On the day he returned to the U.S. presidency, Donald Trump issued an executive order freezing foreign aid for 90 days. Among the many projects impacted was a $500 million grant that was intended to develop critical infrastructure in Nepal. This funding, provided through the Millennium Challenge Corporation (MCC), a U.S. governmental agency, aimed to enhance Nepal’s electricity transmission capacity, including a 200-mile 400kV transmission line facilitating power trade with India. The freeze not only raises questions about the future of U.S. engagement in Nepal but also alters the strategic calculus in a region where China and India are vying for influence.
The government of Nepal originally signed the MCC compact in 2017. However, domestic political hiccups, divided opinions among Nepali politicians, and persistent Chinese efforts to dissuade Nepal from accepting the grant delayed its ratification by five years. The Parliament of Nepal finally approved it in 2022 after much controversy.
In August 2024, the Millennium Challenge Account in Nepal signed a deal with India to initiate the construction of three high-capacity substations at Damauli, Ratmate, and New Butwal, along with a transmission line connecting New Butwal to the Nepal-India border. Nepal, which generates almost all of its electricity from hydropower, is subject to seasonal variations in its electricity supply. These transmission line projects aim to enhance imports of electricity during the dry season and exports in the wet season to bolster its energy security with a stable and reliable electricity supply.
Trump’s decision to suspend the MCC grant now casts uncertainty over these developments.
It is important to note that Trump’s move came shortly after China and Nepal successfully entered into a contract within the framework of the Belt and Road Initiative on December 4, 2024. Like the MCC contract, this step followed a lengthy bout of negotiations since Nepal originally joined the BRI in 2017, due to Nepal’s concerns over debt and geopolitical signaling. Among the 10 identified projects to be executed under “aid-assistance financing,” the centerpiece is a proposal to develop a first-of-its-kind 220kV cross-border electricity transmission line from Jilong via Kerung in China’s Tibetan Autonomous Region to Rasuwagadhi, Nepal. This plan follows Nepal’s completed construction of its domestic Chillime-Trishuli transmission line. The line is designed to transport electricity generated from its hydropower projects in the Trishuli River basin to the national grid.
Taken together, the two lines are part of the larger proposed Kerung-Rasuwagadhi project, which will facilitate Nepal’s electricity trade with China in the future. Additionally, reports have surfaced that discussions are underway to build another electricity transmission line connecting Nepal’s Sankhuwasabha district to China, signaling deeper engagement in the electricity trade network.
Sandwiched between two rising Asian giants, Nepal has prioritized increasing its total electricity generation with an eye toward exporting some of that output. As outlined in its 16th five-year plan, Nepal aims to expand electric generation capacity from 3,157 MW to 11,769 MW and export 5,500 MW of electricity annually in the next five years. With 90 percent of its electricity generation coming from hydropower, Nepal possesses a technically feasible potential capacity of 83,000 MW and an economically viable capacity of 42,000 MW.
This vast hydro-electric potential has gained newfound significance in the foreign policy realms of its neighbors, strategically positioning Nepal at the center of the evolving power dynamics. Both India and China seek to secure their energy futures and assert their influence in the region. Meanwhile, the United States, through the MCC grant, has aimed to align Nepal with its broader Indo-Pacific strategy to counter China.
Over the years, China has intensified its influence in Nepal through both political and economic means, a development viewed with concern by both the United States and India. In Chinese strategic discourse, Nepal is viewed as a “crucial link” for advancing its grand plans for regional connectivity and financial largesse that would reduce Nepal’s decades long dependence on India, as well as an integral component of China’s broader development strategy in Tibet.
Over time China has successfully managed to influence Nepal’s stance on the Tibetan issue through securing its support and recognition of Beijing as the sole legitimate authority over Tibet. In that context, China venturing into cross-border electricity connectivity projects holds significant strategic value. These power projects could accelerate Tibet’s integration into regional trade networks and foster stability through stimulating industrial growth, facilitating the transfer of expertise, manpower, and materials, and optimizing the utilization of local hydropower resources for cross-border electricity trade. By deepening its engagement with Nepal, China is not only strengthening bilateral economic ties but also consolidating its broader strategic influence in the region while advancing its development goals in Tibet.
