The cities of north India are now at their summer peak demand for power. Nepal's monsoon-gorged rivers are at peak supply. Common sense would see a possibility of trade there. Yet, Nepal-India power exchange agreements remain mired in mis-management, bureaucracy, and geo-politics.

When all three turbines of Nepal's largest and newest hydropower plan at Kali Gandaki-A (see picture) went on stream last week, they added 144 megawatts, taking Nepal's total installed capacity to 585 megawatts. This gave the national grid an unprecedented summer surplus of 140 megawatts.

But here is the paradox: although the Nepal Electricity Authority (NEA) has surplus power some of this has to be bought at such a high tariff that one third of its revenue is used up paying just two private power producers for flood energy: Bhote Kosi and Khimti.

Some of this loss could be recouped by expanding the domestic market and exporting to India. But there are many hurdles like transmission bottlenecks, the lack of an agreement with India's inefficient and cash-starved state electricity boards, and New Delhi's unspoken desire to use hydropower as part of wider bilateral bargaining with Kathmandu.

We have to trade the surplus that has started to accrue in the system, admits NEA chief, Janak Lal Karmacharya. That would be mutually beneficial to India and Nepal, and even at seven cents per unit, buying Nepal's surplus flood energy would be cheaper for India than the long-term cost of thermal generation. Selling power to India is Nepal's best chance of reducing its whopping Rs 19.2 billion trade deficit with India.

If there is political will, there would be a way. We don't have to wait for compatible grids, but sell to contiguous tarai towns across the border where some power-exchange is already taking place.

Clues about why Nepal and India are stuck lie in Nepal's only project designed specifically for export to India-the 750MW West Seti dam, a Nepali joint venture with Australia's Snowy Mountain Engineering Corporation (SMEC). The $1 billion project has been stuck since 1997 because a power purchase agreement with India got caught up in domestic Nepali politics, and has been stalled in India's Ministry of External Affairs.

Analysts told us New Delhi seems to want hydropower to be part of wider bilateral give-and-take with Nepal that would include border and trade disputes, and security issues. Meanwhile, Nepal loses potential export revenue and royalties, Indian consumers suffer power outs, and the villagers of Uttar Pradesh do not benefit from West Seti's irrigation and flood mitigation effect on the Karnali River.

It is clear where the main obstacle to Indo-Nepal hydro trade lies: in the lack of political trust. Says hydropower expert Ratna Sansar Shrestha: "India's security concerns seem to override all economic arguments. How can you talk business without that changing?"

The Australians are not waiting for the India-Nepal power trade agreement to go into force, and appear to be giving the project one last chance. SMEC and India's PTC have even discussed tariff and are haggling in the 5 cents per unit range. But both know that in the end it will depend on a nod from South Block.

Nepali experts see an anomaly if West Seti sells cheaper power to India than the price at which NEA has to buy it from private generators here. "Why should we even think of selling cheap when Nepalis are paying one of the highest electricity tariffs in the world?" asks Dipak Gyawali of the Nepal Water Conservation Foundation. "It is cheaper for NEA to buy west Seti Power which is high quality peaking energy when it is already paying six cents for low quality flood energy."

But officialdom has not lost hope. At the National Planning Commission Minendra Rijal says it is an issue of demand and supply and could be easily resolved. "Logically they stand to win by buying from us."

But what if economic logic is not the only factor at work here? Much of that hope hinges on recent private sector initiatives which may help overcome political and bureaucratic hurdles.

During King Gyanendra's India visit in June, the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) agreed with its Indian counterpart, FICCI, to explore joint hydro-ventures in Nepal. "We're trying to see if the Indian private sector can help untangle the knots," says FNCCI's Rajendra Khetan. And a large Indian business house is said to be shopping for a project in west Nepal.