Evaluation of Sub Regional Grids and Role of Energy Markets

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TASK 1.15 EVALUATION OF SUB-REGIONAL

GRIDS AND ROLE OF ENERGY MARKETS

March 2012

This publication was produced for review by the United States Agency for

nternational Development. It was prepared by Tetra Tech ES, Inc.


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South Asia Regional

Initiative/Energy: Task 1.15

Evaluation of Sub-Regional Gridsand Role of Energy Markets

Contract No. 386-00-07-00033-00

Prepared for:

Regional Contracting Office

US Agency for International Development

9000 New Delhi Place

Washington, DC 20521-9000

Prepared by:

Tetra Tech ES, Inc. Tetra Tech ES India Ltd.4601 North Fairfax Drive, Suite 601 11th Floor, Building No 9B

Arlington, VA 22203 USA DLF Cyber City Phase II

Gurgaon-122002 Haryana India

Amit R. Dalal, Chief of Party

[email protected]

Disclaimer

The views expressed in this publication do not necessary reflect the views of the United States

Agency for International Development or the United States Government.
mailto:[email protected]:[email protected]


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i SARI/Energy Final Report | Tetra Tech ES, Inc.

Foreword

The benefits of regional energy trade through sub-regional electricity links in South Asia are now better

understood and accepted by energy planners, policy makers and politicians. USAID recognizes that what

is now needed is more bi-lateral, or sub-regional energy trading projects around strong project

fundamentals that allow the stakeholders to build confidence. While SARI-wide regional energy markets

remain a large opportunity, we understand that this is a complex undertaking whose success will be built

one bi-lateral infrastructure project at a time.

This paper details key ingredients for moving forward on cross-border trading including an overview of

the relevance and longer term role of the Indian energy markets in facilitating cross border trading of

electricity.

The paper also provides a useful road map of future activities for core working groups (CWGs) and

policy planners participating in the South Asia Transmission Utilities Network set up under the SARI/E

program.

We look forward to continued progress on development of effective electricity cross-border trading

mechanisms that can provide benefits for individual countries on a bilateral basis and eventually the

region as a whole.

S. Padmanaban

Senior Advisor

South Asia Regional Initiative for Energy Program (SARI/Energy)

New Delhi, India


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ii SARI/Energy Final Report | Tetra Tech ES, Inc.

Executive Summary

This paper is designed as a working document to set forth a road map of substantive activities and

procedural steps that would allow nations in the SARI region to move forward, on a targeted basis,

with cross-border trading of electricity. The paper builds on the considerable number of studies of

the overall benefits of such cross-border trading undertaken to date as well as the excellent work of

the SARI project to bring together key stakeholders in the region to focus on cross-border

development. Unlike prior studies, it is intended more as an action-oriented document, outlining

key ingredients needed for effective bilateral cross-border trading in the region as well as

prioritizing next steps to move forward. The paper takes a pragmatic view, focusing on the near-term

potential opportunities such as between India and Bangladesh, India and Nepal and India and Bhutan

as fruitful areas for exploration rather than entangling forward movement on the development of a

far more complex and controversial SARI-wide market.

The fundamental objective of moving toward enhanced interconnections between nations and additionalcross-border trading is two-fold:

Providing additional means for the countries in the region to meet the electricity demands oftheir citizens in a reliable and efficient manner; and

Creating the platform to attract investment needed to develop new untapped generationresources in the region including hydropower in Northern India, Nepal and Bhutan, wind

power in Southern India and Sri Lanka and natural gas resources in Bangladesh.

The paper reiterates that mutually beneficial long term bilateral power purchase agreements will remain

the foundation of any cross-border trading but also recognizes the value that deep and liquid powerexchanges can provide in creating short term day ahead and real time balancing opportunities as well as

in serving as a future price discovery tool. To grow, such markets will require the development of

additional generation and transmission infrastructure appropriately funded by the nation which can most

benefit.

There are a number of key ingredients to the development of effective cross-border trading, each of

which is discussed in this paper. They include:

The development of adequate transmission and generation infrastructure to provideopportunities for export of power;

Establishment of protocols to ensure reliability and efficient scheduling; Fair transmission pricing; Developing long term power purchase agreements; Developing an effective congestion management system to address the potential

increased congestion resulting from more robust cross-border trading;

Open access and specification of transmission rights; Development of settlements processes and appropriate counterparty rules to ensure

the appropriate allocation of risk;

Providing means for timely and fair interconnection of new generation and demandresources;


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iii SARI/Energy Final Report | Tetra Tech ES, Inc.

Planning; Ensuring appropriate cross-border regulation and dispute resolution; and Development of market structures that support efficient and mutually-beneficial cross-

border trading.

The paper recognizes that there needs to be an appropriate sequencing of these many developments

with careful study and political support needed before moving to the next stage. Fundamentally,

cross-border trading needs to provide demonstrable long-term benefits to each participating nation.

Moreover, since India will continue to play a key role as the anchor nation which will continue to

buy and sell from its neighbors, political support and capacity building in India will be essential to the

success of any particular cross-border project.

Much good work has already been undertaken in this area. The authors provide a road map of

future steps both for the region as a whole and for the SARI organization. These steps include:

Infrastructure-Related Activities including analysis of additional interconnections betweenIndia and its northeastern neighbors. Such analysis should maintain, as its objective,

supporting the development and financing of new generation and interconnections to

further:

1. hydro development in Bhutan and Nepal,2. natural gas generation development in Bangladesh and3. wind power development in Sri Lanka;

Energy Market Development Activities including analysis of opportunities for short term andspot market sales through power exchanges and other means, review of the emerging load-

generation scenario in India and its impact on quantities and price of power available for

import and export and capacity building to allow Bhutan, Bangladesh and Nepal toparticipating in the emerging Indian electricity markets;

Financial Reviews identifying additional financial structures and institutions that couldsupport additional generation infrastructure development in the region; and

Institution-Building Activities such as capacity-building among the nations in the area,formal coordination with the cross-border work being undertaken at the SAARC level,

targeted communications to build political awareness and involvement of universities and

other institutions that could provide technical support to the SARI/E efforts.

Each of the steps outlined in this paper and the accompanying Road Map are designed to build on

the excellent baseline developed by SARI/E in its Phase One work. This paper is designed to enhance

that work by outlining clear hands-on tasks that need to move forward through targeted bilateral

efforts among nations. As described herein, SARI/E is well-positioned to serve as a clearinghouse for

those efforts so as to ensure that the work on cross-border trading moves forward in a coordinated

and deliberate manner.

The authors wish to thank US AID and SARI for the opportunity to provide this input into the regions

important work in analyzing the potential for enhanced cross border trading in electricity in the SARI

region.


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iv SARI/Energy Final Report | Tetra Tech ES, Inc.

Table of Contents

1.

