Regional Markets in developing areas Nile Basin, Mekong and MER (Central America)

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1 Regional Markets in developing areas Nile Basin, Mekong and MER (Central America) Author: Jorge Alarcón Navarro ( ) IIT Directors: Luis Olmos Michel Rivier Company Supervisor Mr. Alberto Pototschnig (Mercados EMI President) Tlf :

2 Giving money and power to government is like giving whiskey and car keys to teenage boys. P. J. O'Rourke A mis padres y hermanos a mi sobrino Beltrán y su mamá Isabel

3 REGIONAL MARKETS IN DEVELOPING AREAS...1 NILE BASIN, MEKONG AND MER (CENTRAL AMERICA)...1 FOREWORD...5 FOREWORD...5 GENERAL BARRIERS FOR CROSS BORDER TRADING...7 THE CASE OF THE NILE BASIN REGION...12 NILE BASIN REGION:...12 THE GEOGRAPHICAL REGION AND THE POWER SECTOR S SIZE...13 The barrier...13 Possible actions to eliminate / mitigate the barrier...14 LACK OF INFRASTRUCTURE...16 The barrier...16 INTERCONNECTIONS...16 Possible actions to eliminate / mitigate the barrier...17 INSTITUTIONAL BASIS AND GOVERNMENTAL COMMITMENT...19 The barrier...19 Possible actions to eliminate / mitigate the barrier...22 FINANCING CROSS BORDER TRANSMISSION INTERCONNECTIONS...22 The barrier...22 Possible actions to eliminate / mitigate the barrier...23 REGULATORY BARRIERS...24 The barrier...24 Possible actions to eliminate / mitigate the barrier...25 THE DOMINATION OF ONE OR FEW COUNTRIES...27 The barrier...27 Possible actions to eliminate / mitigate the barrier...28 SUMMARY OF BARRIERS AND MITIGATION MEASURES...28 THE CASE OF THE GREATER MEKONG SUBREGION...34 THE GEOGRAPHICAL REGION AND THE POWER SECTOR S SIZE...35 The barrier...35 Possible actions to eliminate / mitigate the barrier...36 LACK OF INFRASTRUCTURE...38 The barrier...38 INTERCONNECTIONS...38 Domestic transmission systems...39 Possible actions to eliminate / mitigate the barrier...39 INSTITUTIONAL BASIS AND GOVERNMENTAL COMMITMENT...40 The barrier...40 Possible actions to eliminate / mitigate the barrier...43 FINANCING CROSS BORDER TRANSMISSION INTERCONNECTIONS...44 The barrier...44 Possible actions to eliminate / mitigate the barrier...45 REGULATORY BARRIERS...46 The barrier...46 Possible actions to eliminate / mitigate the barrier...47 THE DOMINATION OF ONE OR FEW COUNTRIES...49 The barrier...49 Possible actions to eliminate / mitigate the barrier...50 SUMMARY OF BARRIERS AND MITIGATION MEASURES...51 THE CASE OF THE MER REGION...57

4 THE GEOGRAPHICAL REGION AND THE POWER SECTOR S SIZE...57 The barrier...57 Possible actions to eliminate / mitigate the barrier...58 INTERCONNECTIONS...58 Domestic transmission systems...59 Possible actions to eliminate / mitigate the barrier...59 INSTITUTIONAL BASIS AND GOVERNMENTAL COMMITMENT...60 The barrier...60 Possible actions to eliminate / mitigate the barrier...62 FINANCING CROSS BORDER TRANSMISSION INTERCONNECTIONS...63 The barrier...63 Possible actions to eliminate / mitigate the barrier...63 REGULATORY BARRIERS...64 The barrier...64 Possible actions to eliminate / mitigate the barrier...64 THE DOMINATION OF ONE OR FEW COUNTRIES...66 The barrier...66 Possible actions to eliminate / mitigate the barrier...66 SUMMARY OF BARRIERS AND MITIGATION MEASURES...66 INSTITUTIONAL ROAD-BOOK...71 OPTIMAL NETWORK DEVELOPMENT...74 ECONOMIC BENEFITS...75 CONCLUSIONS...77 BIBLIOGRAPHY...81 Table 1: Installed Capacity in the Region s Countries...13 Table 2: Countries Power Policies...21 Table 3: Summary of Barriers and Mitigation Measures...32 Table 4: Power Trade Phases and Actions Required...33 Table 5: Installed Capacity in the Region s Countries...35 Table 6: Countries Power Policies...43 Table 7: Summary of Barriers and Mitigation Measures...54 Table 8: Power Trade Phases and Actions Required...56 Table 9: Installed Capacity in the Region s Countries...58 Table 10: Countries Power Policies...61 Table 11: Summary of Barriers and Mitigation Measures...69 Table 12: Power Trade Phases and Actions Required...70

5 Foreword Electricity interregional markets have been understood from a bottom-up perspective as the first ones created in the latest nineties (nord-pool, and north American inter state markets) and latest initiatives as European-wide regional markets which the European Commission is promoting through the enactment of the so called third package directives which tries to harmonize the internal market structures of each member country of the European Union and the integration of the system operators (ETSO to ENTSO) so as the European-wide regulator (European Regulation agency so far). Additionally, the exiting literature establish that no regional markets can be settled if no common rules are applied to every member of that regional market. Electricity markets are very often compared to the most developed one, the Nord-Pool which represents the success case among every initiative undertaken all aver the world. This regional market development arises from several facts as (among others): 1. Political willingness to integration 2. Every country member has a liberal economical basics acceptance 3. Financial resources to undertake it 4. Willing to compensate their generation shares along the year and seasonality (hydro-thermal) Contrary to these preliminary assumptions, this Master Thesis pursuit to show how under specific conditions regional markets can make local ones to converge to a fully competitive markets (up-bottom solution) even if they are not liberalized or are not based on competitive rules given that the local scarcity of sources might be overcome through interconnections among systems that allow to share generation sources and hence creating a surplus of generation capacity within certain developing areas that otherwise remain under a permanent generation shortfall and consequently no market can be created at all since scarcity is the main barrier for competition and power sector development.

6 On the other way around integration of domestic markets would lead to a more efficient use of resources, since each country belonging to the same region have different resources (fossil based fuels, hydro potential etc ). As is shown along this document, behind the integration willingness of every country belonging to each of the three regional initiatives here analyzed (Greater Mekong, Nile Basin and MER); there are protectionist policies that finally deter any further integration. Nonetheless, given the different economic development and domestic natural resource that countries belonging to each one of the regional markets dealt in the present Master Thesis, a common planning of the development of the network and generation, would lead to a common benefit through the achievement of cheapest generation, private sector participation enhancement, and consequently economical development for each one of the participants (change current sort term policies to long term and strategic positions). The analysis based on transmission and generation systems planning models and technical assessments methodologies and conclusions arisen from them within the present document are based in the next two main parts: 1. Technical and institutional route book (current state vs. needed one) a. Institutional development analysis b. Technical (network and generation planning) assessment 2. Final Economic benefits of integration for each case a. Average generation cost vs. future generation cost b. Avoid generation shortfall (when this currently occurs)

