Power Trade in South Asia: Developing A Framework Based on Case Studies of Power Trading Arrangements in Europe and Asia

Abstract

South Asia is the fastest growing region in the world and is experiencing increasing demand for energy. As a result, countries are witnessing an excessive reliance on fuel imports, making themselves vulnerable to external price volatility and compromising on energy security. Power trade in South Asia can meet the challenge of increasing energy demand owing to complementarities in resource endowments and peak demand. Power trade in South Asia has increased over the years but is below potential. However, there are various challenges due to lack of institutional structures and frameworks for developing regional power trade models. The examples of power integration models in Europe, that is, the Nordic power market, and in Southeast Asia, that is, power trade in the Greater Mekong Subregion (GMS), can provide useful lessons and international best practices for regional power trade to be replicated in the South Asian context. Based on this, the objective of this article is to evaluate the existing power trading mechanisms in South Asia, highlight the challenges to regional energy cooperation, outline the necessary instruments and catalysts to promote regional power trade in South Asia based on the case study of successful power trading arrangements, including the Nordic power market in Europe and the Greater Mekong Subregion (GMS) in Southeast Asia, draw on their experiences to identify key mechanisms and develop a template for greater regional cooperation in electricity in South Asia.

Keywords

Power trade in South Asia Nordic power market GMS power trade regional economic integration South Asia

Introduction

South Asia is experiencing high GDP growth rates and has emerged as the fastest growing region in the world in 2018. With a population of 1.814 billion, South Asia’s combined GDP amounted to USD 3.458 trillion or 4% of the world’s GDP in 2018 (The World Bank [WB] n.d.). The region experienced low economic growth from the 1950s to the late 1980s due to inward-looking growth strategies. The economic reforms of the 1990s had a positive impact, increasing its GDP growth rates and integration with the world economy. However, the reforms did not significantly enhance economic integration in the region. South Asia still remains the least integrated region in the world owing to political tensions, mistrust among countries and the political economy of the region. The intra-regional trade in South Asia is only 5% of its total trade, as compared to the intra-regional trade in Southeast Asia and Europe—25% and 60% of their total trade, respectively (WB, 2016). Similar to the intra-regional trade, the regional trade in energy is also limited in South Asia (WB, 2008).

As there is a direct relationship between economic growth and energy demand, where the former is associated with upward social mobility and standards of living, ultimately leading to increased energy demand, South Asia is witnessing an increase in energy demand to sustain its growing economies (Rahman et al., 2012). Alongside, since 16% of the population in South Asia is below the poverty line, there is a need for socio-economic development (World Bank Data, n.d.). Together, both the economic growth and need for welfare are contributing to the rising energy demand (Bergasse et al., 2013). To address this, South Asian countries are witnessing excessive reliance on fuel imports, particularly crude oil and petroleum products from the Middle East (PTI, 2019), which has made them vulnerable to external price volatility. Thus, there exists a mismatch between the demand and supply of energy in the region. Power trade in South Asia is one of the possible solutions to address this issue and alleviate concerns regarding sustainability of the economic growth and development. Regional power trade in South Asia could reduce the dependency on imported fossil fuels, and ‘higher share of electricity generated from hydro resources’ would address the risk of price volatility in the global price of fossil fuels (IRADe, 2013). In addition, the regional trade in electricity can bring benefits in terms of increasing efficiency and reducing costs of production (WB, 2008).

Power trade in South Asia began with the India–Nepal power cooperation in the 1950s and later extended to power trade between India and Bhutan in the 1960s. India’s bilateral power trade agreements with Nepal and Bhutan were based on the financial and technical assistance from the Indian side to meet their deficit in electricity. Recently, power trade between India and Bangladesh commenced—in 2013. The regional geopolitics has hindered the proposed electricity cooperation between India and Pakistan. India and Sri Lanka are also working on an undersea transmission line for electricity trade (Ramesh, 2017).

Though power trade in South Asia has increased over the years, it continues to be below its potential. The factors that inhibit power trade in South Asia can be categorised as regional factors, including political tensions and mistrust among South Asian countries, the inability of the South Asian association for Regional Cooperation (SAARC) to economically integrate the region, lack of cross-border transmission links and transmission infrastructure and the lack of regional level institutions, and domestic factors, including economic policies and lack of domestic power-sector reforms of countries.

Overview of Regionalism in South Asia

Theoretical Understanding

This section outlines the three dominant theoretical strands in international relations to study regionalism, namely neorealism, neofunctionalism and neoliberal institutionalism.

The neorealist approach is state-centric and is based on the assumptions of anarchy in the international system and states’ quest to maximise their national interest. Regionalism is viewed as a response of nation states within a region to a hegemon that may be either external or within the region, and it advocates pooling of resources and collective action to moderate its exercise of power and maintain their security. Accordingly, the economics of welfare is not the driving force of regional cooperation, but it is the ‘relationship that exists between economic wealth and political power, and from states’ ‘inevitable’ concern with relative gains’ (Hurrell, 1995). It explains regionalism as the ‘politics of alliance formation’ and emphasises the significance of a geopolitical framework for regional integration (Hurrell, 1995). Since increased trade through regional cooperation can affect the power relations among member states, the ‘states are more likely to expand trade with political-military allies than with actual or potential adversaries’ (Desai, 2010). The theory has, however, been criticised for overemphasis on the power relations as a ‘unified, undifferentiated entity that alone defines what constitutes national interests and pursues these interests through its international relations’ (Desai, 2010).

The neofunctionalist approach, on the other hand, argues that increasing interdependence among states would initiate a process of cooperation which would eventually lead to political integration (Dedeoğlu & Bilener, 2017; Hurrell, 1995). Further, such integration would be self-sufficient through the ‘spillover effect’, where cooperation in one sector would inevitably lead to cooperation in other sectors. Hurrell (1995) describes two types of spillovers, each of which would deepen integration. First is the ‘functional spillover’, where initial cooperation would create new problems that could only be solved by further cooperation. Second is the ‘political spillover’, where the role of supranational institutions is emphasised in initiating a ‘self-reinforcing process of institution building’, eventually leading to the shifting of loyalties of nations towards regional institutions as opposed to the earlier national loyalties. The theory is, however, criticised for assuming that the spillover effect will automatically lead to the process of integration and neglecting the role of states in taking voluntary decisions to continue with increased cooperation (Dolan, 1975; Hurrell, 1995; Tripathi, 2013).

The neoliberal-institutionalism theory views regionalism as a solution to address the problems arising out of the complex interdependence of nation states. Institutions, from this perspective, are considered to be ‘purposively generated solutions to different kinds of collective action problems’ (Hurrell, 1995). It should be emphasised here that neoliberal institutionalism has retained the neorealist assumption of states being the primary actors of regionalism but argues that institutions of regional cooperation provide benefits through facilitating communication, information and transparency and reducing mutual threat perception (Hurrell, 1995; Schiff & Winters, 2002). However, the theory is criticised for not considering the role of politics in the decision-making process of nation states.