Introduction..................................................................................................................................... 1

An Overview of the SARI/Energy Program..1

Task Overview ............................................................................................................................................... 1

Statement of Overall Objectives ................................................................................................................... 2

Cross Border Power Exchanges in the SARI Context Today .......................................................................... 3

2. Cross-Border Energy Trade and Energy Markets .......................................................................... 5Review of Overall Benefits of Cross Border Trading ..................................................................................... 5

Key Ingredients Analysis.. .............................................................................. 6The Role of Energy Markets in Facilitating Cross Border Trading ............................................................... 19

Options for Development of Cross-Border Markets ................................................................................... 19

The Pathway Toward Development of Cross-Border Markets ................................................................... 22

3. Next Steps.....................................................................................................................................25Major Issues for Each Nation ...................................................................................................................... 25

Observations on Process Issues Going Forward ......................................................................................... 31

4. Road Map: A Guide to the Path ForwardRoad Map .......................................................................................................................... 33

Conclusion ......................................................................................................................... 35

Appendices

Appendix I --- Cited Sections of Article VIII (Principles Concerning Joint Operations in Emergencies)

from Joint Operating Agreement Between the Midwest Independent Transmission System Operator,

Inc. and PJM Interconnection, L.L.C. (December 11, 2008) 37

Appendix II ---Cited Sections of Article IX (Coordinated Regional Transmission Expansion Planning)

from Joint Operating Agreement Between the Midwest Independent Transmission System Operator,

Inc. and PJM Interconnection, L.L.C. (December 11, 2008) 39

Appendix III -- Summary of Interconnection Projects in South Asian Region and Current Demand-Supply

Scenarios of SARI/Energy Countries ........................................................................................................... 41


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1 Introduction1.1. Overview of SARI/Energy Program

The USAID South Asia Regional Initiative for Energy (SARI/Energy or SARI/E) program was launched in

2000 to promote energy security through increased trade, investment and access to clean sources of

power and fuel. Since then, SARI/Energy has reached out to more than 4000 participants in the region

on clean energy trade, energy efficiency, rural energy supply, energy regulation, energy statistics, and

private sector involvement.

Activities under the SARI/Energy program include building institutional capacity, promoting private

sector and civil society participation in energy policy, and creating and strengthening regional forums,

networks and associations.

The long-term results that SARI/Energy seeks to achieve in the region are as follows:

Improved policies and international agreements enabling cross-border trade in clean energy;

Increased availability of energy to meet regional development needs;

Improved cross-border infrastructure for electricity transmission and natural gas transport;

Improved regional market mechanisms related to energy; and

Improved utilization efficiency of energy resources to ensure sustainable economic growth

and development.

Together, these conditions will encourage trade in energy that will benefit both buyers and sellers,

contribute to economic growth throughout the region, and help mitigate the growth of greenhouse gas

emissions from the region.1

1.2 Task Overview

This paper will analyze the state of efforts underway among the nations in the SARI region to develop

effective mechanisms for the efficient trading of electric power across the borders of the SARI statesincluding the role of energy markets in facilitating such trading. The paper will also suggest next steps to

be undertaken at the SARI level as well as specific activities which should be considered by each of the

participating nations. Finally, attached to this paper is a road map of potential next steps for

consideration by SARI officials and the member nations.

The findings and recommendations contained herein are informed by the proceedings of the SARI

Conference on Cross Border Trading held in New Delhi, India on February 15 to 17, 2012. They are also

1More information on the SARI program can be found at www.sari-energy.org.
http://www.sari-energy.org/http://www.sari-energy.org/http://www.sari-energy.org/


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informed by the considerable technical work performed by SARI to date under the auspices of US AID

and technical work performed for SAARC2 by the Asian Development Bank. Finally, the authors have

received invaluable input through a series of detailed interviews and meetings with the key regulators

and stakeholders directly involved in the power sector in India, Afghanistan, Nepal, Bhutan, Bangladesh

and Sri Lanka.

This paper is organized as follows:

Statement of overall objectives;

Review of identified benefits of cross-border trading;

Outline and discussion of key ingredients to an effective cross-border trading program;

Discussion of the role of energy markets in facilitating cross-border trading Review of potential challenges and obstacles associated with each future task;

Outline of next steps including the role of SARI going forward in this area; and

Road Map matrix of next steps for individual nations as well as for SARI.

1.3 Statement of Overall Objectives

Cross-border trading, and the markets that can develop to support such trades, are not ends unto

themselves---rather, they are tools to help improve the efficiencies of power supply and delivery to

meet each nations future power needs. The fundamental objective of moving toward markets,

enhanced interconnections between nations and cross-border trading platforms is two-fold:

Providing additional means for the countries in the region to meet the electricity demands of

their citizens in a reliable and efficient manner; and

Creating the platform to attract investment needed to develop new untapped generation

resources in the region including hydropower in Northern India, Nepal and Bhutan, wind power in

Southern India and Sri Lanka and natural gas resources in Bangladesh.

The term market can have a number of different meanings and connotations. For purposes of thispaper it refers to the infrastructure (both physical, regulatory and commercial) needed to effectuate

power purchase arrangements (both long and short term) that yield just and reasonable rates to both

the consumer and the investor and ensure the ongoing reliable delivery of that power to the ultimate

consumer.3Cross border markets are a subset of this larger infrastructure and involve capturing the

natural synergies of each participating nation to improve the efficiency of power delivery across the

region and to attract critically needed infrastructure to locations which best match that nations

2SAARC refers to the South Asian Association for Regional Cooperation.

3Organized power exchanges are a tool to enhance development of the market by providing increased liquidity,

transparency and price discovery. The benefits and limitations on the use of power exchanges in the SARI regionare explored in Section 3 of this paper.


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resource mix. Each of the nations in the SARI region has different resource strengths and weaknesses. By

enhancing cross-border trading, the region can begin to capitalize on those potential resources,

particularly hydropower available in Nepal and Bhutan and windpower in Sri Lanka, with the ultimate

goal of improving the supply and delivery of power to the consumers in each nation.

1.4 Cross Border Power Exchanges in the SARI/E Context Today

Cross-border exchange of power between the South Asian countries has been discussed for many years

in the SARI/E forum, but the actual application of this dialogue seems to have been nominal. The aim of

this paper is to suggest how the SARI/E endeavor can be directed in the future, taking the ground

realities into account, to focus better on the immediate issues and possibilities. The first part of this

paper will outline some of the ingredients needed to build an effective long-term cross-border trading

programme. These elements are focused on building a platform that can assist in attracting new

investment, particularly in hydro resources. As it happens, the South Asian countries face immediatepower shortages which force additional prioritization of the various ingredients set forth below. As a

result, the short term road map portion of this paper in Section 3 focuses on essential activities over

the next five years, given the generation deficit faced by each of these countries (except Bhutan).

The primary purpose of cross-border exchange of power in the developed countries (Western Europe

and North America) is to enhance the economy: replacement of costlier generation by cheaper

generation. An inter-connection may also enhance the reliability, reduce the requirement of reserve

capacity and enable a larger capacity of renewable energy to be harnessed. The basic premise in their

case is that each country has adequate generating resources of its own, and can manage to cater to its

consumer load (without load shedding) even if there is no import / export of power. As it happens, none

of the South Asian countries, except Bhutan, fulfill this criterion. All these countries currently suffer from

a serious shortage of generating capacity, and load curtailment is a daily phenomenon. The World Bank

appraisal of Nepal - India project (May, 2011) entitled Project Appraisal Document on a Proposed Credit

in the Amount of SDR 53.8 Million (US $84 Million Equivalent) and a Proposed Grant in the Amount of

SDR 9.7 Million (US $15 Million Equivalent) to Nepal for a Nepal-India Electricity Transmission and Trade

Project provides a comprehensive review of the situation. None of the countries is likely to reach a level

of generation adequacy in near term to be really able to export power, except for off-peak surplus. They

would all look for getting extra power through cross-border exchange to cater to consumer load which is

not presently served due to generation inadequacy.4

What the above implies is that cross-border exchanges of power in South Asia would be driven primarily

by the need to focus on the consumer load which presently remains unserved. Where constraints exist

to the development of additional generating capacity internally within a country to cater to the

presently unserved consumer load, a cross-border regime can allow such generation to be built in a

neighboring country when cross-border transmission of power is a feasible proposition. This is what the

4The situation in India is more complex, and is separately discussed later.


