whatever your view on Nepali electricity exports, there should be no disagreement that regional interconnected electricity markets offer positive benefits. For Nepal, the SAARC framework agreement represented an important milestone in its goal to connect with India’s electricity markets. Earlier it had signed a bilateral Power Trade Agreement (PTA) with India, which sought to create an open framework for electricity trade between the two countries.
With these two agreements, Nepal felt that it was making great progress towards a meaningful framework for cross-border electricity interconnectedness. But last December India unexpectedly appeared to pull the rug from under Nepal’s feet.
In December 2016, India’s Ministry of Power issued the “Guidelines for Cross Border Trade of Electricity.” The specific objectives of guidelines were unclear except it appeared to want a consolidated common framework underlying all of the different bilateral power trade agreements it had with Nepal, Bangladesh and Bhutan along with the regional SAARC framework agreement.
The puzzling aspect in India’s guidelines was the requirement that electricity imports into India would only be possible if the generation source was owned by government of India or an Indian entity held the majority share (at least 51 percent). The overall guideline is ambiguous, offering room for case by case decision on all imports and exports.
Nevertheless, the spirit of the guideline appeared to be against the general intent to move to an open market for cross-border electricity trade.
Nepal is reportedly reviewing the guidelines to see if it is in violation of the PTA. Even if Nepal finds that to be the case, it shouldn’t seek to correct India’s transgression—it should instead seek to capitalize on the opportunity that it offers.
Cross-border electricity trade as envisioned in the power trade agreement between India and Nepal or in the SAARC framework agreement is impossible to achieve. These agreements are predicated on the notion of harmonization, that countries will evolve domestic rules and regulations that are consistent with those of the trading partner. The idea is that such harmonization will enable seamless transfer of electricity across borders.
Harmonization, at least in the context of India and Nepal, is an illusion. It can never be achieved. Electricity trading requires a wide set of rules and regulations (for example on financial transactions and contract enforceability) not just in the technical codes governing electrical flows. It is unreasonable to expect Nepal will be able to harmonize its broader set of economic rules and policies to the level of complexity and maturity of India any time soon.
In the absence of harmonization, the power trade agreement is reduced to a relationship reliant on the generosity of the dominant partner and the subservience of the weaker partner. It cannot evolve into a partnership of equals—certainly not an open market.
Nepal needs to evolve a modern outlook on how to fulfill its energy potential. It cannot do so by staying within its own shell as an under-confident, nervous and uncertain country relying solely on the generosity of its neighbor. It needs to break out of it cocoon.
One way to do that would be for Nepal to incorporate an energy trading company in India.
If structured correctly, such a company could accelerate achievement of Nepal’s 10,000 MW hydro vision, enhance energy security, increase foreign investment in Nepal’s energy sector, reduce government interference and foster lasting enabling environment for private participation.
In short, it could solve just about every problem that currently plagues Nepal’s energy sector (not just in electricity, but energy more broadly).
Nepal’s energy trading company must be incorporated as an Indian entity, governed by and protected by the laws of India. Almost every other country has set up shop in India, so why aren’t we there yet?
Nepal’s energy trading company must serve as the aggregator of all energy transactions into and out of Nepal. In other words, it must be the single vehicle for import and export of all forms of energy (electricity, fuel oil, LPG and coal) for Nepal. If this entity is set up correctly, there will be no energy blockade—official or unofficial—in the future.
Nepal’s energy trading company must also be a conduit for investments into Nepal’s energy sector. All private foreign investments in Nepal’s energy should flow through the company. The company, for instance, could be structured as a holding company with project-specific special purpose vehicles located in Nepal. No Indian guideline on cross-border electricity trading will ever again be an impediment for Nepal.
The biggest constraint to foreign private investment in Nepal’s energy sector is its antiquated financial regulations. Using the energy trading company in India as an investment gateway would unlock foreign investments without having to wait several decades to modernize our financial regulations.
Nepal’s energy trading company must be part owned by the government of Nepal, part by the people of Nepal and must be listed in Nepal’s and India’s stock exchanges. One way to minimize political interference will be to keep the company under the oversight of an entity that has the authority to tell politicians to stay out. Listing it in the stock exchange is such way. This way, it will also be one of the most profitable and valuable companies in the region.
In developing our energy future, we can sit gloomily within our cocoons in Kathmandu and fret about how our neighbors are not being generous. Or we can set out boldly and take our aspirations straight into our neighbor’s courtyards. We can wait to harmonize with our neighbors, or we can simply begin to use our neighbor’s rules to meet our goals.
Our future demands boldness consistent with our big aspirations.