International Trade In Energy: The Chukha Hydro-Electric Project In Bhutan

Historically, one of the most fruitful applications of financial and economic cost-benefit analysis has been in electricity systems planning. Because of the capital intensive nature of the production technology and the possibilities of substitution between capital and fuel, the potential for savings through correct choice of timing, technology and scale are immense. This particular project is unique because these decisions involve two political jurisdictions, India and Bhutan. Furthermore, the value of Bhutan’s unique natural resources, its hydro-electric sites, is entirely determined by their potential to save India’s scarce economic resources, both capital and fuel. The 336MW Chukha hydro-electricity project was built by India on a turnkey basis, with India providing 60% of the capital in a grant and 40% in a loan at highly concessional terms and conditions. In the arrangement, India receives in turn all the electricity generated from the project in excess of Bhutan’s demand at much cheaper prices than India’s generation cost from alternative sources. The analysis, therefore involves an ex ante financial and economic evaluation of the project from viewpoint of Bhutan and India, taking into consideration the project’s terms and conditions, the alternative cost of power generation for India, and the engineering risks and environmental costs. The project is considered beneficial to both Bhutan and India, although its terms and conditions are not inflation-proof.