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The potential gain from regional electricity trade in South Asia

Michael Toman's picture

Countries in the South Asia Region (SAR) face a number of operational and economic challenges as they seek to keep up with rapidly growing electricity demands. Our analysis finds that increased regional electricity trade facilitated by expanded cross-border transmission interconnections among SAR countries can contribute significantly to alleviating these challenges.  Cross-border electricity trade could save as much as US$94 billion (in present value terms) in the region during the 2015-2040 period. It would reduce the regional power sector CO2 emissions during the period by 8% even without pro-active measures to reduce CO2 or harmful local pollutants. Moreover, significantly increasing cross-border interconnection and trade will necessitate taking steps that inevitably will reduce substantial existing inefficiencies in national power systems in the region, as well.

There are two basic reasons for the existence of large potential gains from increased regional power sector cooperation and trade.  Significant seasonal complementarities exist in power demands across the region, meaning countries with lower demands relative to capacity could cost-effectively sell power to countries with higher demands.  In addition, there are large hydroelectric resources in the region that can only be developed profitably if there is access to a regional market. 

The analysis (described in Timilsina et al 2015) compares a projection of the status quo, with very little cross-border trade, to a hypothetical scenario with no technical, institutional, or political barriers to regional electricity interconnection and trade.  Obviously this is a quite optimistic assumption, but it gives us an idea of what the potential gains might be.  With access to a regional market for hydropower, a significant amount of new hydro capacity is built instead of new coal plants.  Substantial new cross-border transmission interconnections would be needed to effectuate expanded electricity trade.  Nevertheless, the present value of fuel and other operating cost savings from expanded trade exceeds the present value of the net increase in generation and interconnection investment costs to increase interconnection and trade by more than five to one. These supply-side cost savings do not take into account the effects of lower electricity costs and more stable supplies for overall economic growth in SAR, or the benefits of a larger and more integrated grid for increasing in use of solar and wind power.  In addition, we have not included the potentially substantial economic and health benefits of reduced local air pollution. 

The region is expanding interconnections and increasing cross-border power flows, though progress is slow. Substantial expansion of regional power sector interconnection and trade to realize the potential gains mentioned above will require development of new or strengthened regional institutions for management, coordination, and dispute resolution.  Moreover, increased dependence on power imports or exports inevitably leads to concern about supply security. The growth of mutually beneficial trade will depend on solid assurances that power supply and purchase agreements would be honored.

An assessment of experiences with several other regional electricity cooperation initiatives in developing and developed countries provides a number of observations that are relevant to electricity cooperation in SAR, as discussed in Oseni and Pollitt (2014) and Singh et al (2015).  These include:

  • Cross-border power sector cooperation and trade can begin with a few specific projects and gradually expand and deepen over time.  They do not require equal participation by all countries, nor the establishment of a single cross-national regulatory body. It is sufficient, at least until a regional power trading system is more highly developed, to increase coordination among national regulatory mechanisms for expanding cross-border transmission capacity and ensuring that contracts for cross-border trade can be effectively implemented.
  • Nonetheless, while regional cooperation based on a collection of bilateral agreements can provide significant benefits, the development of a more formal regional power trading system for wholesale power supplies greatly facilitates expansion of trade and investment. The more a regional trading system can introduce effective competition in wholesale power supplies, the more efficient the system will be.  In this context, the role of well-functioning domestic power markets also is key. 
  • Decisions by domestic power sector regulators affect pricing, cost recovery, and market entry, and thus also affect incentives to invest, especially for expanding private sector participation in power generation. Expansion of regional interconnection and trade thus provides added impetus for regulatory and institutional reforms that improve domestic power sector performance.
The economics of specific cross-border projects depend on availability and comparative costs of generation capacities, and the possibilities for joint benefits from expanded cross-border interconnection. Individual projects can be achieved with relatively simple rules for governing and operating the interconnections, and mechanisms for account settlement with respect to power transactions. As bilateral trade increases, expanded participation by third parties also can grow. One such example is efforts to expand power trade between Nepal and Bangladesh, with India as a transit country. Beyond that, market-based power trade could grow through the development of region-wide power exchanges.
 

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