History of Hydropower Development in Bhutan

Hydropower is the single largest sector of Bhutan's modern economy and the central strand of its bilateral relationship with India. From the commissioning of the 336 MW Chhukha Hydropower Plant in 1986 to the full commissioning of the 1,020 MW Punatsangchhu-II project in August 2025, successive run-of-river schemes have transformed the country's fiscal base, electrified its villages and made electricity Bhutan's dominant export commodity. The same projects have concentrated the country's external debt, tied its revenues to a single buyer and exposed its rivers to geological and climatic risks that have become increasingly visible since the 2010s.

At a glance: Bhutan's theoretical hydropower potential is estimated at around 30,000 MW, of which the technically and economically feasible portion is usually placed between 23,000 and 26,700 MW. Installed capacity reached roughly 2,500 MW by 2024 and rose by almost 40 per cent with the staged commissioning of Punatsangchhu-II between December 2024 and August 2025. Hydropower-linked debt stood at Nu 167.5 billion on 31 March 2024 — about 64 per cent of total external debt and close to 63 per cent of GDP.

Geography and Potential

Bhutan's topography is unusually well suited to hydropower. The country's four main river basins — the Amo Chhu, Wang Chhu, Puna Tsang Chhu (Sankosh) and Drangme Chhu (Manas) — drain the eastern Himalayas from elevations above 7,000 metres to the Indian plains in under 200 kilometres, producing some of the steepest sustained gradients on the subcontinent. Monsoon rainfall and glacial melt deliver high summer flows, while deep valleys make it possible to build diversion dams and underground powerhouses without flooding large areas. These conditions favour run-of-river schemes, which use natural head rather than reservoir storage and therefore displace fewer people and require smaller civil works than comparable projects in India or Nepal.^[1]

Successive government and donor assessments have placed Bhutan's theoretical potential at roughly 30,000 MW. The Power System Master Plan updates commissioned by the Department of Energy have narrowed this down to an economically exploitable range of 23,000–26,700 MW, of which only about a tenth had been developed by the mid-2020s.

The Chhukha Agreement and the Founding Project

Indo-Bhutanese hydropower cooperation began in earnest with the bilateral agreement of March 1974, signed during the reign of the Third King Jigme Dorji Wangchuck and implemented under his successor Jigme Singye Wangchuck. Under the agreement, the Government of India financed the 336 MW Chhukha project on the Wang Chhu — 60 per cent as a grant and 40 per cent as a soft loan at 5 per cent interest repayable over fifteen years from commissioning. Construction was executed largely by Indian contractors with Bhutanese labour and supervision.^[2]

The four 84 MW units at Chhukha were synchronised with the Indian grid between 1986 and 1988. Surplus power was exported under a long-term tariff agreement denominated in Indian rupees, and within a few years royalty energy and export revenues from Chhukha had become the largest single source of domestic revenue for the Royal Government. The project is widely credited with lifting Bhutan from a near-subsistence fiscal base and financing the first generation of post-1970s development plans. It also set the template that later projects would follow: Indian financing on a mixed grant-loan basis, execution through an Indian project authority, and sale of surplus power to India under a cost-plus tariff.^[3]

Institutional Evolution

In its early decades the sector was managed directly by the Department of Power within the then Ministry of Trade and Industry. The Bhutan Electricity Act of 2001 unbundled generation, transmission and distribution and established the Bhutan Electricity Authority as an independent regulator. In 2002 the Bhutan Power Corporation (BPC) was incorporated as a state-owned utility responsible for transmission, distribution and rural electrification. Generation assets were progressively consolidated under the Druk Green Power Corporation (DGPC), established in 2008 as a wholly-owned subsidiary of Druk Holding and Investments and tasked with operating and expanding the country's hydropower fleet. DGPC absorbed the earlier Chhukha Hydro Power Corporation, Basochhu Hydro Power Corporation, Kurichhu Hydro Power Corporation and Tala Hydro Power Corporation into a single generation company.

Early Expansion: Kurichhu, Basochhu, Tala

The success of Chhukha was followed in the 1990s and early 2000s by three further projects. The 60 MW Kurichhu plant on the Kurichhu river in Mongar District — commissioned in stages between 2001 and 2002 — was the first hydropower project to serve the eastern dzongkhags and the first to use a small storage dam rather than a pure run-of-river layout. The 64 MW Basochhu project near Wangdue Phodrang, funded largely by the Austrian government, was commissioned in two stages in 2001 and 2004 and marked the first significant non-Indian financing in the sector.