The Case of South Asia

South Asia is one of the least integrated regions in the world due to the bilateral conflicts among countries and regional dynamics (Chaturvedi et al., 2015). The unresolved border issues, water sharing arrangements, concerns around terrorism and ethnic and religious strife are some instances of poor and hostile political relations that are a cause of mistrust, suspicion and antagonism among countries (Kumar & Sharma, 2015). Other than the bilateral relations, the regional dynamics of South Asia are such that India’s centrality in terms of population, geographical area, natural resources, economy and military capability is larger than that of its neighbours, thereby creating a threat perception for them (Bhasin, 2008). From the perspective of the neorealists, this limits cooperation to the extent of such agreements benefitting their national interests and containing the regional hegemon. Further, the quest for higher relative gains among member states is also likely to limit cooperation unless measures to compensate the disadvantages are put in place (Pande, 2014). In this case, the trade deficit of the smaller countries with India has affected the implementation of economically viable projects, most evident in the case of the Myanmar–Bangladesh–India (MBI) pipeline. The MBI project was cancelled in 2005 when Bangladesh put three pre-conditions for the implementation of the project, namely a customs land corridor via India to Bhutan and Nepal, a customs from hydroelectricity transmission lines from Nepal and Bhutan through India and India removing existing trade barriers and taking the onus of correcting a trade of US $2.5 billion between India and Bangladesh (Thandi, 2013). India did not accept any of the three conditions, mainly because of its unwillingness to provide free transnational movement through the sensitive Siliguri Corridor. The cancellation of the MBI project displays the regional dynamics at play, where security concerns, political mistrust and the quest for higher relative gains have disrupted cooperation, and economic development through cooperation has become a secondary objective. Given that, in South Asia, political mistrust impedes cooperation, it is pertinent to develop legal institutional arrangements that lend credibility and build mutual trust for initiatives for regional cooperation (Schiff & Winters, 2002; Thangasamy, 2019). Interestingly, the establishment of SAARC and its secretariat has not been able to resist the realist perception in the region, and regional cooperation continues to be limited in South Asia. Looking at the regional cooperation in South Asia from a neofunctionalist perspective, it is possible to identify the power sector as one of the initial issue-specific sector for cooperation. However, it is also important to acknowledge that such cooperation will not be sustained automatically but would need an active catalyst to deepen it in South Asia (Tripathi, 2013), as is explored in this article.

Research Objective, Hypothesis and Methodology

The objective of this article is to evaluate the existing power trading arrangements in South Asia, identify trends and patterns in the electricity sector, highlight the challenges to regional energy cooperation and outline the necessary instruments and catalysts to promote regional power trade in South Asia. The hypothesis here is that in South Asia, the economic rationale for power trade is not a sufficient condition for regional cooperation in electricity and needs to be supported by corresponding institutions and policy frameworks, at both the regional level and the national level.

For the same, the article examines the economic rationale and analyses the existing status of power trade and the corresponding institutional and framework agreements in South Asia. The geographical scope of the study extends to India, Bangladesh, Bhutan and Nepal, as the present electricity trade in South Asia is limited to these countries. Further, to develop a framework for power trade in South Asia, a comparative approach has been adopted whereby the international experiences of regional power trade are studied to provide a template for creating institutions and policy frameworks for South Asian electricity trade. The two case studies included are of the Nordic power market in Europe which is the first global instance of a regional market for power and is by now one of the most evolved power markets in the world, and the Greater Mekong Subregion (GMS) in Southeast Asia, where initiatives to promote a regionally integrated electricity market are being actively adopted by member countries. The focus of the case studies are on the specific drivers of electricity trade, approaches adopted by the countries and the regions, presence and role of institutions and domestic power-sector reforms.

The Energy-Sector Scenario in South Asia

Energy Mix and Single-Source Dependence

Collectively, the South Asian region has abundant energy resources, but individual countries are dependent primarily on one source to meet their energy requirements, as shown in Table 1. Specifically, coal dominates the energy mix in India, with its share being 60% of the total energy mix, whereas in Bangladesh, natural gas forms 75% of its energy mix. Similarly, hydropower contributes to 99% of the total energy mix in Bhutan and 93% in Nepal (Central Electricity Regulatory Commission, 2017).

Table 1.

Energy Mix in Selected South Asian Countries (MW in %).

	India (%)	Bangladesh (%)	Bhutan (%)	Nepal (%)
Coal	60	3	0	0
Hydropower	16	2	99	93
Oil	0	19	1	7
Gas	9	76	0	0
Renewable energy	13	0	0	0
Nuclear energy	2	0	0	0

Source: CERC (2017).

Excessive Reliance on Energy Imports

As domestic resources are insufficient to meet energy requirements, the countries are increasingly importing energy fuels. In 2014, India’s dependence on energy imports was approximately one-third of its energy use (WB Data, n.d., Energy imports). Net energy imports for India, Nepal and Bangladesh have shown an increasing trend over the years, with a 10-year period of exceptional decline, from 1998 to 2009, for Bangladesh (Figure 1), which was due to the introduction of independent power producers (IPPs) and consequent increase in generation capacities, which reduced the need for imports. However, the trend could not sustain beyond 2009, as rising demand for energy exceeded the supplies. Over-reliance on imports has increased the import bills of countries and made them vulnerable to supply shocks and price hikes, thus compromising their energy security.

Figure 1.

Source: Compiled from WB (2016).

Peak Power Deficit

Despite the ever-growing amount of imports, the countries are facing deficit in supply during times of peak demand for electricity, as shown in Table 2. This implies that the existing imports are not sufficient to address the peak demand for electricity.

Table 2.

Peak Demand and Peak Demand Met, 2016–2017.

	Peak Demand (MW)	Peak Demand Met (MW)
Bangladesh	12,644	9,479
India	1,59,542	1,56,934
Nepal	1,444	950

Source: CEA (2018), BPDB (2017), and NEA (2018).

Accessibility and Low Energy Consumption

The South Asian countries are characterised by low electricity consumption and lack of access to electricity, especially in rural areas. Per capita consumption of electricity has shown an increasing trend over the years but is still quite low. It is the lowest in Nepal, with consumption at only 139 kWh per capita. India, which has the highest electricity consumption in the region of 809 kWh per capita, is below the global level, which stands at 3,128 kWh per capita (WB, n.d., Electric power consumption). South Asia has approximately 400 million people without access to electricity (ESMAP, 2016). The drive for universal electrification in the region is expected to further contribute to the rising electricity demand.