7 General barriers for cross border trading Cross border trading in the power sector has normally several benefits for the countries involved in this trading. However, initiating trade and making it fluid among participants may sometimes be not so easy. Based on other experiences of successful and unsuccessful initiatives, the following elements can be highlighted (but no limited to) as hurdles or barriers for the development of power trade: a) Poor performance of many of the state-owned utilities, rendering them unable to fully conduct normal commercial activities. b) Long distances involved, and the challenging geographical and natural environment. c) Disparity in the countries power sector size. d) Weaknesses of the national grids, which require strengthening (and hence investment) before trading is possible. e) Lack of infrastructure, such as power transmission interconnections, regional/inter-regional co-ordination centres or control centres. f) Energy strategies that rely on self-sufficiency. g) Difficulty in obtaining project financing for cross border transmission interconnections, and the difficulty (and complexity) of raising government guarantees for cross-border deals. h) Lack of a (commercial/legal/regulatory) framework for transactions to take place. i) Lack of agreement on the tariff system to remunerate the use of transmission infrastructure. j) Lack of institutions to give regional trading political legitimacy and to play the co-coordinating and energy trade enhancement role. In some cases exactly the opposite happens and there exist several institutions with overlapping interests and fields of intervention that require coordination. k) Lack or non coordinated legal framework for energy trade. l) Lack of general harmonization of technical codes, specifications and standards.

8 m) Lack of trading mechanisms in the energy sector, which is much more complex than trading of other goods or commodities. n) Lack or scarcity of qualified human resources to manage technical / commercial / regulatory aspects of cross border trading. Poor performance of many of the state-owned utilities In many developing regions state owned utilities still predominate in the power sector, which are generally not performing well neither technically nor commercially. The reasons for that are generally lack of investment, intervention of policy makers who use the state owned companies as instruments for other objectives, lack of modern management techniques, etc. This results in companies that are in a vicious circle, not able to develop and not credit worthy to receive funds for the investments required. Long distances involved, and challenging geographical and natural environment Extended territories result in a challenge either from the technical point of view (state of the art technologies are necessary to transport electricity) and from the investments required to connect production centres and demand. Disparity in the countries power sector size Big disparity in power sector size can hinder trading because: i) cross border trading will be marginal for one system but very important for the other; ii) bigger systems are normally more developed from the technical point of view than smaller ones, this implying that smaller system may need to upgrade to some technical standards not currently being met, to make trade possible; iii) security aspects are also relevant; traded volumes may be marginal for bigger systems but very important for smaller ones, so the risk of unexpected interruption of energy flow can be a serious problem for the latter. Weaknesses of the national grids Cross border trading involves not only international interconnections or international transport lines, but also domestic grids. These grids are necessary when trading begins to develop and domestic transport grids are used for transit. In other words, when trading begins to develop, trading is not done exclusively between neighbouring countries; third countries begin to be involved as transit

9 countries. Therefore, the need of reinforcements in domestic transmission grids is prominent. Lack of infrastructure The development of cross border trading obviously requires interconnecting the countries systems. In developing countries there are not many examples of systems that have developed interconnections having trading as main objective. Generally, interconnections are linked to generation projects that export from one country to the other under a PPA. These interconnections are then basically used for the PPA, with little or no spare capacity to be used for additional trading. Besides, if trade develops, it is necessary to think in regional organisations such as regional coordination centres or control centres. Initially, the tasks required can be performed by one of the already existing dispatch centres when trading is still simple. As trading evolves it is necessary to develop a regional centre entailing the corresponding investments and human resources. Energy strategies that rely on self-sufficiency Many times, power trade is hindered by policies centred in self sufficiency. Countries do not accept/trust to depend very much on non domestic production. Therefore, cross border trading can be limited by established caps, not based on economic reasons. Difficulty in obtaining project financing for cross border transmission interconnections The economic situation of countries in developing regions, and more specifically their utilities performance, makes difficult obtaining financing in general terms. When it comes to cross border interconnections this turns out to be even more difficult because: i) there are two governments involved and it is necessary to coordinate and deal with both of them; ii) there are at least two utilities involved; iii) benefits from a cross border interconnections might not be so easy to identify unless it is tied to a generation project with its PPA (see point d)). Lack of a framework for transactions to take place Fluent cross border trading involving several countries requires a full framework to be developed with a minimum of regional institutions. Once the initial stages, where cross border trading is reduced to trade between neighbouring countries,

10 are passed, the developments required for a more complex trade may be costly, requiring agreements which may be difficult to achieve, and human resources with the capacity to implement them. Lack of agreement on transmission tariffs Transmission tariffs to remunerate the use of transmission infrastructure (international interconnections and domestic transmission systems) may be difficult to be agreed due to the complexity in some cases, and because of differences in the systems used in each country to remunerate this service. Lack of regional institutions or lack of coordination In developing regions where market forces are not sufficient, it is necessary to count with at least a regional institution to: i) give regional trading a legitimacy and a legal basis which will allow to develop later the general framework required; ii) coordinate the process and foster trading at any moment, which is the ultimate objective. Some times, there can be different initiatives in a certain area, with overlapping objectives. In this case coordination is necessary among the different initiatives to avoid repeating efforts or non coordinated actions. Lack of a common legal framework for energy trade In many cases, differences in the countries commercial frameworks regarding exporting/importing electricity represent a hurdle to develop trading. An example of this is taxation issues; taxes for importing and exporting electricity prevent a real optimisation of the use of the resources from the regional point of view. Even when trading between neighbouring countries, taxes can represent a problem. Regarding regulatory issues, it is required that at least regulations do not prevent this trading or do not represent a hurdle for it. Lack of harmonized technical codes Perhaps the clearest way to illustrate this point is the problems that exist when two countries with different frequencies (50 Hz and 60 Hz) want to trade. Obviously, trading is possible but at a higher cost. Another area of difficulty is technical standards; since systems are connected, to achieve a fluent trade it is necessary to agree on some minimum technical standards, basically regarding quality and security. Security of systems and

11 operational procedures turn into a key element when interconnectors have a capacity which is relevant compared to the system s size. Lack of trading mechanisms Trading mechanisms are needed once the stage of trading just between neighbouring countries is completed. More complex trading is not possible if minimum trading mechanisms are not in place; and this requires agreement from both the countries and the regional institutions. Lack or scarcity of qualified human resources Qualified human resources are necessary to advance in the different stages towards a final situation of regional market. They are necessary to develop the different stages of regional trading and to actually manage it.

12 The case of the Nile Basin Region Nile Basin Region: The Nile Basin Initiative (NBI): Formally launched in February 1999 by the Council of Ministers of Water Affairs of the Nile Basin States, the NBI provides a forum for the countries of the Nile to move forward towards a cooperative process in order to realize tangible benefits in the Basin and build a solid foundation of trust and confidence. The NBI has two primary areas: a) Basin-wide projects - Shared Vision Program (SVP), to help create an enabling environment for action on the ground b) Sub-basin projects - Subsidiary Action Program (SAP), aimed at the delivery of actual development projects involving two or more countries The Regional Power Trade Project (RPTP) is one of the thematic projects to be implemented basin-wide, to help establish a foundation for trans-boundary regional cooperation and create an enabling environment conducive for investment and action on the ground, within an agreed basin-wide framework. The RPTP aims to establish the institutional means to coordinate the development of regional power markets (such as a Power Pool) among the Nile Basin countries, through the creation of a power trade framework which can contribute to achieve poverty reduction including expanding access to reliable and low-cost power supply, in an environmentally sustainable manner. The broad benefits envisaged from the NBI are poverty alleviation through improved, sustainable management and development of the shared Nile waters, and enhanced regional stability through increased cooperation and integration among the Nile states.

