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24th March 2021 – Editorials/Opinions Analyses

Contents

  1. The surge of geopolitics in South Asia’s power trade

THE SURGE OF GEOPOLITICS IN SOUTH ASIA’S POWER TRADE

Context:

India has released new rules governing the trade of electricity across its borders.

Relevance:

GS-III: Indian Economy, Industry and Infrastructure (Implications and Ramifications of International Trading policies and deals, Energy Sector), GS-II: International Relations

Mains Questions:

What are the ramifications of India’s “new rules governing the trade of electricity” on electricity markets of India’s Neighbours? Discuss how India can plan a stable institutional model in this context. (10 marks)

Dimensions of the Article:

  1. History of India’s Energy Cooperation
  2. Key Points in the new rules
  3. Dynamics in India’s Electricity market
  4. India’s Cross-border Trade of Electricity: Position of the Neighbours in the Market
  5. About the Impact of the new rules
  6. Mega solar project
  7. Way Forward

History of India’s Energy Cooperation

Before 2014

  • In the early 2000s, India tried with the SAARC countries for cross-border energy flows.
  • It began to gain steam with substantial power trade agreements between India and Bhutan (2006) and Bangladesh (2010).
  • These were driven by India’s need for affordable power to fuel quickened growth in a recently liberalised economy.

2014

  • The SAARC Framework Agreement for Energy Cooperation and the India-Nepal Power Trade Agreement were signed in 2014 which imposed only few restrictions on trade along with an institutional structure to allow private sector participation and to facilitate market rationality in electricity commerce.
  • The 2014 government in India aimed for a seamless SAARC power grid, for power transmission within SAARC countries, like the offshore wind projects set up in Sri Lanka’s coastal borders to power Pakistan or Nepal.
  • From 2014, India began using the framework of the South Asian Association for Regional Cooperation (SAARC) to make historical moves towards liberalising electricity trade. China soon began to make its presence felt in the region, and India responded by walking back its free-market impulses.

2016

  • However, in 2016, the Union Ministry of Power released certain guidelines which imposed a slew of major restrictions on who could engage in cross-border electricity trade.
  • They seemed to be a reaction to perceptions of increased Chinese investment and influence in the energy sectors of South Asian neighbours.
  • India imposed stringent restrictions that dissuaded everyone other than Indian and government entities from participating. That threatened to undermine private sector participation and promising joint ventures across the region.

2018

  • Nepal and Bhutan protested for years, leading to new guidelines in 2018 that tried to find a middle ground; these rules formalise that balancing act. They allow private sector participation but exclude Chinese investments.

Key Points in the new rules

  • The new rules strongly discourage the participation of plants owned by a company situated in “a third country with whom India shares a land border” and “does not have a bilateral agreement on power sector cooperation with India”.
  • Chinese companies hoping to establish plants in Nepal, Bhutan, or Bangladesh will presumably have a hard time making good on their investments with the Indian market cut off.
  • The new rules also establish elaborate surveillance procedures to detect changes in the ownership patterns of entities trading with India.

Dynamics in India’s Electricity market

  • Between 2008-09 and 2019-19, the share of private sector generation capacity has increased from 15 percent to 46 percent.
  • Two electricity exchange platforms, Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL), have emerged and are providing a wide range of energy trading products.
  • Securities and Exchange Board of India (SEBI) is likely to authorize introduction of forward and derivate contracts for electricity in the near future, which will allow power distribution companies to use financial instruments, such as futures, forwards, swaps, and options to hedge risks, reduce costs and better manage long term power purchase contracts.

India’s Cross-border Trade of Electricity: Position of the Neighbours in the Market

  • India’s power trade with its neighbours is largely one-sided. The country annually imports around 1,200 mw power from Bhutan, exports 1,200 Mw to Bangladesh, exports 450 Mw to Nepal and 3 Mw to Myanmar. India is also working on a plan to develop an under-sea cable for trade with Sri Lanka.
  • While India and Pakistan both have large capacities in coal and hydro, Bhutan and Nepal rely only on hydropower for meeting their power demand.
  • Bhutan has only tapped 6 per cent of its 30 Gw hydro power potential. A majority of its revenue comes from energy export to India. Bhutan has an installed generation capacity of 1,606 Mw currently and exports around 70 per cent of its annual electricity production to India.
  • For Nepal, its overall electricity supply is inadequate to meet rising power demand and therefore the country relies on imported diesel.

About the Impact of the new rules

  • The Central Electricity Authority (CEA) has released new rules governing the trade of electricity across its borders which define the contours of the South Asian electricity market, placing clear limits on who can buy from and sell into India.
  • This has ramifications for the electricity markets of Bangladesh, Bhutan, and Nepal, which, to varying degrees, have aligned their energy futures with the Indian market.
  • The new rules show that India’s approach is an attempt to balance China’s growing influence in the region with developmental aims.

Mega solar project

  • India’s ambition of anchoring a global super-grid called One Sun One World One Grid, or OSOWOG needs an institutional vision as it aims to begin with connections to West Asia and Southeast Asia and then spread to Africa and beyond.
  • Renewable energy transitions benefit from grids that cover vast areas and diverse geographic conditions.
  • Multi-country grids allow for the unpredictable outputs from renewable energy plants to be balanced across countries, thus avoiding expensive country-specific balancing technologies such as hydropower and gas plants.

Way Forward

  • The government needs to actively promote cross-border electricity trade to utilize existing/upcoming generation assets. The SAARC electricity grid is a step in the right direction.
  • Cross-country electricity trade should be depoliticized and should be made market-based with cooperation between grid operators of different countries.
  • It is quite likely, though, that India’s plans will be one among many in a soon-to-be competitive space.
  • An attractive institutional model can lock countries into the pool by setting standards that investors and utilities plan towards and profit by. Once locked in, countries are thus unlikely to defect to other pools.
  • However, impartial institutions for planning, investments and conflict resolution are crucial to multi-country power pools.
  • It is worth considering releasing the vice-like grip on South Asia, aimed at countering China, by creating a rule-based regional institution that can counter Chinese offerings in other theatres.

-Source: The Hindu

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