Overview of Power Trade in South Asia

Regional power trade in South Asia can be seen as part of a larger concern in regional trade and cross-border market integration. Interest in regional energy cooperation soon followed the formation of SAFTA (South Asian Free Trade Area) in 2006 when the South Asia Regional Energy Coalition (SAREC) was formed to promote advocacy initiatives (Singh et al., 2015). The Dhaka Declaration, 2005, established the SAARC Energy Centre (SEC), which started its operations in 2006 as a Special Purpose Vehicle (SPV) in Islamabad, which is envisioned as a ‘catalyst for the economic growth and development of South Asian region by initiating, coordinating and facilitating regional as well as joint and collective action on energy’ (SAARC Energy Centre, n.d.). In 2014, the SAARC Framework Agreement for Energy Cooperation (Electricity) was signed. The framework agreement emphasises non-discriminatory access to national grids and negotiations on voluntary basis through bilateral, trilateral and regional agreements and stresses the need for regional institutions for system operations, a regulatory mechanism and dispute settlement (GOI Ministry of Power, 2014). The agreement also recognises the role of domestic power-sector reforms and emphasises the need to increase competition.

Scope for Power Cooperation in South Asia

There are complementarities in resource endowments in the South Asian countries (CERC, 2017; IRADe, 2016). For instance, Nepal and Bhutan are endowed with immense hydropower resources but experience significant decline in hydropower generation during the dry winter season. As such, they can export hydropower to India and Bangladesh during the wet season and benefit from coal- and natural gas–generated power from the neighbouring countries in the dry season.

Complementarities also exist in the electricity demand of the South Asian countries owing to differences in intra-seasonal and peak time differences (Singh et al., 2015). As shown in Table 3, the months of highest electricity demand for Bangladesh and Northeast India are different, being April, May and June for the former and July, August, October and November for the latter. Also, the months of highest demand for Bangladesh are the months of low or medium demand for Northeast India. Similarly in the case of North India, Nepal and Bhutan, the months of highest peak demand for Northern India, that is, June–September, are the months of low electricity demand in both Nepal and Bhutan. The complementarities in resource endowment and electricity demand in the region can thus be leveraged to allow for pooling and allocation of resources to optimise energy use (Singh et al., 2015).

Table 3.

Non-coincident Peaks in South Asian Countries.

Jan

Feb

Mar

Apr

May

June

July

Aug

Sept

Oct

Nov

Dec

Bangladesh

Northeast India

Bhutan

***

East India

Nepal

North India

West India

South India

Source: IRADe (2016).

Notes: *Blue indicates low peak demands, **Grey indicates medium peak demands and ***Red indicates high peak demands.

Trends in Power Trade in South Asia

Power trade in South Asia has existed at the bilateral level between India and Bhutan, India and Nepal and, more recently, between India and Bangladesh. Figure 2 summarises the current status of power trading arrangements in South Asia.

Figure 2.

Source: Compiled from BPDB (2016), NEA (2017), Bhutan Trade Statistics (BTS) (2016) and Singh et.al. (2015).

India–Nepal Electricity Trade

In South Asia, initial evidences of cooperation in the power sector are in the form of financial and technical cooperation between India and Nepal in the 1950s when India built the Kataiya powerhouse, followed by the Trishuli, Devighat and Phewa hydropower projects (Dhungel, 2009). It was in 1971 that Nepal and India for the first time agreed to trade electricity for supply to border towns of Nepal from the Indian grid in Uttar Pradesh and Bihar for 10 townships (GOI MEA, 2017; ORF, 2014). Now, the number of interconnections between the two countries has increased to more than 20, with 132 kV, 33 kV and 11 kV transmission interconnections (GOI MEA, 2017). In 2014, India and Nepal signed an agreement on ‘Electric Power Trade, Cross-border Transmission Interconnection and Grid Connectivity’ to facilitate and strengthen cross-border electricity transmission and grid connectivity between the two countries (GOI MEA, 2017). The agreement has provisions for Nepal importing electricity from India to meet its power deficit and subsequent imports by India when Nepal becomes power-surplus, on mutually acceptable terms.

Trends in power trade between India and Nepal, as shown in Figure 3, show an increase in the overall power trade. However, Nepal’s import of power from India has continuously increased, contributing more to the total trade, whereas Nepal’s export of power to India, which was already low, has decreased further. This pattern stands in stark contrast to the fact that Nepal has one of the highest per capita hydropower potentials in the world (Asian Development Bank [ADB], 2017).

Figure 3.

Source: Nepal Electricity Authority (NEA) (2017).

India–Bhutan Power Trade

Power cooperation between India and Bhutan began with the signing of the Jaldhaka agreement to provide power to southern Bhutan (SARI/EI, 2014; Tamang, 2007). In 1987, the 336 MW Chukha Hydropower Project (CHP) was commissioned, with financial assistance from India, followed by the signing of the Kurichu agreement and Tala agreement in 1994 and 1996, respectively (Druk Green Power Corporation Ltd (DGPCL), 2017a, 2017b, 2017c). The framework ‘Agreement on Cooperation in the Field of Hydroelectric Power (HEP)’ was signed in 2006 (GOI MEA, 2006). In 2008, a protocol to the 2006 agreement was signed, which ‘agreed to increase the export of electricity from Bhutan to India from 5,000 MW to 10,000 MW by the year 2020’ (Royal Bhutanese Embassy (RBE), 2016). In 2014, India and Bhutan also signed the ‘Framework Inter-Governmental Agreement concerning development of Joint Venture Hydropower Projects’ through the public sector undertakings of the two countries, which outlines a framework for implementing the Kholongchhu, Bunakha, Wangchu and Chamkharchu hydroelectricity projects totalling 2,120 MW (GOI, MEA, 2014; RBE, 2016).

Trends in power trade between India and Bhutan show that total bilateral electricity trade has increased over the period of 2009–2016 (Figure 4.) Power imports from Bhutan to India have increased during this period, though the increase has not been very steep. Electricity exports to Bhutan from India have also increased over the years. Unlike the India–Nepal power trade, Bhutan exports more power to India than it imports. In fact, electricity is a major export commodity of Bhutan, with its share being more than 35% of total exports (in value). In 2016–2017, Bhutan exported around 6,133.22 GWh power to India (Bhutan Trade Statistics (BTS), 2017).

Figure 4.

Source: BTS, Annual Reports 2009-2016 (n.d.)

India–Bangladesh Power Trade

Power trade between India and Bangladesh began in 2010 with the signing of a memorandum of understanding (MoU) to exchange electricity from Bheramara (Bangladesh) to Baharampur (India). In 2012, an electricity purchase pact was finalised between NTPC Vidyut Vyapar Nigam in India and the Bangladesh Power Development Board (BPDB) for import of 250 MW of coal-fired electricity from India to Bangladesh. The commissioning of the first cross-border interconnection in 2013 gave a major boost to export of power from India to Bangladesh, which was further expanded by a second cross-border interconnection between Surjyamaninagar in India and South Comilla in Bangladesh. At present, around 600 MW of power is being exported to Bangladesh (PIB, 2017).