13 The Nile Basin region presents many, if not all, of the described barriers to cross border trading. In the next points the key barriers in the region will be discussed. The previous section identified a series of potential barriers to cross border trading; this section is dedicated to analysing those barriers, which are considered as most relevant in the region and that may impact more in the design of the model and in its the first stages. To achieve this, some of the barriers identified initially have been grouped to facilitate and provide a rationale to the analysis. The geographical region and the power sector s size The barrier The NB region is much extended (around Km from north to south and from east to west in some parts), additionally involving several countries. The longest distance east to west in Europe is Km and in the US, from east to west is Km. The region has also different landscapes, desert, mountains, forests. It is a real challenge, from the technical and economical point of view, to develop the required infrastructure that could link all the countries. The size of the countries power sectors can be seen in the following table. Installed Capacity Total Countries (1) (MW) Total EIA (2) (MW) Burundi 110,5 58 Egypt , DRC (3) 2.515, Kenya 805, Uganda 363,5 321 Rwanda 32,14 31 Tanzania 997,0 881 Ethiopia 662,0 755 Sudan 1.000,6 801 Table 1: Installed Capacity in the Region s Countries (1) Source: Information provided by countries during info. (2)Source: Energy Information Administration (EIA) from the Department of Energy (DOE) USA, year 2005 (3) A good part of this generation capacity is currently out of service (around 50%)

14 Although heterogeneous in size, and except for Egypt (clearly of another scale), the countries power sectors can be basically grouped in two types according, exclusively, to their size: 1. Small systems: Uganda, Rwanda, Burundi 2. Regular systems: Kenya, Tanzania, DRC (considering the high unavailability), Ethiopia, Sudan. 3. Egypt This pattern implies that many of the countries have power sectors with similar size, which facilitates development of trade. On the other hand, there are small systems which may need a special treatment to be fully incorporated to regional trade. It must also be pointed out that the size of the system is not a unique indicator; the systems quality and current condition are also very important. This point will be approached later, but it is worth advancing that, for example, DRC is a big system from the point of view of nominal installed capacity but currently, in DRC a big part of this capacity (50% aprox) is unavailable due to lack of maintenance. It is also important mentioning that heterogeneity in size can be a barrier, but it can also be an opportunity to foster trading. Heterogeneity transforms into a barrier when bigger countries try to abuse their dominant position in the region. However, it can also be an opportunity for smaller countries since bigger ones provide them an infinite market where they can sell or buy. Big systems also provide economies of scale and the required volume in an industry where scale and volume are important. Possible actions to eliminate / mitigate the barrier The wide extension of the territory is a fact that needs to be dealt with; three actions can be envisaged: 1. Development of regional trade in sub regions for being interconnected later. This approach consists of initiating and developing trade in sub regions so as to later in a second step, interconnect the sub regions. This approach allows initiating trading in more reduced spaces from the geographical point of view, which reduces technical and financial problems. In subsequent steps sub regions can be interconnected when

15 it is economically sound. A key requirement is that the sub-regions in their development should follow common principles, so that later it is possible to easily interconnect them, and the initial development does not become a new barrier to the region s full integration. 2. Regional planning: regional long term planning of transmission infrastructure is a key element. This planning should be done considering: a. the medium/long term objectives of the sub region b. Long term objective of sub regions integration c. Regional standards to facilitate sub regional integration in the future. 3. Regional institution to coordinate the process: a long term process needs to be managed permanently so as not to lose momentum, and be in line with the long term objectives. The process as it is proposed clearly needs coordination in several areas: organise the sub regions under common principles, perform regional planning, help achieve agreements on standards to be used regionally, etc. Regarding differences in the system s size, the opportunities must be potentiated and dominant behaviour should be controlled. The best way to achieve this is by proceeding strictly through written rules. The rules must be non discriminatory, clear and transparent. Proceeding strictly by written rules prevents or at least minimises the possibility of some countries prevailing over others. The procedure to approve the rules is also a key element: it is desirable that important rules be approved by consensus. This way it can be avoided that some countries impose their will on others. Another element that helps to avoid the non desired effects of differences in size is sharing and publicising information. Transparent and public information is normally a barrier to undesired behaviours since they can be demonstrated with the information. Obviously, the above mentioned actions will mitigate the eventual undesirable effects of differences in size; however, securing the opportunity will depend on the parties good will. Maybe a good example of a positive effect of size differences can be found in the SAPP. In this case South Africa plays a role of leadership and the other countries find an enormous market to sell in. It can be

16 argued that prices may not be fair, but transparent information helps much in this regard. Once the STEM is in place, with transparent information, the situation will definitely improve. Lack of infrastructure The barrier Infrastructure is one of the key elements to have regional trade of electricity; without infrastructure it is obvious that trade will not be possible. Moreover, infrastructure needs to be adequate for the trade to be fluent. Power trade infrastructure means cross border interconnections and domestic transmission systems which can accommodate flows that are originated in another country and transit to a third country. Interconnections Although there are interconnections in the region, these are limited in number and capacity. The following cross border connections can be mentioned (existing or planned): Ruzizi: Rwanda Burundi DRC to share the hydro power plant of 36 MW. Burundi Rwanda (through SINELAC) Uganda Kenya Uganda Rwanda Uganda - Tanzania Kenya Tanzania Kenya Ethiopia (Interconnection planned which will be coordinated by the EAPP) Tanzania Rwanda Burundi (Interconnection planned, also involving a generation plant) Ethiopia Sudan (Expected to trade 100 MW) Uganda Eastern DRC (Planned) The next figure illustrates part of these interconnections and their characteristics 1 1 Source: NILE BASIN INITIATIVE - NILE EQUATORIAL LAKES - SUBSIDIARY ACTION PROGRAM

17 Figure 1: Interconnections in the Region Domestic transmission systems Domestic transmission systems in the region have, as a rule, little or no capacity to accommodate extra flows. Hosting flows to third countries needs to be taken into consideration for future expansions. Possible actions to eliminate / mitigate the barrier Lack of infrastructure for cross border trading, together with an extended territory and low charges (relatively small systems), is a quite negative mix of elements. It must be considered that the biggest system (Egypt) has around MW of installed capacity; the remaining systems are in the order of MW (if we consider that DRC has no more than 50% of its capacity in conditions of Strategic/Sectoral, Social and Environmental Assessment of Power Development Options in The Nile Equatorial Lakes Region. Revised Final Report Stage II (SNC Lavalin, Hydro Quebec).