The 1,020 MW Tala Hydropower Plant, commissioned in stages between 2006 and 2007, was the most consequential project of the second wave. Built on the Wang Chhu downstream of Chhukha under the same 1974-style intergovernmental framework, Tala more than tripled Bhutan's installed generation capacity at the time of commissioning and roughly doubled export revenues. Unlike Chhukha, the Tala financing mix was adjusted to 60 per cent loan and 40 per cent grant, a shift that foreshadowed the more debt-heavy structures of the projects that followed.^[4]

The 10,000 MW Target and the Punatsangchhu Projects

In 2008, the same year that Bhutan held its first parliamentary elections and DGPC was incorporated, the governments of India and Bhutan agreed in principle to develop 10,000 MW of additional hydropower capacity in Bhutan by 2020. Ten projects were identified, most of them to be financed and executed on the Chhukha-Tala model. Two projects on the Puna Tsang Chhu — Punatsangchhu-I (1,200 MW) and Punatsangchhu-II (1,020 MW) — were launched almost simultaneously in 2008. A third, the 720 MW Mangdechhu project in Trongsa, followed shortly afterwards. Together these three alone were expected to add nearly 3,000 MW.

In practice the 10,000 MW target proved unattainable. By 2020 only Mangdechhu had been commissioned; Punatsangchhu-II was still under construction; Punatsangchhu-I was mired in geological failure; and most of the remaining projects on the 2008 list had not progressed beyond feasibility studies or concession negotiations.^[5]

Punatsangchhu-I

The 1,200 MW Punatsangchhu-I Hydroelectric Project Authority (PHPA-I) was launched in November 2008 with an initial completion target of 2015. In July 2013 a major slope failure occurred on the right bank at the dam site, and subsequent investigations — including satellite-based InSAR studies published in 2020 — identified a previously unrecognised active landslide whose downslope displacement had been visible in imagery as early as 2007. Stabilisation works, including large-scale rock anchoring, shotcreting and drainage galleries, have been in progress almost continuously since 2013. Repeated cost revisions have pushed the project budget several times above its original estimate, and the scheduled completion date has been deferred repeatedly. As of early 2026 the project remains under construction, with DGPC publicly committed to completing it despite the geological difficulties.^[6]^[7]

Punatsangchhu-II

Punatsangchhu-II (PHPA-II), downstream of PHPA-I, encountered its own geological problems — including a significant rockmass collapse that required the installation of 100-tonne permanent strand anchors — but progressed more smoothly than its sister project. The first two of the six 170 MW units were synchronised with the grid in December 2024, followed by the third in March 2025, the fourth in May, the fifth in July and the sixth and final unit on 27 August 2025. The fully commissioned project was jointly inaugurated by Prime Minister Narendra Modi and King Jigme Khesar Namgyel Wangchuck in November 2025. Its 1,020 MW of added capacity increased Bhutan's total installed generation by roughly 40 per cent.^[8]

Mangdechhu

The 720 MW Mangdechhu project, built on the Mangde Chhu in Trongsa, was executed under an intergovernmental framework broadly similar to Chhukha and Tala but managed by a dedicated project authority. All four 180 MW units were commissioned between June and August 2019, and the plant was formally inaugurated by Prime Minister Narendra Modi and Prime Minister Lotay Tshering on 17 August 2019. Handover to DGPC followed in 2022. A long-running dispute over the export tariff was settled in April 2019 through a bilateral protocol that fixed the opening tariff at Nu 4.21 per unit for 35 years with periodic escalations.^[9]

Failed and Stalled Projects

The 600 MW Kholongchhu project on the Kholong Chhu in Trashiyangtse District was the first Indo-Bhutanese hydropower project structured as an intergovernmental joint venture, with India's SJVN and DGPC as co-owners. The concession agreement was signed virtually in June 2020 during the Covid-19 pandemic. Within months the venture ran into disagreements over project structure, tax treatment and the division of risk, and by late 2020 SJVN had withdrawn. The project was suspended for several years before DGPC reached a new arrangement with Tata Power in 2024, under which DGPC would hold 60 per cent equity and Tata Power 40 per cent, resurrecting the scheme under the revised name Khorlochhu. Construction restart and completion timelines remain to be confirmed.^[10]

The long-planned 2,585 MW Sankosh reservoir project on the Puna Tsang Chhu, conceived as early as the 1990s as Bhutan's flagship storage scheme, has never moved past feasibility. Its size, displacement implications and the absence of an agreed financing structure have repeatedly pushed it off the active pipeline, even as it continues to appear in official lists of future projects. The 118 MW Nikachu project, financed by the Asian Development Bank and commissioned in 2023, and the 126 MW Dagachhu project — the first hydropower project in Bhutan registered under the UN's Clean Development Mechanism — represent the smaller, more diversified pipeline that emerged after the 10,000 MW target was quietly abandoned.

