Future of Hydropower Cooperation with Bhutan

‘Hydropower today is an important source of our wealth. With rapid advancements in harnessing nuclear, hydrogen, fusion, solar, thermal and wind energy, hydropower may soon lose its competitive edge. We may soon become a net energy importer’.

Extract from free translation of His Majesty the King of Bhutan’s, National Day Speech, December 17, 2021.

Cooperation in hydropower sector is important for both India and Bhutan: India gets environment friendly energy at competitive rates; for Bhutan it is the most important sector of economy and India provides assured market for its surplus power. Bhutan’s twelfth plan document noted that the sector contributed 13% of GDP, 10% of national revenues and a third of exports in 2017. Since then the contribution of this sector to the economy of Bhutan has gone up, with the 720MW Mangdechhu project having been commissioned. This sector has great potential to strengthen economic interdependence and contribute to overall strengthening of relations in the long run. This is recognized in both countries which is why the statement of HM the King should be considered seriously.

Bhutan’s hydropower potential is estimated at over 30,000 MW, of which it is commercially and technologically feasible to tap 23760 MW. Less than 10% of this has been tapped so far. Bilateral cooperation in this sector commenced in the early 1960s in a small way. Since then Bhutan’s hydropower sector has grown steadily. Bhutan has installed capacity of 2326MW as on 1.1.’22, of which 2136MW are from projects implemented with Indian cooperation. Major projects implemented with Indian assistance are Chukha, 336 MW, [commissioned in 1986-1988], Kurichhu, 60 MW [2001-2002], Tala, 1020 MW [2006-2007] and Mangdechhu, 720 MW [2019-2020].

An agreement in the field of hydropower cooperation was signed on 28.7.2006 by India and Bhutan, under which India agreed to a minimum import of 5000 MW from Bhutan by 2020. India agreed to implement projects to enable this target to be achieved. In 2008, at the request of the first elected Prime Minister of Bhutan under the new Constitution, India agreed to assist Bhutan in developing 10,000 MW of hydropower capacity by 2020 and to import surplus electricity from these projects. A protocol to this effect was signed in 2009. Projects to achieve this target were identified through consultations between the two Governments.

Implementation has lagged far behind, with only one project -720 MW Mangdechhu – having been commissioned since the 2009 Protocol. Two other projects, Punatsangchhu 1 and Punatsangchhu 2 have been long delayed due to geological issues. The latter may be commissioned by next year and the former which encountered landslides on the right bank may take 5-6 years more to be completed. Construction work on 600 MW Kholongchhu project for which foundation stone was laid in June 2014 is yet to commence. Creation of 10,000 MW would catapult Bhutan from being a least developed country to a middle income country.

All the projects executed so far are run of the river projects that involve minimum storage, and operate at full capacity only for 4-5 months in a year. This even necessitates import of power by Bhutan during lean months at rates higher than what it earns for export of power to India.

The reasons why India could not fulfill its commitment are many: the target date 2020 was unrealistic, given the complexities involved in setting up hydro projects; implementation at a fast pace would have overheated the Bhutanese economy; geological surprises while executing the projects; more recently the covid pandemic; and delays on India’s side in addressing some issues that arose out of India’s rules on cross border trade in electricity announced in December 2016. These rules would have stood in the way of export of power to India from the planned 4 joint venture projects between Indian PSUs and Druk Green Power Corporation and would not have facilitated export of power to third countries or sale of power in the growing Indian power exchange. These issues were addressed satisfactorily in the revised rules announced in December 2018, but by then momentum was lost, apart from precious 2 years. Further, Bhutan developed doubts on the JV model and now wants all the remaining projects to be inter-governmental.

Fossil fuels account for nearly 60% of India’s power generation. The focus is now on developing solar and wind energy projects. India is aiming to have a generation capacity of 500 GW from solar and wind sources by 2030. These provide intermittent supply and need support from other sources to have generation load balance and provide for base load during evening peak hours when solar power would not be available. This is where hydro sector has an important role to play and hydro projects in Bhutan can fill this gap. Hydro plants are operationally flexible; they can ramp up generation at short notice and also shut down quickly when supply is in excess of demand. This will ensure grid reliability and stability. Hydro power scores over coal in this respect, apart from being environment friendly.

The concern expressed by His Majesty the King of Bhutan on hydropower losing its competitive edge is valid and needs to be and can be addressed. Cost of construction is going up. There have been long delays in completion of projects in Bhutan due to various reasons, many of them beyond the control of either Government. Cost of solar and wind power is coming down due to technological advancements and subsidies enjoyed by the projects. The subsidies are unlikely to continue indefinitely. Solar and wind power were available for between Rs. 2.00 to Rs 2.50 per Kwh in recent auctions. Cost of hydro power is climbing up steadily. Initial Tariff for power from Chukha project was Rs. 0.27 per unit from 1.1.1990 and has gone up steadily to Rs. 2.55 from 1.1.2017. Tariff for power from Mangdechhu project which commenced production in 2019-2020 is Rs. 4.21, despite the project having been completed on time and at relatively low cost in comparison with other hydro projects completed during the same period. Cost of power from the ongoing Punatsangchhu projects is likely to be substantially higher because of the long delays and the resultant escalation in project cost. Can they compete with solar and wind power? While hydro power may not be competitive, it needs to be recognized that these projects can generate power during the evening peak hours when power will fetch a higher price. Further hydro power is required for base load, even if it is expensive.

Can the cost of hydro power be reduced? The simple answer is yes. Various elements contributing to cost would need to be considered carefully. Efficient and timely completion of the projects will minimize cost escalation. Other major elements of cost are method of financing – higher grant component will bring down the cost – and cost of financing. The interest rate on loans for different hydropower projects has been uniform so far. The rate was a concessional one for the earlier projects, but market rates for such loans are much lower in recent times. The interest rate needs to be reduced to at least the market levels. Tariff fixation has to be in line with our current policy for hydro power in India. Sale of power to third countries and in the Indian power exchange will generate additional revenues for the projects. These are possible under our policy on cross border trade in electricity announced in December 2018. This would enable the project to supply power at competitive rates to Government of India, the major purchaser. Even if the tariff for power from Bhutan is higher, it will push up only marginally, the average cost of energy supplied by Government in India to consumers in India, given its relatively low weightage.

In the Sustainable Hydropower Development Policy announced in April 2021, the Government of Bhutan dropped the reference to 10,000 MW target mentioned in the 2008 Policy, indicating that Bhutan is doubtful of achieving this target. The policy recognizes the need to promote multipurpose hydropower projects. Two such projects – Sankosh and Kuri-Gongri – are on the list of projects identified to meet the 10,000 MW target. Of this Bhutan is keen on Sankosh project. A storage project will generate power and revenue during off monsoon period. India should examine the technical feasibility of this project and hold discussion with Bhutan.

Bhutan is rightly concerned about project delays, cost escalation and mounting hydropower debt. Cost escalation should worry India more as tariff is determined on a cost plus basis. IMF and the World Bank which had examined Bhutan’s hydro power debt serviceability noted that India provides assured market for surplus power, absorbs financial and construction risks and offers tariff on cost plus basis. They concluded that in Bhutan’s case the risk of debt distress is moderate.

What is required now is for India to examine the above issues and hold discussions with Bhutan with a view to convince Bhutan that despite technological advances in solar and wind power and the current market dynamics, hydro power is commercially viable and needed in India. The objective should be to ensure that cooperation in this important sector is put back on track in the longer term interest of both the countries.

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