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general public would understand, what would appeal to all Governments, and what should be projected

as a primary objective.

Another properly-projected primary objective for cross-border exchange of power in South Asia should

be faster harnessing of hydro power in Bhutan and Nepal, to conserve fossil fuels for future and to

reduce CO2 emission in the region. A delay in harnessing this hydro potential means that a usable

natural resource will remain untapped for that much longer. Economy, reliability, trading, market

development and private sector participation, represent additional but secondary objectives to the

overarching objectives outlined above.

Finally, there can be opportunities to take advantage of the diversity of load as a result of differing

weather conditions, the need to schedule maintenance outages and differing consumption patterns,

which can enable better deployment of existing generation fleet in the region, particularly during off-

peak hours. However, these benefits would only be incremental, as they would hardly make up for the

limitations in cross-border transactions due to the persisting unserved load at peak periods in all ofthese countries.

A limited number of cross-border interconnections presently exist with limited uni-directional flows

from discrete projects. The development of additional interconnections and more robust cross-border

trading starting with bilateral trading between India and certain of its neighbors would begin what could

be an extended process to move the SARI region from these limited interconnections toward a more

comprehensive approach to putting in place the physical, regulatory and commercial infrastructure

needed to attract new investment in untapped resources. This investment, in turn, can improve the load

serving capability of each interconnected nation.

The authors wish to make clear at the outset that this paper does not call for a single SARI region-wide

plan for interconnection and trading across each of the nations nor a flash-cut to a competitive market

model as exists in parts of Europe, South America and the United States. Such approaches would fail to

recognize the very different stages of development of each of the member nations and the obvious geo-

political issues which could doom efforts for the region to move in lock step. Rather, the paper

recommends a more deliberate approach than what may have occurred to date but also realizes that

such projects will need to continue to be examined on a case by case basis and only proceed when the

benefits to nations on both side of the trade have been identified and accepted by the appropriate

government officials.


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2. Cross-Border Energy Trade and

Energy Markets

2.1 Review of overall benefits of cross border trading

A number of studies and analyses, including those funded by SARI as well as a recent study funded by

the Asian Development Bank for SAARC,5 have found substantial benefits for the region from enhancing

interconnections among the SARI-nations and developing the institutions and mechanisms to support

cross-border trading where mutually beneficial to the member nations. For example, the recent SAARC

study found benefits to the region as a whole and to the member states ranging from $105 to $389M US

associated with the development of specific interconnections linking India with Nepal, Sri Lanka and

Bangladesh and the use of those links to promote cross-border trade.

As a threshold matter, the overriding benefits of cross border trading are two-fold:

Assisting nations which today suffer from generation deficits to be able to better serve load,and

Harnessing what are today untapped hydro resources in order to conserve fuel, meet futuredemand, promote economic development and reduce carbon emissions.

Within these overarching benefits, there are certain additional tangible benefits to consider:

Reliability Benefits---New interconnections can help to offset the present shortages of supply which lead

to frequency degradation and load shedding in importing nations. Moreover, new interconnections can

benefit both the importing and exporting nations by harnessing the benefits of load diversity in the

region so as to more efficiently dispatch the existing generation fleet. Finally, both importing and

exporting nations can realize reliability benefits by attracting new investment which, as a result of the

interconnection, can now be right-sized to meet the needs of both nations. This is especially true in

the case of hydropower where the needs of the vast Indian market can become the catalyst for further

development of hydro facilities in Indias neighbors to the north;

Operating Cost BenefitsCross border trading can lower the fuel costs paid by all consumers in the

interconnected nations by better utilizing existing and new facilities. This impact on lowering fuel costs

is most directly impacted by the development of additional hydropower resources;

Capacity Benefits---Interconnection and cross-border trading can work to eventually displace aging

thermal capacity that may be environmentally-challenged. In addition, the availability of a larger

seamless market will be more attractive for investors seeking to invest in new facilities on both sides of

the international border.

5

Study on a South Asian Regional Power Exchange Draft Interim Report, Asian Development Bank, November,2011.


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Economic Development Benefits---For the exporting nation, the sale of power across the border can

provide a new source of revenue and, through the development of new generation facilities, spur new

economic development opportunities for the host nation. For the importing nation, to the extent power

delivery is more reliable or power costs reduced as a result of the addition of new generation, the

competitiveness of industries in the importing nation which depend on low-cost, reliable electricity is

increased.

It is natural for observers in each nation (particularly the exporting nation) to raise the question whats

in it for us? , especially if the exporting nation is already facing load shedding due to power shortages.

Although the specifics of each situation must be carefully studied before proceeding, in addition to the

revenue streams that will accrue and the creation of platforms that attract further investment, one

cannot ignore often overlooked operational benefits to the exporting nation such as harnessing the

benefits of load diversity across an even wider region. The electric consumption patterns of each nation

are not the same---they reflect differences in load profiles, the impact of different weather conditions,

different hydrological conditions and, for the smaller nations, even the impact of national events such as

sporting events which require high electricity consumption.

For these reasons, any analysis of cross-border trading should build on, rather than simply reproduce

the basic high-level findings to date from the great number of studies undertaken on the subject, that

cross-border trading can be beneficial to the region as a whole and the member states. Of course,

individual facts and circumstances must be analyzed to ensure that any particular project becomes a

win/win solution for each participating nation.

2.2 Key Ingredients Analysis

The development of adequate cross-border infrastructure and the facilitation of competitive cross-

border trading in electricity are key building blocks to meeting the larger goal of capturing the

efficiencies and synergies associated with neighboring nations respective resources and customer

demands. By capturing such synergies and the natural resource advantage that each nation can bring to

the table, all participating nations can better serve the power needs of their citizens.

Without the essential infrastructure and institutions in place, investment opportunities that could

benefit both importing and exporting nations may well not even present themselves. . In short, the

institutions and structures that help provide a platform for effective cross-border trading do not simply

spring up overnight. No single developer or group of developers is going to be willing to fund such

efforts or tie up his or her capital awaiting such developments. As a result, the time to begin the process

is now.

Just like one organizes ingredients before trying a new recipe, there are a number ofkey ingredients

which first must be gathered in order to build the institutions and create the coordination needed to

support cross-border trade. In many cases, these are similar institutions, investments and processes

needed to enhance power delivery in any single nation with the region. However, by definition, cross-

border trading requires the cooperation of two if not more nations and, as such, requires a far greater

degree of coordination and cooperation than may be needed to develop comparable institutions and

infrastructure simply serving an individual nation. The good news, of course, is that the efforts to


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develop effective institutions to manage cross-border transactions are not markedly different than

those which otherwise are needed to attract new investment and reform the power sector in each host

country. Cross-border transactions raise a greater degree of complexity given their international nature

but do not necessarily require an across-the board development of new institutions over and above

those already being considered as part of domestic power reform. With that in mind, this paper will

outline some of those key ingredients based on our discussions with the major players and analysis of

work undertaken to date.

