Energy, Economics, and Politics: An Analysis of Decisions to Pursue Large Hydropower Projects in Bhutan and Nepal

Large hydropower projects are on the rise. Once subject to universal condemnation by environmentalists and largely abandoned by international donors, these projects have been reborn as a critical component of “sustainable development” in the age of climate change. This resurgence of interest in large hydropower projects raises questions for policymakers about whether these projects provide a net benefit to their constituents. While rigorous economic analyses could provide guidance to the policymakers grappling with these questions, the complexity of this endeavor and the politics that almost always enmesh large infrastructure projects mean that decisions to pursue these projects are likely influenced by a different calculus—one that may vary across countries based on their unique history and political dynamics. Nepal and Bhutan, two developing countries that hold tremendous hydropower potential, provide an illustration of how these decisions are being carried out and what is driving them. This paper examines the political discourse surrounding hydropower projects in each country and how the projects fit within their development narrative. It also includes a cost-benefit analysis of two large projects that were recently pushed forward, Punatsangchhu I (or “Puna I”) in Bhutan and Arun III in Nepal. This paper concludes that the overwhelming economic benefit of the hydropower generated by these projects has driven and will continue to drive development in both Bhutan and Nepal, with the potential to bring substantial net benefits to the region. As a result, people who are concerned about the social and environmental costs of projects may be more successful in arguing for stronger safeguards for projects rather than a complete halt in their development. The economic value of clean energy for an area that has not been fully electrified is simply too large for policymakers to ignore. This paper also considers the role of political and international dynamics in development choices and the shadow price of capital, and how these factors could explain why Bhutan has made more progress in hydropower development than Nepal.