Bhutan–India Hydropower Agreements

The Bhutan–India hydropower agreements constitute the most consequential element of the bilateral relationship between Bhutan and India. Since the commissioning of the Chhukha Hydroelectric Project in 1986, a succession of intergovernmental agreements has governed the construction, financing, and electricity trade arrangements for Bhutan's hydropower sector. These agreements have made India the sole purchaser of Bhutanese surplus electricity and the primary financier of dam construction, creating an economic relationship of profound strategic importance to both nations — and one that has generated significant debate within Bhutan about sovereignty, debt sustainability, and economic dependency.^[1]

The centrepiece of this framework is the 2006 Agreement on Cooperation in Hydropower, which committed both countries to developing a minimum of 10,000 megawatts (MW) of hydroelectric capacity in Bhutan by 2020. While that target has not been met, the agreement continues to shape bilateral relations, with several major projects at various stages of completion and others mired in delays and cost overruns.^[2]

Historical Background

Bhutan's hydropower potential was first identified in comprehensive surveys conducted jointly with India in the 1960s and 1970s. The country's steep river gradients, fed by glacial melt and monsoon rainfall in the eastern Himalayas, give it an estimated 30,000 MW of technically feasible hydropower capacity, of which approximately 23,760 MW is considered economically viable. This makes Bhutan one of the most hydropower-rich nations per capita in the world.^[3]

The first major hydropower cooperation began with the Chhukha Hydroelectric Project on the Wangchhu river, which was agreed upon in 1974 and commissioned in 1986 with an installed capacity of 336 MW. Financed entirely by India through a 60% grant and 40% loan arrangement, Chhukha established the template for all subsequent Bhutan–India hydropower projects: India provides the capital, Indian companies undertake much of the construction, and Bhutan sells surplus electricity to India at a bilaterally negotiated tariff.^[4]

The 60:40 Grant-Loan Model

The financing model that has governed most Bhutan–India hydropower projects divides the capital cost into a 60% grant from the Government of India and a 40% loan bearing interest (typically at concessional rates). Under this model, Bhutan repays the loan portion from revenues generated by electricity sales to India, while the grant component represents Indian development assistance. The model was designed to make the projects financially viable for Bhutan while serving India's growing electricity demand.^[1]

However, the model shifted for some projects developed after 2008. The Punatsangchhu-I, Punatsangchhu-II, and Mangdechhu projects were initially structured on an intergovernmental (IG) model with the 60:40 split. But the Kholongchhu project, agreed in 2014, introduced a joint venture (JV) model in which Indian public sector undertakings and Bhutan's Druk Green Power Corporation hold equity stakes. This model was intended to give Bhutan more ownership and commercial flexibility but also altered the risk-sharing arrangements.^[5]

Major Projects

Chhukha (336 MW)

Commissioned in 1986 on the Wangchhu river in Chhukha district, this was the first major bilateral hydropower project. Its success demonstrated the viability of the hydropower cooperation model and generated significant export revenues for Bhutan. The project was completed on time and within budget — a distinction that would not characterise several later ventures.^[4]

Kurichhu (60 MW)

A run-of-river project on the Kurichhu in eastern Bhutan, commissioned in 2002. Smaller in scale, it served primarily to demonstrate the feasibility of hydropower development in Bhutan's eastern districts.^[6]

Tala (1,020 MW)

Commissioned in 2007, the Tala Hydroelectric Project on the Wangchhu was Bhutan's largest power station at the time. With an installed capacity of 1,020 MW, Tala transformed Bhutan's fiscal position, with electricity exports becoming the single largest source of government revenue. The project demonstrated that Bhutan could successfully manage gigawatt-scale hydropower developments, though it also highlighted the risks of economic over-reliance on a single sector and a single buyer.^[7]

Mangdechhu (720 MW)

Completed in 2019 on the Mangdechhu river in Trongsa district, this project was delivered with relatively contained cost overruns and became operational during the Lotay Tshering government. It was seen as a partial vindication of the intergovernmental model after the troubled Punatsangchhu projects.^[8]

Punatsangchhu-I (1,200 MW) and Punatsangchhu-II (1,020 MW)

These twin projects on the Punatsangchhu (Sunkosh) river have become the most controversial bilateral hydropower ventures. Originally estimated at INR 35.15 billion and INR 33.82 billion respectively, both projects have experienced massive cost overruns and repeated delays. Punatsangchhu-I, which broke ground in 2008, has seen its cost escalate to over INR 93 billion — nearly triple the original estimate — owing to geological complications, including the discovery of unstable rock formations at the dam site. As of 2025, neither project has been commissioned, making them symbols of the risks inherent in large-scale hydropower development in seismically active Himalayan terrain.^[9]

India as Sole Buyer

Under the bilateral agreements, India is the sole purchaser of Bhutan's surplus electricity. The tariff at which Bhutan sells power is negotiated between the two governments and has historically been set below market rates, a point of recurring tension. Bhutanese commentators have argued that if Bhutan were able to sell electricity on the open Indian power exchange or to third countries such as Bangladesh, it could command significantly higher prices. India has resisted moves to allow Bhutan to access the Indian Energy Exchange, though discussions on tariff revision and market access have continued.^[9]

Debt Implications

Hydropower-related debt constitutes the overwhelming majority of Bhutan's total external debt. As of 2023, Bhutan's external debt stood at approximately USD 2.8 billion, of which hydropower loans to India accounted for roughly 75–80%. While these loans are denominated in Indian rupees at concessional interest rates and are technically self-liquidating (repaid from electricity sales revenue), the sheer scale of the debt relative to Bhutan's GDP — approximately 110% of GDP — has raised concerns among economists and international observers about fiscal sustainability.^[3]^[9]

The delayed commissioning of the Punatsangchhu projects is particularly problematic, as interest continues to accrue on the loan portions without corresponding revenue generation. Bhutanese economists and opposition politicians have called for a renegotiation of the financing terms, though the bilateral nature of the agreements limits Bhutan's leverage in negotiations.^[9]

Strategic Significance

For India, the hydropower agreements serve multiple strategic objectives: securing clean energy supplies for its northeastern states, maintaining close political and economic ties with Bhutan (a buffer state between India and China), and demonstrating the benefits of bilateral cooperation to other South Asian neighbours. For Bhutan, hydropower revenues underwrite the national budget, fund education and healthcare, and constitute the backbone of the country's development strategy. This mutual dependency makes the hydropower relationship arguably the single most important dimension of Bhutan–India relations.^[1]