18 generation) and the amounts traded across the current interconnectors are small. It is obvious that long transport lines are only economically feasible if great loads are transported, and this seems not to be the case. Long distances may be involved but not great loads. The following actions can help mitigate / overcome this barrier: 1. Think of developing infrastructure in sub regions which will be later interconnected. Given the loads that can reasonably be exchanged among the countries, it is not sensible of thinking of extremely long / big transmission lines. The configuration of the whole region does not allow a solution like SIEPAC with a backbone on which different countries inject and retire energy. 2. A regional and sub-regional long term planning: planning of infrastructure at sub regional level considering the future of a wider interconnection with both other sub regions and the region as a whole. 3. Planning of transmission system expansion at domestic level taking into account the sub regional (and later regional) level, the impacts of the regional, sub regional planning in the domestic transmission systems and vice versa. 4. Planning taking into account these multiple levels, i.e. domestic sub region region, requires coordination and, especially, an agreement and acceptance of the countries since these additional considerations will certainly introduce modifications in the classic planning of the countries transmission system expansion. And even more, it may introduce further costs. 5. Systematic planning at different levels, or taking into account different levels to be efficient, requires: a. Establishing common standards for all countries. Obviously, this cannot be achieved immediately but an agreement to evolve to a situation with common standards for planning (at least for the networks involved in cross border trading) is desirable. b. Standardization of methodologies and instruments for system expansion planning is desirable.

19 Institutional basis and Governmental Commitment The barrier A regional institution For the development of regional power trade, taking as point of departure the region s current situation, it is necessary that a regional institution takes the responsibility and leadership of coordinating, overlooking and fostering the process required to develop trade, regardless of the chosen model. Without an institution with these characteristics and objectives the initiative will not succeed, since in developing countries/regions market forces alone are no sufficient. This happens because, in the first place, oftenly there are no markets in developing regions, and in other cases markets are quite distorted. Therefore, market forces do not produce the expected results. It is necessary to steer the process and continuously overlook it. Governmental policy It is also necessary to have a clear and explicit commitment from the governments involved; this commitment should basically deal with: Making the integration policy in regional cross border power trading explicit and part of the domestic policy. The integration issue does not appear generally in the main policy lines for the energy sector; other issues are generally more relevant, such as meeting the demand reliably, with quality and at low cost, and ensuring access to energy to all the population. However, when asked, officials always consider integration as desirable and part of the strategy to achieve higher level objectives (Uganda is the only country that has explicitly at the highest level the objective of regional integration). In very few cases the country s energy strategy relies on self sufficiency, or at least caps on dependence on foreign supply are established unofficially (Kenya for example considers that dependence on foreign supply should be limited, Ethiopia has explicitly as a goal self sufficiency through the development of

20 indigenous resources, as well as Sudan). However, a self sufficiency policy is not contradictory with power trade if it is correctly interpreted and articulated with it. Countries may desire an assurance of being capable to satisfy domestic demand (with investments in capacity in their countries) but at the same time be willing to trade so as to minimize operating costs. This kind of policy takes to a second best from the economical point of view, in other words, there will be additional costs investment-wise. But articulating the self sufficiency policy with cross border trading has the benefit of meeting both the political objective (of being capable of supplying the domestic demand with domestic means) and the efficiency one, of minimizing the system s operating cost (through trading). Sometimes an old culture of planning generation with criteria that only looks at the domestic market from a self sufficiency optic and not at the entire region, results in overlooking better possibilities. The following table presents for each country relevant policy guidelines for this study. Country Rwanda Energy Policy Guideline Have affordable and reliable energy supplies country wide. Enhance the development and utilization of indigenous and renewable energy sources and technologies. Burundi Ensure reliable access to energy with quality and efficiency. Meet the demand, efficient use of indigenous resources and protection to environment. Kenya Provide sustainable quality energy services for development. Enhance security of supply. Promote development of indigenous energy resources. DRC SNEL, the DRC s integrated utility, has several exportation contracts even if this meant that domestic demand would not be met because of the contracts. Policy is currently prioritizing domestic supply to exports

21 Country Ethiopia Tanzania Sudan Uganda Energy Policy Guideline To ensure a reliable supply of energy at the right time and at affordable prices. To give priority to the development of indigenous energy resources with a goal towards attaining self sufficiency. To satisfy the energy demand of all sectors of the economy. To develop domestic energy sources in order to substitute for imported petroleum products. Provide reliable power supply for all Sudan with highest efficiency and lowest costs. Achieve self sufficiency in power generation and not depend on the region. The goal for Uganda s energy policy is: To meet the energy needs of Uganda s population for social and economic development in an environmentally sustainable manner in the context of: o The existing economic, social and environmental policies; o The nature and linkages of the energy sector with other sectors; and o International and regional linkages of the sector. Table 2: Countries Power Policies Provide legal support to the regional institution: if it is agreed that a regional institution is needed to steer the process, then this institution will require a legal support to act; if not, it will turn into an empty shell because it will have no instruments to achieve its goals. Another aspect is the need of coordinating different initiatives in the region that deal or can deal with cross border trading. Multiplicity of initiatives results in a non efficient use of resources which are scarce and, therefore, generate the risk of not achieving the ultimate objective. Make the minimum domestic reforms, if necessary and when necessary, to eventually eliminate existing barriers to cross border trading; these barriers could be regulatory, commercial (taxes for example), technical.

22 Possible actions to eliminate / mitigate the barrier The best way to overcome this kind of barriers is to agree a document which will establish at least: The commitment of the involved governments with regional power trade. The creation of a regional institution with the capacity and objectives to coordinate, overlook and promote the process. The coordination among already existing regional initiatives that deal with power trade and profit as much as possible of advances already made. The acceptance to process in their respective countries modifications such as: o Establish the mechanism to determine cross border trading capacity and the mechanism to allocate this capacity o Elimination of taxes to import/export electricity 2 o Accept to plan the domestic generation and transmission system taking into account the sub regional and regional aspects. In the case of generation this may mean that projects that do not have sense if considered from a domestic optic, may turn into feasible ones when considered in a regional context. o Accept exchange of information. Financing cross border transmission interconnections The barrier Financing cross border interconnections is in general subject to the same type of hurdles as the power sector in developing countries: big difficulties to find financial sources to fund their expansions in the power sector, mainly because: Countries are considered as high risk ones for investments and credit. Utilities are not credit worthy, nor have resources to invest. 2 Taxes to cross border trading result in sub optimal benefits for the region because taxes are distortions to prices. Taxes to exports / imports may prevent a transaction that is economically sound from being achieved, because of the distortion that they introduce.

23 High losses and low tariffs that do not reflect cost of service and therefore impact in the companies credit worthiness. The power sectors of the region suffer, in higher or lower degree, the above mentioned problems, making difficult the access to credit. Possible actions to eliminate / mitigate the barrier Two different situations can be distinguished for cross border expansion: 1. Transmission line linked to a generation project: this would be the case of a generation project that exports energy (totally or in part) to other(s) country(ies). 2. An interconnection line to link two (or more) systems (pure interconnection): this would be the case of an opportunity that it is identified for trading between two or more systems, and that requires the construction of a transmission line. Transmission line linked to a generation project Best Practises for PPAs might be used so that PPAs do not represent a barrier to additional cross border trading, but on the contrary, cooperate with this trading. Basically, the idea is to allow that the spare capacity of the line linked to the PPA (if existing) is used for exchanges. The owner of the line would be compensated for the use of this spare capacity. Another issue to consider is the possibility of incrementing the capacity of the line linked to the PPA with a marginal investment. When a generation project involving a cross border line with a PPA is identified, the possibility of incrementing the capacity of the cross border line can be evaluated, so as to accommodate other flows which do not correspond to the PPA. A transmission line (cross border) designed to accommodate the power of a PPA, with a marginal additional investment can increment the capacity of transport in a relevant manner. This is a way of taking advantage of an investment that will be made anyway, and with little additional investment obtain a relevant additional capacity for regional trade. Obviously, in this situation arrangements will have to be made with the original investors and compensations will have to be discussed case by case. A pure interconnection project