China’s investment in global energy-related infrastructure is a key pillar of its overseas strategy, accounting for nearly 31 percent of its total foreign investments. Reports indicate that its electricity transmission lines alone are valued at over $7 billion, with plans for additional expansion under the part of its “global energy interconnection initiative” in coming years. The renewed negotiations with Nepal signal China’s intent to regain momentum in electricity transmission infrastructure development, an area where progress had previously stalled.
India, on the other hand, has actively engaged with Nepal’s hydropower sector through establishing long-term power trade agreements and constructing multiple electricity transmission lines, including the Dhalkebar-Muzaffarpur and Dhalkebar-Sitamarhi 400 kV electricity transmission lines, with plans for further expansion and completion in the upcoming years.
Further, last year, both sides inaugurated another three 132 kV cross-border transmission lines, including the Raxaul-Parwanipur, Kataiya-Kusaha, and New Nautanwa-Mainhiya lines, and India agreed to buy 10,000 MW of electricity from Nepal over the next 10 years. Additionally, both countries entered a tripartite agreement with Bangladesh last year, and Nepal successfully exported 40MW of electricity to Bangladesh via India. India views the electricity trade as a key component of its strategic relationship with Nepal, and the increased export of electricity promises to strengthen ties between the two countries.
However, over the last decade the relationship between India and Nepal has remained fraught with political sensitivities. Tensions snowballed following Nepal’s 2015 constitutional amendments, alleged Indian support for ethnic protests against the change, the unofficial blockade at the border that followed, and India’s inauguration of a new road in the disputed Kalapani region. All these developments, along with the growing nationalist rhetoric in Nepal, fueled anti-India sentiment, which has significant repercussions in power trade dynamics.
Many Nepali experts argue that Indian dam construction projects in Nepal face deliberate delays, with Indian companies stalling progress to maintain long-term control, especially in border areas where India is perceived as asserting claims over Nepali rivers and hydropower resources. Others contend that India’s stringent approval process for Nepal’s power exports, driven by its strategic concerns, has erected substantial barriers. India has explicitly stated that it will not purchase electricity from projects involving any form of Chinese investment. To enforce this, India has demanded comprehensive financial disclosures from Nepali hydropower projects, including details of funding sources and financial institutions involved. Additionally, India has made the annual renewal of export approvals mandatory, entangling the process in bureaucratic red tape.
As currently there is no alternative market for selling the surplus electricity produced in the wet season, amid these procurement delays Nepal has witnessed occasional power spillage. This situation has caused frustration among Nepali officials and cast doubts about the long-term rationale of the electricity trade with India. Such complexities reinforce the perception that Nepal’s hydropower sector is being shaped by India’s strategic interests and managed by Delhi’s dictum rather than by Nepal’s economic priorities and broader development needs.
Against this backdrop, the U.S. suspension of the MCC grant further exacerbates these challenges, complicating Nepal’s electricity transmission projects and jeopardizing its overall power trade ambitions. For China, the freeze presents a window of strategic opportunity to expand its presence in Nepal’s electricity sector. While the suspension is temporary, China may seek to exploit anti-U.S. sentiment and Nepal’s perception of the United States as an unreliable partner. The decision could also raise concerns for India, which had tactically supported the MCC compact and was intricately involved in its formulation to counter China’s escalating influence in the region.
With Trump’s aid freeze and Nepal’s renewed engagement with China under the BRI, Nepal’s power trade and electricity networks stand at a crossroads. While a cross-border electricity connection with China presents an opportunity to diversify its power trade and strengthen its bargaining power, it also reflects Nepal’s broader intent to assert geopolitical autonomy beyond India’s influence. That said, the China-Nepal transmission line project is still under consideration – and concerns persist regarding debt sustainability, transparency, and China’s long-term strategic intentions under the BRI. It is vital for Nepal to carefully assess the implementation and the financing modalities of the project to avoid potential financial entrapment.
Given the country seeks to leverage its hydroelectric potential for economic growth, Nepal’s power trade strategy will continue to be shaped by the competing interests of the United States, China, and India. Whether Nepal can successfully navigate these geopolitical complexities to maximize its economic and strategic advantages, or whether external pressures will dictate its energy future, remains an open question. These evolving power dynamics suggest that Nepal’s role as a powerhouse in South Asia will be determined not just by its resource endowments but also by its ability to balance the aspirations of the powerful regional and global actors while safeguarding its own strategic interests.