Very few realise that energy trading by South Asian countries has been on an upward trend. Specifically speaking, cross-border electricity trading (CBET) in South Asia has almost doubled in a decade since 2012. In 2012, it was 1400 MW; by 2020 this had edged up to 3760 MW.[1] The hydroelectric power generation potential in the region is over 350 GW. This is massive!

South Asia’s hydroelectricity potential is a key reason to pursue CBET. India already has successful bilateral energy trade agreements with its neighbours Bangladesh, Bhutan and Nepal. With different countries bilaterally trading, is the region now ready for a multilateral electricity trading regime?

The situation is promising. These bilateral level figures were implausible even over a decade ago in the 2000s. Meanwhile, support for a multilateral CBET regime will create positive spillovers within the fraught South Asian geopolitical situation.

IEX and South Asian energy

Bilateral trade in the region hit a high point in May 2021, when Nepal became the first South Asian country to import power via the Indian Energy Exchange (IEX) platform. In November of the same year, Nepal also began selling power into the IEX. Bhutan also joined the platform, and Bangladesh can also consider this course of action.

Even before the creation of the IEX, Bangladesh was trading power with India. In 2022, Bangladesh was importing 1,1610 MW from India from both its western and eastern borders.[2] This is notable. While this amounts to 5.4% of the total generating capacity in the country, in 2021 it already amounted to 10% of the country’s total consumption.

A 1600 MW plant built by energy giant Adani Group in the Indian state of Jharkhand will exclusively supply electricity to Bangladesh. Bangladesh is also having talks on importing power from the Upper Karnali project in Nepal and Dorjilung in Bhutan, both hydro-based, via India.

In 2022, the average cost of electricity production in Bangladesh was BDT 10, equivalent USD 0.13 per kWh. As of now, imported power is cheaper for Bangladesh, at nearly half the cost. [3]

…imported power is cheaper for Bangladesh, at nearly half the cost.

With advantages of price discovery on an exchange platform, the average IEX day-ahead price was significantly cheaper, with a unit price at BDT 4.6, equivalent to USD 0.05, in 2022. This is undoubtedly more competitive than furnace oil-based energy, which makes up 24% of Bangladesh’s energy trade.[4]

Bangladesh is also being smart about its energy exchange. It is now talking about exporting energy! By 2022, Bangladesh’s electricity demand averaged 15,000 MW. But in winter this falls to around 8,000 MW, as a result of a drop in demand. This means that 60% of generation capacity lies idle during winter. As a result, Bangladesh has approached India to export power through the IEX platform.

Bangladesh’s interest

Bangladesh’s biggest power producer, Summit, has recently taken a stake in a power plant in India’s Tripura. Other buys are in the pipeline, all to export power to the country.

There is also a policy push by multilateral donors for a broader South Asian regional integration, under the framework of BBIN (Bangladesh, Bhutan, India, Nepal). BBIN is essentially a South Asian multilateral grouping that excludes Pakistan, in an approach to smoothen regional trade. Another dialogue body, the South Asia Forum of Electricity Market, is also being envisaged to facilitate a regional electricity market.

The benefits of a robust single electricity market surely push a country’s development agenda. But, as in any policy world, the benefits are context-specific. India’s electricity market has developed substantially, both technically, with much-improved relatively low-cost generation and transmission, and institutionally, with strong agencies like the Power Grid Corporation. It also has an economy that demands electricity. The development of the IEX was a logical next step for India.

This is not yet so in the case of Bangladesh. Bangladesh’s unit cost of production is very high. The grid is also not as technically developed as India’s. While price discovery on the IEX is very efficient, leading to lower transaction costs, it is based mostly on Indian generation. This means that Indian participants shape the structure of the exchange and the underlying market fundamentals. In a single market situation, the questions of net gains of participants like Bangladesh remain unanswered.

Challenges to one-market policy

Borrowing an analogy from economics may help explain the constraints better. The preconditions to a unified currency market, like the Eurozone, are price flexibility and factor mobility. Then after it becomes an optimum currency area (OCA). Yet the European Union cannot be called an OCA. It makes up for the gaps, especially in price flexibility, through political transfers, like the covid-19 bailouts.

In the case of large countries like India, fiscal transfers can close the gap. Single electricity markets need to be optimal in terms of technical and institutional integration. They also require political transfers. This architecture does not exist in the South Asian region yet.

Single electricity markets need to be optimal in terms of technical and institutional integration.

While technical aspects, like harmonising of codes, are easier, harmonising the institutional architecture will be difficult when the dominant player by far is one country, in this case India. For instance, Nepali plants can serve power-hungry Pakistan via India. But the geopolitical interests of India mean this will not be possible. In another example, India was insistent that Nepali power export to India be produced by joint ventures with India, like in the case of the Upper Karnali project.

On the other hand, the European Union is a good example of what a single market for electricity looks like. Interconnectors have served the region since the 1990s. They allow countries to import power when demand is high and export any generation that is extra.[5] It has since developed differential pricing for different sources of energy.

Where to now?

As countries build in more renewable capacity, interconnections will become more important. South Asia will be no exception. Yet, even in Europe, uncertainty resulting from the war in Ukraine since 2022 has threatened to upend the decades-long synchronisation in the energy market. Countries are beginning to consider their own needs first while planning their energy needs. Either way, the South Asia region is still far behind in reaching such a level of commitment.

The political risk for Bangladesh is that India will weigh in with its own calculus of regional outlook, which will surely differ. Given India’s dominant role in the energy market, its own political economy imperatives can hinder the one-market journey. For instance, energy tariffs are at the efficient point because of political considerations. Even trade-related issues like tariffs will have a bearing in political constituencies. For instance, at one point, India was reluctant to waive import duties on construction equipment for power plants going to Nepal from a third country.

Another relevant development for Bangladesh is that power plants are now being built in India specifically to supply to the Bangladesh market. This is basically done with a view to lowering the costs of production. It does not really reflect an efficient single market rationale.

Last remarks

What does a single energy market regime look like in South Asia? In short, it has yet to develop a long way. There is no doubt that the region will benefit from a genuine single market. Being part of a single South Asian electricity market would benefit Bangladesh in the short to medium term. It should also bring more balance to the country’s energy policy mix. But this cannot be at the expense of the country’s own energy security. For real energy security, Bangladesh requires in-country investments from a variety of sources, in both generation and transmission, as well in renewables.

 

[1]  The latter at peak loads.

[2] On the western side, from Baharampur in India’s West Bengal into Bangladesh’s Bheramara; on the eastern side, from Surajmaninagar in India’s Tripura to Bangladesh’s Cumilla.

[3] Per kWh was BDT 5.8, equivalent USD 0.07, in 2021, according to the Bangladesh Power Development Board.

[4] Furnace oil-based energy has averaged at BDT 17, equivalent USD 0.2, per kWh in 2022.

[5] For instance, on particularly windy days in offshore wind farms.

 

Photo ©️ Mahmud Hossain Opu

Pallavi Roy is Senior Lecturer in international economics at the School of Oriental and African Studies (SOAS), University of London, UK. She is an economist. She is a researcher at the FCDO-sponsored Effective States and Inclusive Development project. Her research interests include institutional economics, industrial policy, anti-corruption, commodity markets and economic development. She pursued her doctoral studies in economics at SOAS.