Both the development of cross-border infrastructure and the effective utilization of that infrastructure

can best be realized through comprehensive development of:

Cross border interconnections and associated facilities; A cross border grid code and governance structure to ensure the fair and effective operation

of those facilities;

Cross-border power purchase agreements that support the long term financing of newgeneration as well as transmission infrastructure;

Determination of sources of power, firmness of delivery and identification of clear benefitsto both exporting and importing nations;

Development of suitable markets to ensure availability of power to meet load and toprovide ancillary services;

Structures to ensure the just and reasonable pricing of monopoly transmission service andto allocate rights to use of those transmission assets;

Markets to provide price discovery and competitive discipline on the pricing of long termbilateral agreements and short term balancing services;

Coordinated regulatory oversight; Identification and empowerment of individuals and entities dedicated to comprehensively

ensuring success of cross-border projects; and

Timely and fair means of dispute resolution.Each of these is discussed in more detail below.


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Ingredient #1---Adequate Infrastructure

Although the need for adequate transmission infrastructure to support cross-border transactions seems

obvious, there are various requirements needed to ensure its timely development and construction. For

the SARI region, without additional cross-border interconnection, the business case for development of

additional hydro resources in the north or wind resources in the south will be much more difficult tomake.

Development of interconnections between nations has been a key focus of regional initiatives around

the globe. The European Union has embarked upon development of an EU-community-wide

development plan every two years with the goal of increasing beneficial interconnections between the

EU nations.6

Under this initiative individual national plans are required to take into account and

coordinate with regional developments and integrate identified EU-community agreed goals. Similar

efforts are underway to harness the different resource profiles of the nations of West Africa through the

effort to create a West Africa Power Pool.7 Each of these efforts begins with the identification of

multilateral objectives and an examination of how individual national planning efforts can utilize cross-

border interconnection as one tool to meet unserved load across the broader region.

A number of key points must be considered as one contemplates the infrastructure needed to support

further cross-border trading in the SARI region:

a. The Nature of Transmission Infrastructure Investment----Obviously, an effective generation and

transmission infrastructure is critical to ensuring adequate resources and delivery mechanisms to

support cross-border trading. Generation development is largely driven by an appropriate risk/reward

division that can support the long term financing of this capital-intensive investment. On the other hand,

investment in transmission infrastructure is driven by different drivers. Transmission assets are enablers.They do not, in and of themselves, generate market revenues for the asset owners nor are they subject

to competition. However, transmission assets are key enablers of any market and provide the means by

which bottled up generation can realize its true value and efficiently serve the needs of distant

customers. This is not to say that development of additional transmission needs to pre-date

development of generation assets. In the SARI region, development of generation has lagged behind

transmission due to challenges in obtaining the necessary financing for large generation investments. At

the time investment decisions are being made for generation, there needs to be a clear implementable

plan to assure that the necessary transmission can be timely constructed to maximize the output of that

generation on the grid.

b. Contractual Structures to Support the Development of Adequate Transmission Infrastructure---

Work appears well underway toward the development and financing of additional cross-border

interconnections between India and Nepal and India and Bangladesh. Construction is scheduled to

commence in the near future on new 400kV double circuit AC interconnection between Nepal and India.

Contracts have already been awarded for construction of a 500 MW HVDC back-to-back station at

Bheramara in Bangladesh to enable a cross-border exchange of power between India and Bangladesh.

6See http://www.naruc.org/International/Documents/Session%20II_Sihvonen-Punkka%20CBT%20Planning.pdf

7

See http://www.naruc.org/International/Documents/21%20ECOWAS-%20RE%20Presentation%20March%202011.pdf


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Ties between India and Sri Lanka as well as ties between Afghanistan and its neighbors and between

India and Pakistan are more distant prospects.

A critical next step is to develop the governance, operational protocols and rate structures to support

the effective use of these interconnections going forward. These next steps, which can serve as a

template for further cross-border work, include:

Development of a grid code or similar protocols to establish the common reliability rulesassociated with operation of cross-border transmission infrastructure;

Development of suitable facilities to convert DC power and otherwise ensure theappropriate interconnection of facilities;

Establishment of just and reasonable rates and terms and conditions of service that supportcross-border trading and are consistent, on both sides of the border, with principles of open

access;

Provide means for consistent non-discriminatory regulation both of the cross-bordertransmission assets themselves and the key transmission assets on both sides of the border,

that support those facilities and facilitate cross-border trading over them;

Establish market-based means to manage congestion, ensure for those countries connectedthrough AC interconnections that each nation is supporting maintenance of acceptable

system frequency, and developing consistent measures of available transmission capacity on

each countrys respective systems and across the border facilities, whether they be DC or AC

facilities.

c. Costs, Benefits and Challenges of Direct Current (DC) Lines---As a final matter, cost benefit

analyses will need to be undertaken to weigh the increased costs associated with DC facilities vs. their

overall benefits in a cross-border application. DC facilities are far easier to manage than AC facilities.

Moreover, DC facilities avoid issues associated with operating a single synchronous interconnection

across borders or otherwise harmonizing two nations different systems. As a result, although initial

allocation rights to use of those facilities must be fairly determined, the DC facility is not subject to the

impacts of other outages of generation and transmission on the grid that could significantly increase

congestion on AC ties. On the other hand, DC lines and particularly the conversion facilities on each end

of the line can be quite expensive. Their costs as well as the costs of associated conversion equipment

are only justified for the interconnection of large systems where the benefits (when considered against

the potential complexities of operating as synchronous systems) sufficiently outweigh the up-front

costs. Moreover, as the adjoining systems are essentially independent of each nations AC system, there

are no back-up facilities available in the event of a failure of the conversion facilities or loss of the line

itself thus providing heightened reliability risks for the importing nation dependent on imports over the

DC line. Finally, although a DC interconnection appropriately separates two discrete AC systems and

eases operational issues, there still remain critical issues associated with how the generation assets in

one country can effectively participate in the market of the other. Particularly hydro assets as well as


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thermal assets can be dispatched in a manner which benefits the needs of both countries and takes

advantage of the benefit of load and hydrologic diversity. These issues will be further explored below.

Ingredient #2----Protocols to Ensure Reliability and Efficient Scheduling.

There are a number of important issues that need to be addressed in an operating protocoldesigned to govern the operation of cross-border facilities. Development of such protocols is especially

important in the SARI region given the lack of history or institutions accustomed to dealing with the

operation of electric systems across international boundaries.

At a high level any such protocols must:

affirm the right of participating nations to utilize the facilities up to their designatedallocation of capacity on cross-border facilities to meet their local needs;

ensure that each user of the facilities participates in or provides frequency supportequivalent to the requirements of its own system (and does not lean on its neighbors) and

provides sufficient reactive capability and voltage control facilities to meet the reactive

requirements and voltage levels of their own system as well as the reactive and voltage

requirements of the interconnected system (which should logically be met by each

respective country for its own system and by the owner of the interconnection for the

interconnection itself);

require coordination of the operation schedules of the generating facilities using therelevant cross-border facilities to ensure that reliable service is maintained while obtaining

maximum operating efficiencies from such facilities;

require coordination of schedules of planned outages of generation and transmissionfacilities with those of other member utilities in order to maintain reliable and economic

operation of the system;

adopt standards for system design, equipment ratings, and operating and maintenancepractices;

establish nondiscriminatory rules on transmission access and curtailment; as detailed further below, participate in the development of consistent congestion

management protocols for any synchronous AC facilities;

ensure cooperation in implementing uniform emergency procedures; require that each participating entity maintain a proportion of load subject to control by

automatic under-frequency load shedding devices;


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establish a governance structure through creation of a Technical Committee and higher-level Operating Committee to address issues associated with the operation of the

interconnection; and

as noted above, provide a dispute resolution procedure that allow for rapid and fairresolution of disputes.