24 A system interconnection project can be identified at the regional (or sub regional) planning level, or by two or more countries. In this case, first must be analyzed the technical and economical feasibility of the project where the key element will be the tariff. If the project is feasible, this means that: i) for a given tariff the investment is recuperated with a reasonable gain and O&M costs are covered; ii) the countries involved receive benefits for trading after paying the transmission tariff. In this case a specific agreement among the involved countries for the specific project can be designed so that the countries (or their utilities) become themselves owners of the project. Eventually, if the size of the project justifies it, a specific organization can be put in place to manage and later operate the project. The case of SINELAC is already an experience that even if it can be improved, it shows that three countries can get together to design and operate one project. Once the organization and agreements for the project are put in place, funding for the project can be pursued among international agencies or even with private sector. A cost reflective tariff that recuperates and remunerates capital and covers O&M expenses will be the key to obtain funding. Additional mechanisms for ensuring tariff payment could be designed if the private sector is involved in the project, so as to reduce the risk perceived by them. Regulatory barriers The barrier In the region few advances have been made towards a reform processes. The State is still by far the predominant actor in the power sector; there can be found vertically integrated monopolies, unbundled sectors with ownership still in hands of the State and limited participation of private sector. A regulatory authority exists in nearly all countries (with different degrees of independence and objectives in each country), however, in the sectors structure, the State is by far the main actor either through integrated companies

25 or even in unbundled sectors, through the ownership (or participation in the shares) of the unbundled companies. This structure of the power sectors is not actually a barrier for trading; in previous documents it has been demonstrated that it is perfectly feasible to develop regional trade with different types of sector structures. However there are some elements that need to be addressed: Non discriminatory open access to the transmission system s spare capacity: few countries have this possibility, and it is generally through arrangements with the government (DRC, Ethiopia). Trade requires the possibility to access transmission systems when there is spare capacity. Transmission tariffs, wheeling charges, conditions of access to the grid: the use of infrastructure must be remunerated somehow, therefore, agreements on this remuneration are required and they must be non discriminatory and transparent; same for the conditions of access to the grid. Licenses: import/export of electricity in some countries is subject to licenses or authorizations i.e.: Tanzania requires a decree from government, Uganda requires a license, Rwanda is not specified. Possible actions to eliminate / mitigate the barrier The above mentioned barriers are possibly the ones that will require more work for reaching agreements and building up consensus. On the other hand, it can be said that although they are important barriers to a fluent trade, there is time to work them out during the initial stages, since in those stages their negative impact is not so harmful. Non discriminatory open access to the spare capacity of the transmission system Initially, trading will begin as cross border trading between neighboring countries, where the corresponding utilities that trade will be either integrated ones or the transmission system owner. In this case, non discriminatory open

26 access is not necessary for trading; therefore, not having open access will not represent a barrier for trading. Moreover, the utilities will be responsible for maintaining their systems parameters, the agreed parameters at the point of delivery and their systems stabilities. However, when trading evolves to further stages and involves transit through third countries, then for a fluent and dynamic trade, open access would be desirable. Since this may represent a major modification in the countries regulations, it can be substituted by a mechanism for determining the cross border trading transmission capacity together with a mechanism for allocating this capacity. If countries are not capable to process the required modifications and achieve non discriminatory open access in their grids, then an agreement on the above mentioned mechanisms will be sufficient to allow trading according. Transmission tariffs, wheeling charges, conditions of access to the grid Transmission tariffs, wheeling charges and non discriminatory and transparent conditions of access to the grid are necessary once non discriminatory open access is put in place. These are the means to remunerate the transmission facilities owners for hosting energy flows. Open access is not indispensable, it is sufficient with agreeing on a mechanism to determine the cross border trading transmission capacity and the way to allocate this capacity. So, it will be required at least to agree on this mechanism for making trading possible (this for the 3rd of the proposed phases). Wheeling charges are proposed to be agreed by countries if necessary, or considered as zero. A decision by the countries is needed on this proposal. Regarding conditions of connection to the grid, the model proposes that each agent connected to a domestic grid, be considered as agent for regional trade if allowed by the country s regulation.

27 Licenses Licenses can be a real barrier for power trading from the very initial stages. Countries with strict requirements regarding licensing should review their position if regional integration is valued as an objective. This does not mean at all that licenses should be eliminated, rather that they should be shaped in such a form so as to not turn into a barrier for trading. They may be even helpful if correctly designed from the point of view of information production and sharing. Among some recommendations regarding the licenses and the procedure to give a license the following principles can be mentioned: 1. Licenses should be given in a non discriminatory way. 2. Licenses should be as simple as possible from the point of view of the requirements from the licensee. 3. The license itself should be standardized and public. 4. The procedure for obtaining a license should be simple, reducing as much as possible the number of steps required. 5. The maximum period that may take for the organization issuing the license to decide in each step of the procedure must be pre established. In case this period is exceeded it must be understood that the decision is in favor of the applicant. 6. The cost of the license (if any) should be minimized. 7. An agreement among the countries of the region for the general conditions of a license would be desirable. The Domination of one or few Countries The barrier In some contexts it is possible that one or few countries in the region have a dominant behavior over the rest. For example, the more developed or bigger systems may dominate over the smaller ones. More than a barrier, this is a risk because the existence of bigger and developed systems can also function as leaders for the regional development. This can be the case of ESKOM (South Africa) in the SAPP.

28 Dominant behavior can not be considered as a barrier ex ante ; it can be no more than a risk to be avoided. Dominant behaviors need to be proved before considering them an actual barrier. However, it is worth addressing the risk and try to avoid it from the very beginning. This dominant behavior can be exercised in two ways: during the commercial relationship (when actually trading) or during the decision making process, when key issues for power trade in the region are being decided. Possible actions to eliminate / mitigate the barrier In both cases the best way to avoid this undesirable behaviour is proceeding by written rules. The first risk, exercise of dominant position during actual trading: this problem needs to be addressed in the design of the trading rules. In a general way, the avoidance of dominant position in the markets or market surveillance is an issue treated specifically in the market rules. An institution (normally the regulator) is in charge of overlooking the behaviour of different agents in a market. Transparency and public information are key tools to avoid these undesirable behaviours. The second risk, exercise of dominant position during decision making process: in this case, it is the design of the decision making process itself which ensures that no country or group of countries can exercise a dominant position. However there is no possible mechanism that can completely ensure this fact, because the decision making process is a human process and therefore subject to human nature forces. For the case of the Nile Basin countries, the Treaty is the first document to address this problem, establishing how the decision making process should be carried out at least for key issues. Different alternatives can be envisaged: total consensus, special majorities, etc. Summary of barriers and mitigation measures The following table summarizes the identified relevant barriers for the Nile Basin region and the corresponding mitigation measures proposed.

