The business of import/export of electricity across borders is not new, but traditionally had been a bilateral affair and considered as a case for development aid or an extension of foreign policy.
By Kameswara Rao
Power ministers of South Asian nations had a reason to cheer this new year. They got a step closer to founding the subcontinent’s regional power market when India repealed old guidelines for cross-border power trade, in December. The framework replacing it is progressive and can unlock an entire new industry and trade arrangements.
The business of import/export of electricity across borders is not new, but traditionally had been a bilateral affair and considered as a case for development aid or an extension of foreign policy. From the other side of the border, India was seen as an insatiable market to sell into. These attitudes started to change as growth picked up across South Asia. New projects could not be built fast enough to meet the rising demand and, having overcome its power shortages, India found itself a net exporter of electricity for the first time.
The new framework for signing power contracts across borders is liberalised, where the public sector no longer has preferential position and commercial decisions to buy or sell are left to individual market participants. The policy is technology-agnostic and export projects can be based on commercial coal or renewable energy, and can be set up as standalone or integrated facilities (i.e. the generation plant with a transmission line to the border). Other South Asian nations can gain from a competitive Indian power market to save on operating costs and avoid having to sink scarce capital into long-gestation generation projects.
Energy cost is an important issue for developing countries. Imports of coal and petroleum products pose a serious threat to BoP and competitiveness. It is not easy to regulate the surge in demand for electricity, and the megatrends of urbanisation, mobility, digitisation are energy-intensive. So, governments focus on what can be managed—finding the most affordable ways to supply it. In the past, the considerations of geopolitical risk and energy security swayed policymakers’ decisions to set up power plants on own territory. It was not a smart move to give an unfriendly neighbour the means to switch off lights. This has grown less relevant with sufficient home-grown capacity and with the subcontinent getting more globalised with the consequent need of ready and affordable power to run their factories and supply chain.
Private participation could be the surprise differentiator. State-owned companies dominate power flows over transnational grids in the developing world. In our case, however, the restrictions on using linkage coal and higher uncommitted capacity in the private sector could see them embrace cross-border trade more readily. So, we are more likely to transcend geopolitics and focus on getting the core technical and regulatory protocols right for power trade.
It can be a game changer. Cross-border networks are hard to establish (constructing new lines, agreeing on dispatch procedures, synchronising grid frequency), but they are long lasting and promote regional cooperation. The benefits from resource sharing are plenty. As Bangladesh’s power minister noted, they run a surplus in the winters when Nepal goes through a lean season, giving them an opportunity to export power. This complementarity of demand curves means both countries get to use their generating assets more efficiently. Such opportunities exist within a regular day, too. The peak demand of an urbanising India is growing faster than average demand, and is best met by imports from Bhutanese hydro plants, where the system peaks hours earlier.
The diversification of energy sources offers a solution to certain pressing challenges. The rapid expansion of renewable energy and household electrification, which heightened the risks of curtailment and decline in quality of supply, can be mitigated by integrating Bhutan and Nepal hydro plants with our grid. This is more environment friendly than our current ancillary market dominated by coal-fired power plants. IPPs are keen, too, to mitigate regulatory and commercial risks by selling to diversified markets.
Developed markets (Nordic, the UK, Canada-US) trade in large volumes of energy to take advantage of lower costs of production and mutual diversification to improve efficiency of their energy sectors. The new regulations for cross-border power trade offer hope that South Asia can do this, too. The future step, to plug into the ASEAN regional grid allowing power flows to the growing markets of Myanmar, Thailand and Vietnam, will, then, be an easier one.
The author is leader, Energy, Utilities and Mining, PwC India