There are a variety of models, ranging, on one end, from the development of a new inter-regional grid

code and the creation of an inter-regional system operator with specified duties and responsibilities

to, on the other end, handling this matter solely through agreements among neighboring electric

utilities. In this regard, we note that the Road Map for Developing SAARC Market for Electricity

proposed by the Government of India in April of 2010 states:

It may not be necessary to have a uniform grid code for each of the SAARC Member

countr(ies). For instance, even in the case of Nordpool countries, deviations from schedules are treated

differently by each country according to its national grid code. Within India also each State has its own

state grid code and it has to be harmonized with Indian Electricity Grid Code (IEGC) to facilitate interstate

trade transactions.The important thing is coordination among the national grid operators, a common

timeline for issuing dispatch schedules, agreement on handing grid emergencies and financial

settlement system. (emphasis added).

The observations outlined in the India-proposed Road Map for SAAARC are generally correct. These

matters have been dealt with in other regions through interregional agreements. However, the need for

coordination and a clear hierarchy of decision-making is critical to the success of such agreements.

Unclear language merely pledging cooperation will not suffice as an actual operating protocol given the

dynamic nature of the grid. For example, the common protocols between two very large systems in the

United States, the Midwest ISO and PJM Interconnection, provide a clear protocol for rapid response of

each system to specified emergencies declared by the neighboring system while avoiding real time

second guessing by the neighboring entity. Section 8.1.4 of the MISO/PJM Joint Operating Agreement

(JOA) provides:

Transmission System Emergencies may be implemented, when, in the judgment of either Party,

the system is in an emergency condition that is characterized by the potential either imminently or for

the next contingency, for system instability or cascading, or for equipment loading or voltages

significantly beyond the applicable operating limits, such that stability of the system cannot be assured,

or to prevent a condition or situation that in the judgment of a Party is imminently likely to endanger life

or property. In the event that either it becomes necessary for either Party to declare a Transmission

System Emergency for an area that is in close electricalproximity to both of the Parties RC Areas, both

Parties will declare a Transmission System Emergency or redispatch without declaring a Transmission

System Emergency, and take action(s) in kind to address the situation that prompted the Transmission

System Emergency consistent with safe operating mode. These actions may include:

(a) Curtailment of equivalent amount of firm point-to-point transactions within both Parties;

(b) Redispatching of generation within both Parties; and


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(c) Load shedding within both Parties.8

Of course, differences can arise as to whether a true emergency exists that impacts both systems.

However, to avoid lack of direction while that issue is resolved, Section 8,1.7.3 of the JOA also provides a

rapid response protocol in those situations where disputes arise as to whether an emergency condition

potentially affecting both systems actually exists. In these cases, there is precious little time to analyzethe situation before taking some action. As a result, the Section provides:

When any one Party identifies an overload/emergency situation that may impact the other

Partys system and the other Partys results/systems do not observe a similar situation, both Parties will

operate to the most conservative result until the Parties can identify thereasons for these differences.

The above sections are provided merely as illustrations of the need for the protocols to anticipate a

wide variety of circumstances including how to operate when there is disagreement as to the existence

of a system emergency as between different systems and to illustrate the breadth of the kinds of

circumstances that such protocols should anticipate.

Ingredient #3---Fair Transmission Pricing.

One key issue that will be critical to developing infrastructure involves the appropriate pricing of

transmission service. Fair pricing of transmission is especially important among the SARI nations as the

principle beneficiaries of the relevant interconnection may change as additional resources are

developed on one side or the other side of the border. Pricing of transmission for cross border facilities

and related infrastructure should include three key components:

Ensuring that the overall pricing and collection mechanism ensures recovery of the fixed andvariable costs associated with the transmission asset and associated facilities plus areasonable return on that investment;

Ensuring a fair allocation of the costs of transmission among the beneficiaries of the line;and

Designing a rate structure that complements rather than impedes cross-border trading.Certain guiding principles for consideration are outlined below:

a. Recovery of Fixed and Variable Costs---Transmission fixed costs are generally recovered through

a capacity charge which is tied to specific schedule or reservation of the transmission system utilized by

the transmission user. Costs for recovery under a capacity charge include an amortization of the original

construction costs of the line and related fixed costs associated with financing, currency conversion and

necessary upgrades to the facility. Fixed costs are generally amortized over the life of the facility

however, in order to incentivize new investment, regulators have, in recent years, been utilizing

shortened lives and accelerated depreciation of transmission assets.

8Copies of these sections are attached in the Appendix to this report. The complete

MISO/PJM Joint Operating Agreement can be accessed at:http://www.pjm.com/documents/agreements/~/media/documents/agreements/joa-complete.ashx


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Returns should reflect the risk of construction, maintenance, debt service, a reasonable return to equity

holders and the need for an adequate return to reflect continued financing for upgrades or maintenance

of the line. In many countries, transmission is considered a relatively low risk investment however, for

international facilities, given that transactions are tied, in most cases, to a single facility which could be

subject to an extended outage, the financial risks associated with line outages are clearly higher. A

transmission usage charge should reflect the actual amount of energy which flows over the line during

the billing cycle as measured. This calculation is relatively straightforward for DC lines but is more

complex involving AC lines that are part of a networked system. It is for this reason that AC lines are

generally priced on a network basis with all facilities rolled-in to a single uniform rate. The costs for

any system upgrades on each side of the border as well as the cost of the actual interconnection

facilities will need to be similarly treated in this manner in order to recognize that those facilities are

now part of the overall transmission system of each country;

b. Fair Allocation of Costs---This is perhaps the most challenging issue associated with transmission

pricing. In the United States, major disputes arise as to who constitutes the beneficiaries of this asset

and therefore how its costs should be allocated. Even greater disputes occur between nations on cross-

border facilities. Ironically, transmission is a relatively small part (about 10-15%) of an end users electric

bill. Nevertheless, cost allocation discussions can effectively delay the development of transmission and

as a result, delay the benefits of transmission.

Presently, the Government of India has determined that the cross-border interconnections which have

occurred to date are worthy of government funding and their development has been deemed in the

national interest. As a result, the costs of such facilities are socialized across the whole country.

However, the beneficiaries of a given interconnection may change over time as new generation,

developed in nations with untapped hydropower potential, can work to transform an importing nation

to an exporting one. Perhaps the best resolution of cost allocation decisions is to develop a no regrets

policy---one which allows adjustments over time at discrete review periods for changes in transmission

pricing to reflect the fact that the particular degree to which an entity benefits may change over time as

each countrys situation changes.

c. Complementing Cross Border Transactions---Any pricing mechanism needs to be appropriately

disconnected from and nondiscriminatory to the choice of generation. Single line pricing for cross

border facilities carry with it certain built-in inequities as a generator on one side of the border has to

compete against local generators who perhaps enjoy free or subsidized use of the host nations

transmission system. Ideally, the recovery of costs of transmission should be indifferent to whether the

generation is on one side or the other side of the border. Although there are a variety of ways to achieve

this result, this remains an important principle in the design of transmission rates. A rate structure

where the importing country only pays at a uniform delivery point irrespective of the source of

generation avoids the discrimination which may occur from more complex location-based transmission

pricing methods. Any final agreements will need to establish clear points of injection and withdrawal for

pricing purposes and should consider this need to avoid discrimination among different generators.