Assessment of Power Trading Arrangements in South Asia

Regional initiatives, especially the SAARC framework agreement, provide a set of guiding principles to promote power integration in the region and are indicative of the political willingness of the countries that are party to it. However, the framework agreement is only at the initial stages of conceptualisation of the idea of power integration in South Asia and is marked by a complete lack of a future plan for the development of a regional power market and the process for its evolution. There is also an absence of regional-level institutions to monitor, implement and review the development of the regional power market in South Asia. The issues around transmission, and new infrastructural needs and investment, are addressed at the national level and are agreed upon in the specific bilateral power purchase agreements (PPAs). Furthermore, the electricity interconnections are with India only, due to territorial continuity. There is no evidence yet of trade between countries with third-party access through the transmission grid of another country. For instance, there is no electricity trade between Nepal and Bangladesh through the Indian transmission grid.

International Power Trading Arrangements in Europe and Asia: Case Study of Power Trade in the Nordics and the Greater Mekong Subregion

Drivers of Power Trade

Power trade among the Nordics was led by the surplus electricity situation in Norway, where production capacity exceeded consumption (Bredesen, 2016).¹ It was then that surplus power was exported to Sweden, which subsequently led the way for the integration of their energy markets. Further, per capita electricity consumption in the Nordics during 1991–2000 was very high, particularly in Norway, when compared to the European Union (EU) and the world average (Figure 5).² Simultaneously, there is diversity in resource endowments in the region (Bergman, 2001). Norway has rich hydropower sources, while Sweden has hydropower in the north and thermal resources in the south. Wind power is the major source of energy in Denmark, and Finland is rich in thermal resources. Therefore, in times of high precipitation, Norway and northern Sweden have excess hydropower resources that are used for the benefit of all but face shortages in the dry season, when the thermal sources of southern Sweden and Finland and the wind power of Denmark provide electricity to Norway and northern Sweden. The power market integration has therefore led to optimal and cost-efficient utilisation of energy resources in the Nordics (Bergman, 2001).

Figure 5.

Source: Compiled from WB Data.

Similar diversity and complementarities in resource endowments are also observed in GMS, where Lao People’s Democratic Republic (Lao PDR), Myanmar, Vietnam and the two PRC (People’s Republic of China) provinces account for about 94% of the regional hydropower resources: Myanmar, Thailand and Vietnam possess natural gas deposits; Vietnam has the most oil reserves; and Yunnan province, PRC, holds coal deposits. Also, the hydropower potentials of Lao PDR and Myanmar are substantial compared to their population size and expected power needs (ADB, 2012), and they are already generating electricity for export, beyond the supply requirements of their domestic grid. Thus, the GMS programme recognised energy as one of the nine areas of subregional cooperation in 1992 (GMS Secretariat, 2019) and estimated that energy cooperation in the GMS would bring ‘savings amounting to about 19 per cent of total energy costs or about $200 billion’ (ADB, 2009).³

Similarly, there exist complementarities in resource endowment and demand patterns among member countries in South Asia, allowing for electricity trade in the region to address the demand–supply gap in electricity. The pooling of resources for optimisation is expected to reduce costs of production, since the participating economies would be able to buy from the least-cost energy source. Specifically, the region can save ‘US$ 226 billion in its electricity supply costs’ through regional cooperation in energy during the period 2015–2040 (CUTS International, 2019). The diversity and complementarities of energy resources in the countries therefore offer opportunities for trade and cooperation in energy in a regional arrangement in South Asia, similar to the case of the Nordics and the GMS.

Lessons from the Power Trading Arrangements in the Nordics and the Greater Mekong Subregion

Gradual Approach to Integration

Established in 1993, the development of the Nordic power market was led by power-sector reforms in Norway in 1991 and took almost a decade to develop, developing in 2000 (Nord Pool, 2018). It started with Norway creating a common electricity market with Sweden in 1996 and subsequently integrating it with Finland (1998) and Denmark (1999). Later, it continued to expand into the Baltics and other European countries. Therefore, it was over the years that the regional electricity market had grown from ‘four national markets, to becoming one, common Nordic electricity market’, and it is now recognised as the ‘most harmonized electricity market in the world’ (Norden, 2009). The Nordic electricity market was based on ‘consensus and common understanding’ and originally did not have a legal basis to it (EMG, 2009). Presently, interconnections are such that each country’s main grid is part of the synchronous inter-Nordic system (Fingrid, 2017). Furthermore, the Nordic wholesale electricity market is well integrated both institutionally, with the existence of a common power exchange market and removal of border tariffs, and economically, in terms of the prices faced by producers and consumers in the different countries (Bergman, 2003).

The GMS began the process of creating an integrated regional power market as part of the GMS Economic Cooperation Program launched in 1992 (GMS programme), where energy cooperation was identified as a low-hanging fruit for regional cooperation (GMS Secretariat, 2019). An overview of the status of interconnections in the GMS is given in Table 4.

Table 4.

Interconnections in the Greater Mekong Subregion.

Country	Cross-border Interconnection
Cambodia	Cambodia imports power from Vietnam and Thailand.
Lao PDR	Many cross-border connections are planned, mainly for export of power to Thailand and Vietnam.
Myanmar	Existing connections with PRC. New interconnections with Thailand and PRC proposed.
PRC (Guangxi and Yunnan)	Links with Myanmar; others are foreseen but uncertain. Three links to Vietnam.
Thailand	Strong connections with Lao PDR. Connections with Cambodia, PRC and Myanmar planned.
Vietnam	Three lines to PRC for import. More connections with Lao PDR and greater connectivity to Cambodia is likely.

Source: Wijayatunga (2016).

The World Bank has developed a plan for regional power market in the GMS to be evolved in four stages, as shown in Table 5 (Barker & Minogue, 2006). The GMS has completed the first stage and is in the process of transition to the second stage.

Table 5.

Stages in the Evolution of the Regional Power Market in the Greater Mekong Subregion.

Stage 1	The initial period when only country-to-country power transactions are possible and existing cross-border transmission lines are mostly associated with power purchase agreements (PPAs) between the parties or an independent power producer located in any one party country selling power to a national power utility in a neighbouring country. The cross-border trading in Stage 1 refers to opportunity exchange of power between national power utilities of the parties using the excess capacity of existing cross-border transmission lines over and above the transmission capacity required for power transfers associated with PPAs.
Stage 2	Trading is possible between any pair of Greater Mekong Subregion (GMS) countries, eventually using transmission facilities of a third regional country. However, in this stage, the available cross-border capacity is limited and based on surplus capacity of lines linked to PPAs.
Stage 3	This occurs when interconnectors for cross-border trade are expressly developed and third parties other than national power utilities are allowed to begin trading over these.
Stage 4	This corresponds to when a regional competitive market exists whereby multi-buyer and multi-seller markets can execute trades within and across countries.