29 BARRIERS AND MITIGATION MEASURES Barriers Geographical region and power sector sizes: extended region: extended region (long distances), several countries, difficult landscape, power sectors with different size and different degrees of development. Lack of infrastructure: few and weak existing interconnectors; domestic transmission systems with difficulties to host transit flows. Measures 1. The Power Trade model must be flexible, able to recognize subregions that better accommodate its features. Initial development of power trade in sub regions. 2. Planning: gradually introduce the concept of indicative regional planning starting with coordinating country planning to take into account the regional factor. NELSAP is a good example of successful efforts in sub regional planning. 3. Regional institution to coordinate and promote regional power trade, regional planning and especially the link between domestic planning with regional objectives and regional planning. Gradual development. 1. Develop infrastructure in sub regions foreseeing that later they will be interconnected with other sub regions. This reduces distances and therefore investment needs. SINELAC is a good example showing that infrastructure can be developed through an effort carried out by several countries. 2. Planning at sub regional level (like NELSAP). 3. Coordinating sub regional planning with domestic planning. 4. Establish regional standards for planning. 5. Agree on common methodologies and instruments for planning.

30 BARRIERS AND MITIGATION MEASURES Barriers Institutional basis and Governmental commitment: need of a regional institution to take the responsibility of coordinating and promoting regional power trade; governmental commitment with power trade articulating self sufficiency policies. Measures 1. Explicit and transparent commitment of the Governments with regional power trade and coordination with other existing initiatives. 2. Creation of a regional institution with the capacity and objectives to coordinate, overlook and promote the process. 3. Acceptance to process in the respective countries the modifications needed to develop power trade. 4. Planning G&T from a regional optic and not only taking into account domestic needs and domestic market. Again, there are already in the region, good examples of regional planning (NELSAP)

31 BARRIERS AND MITIGATION MEASURES Barriers Financing cross border interconnections: countries considered as high risk for credit, utilities not credit worthy, bad performance of utilities and vicious circle (low tariffs, lack of investment, lack of credit worthiness to develop investment) Measures 1. Transmission line linked to generation regional project: a. Consider Best Practices in PPAs b. Enforce open access to spare capacity of line to use it for cross border trading. c. Consider possibility of incrementing capacity of decided line with marginal investment, to use this additional capacity for international trading. 2. Pure interconnection project (opportunity identified at regional planning or by group of countries): a. Analysis of project feasibility with cost reflecting tariffs for the line. b. Involved countries owners of the project and responsible for it. (See SIEPAC example Deliverable 5) c. Development and exploitation of the project individually (example of EGL and Ruzzizi) with a specific agreement among the countries and, eventually, with an organization to achieve this. d. Search for funding the project once previous points are achieved. If previous points are achieved, this provides credibility to the project.

32 Barriers Regulatory barriers: non discriminatory open access to spare capacity of transmission, remuneration of transmission services, licenses. Domination of one or few countries: exercise of dominant position during trade or during decision making process. BARRIERS AND MITIGATION MEASURES Measures 1. Countries should at least agree on the mechanism to determine cross border trading transmission capacity and its allocation. 2. Non discriminatory open access to spare capacity of cross border lines that are constructed by PPAs dedicated to exportation must be established from the beginning (even if some agents have priority on the capacity, like PPAs that finance the line). 3. Remuneration to transmission systems hosting transits must be agreed. Initially there can be no remuneration. Other cases may be agreed on a case to case negotiation basis. 4. Licenses should be designed so as to not become a barrier to trade. 1. The (regional) regulator or the institution acting as regulator should perform market surveillance. 2. Proceed by written rules 3. Establish a decision making process that minimizes the possibility of domination during the process itself by one or few countries. Table 3: Summary of Barriers and Mitigation Measures According to the proposed model for power trade, the different mitigation actions can be organized according to each phase of power trading. In other words, it can be established which of these actions are required to be achieved in each of the proposed phases. The next table shows correlation between power trade phases and the actions required to mitigate barriers to power trade. Power Trade Phases and Actions Required

33 Power Trading Phase Phase I: Initial Stage Preparatory Stage Phase II: Bilateral Cross Border Trading Phase III: Multilateral Trading or Parties Transactions. Transits Actions to be achieved 1. Regional institution creation through a treaty among governments, which would also include the governments commitment in favor of regional power trade. 2. Establishment of the concept of regional planning, coordination of domestic planning with a regional view. 3. Definition of regional standards to meet, and the transition to achieve, these standards within a timeline. 4. Harmonization of planning methodologies and standards. 5. Agreement to use Best Practices for PPAs for future cases. 6. Agreement on information exchange and establishment of regional data base. 1. Regional and sub regional planning tightly coordinated with domestic expansion planning. 2. Development of regional projects that involve two or more countries by the incumbents. 3. Define what will be the regional network (or sub regional) and establish the principle of non discriminatory open access to the lines spare capacity in this network. This will be a condition to begin Phase III. 4. Advances towards regional standards. Common methodologies and tools for planning should be developed. 5. Requirements for import / export licenses should be minimized. 1. Non discriminatory open access or agreement on mechanism to determine cross border trading transmission capacity and its allocation. 2. Domestic sub regional and regional planning functioning in coordination. 3. Agreement on remuneration to transmission systems that host third parties flows (transits). 4. Harmonized regional technical standards. Table 4: Power Trade Phases and Actions Required

34 The case of the Greater Mekong Subregion The Greater Mekong Subregion (GMS) comprises Cambodia, the People's Republic of China, Lao People's Democratic Republic, Myanmar, Thailand, and Viet Nam. In 1992, with ADB's assistance, the six countries entered into a program of subregional economic cooperation, designed to enhance economic relations among the countries. The program has contributed to the development of infrastructure to enable the development and sharing of the resource base, and promote the freer flow of goods and people in the subregion. It has also led to the international recognition of the subregion as a growth area. The Greater Mekong Subregion (GMS) is one of the world's fastest growing subregions, growing at an average annual rate of over 6%, in spite of a number of adverse internal and external shocks. Since 1992, the economies of Cambodia, Lao People's Democratic Republic (Lao PDR), Myanmar, People's Republic of China (PRC), Thailand, and Viet Nam have agreed to pursue a program of regional cooperation to foster their sustained economic and social development. PRC s participation in the program is through the Guangxi Zhuang Autonomous Region and Yunnan province. The GMS Program has focused on the energy sector as one of its priority areas.

35 The Asian Development Bank, in partnership with the GMS economies, is undertaking a comprehensive study to define a regional strategy for the energy sector. The energy strategy aims to expand cooperation among GMS economies to ensure efficient and affordable access to modern energy services for all. The geographical region and the power sector s size The barrier The GM region is much extended (around 2500 Km from north to south and from east to west in some parts), additionally involving several countries. The region has also different landscapes, mountains, forests, huge rivers etc. It is a real challenge as in the Nile Basin Case, from the technical and economical point of view, to develop the required infrastructure that could link all the countries. The size of the countries power sectors can be seen in the following table. Installed Capacity Total Countries (MW) Cambodia 130 Lao Myanmar 1240 Yunnan (PRC) 5300 Vietnam 9000 Thailand Table 5: Installed Capacity in the Region s Countries Source: Information provided by countries during info. Although heterogeneous in size, and except for Thailand (clearly of another scale), the countries power sectors can be basically grouped in three types according, exclusively, to their size: 1. Small systems: Myanmar, Cambodia, Lao 2. Regular systems: Vietnam and Yunnan 4. 3 This Capacity does not include the dedicated projects to directly supply neighbouring countries 4 Only taken into account the local generation capacity regardless the DC interconnections support from another regions of China

