The gain from regional electricity trade in South Asia

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Nations in the South Asia Region (SAR) face a number of operational and financial challenges as they seek to keep up with rapidly growing electricity demands. Our analysis finds that improved regional electricity trade facilitated by expanded cross-border transmission interconnections amongst 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 strength sector CO2 emissions during the time period by 8% even without pro-active measures to reduce CO2 or harmful local pollutants. Moreover, significantly maximizing cross-border interconnection and trade can necessitate taking steps that inevitably will reduce substantial existing issues in national power systems in the area, 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 nations with lower demands relative to capability could cost-effectively sell power to countries with higher demands. In addition , you can find large hydroelectric resources in the region that may only be developed profitably if there is access to a regional market.

The analysis (described in Timilsina et al 2015) analyzes a projection of the status quo, with very little cross-border trade, to a theoretical scenario with no technical, institutional, or political barriers to regional electricity interconnection and trade. Obviously it is a quite optimistic assumption, but it gives us an idea of what the potential gains might be. With access to the 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 industry. Nevertheless, the present value of fuel along with other operating cost savings from expanded industry exceeds the present value of the net increase in generation and interconnection investment expenses to increase interconnection and trade by more than five to one. These supply-side cost savings do not take into account the effects of reduce electricity costs and more stable supplies for overall economic growth in SAR, or the benefits of a larger and more included grid for increasing in use associated with solar and wind power. Additionally , 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 growth of regional power sector interconnection and trade to realize the potential benefits mentioned above will require development of new or strengthened regional institutions for administration, 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 strong assurances that power supply and purchase contracts would be honored.

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

  • Cross-border power sector cooperation and business can begin with a few specific tasks and gradually expand and deepen over time. They do not require equal involvement by all countries, nor the particular 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 to get expanding cross-border transmission capacity plus ensuring that contracts for cross-border business can be effectively implemented.
  • Nonetheless, while regional cooperation depending on a collection of bilateral agreements can provide substantial benefits, the development of a more formal regional power trading system for wholesale power supplies greatly facilitates development of trade and investment. The greater a regional trading system may introduce effective competition in low cost power supplies, the more efficient the device will be. In this context, the function of well-functioning domestic power marketplaces also is key.
  • Choices by domestic power sector regulators affect pricing, cost recovery, and market entry, and thus also affect incentives to invest, especially for expanding personal sector participation in power generation. Expansion of regional interconnection plus trade thus provides added inspiration for regulatory and institutional reforms that improve domestic power field performance.

The economics of specific cross-border projects rely on availability and comparative costs associated with generation capacities, and the possibilities meant for joint benefits from expanded cross-border interconnection. Individual projects can be achieved with relatively simple rules for governing and working the interconnections, and mechanisms designed for account settlement with respect to power dealings. 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 develop through the development of region-wide power trades.

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