Source: Barker and Minogue (2006).

It can be concluded that both the Nordics and the GMS have followed a gradual approach to regional power markets where bilateral trade was the norm in the initial stages. Over a period, bilateral trading evolved into more complex arrangements with third-party access and finally into a fully integrated regional market for power, in the case of the Nordics. The GMS is also expected to develop in stages from bilateral to fully integrated regional power markets. However, the present degree of market integration is limited to only bilateral government-to-government trade in electricity. Thus, development of power trading arrangements is not a one-time phenomenon but a process to be progressed over a period of time. South Asia, like the GMS, also has government-led cross-border electricity trade only, which is agreed upon through specific PPAs, as highlighted in section IV.B.

Comprehensive Policy Framework

One of the characteristic features of the power trading arrangements in the Nordics and GMS is that they have comprehensive policy frameworks, at both the regional (EU and Association of Southeast Asian Nations [ASEAN]) and subregional (Nordics and the GMS) levels, that are reflected in their national policies, thereby aligning national priorities with the regional objectives of integration. There are legislative packages for the liberalisation of energy markets adopted at the regional level by the EU, like the directive (1996) on ‘the common rules for the internal market in electricity’ and the directive to ‘liberalise the market by unbundling supply, generation and networks providing market access to third parties and increasing the transparency of retail markets’, among others (European Union, 1996). Similarly, the ASEAN Plan of Action for Energy Cooperation (APAEC), 2016–2025, functions as the guiding policy document and provides a comprehensive road map for the implementation of multilateral energy cooperation in ASEAN. It has created a master plan for the ASEAN Power Grid (APG), which is a collection of interconnected grids offering bilateral exchanges of electricity and will subsequently evolve into a subregional and regional grid (ASEAN Centre for Energy, 2015). Three sub-regions have been identified with the APG, where GMS is identified as the northern subregion. A Policy Statement on Regional Power Trade in the GMS was adopted in 1999, which further led to the signing of an inter-governmental agreement (IGA) in 2002 to provide a framework for the implementation of the policy statement. In South Asia, the SAARC Framework Agreement for Energy Cooperation (Electricity) highlights the ‘common benefits of cross border electricity exchanges and trade’ in the region in terms of resource optimisation and differences in demand patterns and promotes regional trade in electricity through information sharing, increased competition, construction of more transmission networks and development of corresponding procedures for dispute settlement, regulation and system operation, among others (GOI Ministry of Power, 2014). However, the framework agreement does not lay out a specific plan or timeline for the same.

Institutions for Implementation of the Policy Framework

The existing policy frameworks are further supported by institutions for implementation and monitoring of the process of regional power market integration. The Agency for the Cooperation of Energy Regulators (ACER) was established through a regional regulation, that is, the Third Energy Package, by the EU and became functional in 2011, and it is responsible for ‘promoting cooperation between national regulatory authorities, monitoring progress in the implementation of the development plans and internal markets in electricity’ (ACER, n.d.; EU Legislation, n.d.). There is the inter-Nordic Transmission System Operation Agreement (TSOA) for setting security standards, information exchange, congestions management, rules for power shortage and joint operation with other systems, among others (ENTSO-e, n.d.; IRADe, 2016). In the GMS, the IGA provided for the setting up of the Regional Power Trade Coordination Committee (RPTCC) to coordinate and follow up on its implementation and develop initial technical and commercial guidelines (WB, 2007). Subsequently, an MoU on Guidelines for Implementation of Stage 1 (Table 5) of the Regional Power Trade Operating Agreement (RPTOA) was signed by the GMS members in 2005, which gave it an institutional structure (ADB, 2005). Another MoU on the road map for implementing the GMS Cross Border Power Trading (MoU-2) was later signed in 2008, which defined the key activities, including ‘Indicative Regional Master Plan on Power Interconnections in the GMS’ and timelines up to 2012, intending to fully realise Stage 1 and to prepare for Stage 2 (ADB, 2012). In South Asia, there are no regional-level institutions yet to address the issues of monitoring, regulation and dispute settlement required for regional electricity trade.

It should be noted that the development of regional institutions is not a necessary precondition for the development of regional power markets. This is most evident in the case of the Nordic power market, where electricity-market reforms in the Nordics preceded the EU electricity-market directive and has been more far-reaching than the directive (Bergman, 2002). For instance, where the EU directive is only concerned with the regulatory framework of national electricity markets within the EU, the Nordics have focused on the creation of common power exchange, that is, Nord Pool, and also established closed cooperation between the transmission system operators (TSOs) in the four countries. Moreover, policy guidelines and institutions have themselves evolved and been created in response to the requirements and challenges of the new energy markets. Thus, they are dynamic and need-based and reflect the present context of the region, countries and the challenges of expansion into new markets. However, since there is a problem of political conflicts and mistrust among countries in South Asia, institutions can develop trust and provide a mechanism for negotiation based on the norms developed by all for mutual gains.

Provisions and Rules for Transmission Grid Usage and Connectivity

Transmission is at the core of power trading among countries and is likely to face challenges in terms of transmission planning, identification of interconnections, harmonisation of grid codes and third-party access, among others. In Nord Pool, the Nordic transmission grid connects with all the Nordic states, thereby combining national grids into one synchronous power system. Transmission planning is done by the planning committee, and its members are managers of planning functions for various Nordic TSOs (IRADe, 2016). In the GMS, the Planning Working Group (PWG) does operational and system planning working groups identified in the RPTOA (IRADe, 2016). The PWG’s membership comprises a senior-level representation from each member country’s transmission system operator with responsibility for national transmission planning. Emphasis has therefore been given to stakeholder consultations and information sharing in both power trading arrangements to promote trust and provide legitimacy to the proceedings. PWG identifies priority interconnection projects, establishes common regional performance standards and database and plans and prioritises addition of new transmission capacity, including recommendations regarding ownership and financing.

All networks in the Nordics are open to non-discriminatory third-party access to national transmission infrastructure (IRADe, 2016). The elimination of transmission border fees between countries has ensured that electricity buyers and sellers pay tariffs only at the point of connection. Moreover, these transmission prices are independent of distance between the traders. Such provisions and rules on transmission grid usage have played an important role in expanding electricity trade in the region. However, there seems to be no provision related to open access yet in the GMS. The first MoU of the RPTOA (MoU-1) established guidelines and an institutional framework for power trade, including one based on cross-border transmission lines through the bilateral PPAs, and the development of some transit trade, that is, the use of transmission facilities belonging to GMS members not involved in the trade itself to allow power trade between any pair of GMS countries. This remains yet to be achieved in practice.

