Fears Of Climate Change And China Are Bringing South Asia Closer

For much of June the 23m people in and around Dhaka, Bangladesh’s capital, suffered in temperatures of up to 38°C.

Fans and air-conditioners were of little use—the country experienced power cuts on 114 of the first 150 days of this year. Just 500km to the north, the Himalayan republic of Nepal faced the opposite problem.

The country’s demand for electricity tops out at 1.7gw but generation capacity—almost entirely from hydropower—peaks at 2.8gw. Officials have been telling power plants to cut production to avoid destabilising the grid.

The imbalance may soon start to be corrected. A trilateral deal between Bangladesh, India and Nepal, expected to be finalised in weeks, would see some of Nepal’s surplus electricity flow to power-starved Bangladesh via India’s transmission infrastructure, starting with a modest 50mw. Sceptics dismiss it as a rounding error in Bangladesh’s shortfall. At peak times demand exceeds supply by up to 25%, according to analysis by Reuters.

Yet to focus on the amount of power coming in from Nepal is to miss the point. That it is happening at all is a breakthrough in a region where neighbours have viewed each other with suspicion for decades. Observers hope this deal will lay the foundation for a more integrated energy market in the region.

Three immediate factors have helped the deal gain momentum. The first is the rising cost of energy. South Asia has struggled to meet its needs on global energy markets, which have been disrupted by the war in Ukraine. Second, South Asian countries are dealing with the realities of climate change, with heatwaves and floods becoming more frequent and intense. Third is a growing wariness of China, whose assertiveness in and around the Himalayas has pushed India to pay more attention to its smaller neighbours.

South Asia is among the least economically integrated regions in the world, so any increase in trade could have juicy benefits. But politics has long stood in the way. India’s fraught relationship with Pakistan is the biggest hurdle. But in Nepal and Bangladesh, too, political and other upheaval prevented progress.

Nepal was riven by civil war until 2006 and suffered a devastating earthquake in 2015. Worried about Indian domination and keen to explore other options, in recent years it had begun to turn to China. India and Bangladesh have disagreements over everything from sharing river water to illegal immigration. As recently as 15 years ago, says Tariq Karim, a former Bangladeshi ambassador to India, “you had people in Bangladesh saying, we don’t want Hindu power, we’d rather go dark”.

Having spent quite a lot of time in the dark, Bangladeshis are now reconsidering. The country’s natural-gas reserves, which account for two-thirds of its consumption, are dwindling and may be depleted within the decade, making it more dependent on imports of liquefied natural gas (lng).

Rich European countries drove up prices of lng last year as they sought alternatives to Russian gas, making it hard for Bangladesh to strike long-term deals with suppliers and forcing it to switch to more expensive oil and petrol plants. That depleted its currency reserves and left it unable to afford enough fuel. Moreover, Bangladesh has pledged to reduce its carbon emissions by more than 20% by 2030, which requires cutting its use of fossil fuels.

Nepal, meanwhile, has staked much of its economic-development strategy on future sales of hydropower to its neighbours. Last year it started exporting 400mw of power to India; this year it struck a deal to export an additional 600mw. A further 5gw of capacity is under construction. If the gamble fails to pay off, both the government, which has a monopoly on the purchase and sale of electricity, and the country’s private power producers will end up with a pile of debt and unfinished projects. “If these deals don’t work out, we’re doomed,” says Ashish Garg, a hydropower investor.

Integration is also crucial to South Asia’s green-energy transition. Nepal and Bhutan have between them an estimated potential of nearly 70gw of hydropower, only a small fraction of which has been developed.

Bangladesh has little renewable capacity and insufficient space to add enough wind and solar. India plans to install 500gw of renewable capacity by 2030. To meet its projected power demand in 2040 it will need to add 950gw of capacity overall, about the size of Europe’s power market, in addition to its existing 418gw.

Hydropower from its neighbours would help supply a stable baseline of renewable energy. The benefits of cleaner electricity ought to pay off in the short-term, too, in the form of more breathable air in the region’s cities, which are some of the world’s most polluted.

India has historically been unwilling to enter into multilateral energy deals, preferring bilateral agreements such as import deals with Nepal and a new long-term agreement to sell coal-fired power to Bangladesh from an Indian plant near the border. But it is “keen to create interdependence in the region to counter China, and energy is a less threatening way of doing so than, say, trade in other things,” says Sanjay Kathuria of Georgetown University in Washington, dc. Narendra Modi, India’s prime minister, has prioritised relations with the country’s neighbours. In 2021 he travelled to Dhaka for a cordial tête-à-tête with Sheikh Hasina, Bangladesh’s prime minister. In May he hosted Pushpa Kamal Dahal, Nepal’s prime minister, in Delhi.

The trilateral deal was touted during the summit in May; Mr Modi also promised to buy 10gw of power from Nepal over the coming years. “We’re very happy for Bangladesh to buy directly from Nepal as long as they use our transmission lines,” says Ajay Tewari, who oversees the negotiations at the power ministry. India’s power-purchase rules ban the import of electricity from Chinese-financed projects, encouraging Nepal to favour Indian investors.

Hurdles remain to deeper energy integration. The chief challenge is the lack of grids to transport power around the region. Existing high-voltage lines between the three countries are already overloaded. New ones are planned (see map) but their construction is hampered by land-acquisition problems and a lack of financing, especially in Nepal, whose government has no money for new lines but refuses to let the private sector build them. Bangladesh and Nepal are lobbying India to allow the construction of a dedicated line for power trade between its two neighbours across its territory. But India has so far demurred and is unlikely to change its mind anytime soon. Climate change, too, may worsen the problem: melting glaciers, landslides and changing river flows could render some of Nepal’s hydropower potential unviable in the coming decades.

India has little choice but to turn away from coal if it is serious about its net-zero goals. Bangladesh, too, will have to shed its reliance on fossil fuels. To ensure a stable, secure power supply from renewables, the neighbours will have to connect their grids, liberalise their power markets and harmonise their regulatory regimes. The small trilateral deal in the works today could lay the groundwork for this grand ambition, says Prabal Adhikari, who oversees power sales at the Nepal Electricity Authority. “It’s a small amount, but it means all the rules, standards and norms will be in place to export more in the future.”