Bhutan and India are in the midst of a year-long celebration marking 50 years of formal diplomatic ties between the two nations.
The celebratory events so far have been mostly cultural events and project announcements, but many eyes in Bhutan will be on the two specific and big events which have been packaged as a part of the celebrations.
The first is the formal agreement with India on the 2,560 MW Sunkosh reservoir project and the laying of its foundation stone, which is awaited – though assurances have been given to top Bhutanese leaders by New Delhi.
This project was part of the original 10,000 MW by 2020 hydro projects agreed to by both countries in 2008, although around less than half of that number would be possible by 2021.
The second event is the inauguration of the 720 MW Mangdechu project scheduled for around November 2018 by Prime Minister Narendra Modi, but here it is more about the final power tariff rate that India will agree to before the inauguration.
Hydro Projects Powered Friendship
With the two biggest events in this important year being related to hydropower; it underscores the now central importance of hydropower and hydro projects in ties between the two countries. What happens in terms of the implementation of the Sunkosh project and the tariff rate with Mangdechu project will play an important role in determining the quality of diplomatic ties between South Asia's closest friends, which has stood the test of time and both world and regional events.
For the 2,500 MW Sunkosh, Bhutan only wants India to fulfill its commitment, especially since the completed Detailed Project Report (DPR) shows the project as both technically and financially feasible.
Bhutan also wants India to stick by the committed Inter-Governmental model of the project wherein it would be financed under 30 percent grant and 70 percent loan with full ownership remaining with Bhutan.
India’s gain from the project would be clean and reliable energy exported from a strategically important friend. The other gain is that as India pushes for 175 Giga Watt by 2022, hydro will play an importantly increasing role to supplement solar and wind energy.
For Bhutan, the importance of Sunkosh apart from export revenue is energy security, in the sense that Bhutan does not have any reservoir projects to help save water during the lean winter months when rivers flow low and power generation is only a fraction of the summer months. Bhutan, in fact, has to import some power from India during winter.
The Tricky Tariff Turf
A slightly trickier matter is the ongoing negotiations between officials of the two countries to arrive at a fair power tariff rate for the Mangdechu project.
India, in the past and even now, enjoys the world’s cheapest tariff rates importing power from the 336 MW Chukha project (commissioned in 1986) and the 1020 MW Tala project (commissioned in 2006), both built with 60 percent grant from India and 40 percent loan.
Put simply, India could enjoy these low tariff rates since it put up a generous 60 percent grant with only 40 percent loan for Chukha and Tala. While this made financing much easier for Bhutan it also had the impact of driving down tariff rates as the cost of financing is a large component of the tariff rate.
A study on the Chukha project conducted in 2008 by the Center for International Development, Duke University, USA, and the Department of Economics, Queen University, Canada concluded that due to the low tariff rates, India completed the recovery of the investment cost with its economic opportunity cost by 1997, which is just nine years after the project started in 1988.
However, the Mangdechu project, unlike Chukha and Tala, is built on only 30 percent grant and 70 percent loan making the cost of financing much higher and hence, pushing up tariff rates.
Another factor to consider is the prevailing market condition in India where power prices have been moving up with India's average national tariff being around Rs 5 per unit.
In short, Bhutan has a strong financial and mathematical case for a fair tariff rate which would still be very competitive compared to power producers in India.
Bargain, But Be Fair!
Indian officials can decide to ignore these numbers, play hardball and ride roughshod over Bhutan using the monopoly of being the sole customer to drive down the Mangdechu tariff rate. This would also impact the upcoming 1,200 MW Punatsangchu I and 1,020 MW Punatsangchu II projects.
Such a strategy will deeply impact the relations between the two countries as Bhutan will feel it is not being given a fair deal in its most vital economic area.
This will also play out in an election year in Bhutan where it will strengthen the arguments of some political players who are critical about various aspects of the Bhutan-India relationship.
Some in India may wonder why all this hullabaloo about some power projects in Bhutan.
Financially, hydropower is the largest source of domestic revenue for Bhutan and is its largest export to India. It is also the only viable medium term option to balance the huge trade deficit with Bhutan's largest trading partner, India, which in 2012 led to a major economic crisis in Bhutan.
Politically, economic self-sufficiency has been a long aspired sovereign goal of Bhutan right from the time of Bhutan's Third King, His Majesty Jigme Dorji Wangchuck, who along with Jawaharlal Nehru, laid the foundations of strong ties between the two countries.
India has been Bhutan's most important developmental partner right from the 1960s, and Bhutan, in turn, has been India's closest friend and sensitive to India's security and geo-strategic concerns.
The implementation of promised hydro projects and payment of fair tariff rates gives an important opportunity to India to play an important role in making Bhutan economically self-sufficient, and in the process winning the trust and goodwill of a new generation.
India stands to make a good economic and energy deal for itself, deepen its friendship and trust with its closest friend and play a major role in the natural evolution of ties with its most reliable friend. Now, who can say no to that?
(Tenzing Lamsang is the Editor of The Bhutanese Newspaper in Bhutan. He tweets at @TenzingLamsang. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)