The issue of harmonisation of network codes in the Nordic countries is done by the European Network of Transmission System Operators of Electricity, or ENTSO-E, under ACER. ENTSO is responsible for the technical cooperation between the TSOs and the development of long-term pan-European network plans. In the GMS, the Asian Development Bank (ADB) has set up a Working Group on Performance Standards and Grid Code (WGPG) to determine technical performance standards and grid codes for the region.

There are no established procedures or institutions to address the issues of transmission, grid infrastructure and connections and investment decisions at the regional level. Such issues are negotiated bilaterally through the specific PPAs and are addressed at the national level by specific electricity regulatory authorities. Further, there is no evidence yet of third-party access through the transmission grid of another country. The ‘Guidelines for the import/export of cross border electricity’ (GOI Ministry of Power, 2018) by India, however, facilitate bilateral electricity trading arrangements through allowing Bangladesh, Nepal and Bhutan to sign tripartite agreements for electricity trade and providing for a transmission corridor through Indian territory.⁴ This therefore provides an enabling policy framework to support regional trade in electricity, with a possibility to evolve it into subregional electricity trading arrangements within the BBIN (Bangladesh, Bhutan, India and Nepal) Initiative. This will enable Bangladesh to trade in electricity with Nepal and Bhutan directly by using the transmission corridor on the Indian territory. Following up on this, the government of Nepal has also allowed the Nepal Electricity Authority (NEA) to trade electricity with India and Bangladesh (via India) in real time at competitive prices (The Himalayan Times, 2020).

Power-Sector Reforms

Before power trade in the Nordics, their domestic power markets were vertically integrated and lacked competition (Bergman, 2002). The underlying objective of the reform process was to enhance efficiency and reduce electricity prices, and therefore emphasis was given to increasing competition. Despite reforms, Nordic countries have maintained a considerable degree of public ownership and reduced the market share of existing public electricity utilities through their integration and expansion of the energy markets (Bredesen, 2016). Therefore, privatisation is only one of the several means to increase competition and is neither a necessary nor a sufficient condition for the development of fully integrated regional power markets. Other reforms that facilitated the development of regional power markets are regulated third-party access to the grid and separation of the competitive (generation and supply) and natural monopoly (transmission and distribution) parts of the power industry (Bergman, 2001).

The GMS countries lack power-sector reforms, and different countries are at different stages of the reform process. The power sector is corporatised in all countries except Myanmar and Thailand (ADB, 2013). There are distinct regulatory agencies in all countries except in Lao PDR and Myanmar. There is some unbundling of transmission in all countries except Myanmar and Thailand. The market structures and power-sector reforms in the GMS are summarised in Table 6.

Table 6.

Power-Sector Reforms in the Greater Mekong Subregion.

Country	Corporatisation	Unbundling	Regulation	Use of System
Cambodia	EDC is a wholly state-owned corporation.	The sector is fragmented, but the main transmission operator is also a generator and distributor.	There is a regulator with distinct legal identity.	None
Lao People’s Democratic Republic	EDL-Gen operates as a private company, and its shares are privately traded. EDL is a wholly state-owned corporation.	The sector is formally unbundled, although there are substantial cross-shareholdings.	There is no independent regulator.	There are no published use-of-system charges, but there seems to be no reason for not introducing them.
Myanmar	Electricity supply is part of the government.	Different government departments are responsible for hydro plants and the remainder of the system.	There is no independent regulator.	None
People’s Republic of China (Guangxi and Yunnan)	This is largely the preserve of state-owned enterprises (SOE) and their corporatised subsidiaries.	Generation and transmission were unbundled since 2002.	Regulation is done by the State Electricity Regulatory Commission.	Set by the State Electricity Regulatory Commission
Thailand	An initial corporatisation of the Electricity Generating Authority of Thailand (EGAT) was reversed, and it reverted to an SOE.	There is no unbundling of EGAT’s generation and transmission activities.	There is a partially independent Energy Regulatory Commission.	There is no published use-of-system charge. There is no separate accounting of transmission.

Source: ADB (2013).

In South Asian countries, power-sector reforms were initiated around the 1990s owing to the poor financial conditions and operational performance of the public power utilities. Despite three decades of the initiation of the reform process, South Asia has not fully liberalised the power sector. The state has maintained considerable ownership in the power sector, particularly in transmission and distribution, and there is a lack of competitive market structures. The ‘single buyer model’ (SBM)⁵ is the prevalent market structure in all the South Asian countries. Privatisation of the power sector can be seen only in the generation segment, with the transmission and distribution segments showing very little evidence of increasing private-sector participation. A majority of South Asian countries have introduced independent regulatory commissions. The present status of the power-sector reforms in South Asia is summarised in the Table 7.

Table 7.

Status of Major Reform Elements in South Asia.

Country	Nominal Generation Market Structure	Initiation of Private Ownership and/or Participation			Introduction of Legally Independent Regulator	Transmission Arrangement
Country	Nominal Generation Market Structure	Generation	Transmission	Distribution	Introduction of Legally Independent Regulator	Transmission Arrangement
Bangladesh	Multiple sellers, single buyers	1992	–	–	2003	Unbundled transmission owner
Bhutan	Multiple sellers, single buyers	2008	–	–	–	Vertically integrated
India	Competition with organised trading but includes SOEs	1991	2000	1992 (Orissa); 2002 (Delhi)	1996 (Orissa); 1998 (national)	Unbundled transmission and independent system operator
Nepal	Multiple sellers, single buyer	1992	–	–	1994/2011	Vertically integrated

Source: Singh et al. (2015).

Price Setting Mechanism

The prices of electricity in the Nordic power market are competitive and market-based. Power exchanges offer a fair, transparent and neutral platform, resulting in the discovery of efficient prices of electricity. Further, prices are able to identify and are sensitive to congestion, its severity and its trajectory.⁶ Furthermore, the transmission and distribution tariffs in the Nordics have to comply with general principles, like being cost-reflective, fair and stable, but do not follow rigid rules or are approved in advance, thereby giving flexibility and allowing them to be reflective of costs (Fingrid, 2017).

Unlike the Nordic power market, the price determination for traded electricity in the GMS is not yet fully determined by the market forces of demand and supply and is bilaterally negotiated through the PPA. Virtually all countries in the GMS, apart from Thailand, operate with electricity prices far below the actual cost of supply (ADB, 2013).

