Lessons from Doklam: India needs hydropower to keep Bhutan on its side

China will be ready to pour in its yuans if India fails to invest in Bhutan's hydro power sector

In May 2014, when Narendra Modi was sworn in as the Prime Minister of India, the delegation from invitee country Bhutan was more than delighted. Bhutan Foreign Minister Rinzin Dorji was reported saying, "Narendra Modi is a prime minister who delivers. From the interaction, we could sense he has concerns for Bhutan and the region. The PM also expressed concerns on why the implementation of Bhutan's hydropower projects was delayed."

Subsequently, India signed an agreement to build four new hydropower projects, totalling 2,120 Mw, in Bhutan. In a month after that, Modi went to Bhutan and laid the foundation stone for the 600-Mw Kholongchu hydropower project, a joint-venture between India and Bhutan. The other three were under pre-construction activity back then. Things seemed to be moving fast but actually, they are slower than initially envisaged.

During the United Progressive Alliance (UPA) regime, India and Bhutan signed two major agreements to jointly develop 10,000 Mw of hydropower in Bhutan by 2020. Under the agreement, the governments of Bhutan and India would oversee financing through a 30 per cent grant and 70 per cent commercial loan scheme. At India’s insistence, it was given 50 per cent ownership in four major power projects totalling 1,480 Mw.

Given the energy shortage back then in 2008, India agreed to purchase and line up cheap hydropower. The tariffs were as low as Rs 1.5 per unit in a scenario where India was battling coal shortage and high power tariffs even in the merchant market. For Bhutan, this was a major investment. Bestowed with hydro resources, selling power to India ensured long-term reliable business.

But in 2014, the tables turned. India declared itself "power surplus" and shot down the proposal to build 10,000 Mw of hydropower jointly with Bhutan. Instead, India under PM Modi offered four new joint hydropower projects of 2,120 Mw, as mentioned earlier.

Bhutan kept its loyalties intact with India and warmly accepted this offer as well. But the ongoing Doklam crisis has opened a Pandora’s box. It's just a matter of time that crevices in the hydro agreement surface and China would be quick to pour in yuans into Bhutan's promising hydropower sector.

India’s hydropower installed capacity currently stands at 44,000 Mw, which is 13.5 per cent of the country’s total power generation. The growth of hydro in India has been stagnant for the past five years now, with no new investment except for some ongoing projects of state-owned NHPC, which also has a gestation period of eight years. Private investment failed miserably with more scams cropping up than projects.

Solar and wind energy has taken strides in India at the same time as hydro has seen its downfall. While the growth has been remarkable, it is in no way going to support energy access, energy security, and energy sustainability that PM Modi mentioned in his first address to the nation from the Red Fort.

For intermittent solar and wind, hydro is needed as a balancing power, especially in India whose base power has and always will be coal. Hydropower serves as a peaking power when demand shoots up during summer months. It also acts as a bridge when solar and wind are not feeding the grid and coal can't be stepped up at a short notice.

Bhutan has an identified hydropower capacity of 23,000 Mw. It has installed 1,488 Mw and another 5,060 Mw is under construction. Investing in Bhutan’s hydro sector serves India's energy and diplomatic purposes. Not only would it ensure cheap power, it would keep China out of Bhutan’s energy sector. It is cheaper than coal, solar, wind, and the storage solution for the same.

It’s a win-win for both nations with the odds favouring India more. Coal-based power is running at half the capacity as the demand is not increasing. At the same time, the free fall in tariff in solar and wind is making states that had signed agreements earlier uncomfortable. State-owned power distribution companies are dealing with their own financial crisis. Investments in the power sector have passed the lull stage and become stagnant.

It's time that India looks at hydropower as a diplomatic tool. It will fill the gaps in its own energy sector and also ensure a partnership built on robust business interests. Loyalty can always be the footnote in such agreements.