Ingredient #4---Finalizing Long Term Power Purchase Agreements.

Given the capital requirements associated with development of new generation, and the lack of

adequate transmission infrastructure today to allow vibrant competition among generating units, long


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term power purchase agreements are necessary to ensure adequate revenue streams and provide price

certainty to protect consumers. Price formation can be one of the major challenges facing the

development of new generation as generators need sufficient long term predictable revenue streams

while consumers are left with little choices and thus limited bargaining power over the pricing of such

assets. These issues are especially important for the SARI region as long term power purchase

agreements will be key to ensuring the return on investment that will be needed to develop the

untapped resources noted previously. Moreover, negotiation of such agreements will play an even

greater role given the requirement of the Government of India that any new generation resources be

procured through a competitive procurement process.

In the absence of adequate competition, cost plus a reasonable return should be the guide with an

effective cap at the cost of new entry of efficient alternative generation resources. The appropriate

competitive price for long term contracts can be informed by the price discovery features of the existing

Indian exchanges. Although at this point the volumes of trades of long term commitments on the

exchanges may be thin, the exchanges in the future can provide a valuable price discovery tool to the

marketplace in determining what the market assesses as the value of such long term arrangements.

Finally, the determination and verification of costs ultimately becomes a regulatory issue. Given Indias

requirement that all new generation be procured through a competitive procurement process, it is

imperative that agreement be reached among the regulators of both countries so that one countrys

procurement process does not assume an allocation of costs to consumers in the neighboring nation

that is not sustainable under that second countrys regulatory regime. Moreover, contractual

negotiations will rapidly founder should they be premised on one set of consumers in one nation

bearing costs more appropriately borne by customers across the border. And, to protect against

erroneous predictions of future prices and unduly shifting the risk/reward balance, portions of the

contract can be indexed off of the results of trading of long term transactions off of Indias existing

electricity exchanges as well as its commodity exchanges dealing in fuel.

Ingredient #5---Developing an Effective Congestion Management System to Address the Potential

Increased Congestion Resulting from More Robust Cross-Border Trading.

Long term power purchase agreements must ensure that there are adequate means to schedule power

from multiple generation sources to meet the needs of the consuming nation and that the

consequences and costs of running units out of merit order to clear congestion on the grid are

appropriately compensated. The agreements need to address curtailment priorities, emergency

procedures and access of facilities in a neighboring country to the use of transmission in the host

country.

In short, there need to be adequate incentives for the two nations to dispatch their generation in a way

which works to clear congestion and allows the physical entitlements specified in bilateral contracts to

be honored by the system operator. Absent a workable congestion management protocol, generators

may well find it difficult to meet the promised schedules due to congestion on the grid and the lack of

coordination between generators operating to meet the long term purchase power agreement

obligations and other generation on the grid.


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To date, congestion management has been a manageable issue in the SARI region given the existence of

radial lines and limited interconnections. However, as further hydro facilities are developed in Nepal,

Bhutan and northern India, and as further wind resources are developed in southern India, the potential

for increased congestion on the grid increases exponentially. Although to date it appears that the

transmission infrastructure has outpaced the development of generation, that situation could well

change as these new resources come on line. The fundamental challenge that all nations addressing this

issue have faced is to establish a means to identify and then compensate generation which may be out

of merit order but is located in such a place as to help clear the constraint through increasing or backing

off its own output (redispatch). Although in the short run these congestion charges can be absorbed

by the load serving entities and simply passed through to consumers, those nations and states which are

not facing congestion will rapidly protest their having to absorb the costs of clearing congestion on their

neighboring states system.

As a result, development on a more targeted form of congestion management, such as through the

development of zonal or nodal pricing and incentives to generators to adjust their output in order to

clear congestion, will go a long way to ameliorating the more blunt instruments of transaction

curtailment or load shedding which exist today. More work will be needed in this area and although it

will need to be addressed with or without cross-border trading, the prospect of increased hydro

resources as a result of cross-border trading could well accelerate the need to resolve this issue earlier

than it might otherwise need to be addressed.

Ingredient #6---Open Access and Specification of Transmission Rights.

As the SARI nations move into a system of cross-border trading, the prioritization of access to thetransmission system of each nation will need to be addressed. If trades are to operate either bilaterally

(e.g. Nepal to India) or even multilaterally (e.g. between Bhutan and Bangladesh through India),

questions will arise as to the priority of these transactions vs. in-nation transactions. Although open

access concepts allow for access to the grid, it does not, in and of itself, decide transmission priorities.

There has been an ongoing issue internationally as to whether native load or domestic uses obtain

priority in recognition of their having paid for the system. For the market to work in its most liquid

manner, there needs to be a policy of nondiscrimination as to international trades right to priority of

access and limitations on curtailment. However, tradable transmission rights can be awarded to those

who have historically paid for their transmission system. The trading of these rights through a market

ensures liquidity and allows parties seeking to import power across an international border to pay their

fair share of any increased congestion their transaction may be causing while still allowing fair access to

the transmission system to allow that trade to be effectuated. Transmission rights and prioritization of

cross-border access represents a key detail to be developed to effectuate the principle of open access

among nations.

Ingredient #7---Development of Settlements Processes and Appropriate Counterparty Rules

to Ensure the Appropriate Allocation of Risk.

In the market context, enforceable rules need to be developed for the clearing and settlement of the

market and the guarantee of payment. An exchange can help facilitate the efficient netting of various


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transactions. Clear rules will need to be developed on the counterparty status of the traders to each

transaction and the exchange. Issues concerning settlement and credit guaranties and the handling of

currency fluctuation are critically important issues in a region such as SARI where there have been very

few cross-border trades in electricity.

Even in the bilateral context, there will need to be protocols established to allow for the billing andtimely payment for congestion costs and the settling of payments for power which has been purchased

under long term agreements. To the extent such transactions have been curtailed or billing disputes

arise, there will need to be an international forum for the resolution of such disputes. Moreover, the

countries need to collectively address how currency valuations and currency risk are handled among

them.

Ingredient #8---Provide Means for Timely and Fair Interconnection of New Generation and Demand

Resources.

As the markets in the SARI region develop between nations, it is expected that new generation will seekto interconnect to the new expanded grid. The aggressive expansion of the Indian transmission grid is

evidence that interconnection issues will need to be tackled to the extent there is not already ample

capacity on a particular line to ensure that the output of a new generator is deliverable across the

nation and potentially to other nations. To date, the development of transmission has outpaced

generation. However, that situation will hopefully change as clearer market rules and access to long

term purchase power agreements begin to incent the development of new generation.

Interconnecting generation should pay for the costs of upgrades needed for their particular facilities.

However, excessive build-out costs have made interconnection of renewable resources much more

problematic in the U.S. and other markets requiring a degree of subsidization or socialization of costsnot otherwise needed for more traditional forms of generation. This is an area where size and

concentration of generation matters and where long term purchase power agreements can help

ameliorate for developers an otherwise unacceptable level of interconnection costs. There are policy

choices to be made here as to whether to accept government subsidization by technology or whether to

leave such issues to competitive negotiations among buyers and sellers with the understanding that

agreements may not prove viable for renewable resources (which are often distant from load and

existing transmission). Today, such costs are socialized but a question remains whether this is

sustainable in the future.

Ingredient #9---Planning.

