Due to Nepal’s misgivings about Indian intention vis-à-vis its water resources, hydropower sector remains an extremely sensitive topic in Nepal-India relations. In the past, hydropower agreements between the two countries have been a victim of over-politicization. Nepalese leaders especially in the opposition camp have portrayed Indo-Nepal agreement on water resources as machinations to ‘sell Nepali rivers to India’. In general, Nepalese public see India’s involvement in Nepal’s hydropower sector with suspicion. It is generally believed that, India is “more interested in controlling Nepal’s water resources” than “in the development of the country’s hydropower potential”.

While it is generally believed that Nepal’s water resource can go a long way in meeting growing energy demands in India, Dipendra Bhattarai, an energy expert has a different perspective. He has argued that Nepal’s hydropower is not price competitive compared to Indian cost of production of renewable energy from solar systems and therefore he casts doubt on rationale for India’s purchase of Nepal’s hydroelectricity.This does raise the pertinent question of what is that India actually wants out of Nepal’s water sources.

China meanwhile sees Nepal’s water resources from economic perspective. One Chinese scholar has maintained that Nepal’s immense hydropower potential provides opportunities for investment and joint ventures. This can prove to be beneficial especially for Tibet region which could mobilize its economic, human and technological resources in harnessing Nepal’s hydro-potential which in turn will benefit Tibet’s economy.

For Nepal’s surplus electricity, India is without a doubt a readymade and by far the biggest market. Bangladesh also presents an accessible option for Nepal’s energy export in South Asia. In addition, China’s Tibet region can also be a potential market in the future. While topography presents a significant challenge for Nepal’s energy trade to China, energy export to Bangladesh not only requires agreement with India but also use of its transmission line.

Nepal’s total electricity generation capacity in the last FY 2022/2023 stood at 2,684 MW and has already started exporting 452 MW of surplus energy during wet season to India. For Nepal to harness its hydropotential, it is imperative that Nepal attracts big investment in this sector that has the potential to significantly alter Nepal’s economic landscape. If Nepal can harness even half of its practically feasible hydroelectric generation capacity of 42,000 MW, not only can Nepal establish itself as a hydropower hub in South Asia but it could also use its hydel capacity to wean off imports of petroleum products and use energy trade to reduce its overwhelming trade deficit with India. Furthermore, the revenue from sale of hydroelectricity can be used towards Nepal’s economic development.

In this light, India is extremely crucial for Nepal’s energy trade. However, India’s changed policy that it will not purchase electricity generated from any hydel projects in Nepal that have “Chinese investment or involvement” is a strategic move with which India aims to tighten its grip over Nepal’s water resources. In line with this, India is yet to grant approval for export of hydroelectricity generated by several projects including Nepal’s flagship Upper Tamakoshi Hydropower Project (456MW) that became operational in July 2021, allegedly on the grounds of Chinese involvement, as civil work of the project was completed by China’s state owned Sinohydro Corporation. Such Indian policy is rooted in geo-strategic calculation that will have several implications on Nepal. For one, it will significantly discourage Chinese investment in Nepal’s hydel projects and limit China-Nepal cooperation on water resources. Second, it forces Nepal to provide construction license to Indian companies and contractors or else risk losing investment in its water resources. As a result, more and more hydropower projects in Nepal will see increasing Indian involvement. In a nutshell, this demonstrates India’s willingness to use Nepal’s hydel sector as a geopolitical tool to entrench its influence and monopolize Nepal’s hydropower and in doing so deepen Nepal’s dependency on India for its power trade.

The repercussions of India’s changed power purchase policy vis-à-vis Nepal are already evident. Following India’s policy and an uncertain energy market, Chinese companies are gradually withdrawing their investment from Nepal’s hydro sector, whereas Indian companies are aggressively acquiring licenses to construct hydroelectric projects. For instance, in the recent visit to India, PM Prachanda awarded India’s SJVN license to construct 669 MW Arun Hydropower Project. During the same visit, the Nepalese PM also decided to award the license for the construction of 480 MW Phukot Karnali hydel project, that the  KP Oli government in 2018 had included among the nine proposed BRI projects, to an Indian company NHPC. The same company in 2022, had acquired license to develop 750 MW West Seti and 450 MW SR-6 Hydroelectric Project. The trend of increasing Indian involvement in Nepal’s hydro-sector will only rise in the near future. This demonstrates that India may have finally outmaneuvered China in Nepal’s hydropower sector.