Similarly, in South Asia, the prices of electricity are not market-determined but negotiated by the respective governments in their PPAs. Since the prices in electricity trading agreements are not market-determined, price setting is another contentious issue that puts the additional burden of negotiations on the parties to the agreement and creates unrealistic price expectations. For instance, in the late 1990s, when Pakistan had surplus power generation, mainly in the form of IPP take-or-pay power generation, there was a proposal to erect a 50-km high-voltage direct current (HVDC) double-circuit transmission line to carry power from the Dinanath substation near Lahore to the Patti substation in the Indian Punjab. However, this proposed project could not be realised due to the relatively wide gap between the price offered by the Indian side, which was approximately $0.023 per kWh, and the price sought by the Pakistani side, which was approximately $0.072 per kWh (Rahman et al., 2012). Similar differences in the expected prices were evident in the case of India and Nepal as well, where with respect to power exports to India Nepal expected very high prices based on the avoided peak-power costs in India, whereas India was considering a price based on reasonable return on investments relating to the generation project (WB, 2007).

In a nutshell, the section highlights that the regional power trading arrangements in the Nordics and the GMS not only have an economic rationale but are also supported by corresponding procedures and institutions to facilitate the process of regional electricity market integration. Furthermore, the regional-level initiatives are reflected in the national policies of the countries concerned, which have aligned the national interests with the regional interests. Electricity cooperation in the Nordics and the GMS has also been facilitated by well-integrated regions in the form of EU and ASEAN, respectively, which have provided them with the already-existing institutions and policy frameworks and set a firm ground for issue specific integration. Finally, there have been initiatives to liberalise the domestic power sector, particularly in the Nordics, which has complemented the regional electricity trade. In South Asia, while there is an economic rationale for promoting regional trade in electricity in terms of increased efficiency and optimisation of regional resources, there is an absence of policy frameworks, integration plans and regional institutions. South Asia being the least integrated region in the world has further contributed to such limited regional trade in electricity. Simultaneously, the domestic power-sector reforms in the region are incomplete, thus being another limitation for regional power trade in South Asia.

Template for Power Trade in South Asia: Lessons from Europe and Asia

Based on the lessons from the previous section on the successful experiences of power trade in the Nordics and the GMS, a template to facilitate power trade in South Asia is discussed below.

Gradual Evolution from Bilateral Power Trade to Subregional to Regional

As in the case of the Nordic countries and the GMS, emphasis should be placed on developing power trading arrangements in stages, starting with bilateral trade between countries, to be later evolved into subregional and regional trading arrangements. The four stages of development for a fully integrated regional power market in the GMS (Table 5) can serve as a practical blueprint for South Asia as well. The subregion for emphasis should be the BBIN countries, as power trade already exists between them. The hostility in the India–Pakistan relationships has adversely impacted any attempts at economic regional integration in South Asia. Therefore, the BBIN countries offer an immediate opportunity for power integration to occur at the subregional level.

South Asia is presently at Stage 1 of the development of a regional electricity market as envisioned by the GMS, where electricity trade happens through cross-border transmission infrastructure and is negotiated upon in the PPAs. However, this is slowly moving towards Stage 2, where electricity trading between any two countries in the region will be made possible through access to transmission grids of a third country in the region. The 2018 guidelines by Government of India for the import/export of cross-border electricity facilitate this arrangement through allowing Nepal, Bhutan and Bangladesh to trade in electricity through India’s transmission grids. This also addresses the long-standing demand of Bangladesh, as was put forward during the MBI pipeline consultations, which was not agreed to by India in 2005. Granting access to the transmission grid of India to the other South Asian countries is therefore significant for addressing the neorealist perception of unequal gains in regional cooperation, which has been a major impediment to regional cooperation in South Asia in general.

Creation of Institutions at the Regional Level

To implement the framework for integration of the power market in South Asia, corresponding regional-level institutions are important to devise a strategy to achieve the objective and oversee its implementation. A planning committee needs to be created for the purpose of identifying priority interconnections to be developed in the future, time periods for their completion and conception of an implementation strategy. Furthermore, a body for the purpose of project execution and review and monitoring, along with a dispute settlement mechanism, is needed.

Multi-stakeholder engagement, with the process being based on consultations, should be emphasised. For instance, including the national regulatory authorities of the member countries, along with their transmission operators, will address the challenge of harmonisation of legal, policy and regulatory framework and facilitate resolving technical challenges, particularly those related to harmonisation of grid codes. Such consultations and flexibility will promote trust and goodwill and provide legitimacy to the entire process, which is very significant for South Asia, considering the fact that suspicion and mistrust among the countries in the region has been a major factor for the low economic integration in the region (Kardar, 2011). Moreover, as is the case in EU, the regional framework should develop a regional plan and give flexibility to the countries to achieve those in accordance with their national priorities.

Address of Domestic Challenges: Reforming the Power Sector

The incomplete nature of the power-sector reforms in South Asia has limited power trade in the region. Competitive market structures encourage private-sector participation, which enhances investment in infrastructure and improves the operational and financial efficiency of the electric utilities. On the other hand, lack of competitive market structures acts as a barrier to the entry of private companies and does not offer them adequate incentives to invest. The price setting mechanism of electricity determines the financial health of the electric utilities, which are important for both domestic supply of electricity and power trade between countries, since public-sector electric utilities are important stakeholders and investors for the creation of cross-country infrastructural development needed for electricity trade. The inability to recover costs leaves the utilities with reduced funds for expanding generation capacities, which further reduces the incentives for investment in cross-border trade and infrastructure.

Incomplete power-sector reforms will continue to be a challenge for regional power trade, despite the initiatives to facilitate it at the regional level. Thus, domestic reforms will have to go hand in hand with the regional-level institutions to promote regional trade in electricity. Also, domestic power-sector reforms can be a starting point for the countries, because it is easier to undertake initiatives at the national level as compared to bringing consensus among all the parties on regional trade, and the benefits of the liberalised power sector can be reaped at the level of bilateral trade as well.

Changing Market Structures: Increasing Competition Through Privatisation

One of the first steps towards power-sector reforms is to make market structures competitive and reduce government ownership. This is done through unbundling vertically integrated utilities into separate entities responsible for different functions, such as generation, transmission and distribution, increasing the role of the private sector and making provisions for the choice of supplier to distribution companies, large suppliers and eventually to consumers.

The vertically integrated state-owned monopolies provide limited incentives for investing in the generation capacity and infrastructural requirements. Similarly, state ownership provides limited economic rationale for adopting cost-efficient techniques and improving overall operational efficiency. Consequently, public power utilities perform poorly and are financially constrained. The burden of investing in the power sector thus lies on the state funds, which are already scarce and face numerous other competing claims. It, therefore, becomes politically difficult for governments to fund power trade projects, particularly the export-oriented ones. In contrast, private companies are always on the lookout for cost-effective supply additions and attractive markets to increase the volume of their business and profits (WB, 2008). Therefore, a greater degree of competition, privatisation and liberalisation of the power sector is more likely to improve the prospects of power trade than the vertically integrated state-owned monopolies, which are a major challenge to it.