The India-proposed SAARC Road Map document of April, 2010 states at p. 3:

It is not necessary to plan and create a common transmission grid for the SAARC countries. Each

country should have the autonomy to plan and develop its national transmission grid as per its

requirements. The coupling or interconnection between the countries can be planned depending on the

need of quantum of power to be exchanged in a desired time frame and in a phased manner.


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It is correct that attempting to plan a common transmission grid for the SAARC countries through some

kind of super-regional process could create far more difficulties than benefits for the region. However,

the Asian Development Bank report also correctly recognizes at p. 17 that:

Development of a regional power market would require coordinated planning across

transmission licensees in the region to develop cross border linkages with adequate margin to allow forregional trade.

Presently, it is envisioned that the costs of spare transmission capacity are to be borne by respective

entities or the existing beneficiaries of those linkages. It is further envisioned that a formal cost-benefit

analysis regime. would need to be introduced to provide a basis for future investment decisions,

planning and cost allocation.

In short, the sizing of future interconnections and the impact on local congestion of the delivery of vast

amounts of power at a single interconnection point needs to be addressed through a coordinatedcountry-to-country planning process. Otherwise, the local infrastructure may be ill-suited to handle the

large amounts of power being transferred over the interconnection leading to sub-optimal results which

could make countries worse off than they are today.

There are examples from other nations that could be helpful to serve as a guide to such arrangements.

For instance, in the United States, the Joint Operating Agreement between two very large system

operators, the Midwest ISO (MISO) and PJM Interconnection, (PJM) may be instructive here as a

possible guide. It affirms each entities right to undertake its own system planning to meet its system

needs but then requires that each individual entitys annual transmission plan will be incorporated into a

Coordinated System Plan. Section 9.3.5.1 of the Joint Operating Agreement describes the purpose ofthe Coordinated System Plan to:

(a) Integrate the Parties respective transmission expansion plans, including any

market-based additions to system infrastructure (such as generation or merchant transmission projects)

and Network Upgrades identified jointly by the Parties together with alternatives to Network Upgrades

that were considered.

(b) Set forth actions to resolve any impacts that may result across the seams between

the Parties systems due to such system additions or Network upgrades; and

(c)Describe the results of the joint transmission analysis for the combined transmission

system as well as the procedures, methodologies, and business rules utilized in preparing and completing

the analysis.

Similar joint planning protocols should be negotiated between India and those neighbors to which it is

planning to interconnect in the near future to facilitate cross-border exchanges of power.

Ingredient #10---Ensure appropriate cross-border regulation and dispute resolution.

Any cross-border exchange will need to be supported by a system of regulation that sets common rules

for licensing, reliability, price formation and the policing and correction of instances of market power

and market failures. Moreover, an enforceable system of settlement and collection is absolutely critical


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to the functioning of the market with clear consequences for failure to pay bills and resolve disputes in a

timely manner. These ingredients are especially important to sort out in the Indian electricity sector

given the great number of institutions with a role in that sector.

A single regulator is not needed to govern cross-border transactions but the regulatory structures need

to be sufficiently developed in each nation to ensure that effective protocols can be addressed andsupported through government. Entities such as SARI can help form regional regulatory agreements and

forums for the development that will be needed on the regulatory front. These agreements can then

form the backbone of any inter-governmental agreements reached at the SAARC level.

Although some of the issues such as the pricing of monopoly transmission assets need to be resolved by

regulators, there are a number of commercial disputes which will arise and which will need timely

resolution. These could be addressed through international arbitration tribunals but the results will

need to be accepted by the regulators in each of the member nations in order for the parties not to find

themselves caught between a binding arbitration decision on one hand, and the reluctance of

government to allow the result of that decision to be effectuated back in the home country. Additional

work will need to be undertaken by SARI in this important area.

Finally, it will be critical at the SAARC level that there be agreement not to impose customs duty or

special taxation on the import or export of electricity. For cross-border trading to be effective, the load

serving entities in each nation should be able to choose the generation that, in the long term, best

meets their supply needs. Additional duties, fees or taxes on one form of generation over another can

only serve to distort that decision and, in the long run, raise consumer costs.

_____________________________________________________________

As noted below, it is unrealistic for these key ingredients to simply spring up overnight. The next section

of this Paper details the role of markets in facilitating cross-border trading with the last section providing

a near-term road map with suggestions for moving forward.

2.3 The Role of Energy Markets in Facilitating Cross-Border Energy Trade

Many analyses of cross-border trading in the SARI region recognize the value of developments of

power exchanges and other market mechanisms to enhance the bilateral arrangements that are at

the heart of any cross-border trading program. Such market mechanisms can also provide for more

efficient exchanges of increments of power to better manage schedule deviations and takeadvantage of diversity of the hourly load profile of each trading nation. As stated in the Asian

Development Banks Study on a South Asian Regional Power Exchange (Draft Interim Report---

November, 2011) at p. 10:

Market arrangements and prices provide a level playing field and a useful benchmark for

investors, generators and purchasers. An extension of power exchanges to deal with cross-border trading

has its attractions because the vast potential for such trading could only be unleashed if developers of

generation and buyers of power could both have confidence in a system that is fair, transparent, reliable

and represents the state-of-the art technology.

a. Options for Development of Cross-Border Markets.


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Several options exist for developing cross-border markets. These options are incremental to each other

in many instances and can evolve over time as the degree of cross-border trading increases. Although a

range of options are set forth herein, given the nascent development of these institutions in the SARI

region, a concentration on the more limited markets described below most likely represents an

appropriate starting place.

In analyzing the role of markets, one can easily fall into a false debate between development of a

market versus reliance on bilateral contracting. The original market designs such as those in California

and in the United Kingdom, which relied almost totally on purchases from the market, exhibited serious

flaws for a commodity as volatile as electricity. As a result, there is now general recognition that the

market should provide for a mix of bilateral contracting with the market available to address more

limited short term needs. Moreover, a liquid market should be seen as providing a valuable and

transparent price discovery tool which can inform price negotiations over long term agreements. Liquid

markets also can serve as a neutral index upon which some discrete portion of the long term contract

pricing can be tied to ensure that the long term agreement continues to reflect competitive outcomes.

As a result, additional work undertaken at the SARI and SAARC level on market development should be

viewed as complementing rather than supplanting an overall landscape where long term bilateral

contracts continue to make up the bulk of power supply sources serving the respective nations.

Today, there are two exchanges in India which perform a clearing/balancing function. The exchanges

accept orders for power, provisionally match bids, account for constraints on the transmission grid

which impact the feasibility of delivery and then re-run the market to take into account the constraints

on physical delivery detailed by the system operator. The exchanges use features such as a uniform

price auction and double sided bidding in clearing the market.

Below are some of the different options for the role of markets in cross-border trading:

Option A: Develop a balancing market for managing schedule deviations.

Under this option, an exchange serves as a real time balancing market, at least as an initial step. The

balancing market provides a place where load and generation can come to secure supplies to meet real

time imbalances in load or supply not otherwise covered under their existing long term agreements.

Todays Unscheduled Interchange (UI) mechanism utilized in India serves as a useful tool, using price

signals, to ensure that generation and load are not aggravating conditions which lead to system

frequency balance. However, a real time balancing market can build on the successful UI tariff and

provide a rich array of options to meeting a host of deviations, not limited to adjustment of generationor load to meet frequency targets. Load serving entities can go to the balancing market to purchase

their short term needs and generation (and particularly hydro generation) can receive fair compensation

in the marketplace for the real time value of any additional generation they can produce, based on real

time river conditions, to meet unanticipated real time load demands.