Exports, Revenue and Debt

Hydropower is the dominant item in Bhutan's export basket and a decisive contributor to state revenue. According to DGPC and Ministry of Finance reporting, electricity accounts for around 63 per cent of merchandise exports, and taxes and dividends paid by DGPC and its subsidiaries make up roughly 40 per cent of national revenue in most years. In a detailed 2024 Article IV consultation, the International Monetary Fund put hydropower's direct contribution to GDP at about 14 per cent and noted that the sector still accounted for roughly a quarter of government revenues.^[11]

The fiscal benefits of hydropower have come with a correspondingly large debt exposure. According to the Ministry of Finance's Debt Situation Report for the quarter ending 31 March 2024, hydropower debt stood at Nu 167.5 billion — about 64.1 per cent of total external debt and 62.8 per cent of estimated GDP for fiscal year 2023–24. The figure covered the debt stocks of Mangdechhu, Punatsangchhu-I, Punatsangchhu-II, Nikachu, Dagachhu and both Basochhu stages. Total public debt stood at 105.9 per cent of GDP as of September 2024. The IMF and the World Bank have consistently described Bhutan's public debt as high but assessed its risk of debt distress as moderate, on the grounds that most hydropower debt is rupee-denominated, matched by rupee revenues from India and backed by sovereign purchase commitments — a structure the IMF has characterised as having "FDI-like" risk properties.^[12]^[13]

Rural Electrification

Alongside the large export-oriented projects, successive Bhutanese governments pursued a parallel programme of domestic electrification. The Rural Electrification Master Plan, developed with support from JICA and the World Bank, set a target of universal household electrification and was executed primarily by Bhutan Power Corporation. The programme drew heavily on the Fourth King's vision of bringing "electricity in every home" — a goal that was formally declared achieved in the mid-2010s, when BPC reported connections for more than 99 per cent of households. Extension of the grid to remote villages, backed by targeted subsidies and a lifeline tariff for low-income consumers, remains one of the most visible development achievements of the post-2008 period.^[14]

Climate and Hydrological Risks

The long-term viability of Bhutan's hydropower fleet depends on glacial and monsoonal flows that are now visibly changing. Several studies from the International Centre for Integrated Mountain Development (ICIMOD) and the National Centre for Hydrology and Meteorology have documented accelerated retreat of Bhutanese glaciers since the 1980s and the expansion of proglacial lakes behind unstable moraines. A glacial lake outburst flood (GLOF) from Luggye Tsho in 1994 killed at least 21 people downstream in Punakha and damaged infrastructure on the Puna Tsang Chhu. Mitigation work on the Thorthormi and Raphstreng lake complex in Lunana, begun in 2008, lowered water levels through controlled drainage. Climate models suggest that winter lean-season flows — which already constrain firm capacity — may decline further as glacier storage is exhausted, even as monsoon floods grow more intense.

Critiques and Debates

The hydropower-led growth model has been the subject of sustained debate inside and outside Bhutan. Supporters point to the scale of revenue, the electrification of the country, the low carbon intensity of the sector and the FDI-like financing structure that shields Bhutan from most currency risk. Critics raise several concerns.

Single-buyer dependence. All major projects sell surplus power exclusively to India under long-term tariff agreements, exposing Bhutan to decisions taken in New Delhi about pricing, cross-border trade rules and the CERC-approved regulatory framework. Bhutanese commentators have periodically argued for diversifying buyers, for example through Bangladesh or via regional grids, but actual cross-border sales outside India remain small.

Cost overruns and governance. The Punatsangchhu-I experience has drawn particular criticism. Bhutanese media, including Kuensel and The Bhutanese, have reported that inadequate pre-construction geological investigations, slow decision-making between the two governments and the absence of a clear contractual pathway for dealing with force-majeure geology all contributed to the delays. Independent analysts writing in The Druk Journal and Dialogue Earth have questioned whether the intergovernmental model, which worked well for Chhukha and Tala, is well suited to projects of this size and complexity.^[15]

Environmental and social impact. Although run-of-river layouts minimise reservoir flooding, construction of access roads, diversion dams, spoil dumps and transmission corridors has affected riverine ecosystems and contributed to local landslides. The 2013 slope failure at Punatsangchhu-I itself is widely cited as an example of how pre-existing slope instability can be aggravated by heavy construction loads. Fisheries organisations have raised concerns about the cumulative impact of multiple cascades on the same river system, particularly on the Puna Tsang Chhu and Mangde Chhu.

The "hydropower curse" debate. Economists at Brookings and the Centre for Social and Economic Progress have described Bhutan's reliance on a single sector and a single buyer as an example of the resource-dependence trap, in which export-led growth fails to generate broad-based employment or diversified tax revenues. The sector is capital-intensive, employs relatively few Bhutanese once construction is complete and has not substantially reduced the country's structural trade deficit in non-energy goods.^[16]

Gelephu and the Next Phase

The Gelephu Mindfulness City project, announced by King Jigme Khesar Namgyel Wangchuck in December 2023, has reopened the question of how much additional hydropower Bhutan should develop and for whom. Planning documents for GMC envisage a cluster of new run-of-river and small-storage projects in southern and central Bhutan to supply the special administrative region's industrial and data-centre demand, while continuing to export surplus to India. Whether this can be financed without further concentrating the country's external debt, and whether the associated rivers can carry the additional load under a changing climate, are the questions likely to define the sector through the late 2020s.