36 3. Thailand This pattern implies that not many countries have power sectors with similar size, which in principle deters development of trade. On the other hand, there are small systems which may need a special treatment to be fully incorporated to regional trade. It must also be pointed out that the size of the system is not a unique indicator; the systems quality and current condition are also very important. This point will be approached later, but it is worth advancing that, in case of lack of maintenance of whether power generators or transmission lines might lead to unplanned outages that definitely would deter any possibility of developing trading. Heterogeneity transforms into a barrier when bigger countries try to abuse their dominant position in the region. However, it can also be an opportunity for smaller countries since bigger ones provide them an infinite market where they can sell or buy. Big systems also provide economies of scale and the required volume in an industry where scale and volume are important therefore this might be an opportunity for small systems to develop huge projects that otherwise would be impossible 5. Possible actions to eliminate / mitigate the barrier The geopolitical configuration of the territory is a fact that needs to be dealt with; three actions can be envisaged (similar to the Nile Basin case): 1. Development of regional bilateral trading among countries (i.e Lao- Thailan, Lao-Vietnam, Cambodia-Vietnam) and then integrate those bilateral trading system into a single and wider one (European Case). 2. Regional planning: regional long term planning of transmission infrastructure is a key element. This planning should be done considering: a. The realistic hydro potential resources of each country b. Long term demand of each country and accurate location c. Regional standards to facilitate sub regional integration in the future: Voltage agreement (i.e. In this case it seems reasonable to adopt 500 kv as a rated voltage value for network development) 5 Someway this is the case of Lao, but as pointed out further below in this document the development is not trading base driven

37 3. Regional institution to coordinate the process: The GMS should make a step forward in order to settle an independent institution that coordinate this latter planning procedures and to fit them in order to be objective principles agreed in advance by the country members. Regarding differences in the system s size, the opportunities must be enhanced and dominant behaviour should be controlled. The best way to achieve this is by proceeding strictly through written rules. The rules must be non discriminatory, clear and transparent. Proceeding strictly by written rules prevents or at least minimises the possibility of some countries prevailing over others. Even this above mentioned conclusion is similar to the Nile Basin case, in case of the Great Mekong Sub-region, the attention should focus in how resources of small systems as Lao s is, are exploited by countries with bigger systems (Vietnam and Thailand) and which are terms are they agreeing these actions. The procedure to approve the rules is also a key element: it is desirable that important rules be approved by consensus. This way it can be avoided that some countries impose their will on others. Another element that helps to avoid the non desired effects of differences in size is sharing and publicising information. Transparent and public information is normally a barrier to undesired behaviours since they can be demonstrated with the information. Obviously, the above mentioned actions will mitigate the eventual undesirable effects of differences in size; however, securing the opportunity will depend on the parties good will. In this case the leadership would rely on Thailand and Vietnam (currently supported by China with which they have existing interconnections and agreements to improve them) to boost the power trade since these two countries have interest in Cambodian and Lao s hydrological resources and thereof contrary to adopt an abusive position they would encourage the development of those resources in order to get less costly energy with the consequent non discriminatory environment regarding the smallest country members.

38 Lack of infrastructure The barrier Infrastructure is one of the key elements to have regional trade of electricity; without infrastructure it is obvious that trade will not be possible. Moreover, infrastructure needs to be adequate for the trade to be fluent. Power trade infrastructure means cross border interconnections and domestic transmission systems which can accommodate flows that are originated in another country and transit to a third country. Interconnections Although there are interconnections in the region, these are limited in number and capacity. The following cross border connections can be mentioned (existing or planned): Yunnan (China)-Vietnam. Lao - Vietnam Lao - Thailand Cambodia Vietnam The next figure illustrates part of these interconnections and their characteristics Myanmar Yunnan (PRC) Planned 220 kv 400 MW Existing 220 kv Planned 500 kv: Total 2500 MW Vietnam Thailand Planned 220 kv 400 MW Lao Cambodia Planned 220 kv 400 MW Figure 2: Interconnections in the GMS Region

39 Domestic transmission systems Domestic transmission systems in the region have, as a rule, little or no capacity to accommodate extra flows. Hosting flows to third countries needs to be taken into consideration for future expansions. Another relevant issue is that Cambodian and Lao s systems are not interconnected and they are a set of separated transmission system with different characteristics and obviously not meshed. Possible actions to eliminate / mitigate the barrier Contrary to the case of the Nile Basin, in the GMS big amounts of load xould be transferred from some systems to others and therefore Extra High Voltage transmission lines would be economically feasible: 1. The three biggest consumption poles; Thailand, Vietnam and Yunnan, should be interconnected since their transmission networks are quite developed, wide generation share (hydro, gas, coal) and comparatively high demand. 2. In the medium and long term and at a second stage, Lao and Cambodia should interconnect their systems as their expected big hydro projects are connected and at the same time integrate both domestic transmission networks not yet integrated. 3. Planning of transmission system expansion at domestic level taking into account the regional level. 4. Planning taking into account these multiple levels, i.e. domestic sub region region, requires coordination and, especially, an agreement and acceptance of the countries since these additional considerations will certainly introduce modifications in the classic planning of the countries transmission system expansion. And even more, it may introduce further costs even in the long term the integration would derive in overall lower cost.

40 Institutional basis and Governmental Commitment The barrier A regional institution As above mentioned in the case of the Nile Basin integration project, the power system integration arises from a previous trading agreement over other goods or commodities. The Greater Mekong Region has not a common commercial interest. In fact the Cold War built fences among the countries that were supported by the NATO (Thailand) and others by the Communist Bloc (Vietnam and Cambodia). This fact had led to very different internal policies in their trading and domestic development from one country to other. Nonetheless, Vietnam in the latest years has followed the market based economic policy of China and thereof similar interest might have arisen between Thailand and Vietnam. As a consequence of these issues a new chances have appeared in the region since market base economic development will definitely change the power sector paradigm 6. In fact the Great Mekong Region initiative goes further than the mere cooperation in energy. Fields like land transportation to foster the free trading of goods and telecommunications initiatives are under the scope of the auspice of the GMS initiative. Governmental policy It is also necessary to have a clear and explicit commitment from the governments involved; this commitment should basically deal with: Making the integration policy in regional cross border power trading explicit and part of the domestic policy. At this point power integration it is assumed from very different perspectives from one country to others. In fact almost every country is committed with the integration but from bilateral point of view rather than region-wide. The current situation makes that for instance Lao is willing to export energy through bilateral contracts with Vietnam and Thailand separately and by the development 6 In fact among the whole region private equity is present in the sector through IPP initiatives in different term

41 of the former country natural resources by the latter ones. Yunnan (PRC) through their regional state owned monopoly has agreed to enhance the export of electricity to Vietnam (2000 extra MW transmission capacity are already committed), but other bilateral agreements are being achieved and these not always derive in a regional integration, as is the case of Myanmar which is seeking interconnections with India (and as already shown is not very committed with the power system integration of the region) and Thailand that is achieving by its own agreements with Malaysia in energy matters. Another political barrier is the economical growing rates disparity among countries what makes quite difficult to achieve a common route book in the system integration. Notwithstanding, it must be remarked that the great Mekong Basin hydrological resources is a common point for every participant, in fact there was an initiative to build seven dams in cascade in the Chinese part of the river and it was to be stopped due the fact the eventual impact downstream in the river led in no consensus by the stakeholders (rest of the member countries of the Mekong Region) therefore the Mekong River will be for sure the main pillar of the policy commitment in the future power integration of the whole region. Another positive aspect is the formal commitment with the environmental friendly development, what makes water the main source of electricity (apart of nuclear programs undertaken by China and Vietnam) and the willingness of reduce the fossil fuel dependence (which has reached high generation share lately in Thailand and Vietnam). Country Energy Policy Guideline 7 7 Source: Special Subregional Energy Forum held in March 2009