A real time market is, by definition, more complex than the existing day ahead market being operated

today by Indias exchanges because it needs to be integrally tied into and able to react quickly to real

time system operations. However, it provides great promise as an additional means to manage system

conditions in real time, over and above the UI tariff, and to harness the value of what hopefully will


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become a growing fleet of hydro and other generation resources brought on line as a result of

development of increased cross border trading.

Option B: A financial hedging market.

Under this option, physical delivery is handled separately through, for example bilateral agreements orself-supply. Instead, this market is used to provide a hedge against fluctuating prices in real time. Given

the large agricultural load in each of the countries, such a market could be beneficial as agriculture seeks

to hedge their load risk due to weather fluctuations and seasonal risk and price risk due to changing fuel

prices. Today, these agricultural loads need to absorb these risks or face curtailment as these short term

fluctuations do not fit well within the construct of a long term power purchase agreement.

Option C: Day Ahead and Longer term markets available to users across the borders.Significant developments have occurred in India on the development of day ahead and longer markets.

A properly designed liquid power exchange can:

ensure fair, neutral and robust price discovery; provide extensive and quick price dissemination; and serve as a platform for development of longer term standardized contracts and work

towards increasing liquidity in such contracts.

There are a variety of means to incorporate cross-border trading into the existing exchanges. As noted

by Mr. Rajesh Mediratta ofthe Indian Energy Exchange in his presentation to the SAR Workshop on

Cross-Border Trading held on November 15-16, 2011 in Nepal, the trading structure could evolve from

a single power trader handling all cross-border trades to the development of a cross border power

exchange. In turn, this cross-border exchange could either serve as a single uniform exchange across the

larger region and develop a single clearing price across the nations (subject to transmission constraints)

or allow for two separate exchanges on each side of the border clearing only those transactions which

have not cleared within each nations exchange. The latter proposal loses the advantage of greater

volumes and liquidity associated with a larger market and would require each nation to undertake the

costly infrastructure associated with developing an exchange, a proposition which may not be cost-

effective given the relative size and resources of the nation. On the other hand, the formation of a single

larger exchange across multiple boundaries, although theoretically more sound, would require licensing

and acceptance of the exchange (as well as approval and licensing of traders by both member nations)

through a potentially difficult-to-negotiate common set of regulatory protocols.

Option D: A market for ancillary services vs. self-supplied ancillary services.

Effective grid operations will require the provision of ancillary services. These can be self-supplied by the

local utility as they are done in many areas or be made available through competitive bid where feasible.

For example, the present Indian UI tariff, which controls frequency today through a system of deviation

penalties, could be further enhanced by developing a market for the compensation of generators as well

as load who would be available to provide frequency response service through the rapid ramp up of

generation, the use of control devices such as flywheels or through targeted but compensated demand

response reductions in order to provide additional options to reward, through market mechanisms the

most efficient solution to restoring system frequency. Such mechanisms would not be in lieu of the UI


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deviation penalties but would represent a first line of defense before the penalties would be

triggered.

Option E: Market for the valuing of transmission rights.

As noted below, cross-border trading will inevitably raise issues as to the nature of each countries rightsof access to the others transmission system and the prioritization of such rights relative to the host

nations own users. These are inevitably difficult issues. Although one means to addressing them is to

simply differentiate the priorities of foreign nations access, such across-the-board action can frustrate

the needed requirement of open access outlined above. Rather, a system of allocation of point-to-point

transmission rights can be developed to first recognize one nations continued entitlement to its historic

use of the system but allow for the trading of those rights as load serving entitys purchases change as a

result of new cross-border opportunities. The trading essentially re-allocates the costs of congestion

among users willing to pay the costs of congestion to complete their transactions. This may help to

provide more liquidity and allow entities to meet their financial guaranties rather than be limited to a

single physical, point-to- point entitlement while still honoring the fact that consumers of the host

nation built and paid for the transmission system within their borders and should enjoy certain priorities

as a result;

Option F: Full security constrained economic dispatch across the borders.

Under this model, two or more nations would participate in a joint and common market with a single

integrated dispatch and the operation of an exchange performing clearing and settlement functions

across the borders. This is the most advanced system and requires the development of significant

infrastructure and regulatory/political support. It is a possible future goal but one which would require

the development of more robust interconnections than are presently scheduled for developmentbetween the SARI nations.

b. The Pathway Toward Development of Cross-Border Markets.Any move toward market development to complement and enhance cross-border trading will require

intergovernmental acceptance of the concept of power trading and licensing policies which allow for

traders to operate among several nations.

The South Asian countries covered by SARI/E are Afghanistan, Bangladesh, Bhutan, India, Maldives,

Nepal, Pakistan and Sri Lanka, which also compose the SAARC. Out of these, India is by far the largest,

and is geographically so located that it automatically assumes the central position for any exchange of

power between these countries. Besides, India is many times larger than any other SARI/E country load-

and generation capacity-wise. The net result of the above is that all cross-border exchanges in the

foreseeable future would be naturally bilateral, with India as the counterpart. As a result, attempts to

convert them into multi-lateral transactions, in the foreseeable future could introduce avoidable

tensions and impede the development of cross-border exchange of power. The concept of a SAARC

grid, which has been discussed and agreed at the political level, could still be a long-term goal. Further,

the objective of a SAARC grid too is to facilitate beneficial cross-border exchange of power between

these countries, and the actual initial work on the ground for a SAARC grid would be no different from

what is being discussed here.


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A Power Exchange is only one of the various platforms for exchange of power. Power Exchanges (PX)

have sometimes been taken as being synonymous with exchanges of power, although the former is a

noun and the latter is a verb. Creation of a regional Power Exchange covering the South Asian countries

(a Cross-SARI Nation Power Exchange) has been examined in the November, 2011 ADB study

referenced above. While it could be considered as a long-term goal, a Cross-SARI Nation Power

Exchange or even a cross border Power Exchange among those countries presently interconnected with

India, is not a pre-requisite for cross-border exchange of power between the South Asian countries,

primarily because of the central location and large size of India. It would be much more pragmatic to

enable the other countries to participate in power exchanges developing in India, and thereby derive the

same benefits much faster.

Currently, there are two power exchanges operating in India both of which are closely regulated by the

Indian federal regulator, the Central Electricity Regulatory Commission (CERC). Both exchanges

provide Day-Ahead delivery-based markets for electricity including intra-day, daily and weekly markets

for two weeks in advance. The Indian Energy Exchange (IEX), with 90% market share, is presently the

most liquid and transacts about 55,000 MWh of electricity trades daily. The cleared volume constitutes

about 1.25-2.5% of Indias total electricity consumption. Having a sufficiently large pool of day-ahead

market transactions, the left-over transmission network capacity, after meeting long term transactions,

can be used for residual day-ahead transactions. With 1200+ registered participants and 700+

participating in daily auctions on the trading platforms of IEX, the SARI nations could have access to a

relatively liquid and diverse pool of participants and transactions to use as a price discovery tool as well

as a competitive market for their short term transactions. In short, participation in existing Indian power

exchanges can provide efficiency benefits on the margins, including utilization of transmission capacity

for economy and contingency transactions and price discovery for sale/purchase of surplus/deficits of

the nations. In the future, such exchanges could also potentially be used for balancing services, theallocation of transmission rights or as a financial hedging tool all as outlined above.

Arguably, some of these same goals may also be achievable through close but transparent and

nondiscriminatory coordination with