Will China invest in Nepal’s hydropower plants?

As Nepal’s prime minister visits China in the coming week amid the country’s growing energy crisis, Nepali officials hope that he will be able to secure a long-awaited investment from China to exploit its rich hydropower resources. Nepal is asking China both to build and invest in a number of major hydropower projects and power transmission lines, according to a high level official at Nepal’s Ministry of Energy.

The major goal is to seal an agreement with China’s Three Gorges Company to build the long-stalled West Seti dam. The $1.6 billion project will be the country’s largest reservoir dam and biggest foreign investment in Nepal. It will also be crucial for easing Nepal’s chronic energy shortages and boosting the country’s economy still struggling with the aftermath of last year’s devastating earthquake.

The Nepal government signed a memorandum of understanding with the China International Water and Electric Corporation – a subsidiary body of China Three Gorges – in 2011 and now officials hope things will finally move forward.

“We have been pushing this agenda and hope to get it done during the prime minister’s visit,” said Radhesh Pant, CEO of Nepal Investment Board, the government authority responsible for large dam projects. Despite the earthquake, the government remains confident that investors will see Nepal as a good bet. None of them pulled their stakes, and Nepal has made forward progress on clearing red tape for such investments.

A number of large dams were damaged by last year’s earthquake, however the risks posed by large projects like West–Seti have rarely been publicly discussed. The environmental fears and vehement protests of the past have dissipated as chronic energy shortages have made daily life a struggle for so many people.

The social and environmental costs of large dams are by no means small. About 18,000 people will be displaced by the West Seti project and the 195-m tall dam will flood 3% of the total surface area of the country, according to the Environmental Impact Assessment report. The Asian Development Bank pulled out of the project in the wake of a campaign led by local environmental NGOs in 2010, over environmental and safety concerns.

Nepal’s hydropower dream

The Nepali government is betting big on hydropower as the transformative engine to deal with its energy needs. Last month, it unveiled ambitious plans to develop 10,000 megawatts of hydropower in next ten years – of which these Chinese-backed projects will play a key role. The ten-year plan sets out 11 reservoir projects, out of which the backed West Seti and Budigandaki are the major ones. Currently, there are 117 projects already under construction across the country.

Last year, Nepal also signed deals with India to build 1,800 MW of hydropower – with the Upper Karnali dam in the far west and the Arun III project in the eastern region under construction by Indian companies – but most of this power will be for export to India. The World Bank and Asian Development Bank have also funded a few projects.

Nepal has, for a long time lagged behind its neighbours in the realisation of electricity generation. From the potential 43,000 MW it could produce, it produces about 700 MW. This is not enough to cover the country’s own needs, and Nepal suffers 14 hours of power cuts every day, including in the capital Kathmandu. Nepal’s installed capacity is less than half of Bhutan’s, even though the neighbouring country has a potential of only 24,000 MW. At the end of 2014, The Economist explained this underdevelopment by saying, “In Nepal projects were once scuppered by local politics, a ten-year civil war, suspicion of India and a lack of regulation that put off creditors,” but it ended on a hopeful note, saying that such problems were being tackled.

This was before the Nepali government passed a Constitution that led to conflict on its southern border, and a souring of ties with India – potentially its biggest investor, as well as the ideal consumer of Nepal’s excess production of electricity.

After a protracted estrangement, Nepal and India resolved some outstanding issues, and during the recent visit by the Nepali Prime Minister KP Oli to India, he and Indian Prime Minister Narendra Modi discussed ways to speed up the construction of the hydropower projects that would generate up to 7,000 MW being built in Nepal in partnership with India.

Protracted delays

Amid the delays and political turmoil, Nepal hopes Chinese investment can plug the immediate gap. China Three Gorges brought the license to develop the West Seti dam in 2011 from the Australian company SMEC, which had failed to raise enough investment and stalled the project for over a decade.

The Chinese company promised to provide 75% of the investment and the Nepal Electricity Authority was to raise the remaining 25%. But after four years, the joint investment agreement has not yet been signed, partially owing to problems of raising the necessary finance.

Construction has yet to start on the 500-km of transmission lines needed to bring power from the remote region to the national grid. Nepali authorities continue to express doubts over the Chinese company’s commitment to developing the project. Another Chinese company pulled out of the West Seti project in 2009, complaining of Nepal’s unfriendly investment environment.

The NEA has also not confirmed who will buy the excess electricity that Nepal cannot consume domestically and at what price. This is the first storage dam the country has ever built – previous projects have been run of the river and excess power sold to India.

In 2014, Nepal asked China to provide the $400 million –25 % of the project’s estimated total cost – as a soft loan, but received no response. The dam was supposed to be finished by 2020, but it is likely to face major delays because of the lack of funds.

The top priority

Prime Minister Oli is also likely to sign an agreement to import petroleum from China. Energy is a high priority for Nepal as the country is reeling from severe fuel shortages after six months of interrupted supplies at the Indian border. Tensions between the two countries rose over protests in the border area by Madhesi minority communities who were unhappy with the country’s new constitution.

China agreed to provide USD 1.3 million litres of fuel as a one-off grant to Nepal during this time in October last year, but the two countries have yet to reach a formal agreement for the long term commercial supply of fuel. Nepal hopes a deal with China can secure future supplies and reduce its reliance on India for fuel imports and end the longstanding role of India’s state-owned Indian Oil Company as Nepal’s monopoly fuel supplier.

Nepal Oil Corporation said that India is only meeting 80% of Nepal’s demand for fuel, although the situation on the southern plains near the Indian border has returned to normal about a month ago. “An agreement with China should not be seen as counter to India but [as a way to meet] Nepal’s own need to diversify its sources,” said Rabindra Adhikari, a parliamentarian representing the prime minister’s party CNP-UML.

Key trade agreement

Another key issue on the agenda, according to Nepali officials, is signing a transit treaty that will allow the country to import goods from third countries via Chinese ports. Currently Nepal is completely dependent on India for all imports, as the landlocked country, bordering India and China, has transit agreements only with India.

Deputy Prime Minister and Foreign Minister Kamal Thapa is hopeful a range of agreements will be signed next week. Speaking at a press conference for the South Asian Association for Regional Cooperation ministerial meeting in western Nepal’s tourist city Pokhara this week, Thapa said: “We have been working on a few agreements including the transit [treaty] so there will be a big push on Nepal-China cooperation during the visit.” However, he did not provide any further details about the negotiations.

This article was first published on The Third Pole.