Nepal and India have agreed to fund a second high-capacity cross-border transmission line connecting Butwal to Gorakhpur in India through a commercial entity with both countries pledging equal equity in funding of the project.

The agreement on Tuesday followed a two-day, Seventh Joint Steering Committee and Joint Working Group meeting on Nepal-India Cooperation in the Power Sector in the southern Indian city of Bengaluru.

The meeting concluded with agreements on implementation and financing modality of the 135 kilometre-long, 400 kV transmission line and formalisation of an energy banking mechanism between the two South Asian neighbours.

“The sides have agreed to build the transmission line with 20 percent of equity investment and 80 percent debt,” said Energy Minister Barsha Man Pun.

It was decided that a company would be formed under the modality within three months and to have a project implementation agreement, within six months.

The decision came a month after the Nepali and Indian energy ministers expressed optimism over both sides coming to terms on the development modality of the proposed 400 kV New Butwal-Gorakhpur transmission line project.

The proposed transmission line is a major component of the $630 million ‘Nepal Compact’ — an agreement between the government of Nepal and Millennium Challenge Corporation of the US to fund electricity and road projects of strategic importance in Nepal.

Earlier, officials from the two countries had reached a broad agreement that the portion of the transmission line passing through Indian territory would be built by a commercial entity after India rejected Nepal’s proposal to develop the line under a government to government financial model.

Following the refusal, Nepal proposed to build the line with an equal equity investment from Nepal Electricity Authority and Power Grid Corporation of India and book the use of power lines for seven years to which the Indian energy officials have now agreed.

An agreement between officials of the two neighbouring countries on implementing the transmission line is also a pre-requisite for the multi-million dollar MCC-Nepal compact—viewed by many in Nepal as a counter-initiative under the Indo-Pacific Strategy of the US against China's Belt and Road Initiative—to become effective.

Though the Compact, which will prevail over the domestic laws, has been tabled in Parliament, it is yet to be ratified, reportedly due to the differences within the ruling party lawmakers and leaders over Nepal’s degree of involvement in the USA's Indo-pacific Strategy and China’s Belt and Road Initiative.

According to Energy Secretary Dinesh Ghimire, the Compact is expected to be ratified by the Parliament by the time Millenium Challenge Account-Nepal — the implementing agency of the project — completes an environmental impact assessment of the infrastructure.

Millennium Challenge Account-Nepal announced in August that the Compact would go into effect from June 2020.

According to the Nepal Electricity Authority, the detailed project report of the cross-border transmission lines has been updated and revised by India in consultation with power utility officials which has led to a cost reduction of around $18 million on the Indian portion of the transmission line.

“The cost reduction and decision to evacuate or relay power from the existing substation in Gorakhpur rather than building a new substation for power exchange has added to the commercial viability of the project,” Prabal Adhikari, spokesperson of the Nepal Electricity Authority recently told the Post.

Around 120 km out of the Butwal-Gorakhpur Transmission Line's 135-km length lies in Indian territory.

According to Adhikari, the project is of high strategic importance to both Nepal and India as it will set up a reliable route for energy banking by synchronising Nepal's power grid with India's and allow the power utility to sell large quantum of surplus power, which Nepal is poised to generate in the coming years.

According to a report by the National Renewable Energy Laboratory’s Strategic Energy Analysis Centre of the US, Butwal is a strategic location for cross-border energy trade between India and Nepal because of its proximity and ability to connect with India’s Uttar Pradesh state and the Northern Regional Load Dispatch Centre via Gorakhpur where power demand is high during the monsoon.

As per the power utility's estimate, Nepal will have a surplus of around 8,000 megawatts by 2025 as the country's generation capacity is expected to reach 10,924 megawatts while peak demand is likely to be 2,981 megawatts.

In line with the multiple requests from Nepali authorities and the surplus power projections, India has also agreed to formalise the terms related to energy banking mechanism which will allow Nepal and India to exchange power on a need basis.

“At present, energy banking between Nepal and India is done through mutual agreements under the purview of the Nepal-India Power Exchange Committee. Indian energy officials have now agreed to formalise energy banking through cross-border power trade regulations of India,” said Kulman Ghising, managing director of the Nepal Electricity Authority.

According to Ghising, the Bengaluru meeting also decided to permit Nepal Electricity Authority to trade in Indian Energy Exchange, an automated power trading platform which Nepal is keen on joining.

As well, the meeting approved the detailed project reports of Lumki-Bareilly and Inaruwa-Purnea cross border transmission lines between Nepal and India proposed to be built by 2025.