SAARC countries cooperating on energy could yield economic benefits for all nations

Updated: February 13, 2019 4:35 AM

Geopolitical roadblocks and disagreements between partner countries have stifled the progress of the SAARC framework agreement for energy cooperation (electricity), signed in 2014.

Geopolitical roadblocks and disagreements between partner countries have stifled the progress of the SAARC framework agreement for energy cooperation (electricity), signed in 2014. (reuters)

by Kannan Kumar & Sumedha Shukla

Today, households across south Asia are increasingly gaining access to energy in the form of electricity connections. In this backdrop, the governments of these nations are facing an uphill task of ensuring long-term energy security in electricity (the uninterrupted availability of electricity at an affordable price) to its citizens. The challenge manifests itself in four ways.

Firstly, even though access to electricity has improved in the south Asian region, the quality of supply remains poor with long hours of power outage. Secondly, the distribution of electricity is controlled mainly by public sector units, leading to heavy financial losses for the exchequer. Thirdly, subsidisation of electricity in the form of cross subventions for different consumer groups has led to the creation of multiple prices of electricity, in turn leading to inefficiencies. Lastly, the electricity markets of all SAARC nations are undergoing structural transitions, caused by both exogenous (climate change) and endogenous (political economic) factors in their respective countries.

Despite the improvement in access, the usage of electricity (per capita) in south Asia is amongst the lowest in the world. While the world per capita electricity consumption stands at 3105 kWh/year, the SAARC region’s electricity consumption is a mere 726 kWh/year. According to a NITI Aayog report in 2017, even with huge investments going towards the electricity sector, India would have to quadruple its electricity generation in the next twenty years to meet its projected electricity demand of 4712 kWh/year in 2047. One way to address this spike in electricity demand is to engage in cross-border electricity cooperation within the SAARC region. Even though the feasibility of this approach is crucially dependent on political will and consensus, the potential benefits of the same make it worthy of a trial.

The south Asian region is blessed with abundant renewables resources, specifically those which can be used for energy generation. The major challenge with renewable energy generation is that of economic viability which hinges on the scalability aspect. Currently, while the entire electricity generation in the south Asian region is about 400 GW, unused hydro potential accounts for nearly 350 GW. Similarly, the potential for wind and solar energy generation is also considerably high across the region. But, unless the demand for energy is increased or integrated across nations within the region, the unused potential will remain high, making the scalability of renewable energy generation a massive hurdle.

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The technological advancements in renewable energy generation have made electricity generation economically cheaper than conventional sources of electricity. Last year, in India, auctions conducted for procuring electricity through solar and wind energy saw prices falling below `2.4 per unit even while the average cost of producing electricity through coal was around `3.2 per unit. A working paper by the Asian Development Bank (ADB) has estimated that the entire SAARC region could potentially gain nearly $100 billion (gross profits) for a period of 25 years (2015-2040) through enhanced electricity trade.

A major growth dampener for the electricity sector is the weakened institutional setup in the SAARC region. For example, in India, both the Central and state governments have the power to regulate this economically crucial sector. Unfortunately, due to various political factors, state-level electricity reforms have failed to leave an impact on the sector. Increased cooperation amongst SAARC nations would allow for the building of macro institutions housing a variety of stakeholders to bring in more efficient market-based solutions by pooling electricity sources into a common market. The market mechanism could potentially provide clearer price signals for electricity, allowing for effective spot markets and increased private sector participation in distribution.

The looming concern of climate change has renewed the vigour regarding control of greenhouse gas emissions in the international arena. Increasing sea levels, because of global warming and changing weather patterns, has made the entire south Asian region’s agricultural economy and coastal areas highly susceptible. Despite these growing concerns, the electricity sector in most of the SAARC countries are highly dependent on conventional non-renewable sources of generation such as coal, gas, and oil. Though there has been a shift in focus towards renewable energy, except for Bhutan, the energy mix of most SAARC nations is predominantly composed of conventional energy sources. The adverse environmental consequences, coupled with the fiscal strain of this import-heavy choice, make it an unsustainable option. On the other hand, according to a study published in the Journal of Energy Policy, replacing coal as a source of electricity with renewables could lead to a 45% reduction of greenhouse gas emissions.

Despite these benefits of cross-border electricity cooperation, the countries in the SAARC region have been unable to take forward the initiative that started in 2000 to its formal ending. Fourteen years of negotiations finally led to the signing of the SAARC framework agreement for energy cooperation (electricity) in 2014. However, geopolitical roadblocks and disagreements between partner countries have stifled the progress of this initiative. The need of the hour is to start a common policy dialogue for developing institutional mechanisms for electricity cooperation in the south Asian region. The establishment of institutions for cross-border electricity trade could help bring about environmental and economic benefits for all nations.

(Kumar is an associate fellow at PIF and Shukla is a research associate in the economics division at IIIT-D)

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