Private-sector participation in South Asia has increased over the years but is low as compared to public-sector participation. Except for Bangladesh, South Asian countries show that the contribution of the public sector is more than that of the private sector. Private-sector participation in the generation segment mostly exists in the form of IPPs, with the transmission and distribution segments showing very limited evidence of privatisation. India has a licensing system in place to create transmission infrastructure through the private investors. The same has been used to create transmission links between India and Bhutan. Further, only the state of Odisha and Delhi in India allow distribution by private companies in the region (TERI, 2015).

Though privatisation is not a necessary condition for sectoral reforms and market integration, as evident in the case of the Nordic power market, it will be beneficial for the South Asian region. This is because the success of the Nordic power market also lies in the strong political will displayed by their leaders, not only in introducing reforms but also in times of crisis. One such instance was witnessed in the year 1996, the first year of the integrated Norwegian–Swedish electricity market, when the countries experienced a supply shock, since the year was preceded by a period of unusually low precipitation in both the countries, and hence the electricity production was below normal. The production of hydroelectricity in Sweden was around 15 TWh less than the production in normal years, and Norway was a net importer, rather than net exporter, of electricity that year (Bergman, 2001, p. 8). The reduction in supply of electricity was reflected in the immediate rise in prices. Despite this, the political leaders in the two countries did not intervene in the market-based pricing of electricity. However, lack of political will, along with the urge to make populist decisions, has been a roadblock in South Asian regional integration. Increasing competition through privatisation of the power sector will thus be beneficial in the South Asian context. While privatisation of the power sector will ensure higher efficiency, investments and infrastructural development, there are concerns regarding the social goals of universal electrification at affordable prices.

Price Determination: Gradual Shift Towards Competitive Pricing

Prices determined by the market forces of demand and supply align with the goals of the reforms, improve the financial health of the power utilities and enhance infrastructural investment. The prices of electricity in South Asia are regulated by the government and do not reflect the costs to make electricity affordable for all. This adversely affects the finances of the power sector, which then acts as a constraint to infrastructural investment to expand generation capacities and transmission networks. To set the guiding principles for electricity pricing for South Asian countries, it is important to understand the different criteria that affect the present mechanism of price setting and then outline a framework that works to optimise these objectives. The various objectives of the tariff design include: 1.

Revenue-related objectives—The tariffs should yield enough revenues to meet their financial requirements;

Investment-related objectives—The tariffs for electricity should be such that they provide incentives to the private sector, both domestic and foreign, to invest in the power sector;

Cost-related objectives—The tariffs should reflect the present and the future costs, both private and social costs, to promote economically efficient consumption; and

Social objectives—The tariffs should also align with the social objectives of the government, for instance, the objectives of achieving 100% electrification rates and providing subsidised electricity to the sectors like agriculture (Munasinghe, 1981).

All the above-stated objectives of tariff design are conflicting in nature. Any attempt to achieve one will mean forgoing the other. For instance, an approach to a tariff design that would focus on maintaining the financial viability of the utilities and ensuring enough revenues for them may have to compromise on the social-development goals of making electricity affordable to all, particularly for those sections that could least afford to purchase electricity. Similarly, a tariff design that fulfils the social objectives through subsidies will compromise on the revenue- and cost-related objectives of the price setting of electricity. As Bhattacharyya (2007) highlights, tariff rebalancing will also mean that ‘prices should go down for those consumers who are paying more compared to the cost of supplying them, while prices for those paying less should increase’. He further states that ‘tariff rebalancing is closely related to performance improvement’, where ‘the average prices should increase when subsidies are removed while improved performance tends to reduce the average prices’ (Bhattacharyya, 2007). To achieve all the stated goals at once, it is necessary that certain trade-offs among them are accepted. First, tariffs can be determined based on purely economic considerations, and then adjustments can be brought into them which align with the social objectives of the government as well (Munasinghe, 1981; Ramchandra, 2015). Bhattacharyya (2007) suggests that to manage such a scenario, if the ‘subsidies are removed at the beginning of the reform when the performance is still poor, prices could be expected to decline in real terms once the utility improves its performance’. However, such attempts are unpopular and politically not acceptable, and they may require state intervention or alternate financing mechanisms temporarily during initial periods of reform. Concerns regarding affordability can also be addressed to some extent by adopting a range of innovative solutions, particularly those related to the demand-side management of electricity, like adopting electricity saving appliances, or through differential pricing for peak-hour consumption through temporary government interventions (Stamminger, 2010).⁷

Conclusion

Given that South Asia is facing an increasing demand for energy owing to its economic growth and socio-developmental needs, and consequently its over-reliance on energy fuel imports, intra-regional power trade can be a solution to meet the burgeoning energy demand in the region. However, electricity trade continues to be below potential in the region. In this context, the article has undertaken to present an analysis of the existing power trading mechanisms in South Asia and done case studies of successful power trading arrangements in the Nordics and the GMS, identifying international best practices for the development of fully integrated regional power markets to be replicated in South Asia.

The analysis of the power trading arrangement in South Asia shows that despite the economic rationale for power trade due to the complementarities in resource endowments and peak demand patterns among the countries, there is a lack of regional-level institutions to facilitate such trade. The prevalent form is trade through bilateral PPAs, while the regional initiatives, particularly the SAARC framework agreement (2014), have provided only a set of guiding principles for the same and lack provisions to address the challenges of harmonisation, monitoring, review and dispute settlement. The case studies of successful power trading models in the Nordics and the GMS highlight the need for a gradual approach to the development of integrated power markets, with special emphasis given to stakeholder consultations, power sector reforms and alignment of national priorities with regional objectives. Given that the regional dynamics and political mistrust have impeded regional cooperation in South Asia in general, it is necessary that institutions are formed to facilitate intra-regional trade by building trust and a perception of mutual gains. Based on these lessons from the Nordics and the GMS, South Asia should develop a comprehensive policy framework that goes beyond the guiding principles and has detailed provisions for its implementation and monitoring, harmonisation of transmission codes and operation system and dispute settlement. The phased power sector reform can be an immediate starting point for the countries, as it is easier to undertake initiatives at the national level as compared to reaching a consensus at the regional level. However, caution must be exercised in applying these lessons, as the objective is not to imitate their process to form a regional power market but to utilise the best practices that fit the South Asian context.

Footnotes

Declaration of Conflicting Interests

Funding

The author received no financial support for the research, authorship, and/or publication of this article.

Notes

ORCID iD

Priyanshi Chauhan

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