Trans-Boundary Cooperation in South Asia Power Sector

 
Trans-Boundary Cooperation in the
South Asia Power Sector:
Opportunities and Challenges
 
Mike Toman
Manager, Environment and Energy Team
Development Research Group, World Bank
 
CUTS Regional Event, Kolkata, 7 August 2014
 
Disclaimer
 
  
The results are preliminary and presented for the
purpose of discussion only.
 
2
 
Why the interest in regional power
integration?
 
Short-term gains from ability of trade to
relieve shortages
Long-term gains from opportunity to utilize
lower-cost generation at regional level
Potential environmental gains – to the extent
trade facilitates greater utilization of cleaner
generation technologies
 
3
 
What is our approach?
 
Quantitative analysis with long-term
electricity planning model to simulate
impacts, potential gains of cooperation
Full regional cooperation
Partial cooperation (Bangladesh, Bhutan, India,
Nepal)
Qualitative analysis of institutional and policy
issues
 
4
 
Summary of baseline scenario
 
Regionally capacity grows by a factor of 4
Baseline capacity growth is very coal-intensive
in Bangladesh, India, Pakistan
Least-cost technology
CO2 emissions also grow (4X regionally)
 
5
 
Regional cooperation/trade
 
Major increases in hydro (~30GW with full
regional cooperation), displacing significant
additions to coal capacity
But still a lot of coal – drop in CO2 emissions
relative to baseline is ~3%
Significant additional investments in
interconnection
Allows more short-term capacity sharing as well as
transmission capacity for major new hydro
capacity
 
6
 
Gains from cooperation/trade
 
Direct gains from trade are moderate in present
value terms – ~US$20B over 2015-2040,
discounted at 8% (real rate – fairly high)
About 80% of this still is achieved with
cooperation just among Bangladesh, Bhutan,
India, Nepal
Higher coal prices => significant additions to
hydro capacity and trade, higher power costs
Lower gas prices => some increase in domestic
capacity and reduction in trade (in relative terms)
 
7
 
Why are the gains seemingly so modest?
 
Trade is an incremental effect to the huge
growth of regional capacity going forward
All the increased hydro export to India in the
analysis is ~5% of its total electricity use in 2040
Lying behind these discounted net benefit
figures are some large positive impacts
~US$11B in additional generation and
transmission CAPEX for trade facilitates ~US$28B
in OPEX savings (undiscounted figures)
 
8
 
Why are the gains seemingly so modest?
 
The baseline definition also matters
We assume that current inefficiencies in domestic
power sectors cannot be sustained; in particular,
even without trade, persistent shortages are
attenuated
In work still to be done we are going to attempt to
quantify the benefit of improved domestic sector
performance relative to current BAU
 
9
 
So what about all this market
efficiency business?
 
Increases economic value in its own right
But in addition, why interconnect very
inefficient domestic power systems/markets?
Longer-term cooperation and trade benefits
would be even lower because regulatory
distortions reduce value of investment, create
risks that raise financing costs
Conversely, improved domestic sector
performance is a key part of reaping  full gains
from regional cooperation and trade
 
10
 
What are possibilities for achieving
regional power cooperation and trade
agreement in SAR?
 
Experiences from many other regional
arrangements with varying degrees of
prescriptiveness are generally positive
Even with country size asymmetries
Even with disputes/conflicts among countries
Can proceed in steps/gradually increasing
number of participants and requirements
But broader-scale, more formally organized
coordination can yield considerably more benefit
It takes time and serious dialogue
 
11
 
There are synergies between regional
cooperation agreements and domestic
policy reforms
 
Broader success in regional agreements
depends on significant power market
liberalization, especially in pricing and access
Want prices to reflect opportunity costs, provide
effective signals for regional investments
Prospects of increased gains from regional
coordination may help strengthen case for
admittedly difficult domestic reforms
 
12
 
How are gains from regional power
cooperation and trade shared?
 
No simple or unique answer
If markets have been liberalized with competition
among buyers and sellers (“B2B”), price =
marginal cost will determine a sharing of gains
If decision making is concentrated in relatively
few hands such that market power can be
exercised, importers are likely to capture more of
the gains from trade
They have more options than exporters, especially
hydro
 
13
 
To summarize…
 
Increased regional power cooperation and trade
can provide a valuable addition to broader efforts
to improve sector performance
Experience suggests agreement on (sub)regional
power cooperation and trade is institutionally
feasible for SAR, and can build incrementally
The efficiency of domestic power
systems/markets will have substantial influence
on size and distribution of benefits from
cooperation and trade – as well as being
important in its own right
 
14
 
A Regional Power 
Market
 Master Plan?
 
Necessary technical requirements for high
level of inter-operability
Institutional structures for nondiscriminatory
cross-border transmission access, loss sharing
Including provision for equitable and transparent
cross-border transmission siting and land access
Also provision for efficient, non-predatory
transmission pricing
Further developed regional transmission plan
Priority capacity expansions for increasing trade
 
15
 
A Regional Power 
Market
 Master Plan?
 
Commercial provisions for contracting, dispute
resolution
Addition of electricity to the South Asian Free
Trade Area agreement
Plans for developing more elaborate regional
power trading mechanisms
Can build on positive experience with power
trading in India, e.g. IEX
Utilize regional dialogue among SAARC energy
regulators
 
16
 
Thank you for your kind attention; I look
forward to your questions and comments
 
17
 
mtoman@worldbank.org
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This presentation, given at a regional event in Kolkata, discusses the opportunities and challenges of trans-boundary cooperation in the South Asia power sector. It explores the benefits of regional power integration, the analytical approach taken, baseline scenarios, potential impacts of regional cooperation on capacity growth and CO2 emissions, and the gains from cooperation and trade. The focus is on long-term gains, including the ability to utilize lower-cost generation and cleaner technologies through cooperation among countries like Bangladesh, Bhutan, India, and Nepal.


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  1. Trans-Boundary Cooperation in the South Asia Power Sector: Opportunities and Challenges Mike Toman Manager, Environment and Energy Team Development Research Group, World Bank CUTS Regional Event, Kolkata, 7 August 2014

  2. Disclaimer The results are preliminary and presented for the purpose of discussion only. 2

  3. Why the interest in regional power integration? Short-term gains from ability of trade to relieve shortages Long-term gains from opportunity to utilize lower-cost generation at regional level Potential environmental gains to the extent trade facilitates greater utilization of cleaner generation technologies 3

  4. What is our approach? Quantitative analysis with long-term electricity planning model to simulate impacts, potential gains of cooperation Full regional cooperation Partial cooperation (Bangladesh, Bhutan, India, Nepal) Qualitative analysis of institutional and policy issues 4

  5. Summary of baseline scenario Regionally capacity grows by a factor of 4 Baseline capacity growth is very coal-intensive in Bangladesh, India, Pakistan Least-cost technology CO2 emissions also grow (4X regionally) 5

  6. Regional cooperation/trade Major increases in hydro (~30GW with full regional cooperation), displacing significant additions to coal capacity But still a lot of coal drop in CO2 emissions relative to baseline is ~3% Significant additional investments in interconnection Allows more short-term capacity sharing as well as transmission capacity for major new hydro capacity 6

  7. Gains from cooperation/trade Direct gains from trade are moderate in present value terms ~US$20B over 2015-2040, discounted at 8% (real rate fairly high) About 80% of this still is achieved with cooperation just among Bangladesh, Bhutan, India, Nepal Higher coal prices => significant additions to hydro capacity and trade, higher power costs Lower gas prices => some increase in domestic capacity and reduction in trade (in relative terms) 7

  8. Why are the gains seemingly so modest? Trade is an incremental effect to the huge growth of regional capacity going forward All the increased hydro export to India in the analysis is ~5% of its total electricity use in 2040 Lying behind these discounted net benefit figures are some large positive impacts ~US$11B in additional generation and transmission CAPEX for trade facilitates ~US$28B in OPEX savings (undiscounted figures) 8

  9. Why are the gains seemingly so modest? The baseline definition also matters We assume that current inefficiencies in domestic power sectors cannot be sustained; in particular, even without trade, persistent shortages are attenuated In work still to be done we are going to attempt to quantify the benefit of improved domestic sector performance relative to current BAU 9

  10. So what about all this market efficiency business? Increases economic value in its own right But in addition, why interconnect very inefficient domestic power systems/markets? Longer-term cooperation and trade benefits would be even lower because regulatory distortions reduce value of investment, create risks that raise financing costs Conversely, improved domestic sector performance is a key part of reaping full gains from regional cooperation and trade 10

  11. What are possibilities for achieving regional power cooperation and trade agreement in SAR? Experiences from many other regional arrangements with varying degrees of prescriptiveness are generally positive Even with country size asymmetries Even with disputes/conflicts among countries Can proceed in steps/gradually increasing number of participants and requirements But broader-scale, more formally organized coordination can yield considerably more benefit It takes time and serious dialogue 11

  12. There are synergies between regional cooperation agreements and domestic policy reforms Broader success in regional agreements depends on significant power market liberalization, especially in pricing and access Want prices to reflect opportunity costs, provide effective signals for regional investments Prospects of increased gains from regional coordination may help strengthen case for admittedly difficult domestic reforms 12

  13. How are gains from regional power cooperation and trade shared? No simple or unique answer If markets have been liberalized with competition among buyers and sellers ( B2B ), price = marginal cost will determine a sharing of gains If decision making is concentrated in relatively few hands such that market power can be exercised, importers are likely to capture more of the gains from trade They have more options than exporters, especially hydro 13

  14. To summarize Increased regional power cooperation and trade can provide a valuable addition to broader efforts to improve sector performance Experience suggests agreement on (sub)regional power cooperation and trade is institutionally feasible for SAR, and can build incrementally The efficiency of domestic power systems/markets will have substantial influence on size and distribution of benefits from cooperation and trade as well as being important in its own right 14

  15. A Regional Power Market Master Plan? Necessary technical requirements for high level of inter-operability Institutional structures for nondiscriminatory cross-border transmission access, loss sharing Including provision for equitable and transparent cross-border transmission siting and land access Also provision for efficient, non-predatory transmission pricing Further developed regional transmission plan Priority capacity expansions for increasing trade 15

  16. A Regional Power Market Master Plan? Commercial provisions for contracting, dispute resolution Addition of electricity to the South Asian Free Trade Area agreement Plans for developing more elaborate regional power trading mechanisms Can build on positive experience with power trading in India, e.g. IEX Utilize regional dialogue among SAARC energy regulators 16

  17. Thank you for your kind attention; I look forward to your questions and comments mtoman@worldbank.org 17

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