42 Country Energy Policy Guideline 7 Cambodia Lao Have affordable and reliable energy supplies country wide. Enhance the development and utilization of indigenous and renewable energy (hydro) sources and technologies. Monetize their recently discovered petroleum resources Rural electrification development plan through the use of isolated photovoltaic isolated generators. Promotion of medium and mini hydro projects through the joint participation of private and public sector. Petroleum and gas indigenous resources are being exploited by concessionaires foreign companies Thailand Provide sustainable quality energy services and promote conservation measures. Enhance security of supply at affordable prices Promote development of indigenous energy resources. Commitment with the environment Yunnan (PRC 8 ) There is not an accurate political framework (The National Energy Agency was set up in 2007). Their officially message (through the electricity company operating the region) is to promote natural gas to displace the current aging and pollutant power plants and commitment with the development of environmental friendly initiatives. Another point is to transfer gas and electricity from west to east. Development of wind generation (up to 30 GW) and increase of nuclear generation up to 5% of the total demand Improvement of the efficiency in coal generation Myanmar Maintain the status of energy independence Renewable energy source promotion Energy efficiency and conservation programs Keep on exporting gas by pipeline (is the 11 th exporter by pipeline worldwide) 8 The figures represent the whole China, do not refer to the region involved in the GM initiative

43 Country Energy Policy Guideline 7 Vietnam Promote diversification on their energy sources (including nuclear). Promote mini hydro projects and review the large hydro projects not economically feasible in the past given the distances to big consumption points Launch demand side management programs (DSM) since it is foreseen to have generation deficit in the next 20 years Table 6: Countries Power Policies Provide legal support to the regional institution: if it is agreed that a regional institution is needed to steer the process, then this institution will require a legal support to act; if not, it will turn into an empty shell because it will have no instruments to achieve its goals (idem than in the Nile Basin case). Myanmar and China PR are not at a political level committed to promote integration in the region. The former one explicitly maintain it isolated status and the second one is committed to integrate the country regardless the regional initiative even if this latter ones are economically and technologically more feasible. Regarding the domestic reforms, every country member but Myanmar has launched energy authorities but with different degrees of independency and but the case of Thailand absolutely Governmental dependant. Possible actions to eliminate / mitigate the barrier The best way to overcome this kind of barriers is to agree a document which will establish at least: The commitment of the involved governments with regional power trade. The commitment of the involved governments with the TSO cooperation. The creation of a regional institution with the capacity and objectives to coordinate, overlook and promote the process. (i.e. a region-wide Authority formed by the country member energy commission appointed

44 staff and with a turn based biannual president appointment of that chamber) The coordination among already existing regional initiatives that deal with power trade and profit as much as possible of advances already made: Interconnections through Lao with Thailand and Vietnam The acceptance to process in their respective countries modifications such as: o Establish the mechanism to determine cross border trading capacity and the mechanism to allocate this capacity o Elimination of taxes to import/export electricity 9 o Accept to plan the domestic generation and transmission system taking into account the sub regional and regional aspects. In the case of generation this may mean that projects that do not have sense if considered from a domestic optic, may turn into feasible ones when considered in a regional context (i.e. Vietnamese Hydro potential). o Settlement of interchange of information: Prices for different time horizon (whatever the mean used to fit it), demand by node and network topology (transmission lines under maintenance). Financing cross border transmission interconnections The barrier Financing cross border interconnections is in general subject to the same type of hurdles as the power sector in developing countries: big difficulties to find financial sources to fund their expansions in the power sector, mainly because: Some countries are considered as high risk ones for investments and credit. 9 Taxes to cross border trading result in sub optimal benefits for the region because taxes are distortions to prices. Taxes to exports / imports may prevent a transaction that is economically sound from being achieved, because of the distortion that they introduce.

45 Some utilities are not credit worthy, nor have resources to invest. High losses and low tariffs in some cases that do not reflect cost of service and therefore impact in the companies credit worthiness. The power sectors of the region suffer, in higher or lower degree, some of the above mentioned problems, making difficult the access to credit for some of them. Possible actions to eliminate / mitigate the barrier Two different situations can be distinguished for cross border expansion: 1. Transmission line linked to a generation project: this would be the case of a generation project that exports energy (totally or in part) to other(s) country(ies). 2. An interconnection line to link two (or more) systems (pure interconnection): this would be the case of an opportunity that it is identified for trading between two or more systems, and that requires the construction of a transmission line. Transmission line linked to a generation project Best Practises for PPAs might be used so that PPAs do not represent a barrier to additional cross border trading, but on the contrary, cooperate with this trading (Lao s initiatives). Basically, the idea is to allow that the spare capacity of the line linked to the PPA (if existing) is used for exchanges. The owner of the line would be compensated for the use of this spare capacity. Another issue to consider is the possibility of incrementing the capacity of the line linked to the PPA with a marginal investment. When a generation project involving a cross border line with a PPA is identified, the possibility of incrementing the capacity of the cross border line can be evaluated, so as to accommodate other flows which do not correspond to the PPA. A transmission line (cross border) designed to accommodate the power of a PPA, with a marginal additional investment can increment the capacity of transport in a relevant manner. This is a way of taking advantage of an investment that will be made anyway, and with little additional investment obtain a relevant additional capacity for regional trade.

46 Obviously, in this situation arrangements will have to be made with the original investors and compensations will have to be discussed case by case. A pure interconnection project A system interconnection project can be identified at the regional (or sub regional) planning level, or by two or more countries. In this case, first must be analyzed the technical and economical feasibility of the project where the key elements will be the tariff and cost allocation to each country. If the project is feasible, this means that: i) for a given tariff the investment is recuperated with a reasonable gain and O&M costs are covered; ii) the countries involved receive benefits for trading after paying the transmission tariff. In this case a specific agreement among the involved countries for the specific project can be designed so that the countries (or their utilities) become themselves owners of the project. Eventually, if the size of the project justifies it, a specific organization can be put in place to manage and later operate the project. Once the organization and agreements for the project are put in place, funding for the project can be pursued among international agencies or even with private sector. A cost reflective tariff that recuperates and remunerates capital and covers O&M expenses will be the key to obtain funding. Additional mechanisms for ensuring tariff payment could be designed if the private sector is involved in the project, so as to reduce the risk perceived by them. Regulatory barriers The barrier In the region few advances have been made towards a reform processes (started in the mid nineties). The State is still by far the predominant actor in the power sector; there can be found vertically integrated monopolies, unbundled sectors with ownership still in hands of the State and limited participation of private sector.

47 A regulatory authority exists in nearly all countries (with different degrees of independence and objectives in each country), however, in the sectors structure, the State is by far the main actor either through integrated companies or even in unbundled sectors, through the ownership (or participation in the shares) of the unbundled companies. This structure of the power sectors is not actually a barrier for trading; in previous documents it has been demonstrated that it is perfectly feasible to develop regional trade with different types of sector structures. However there are some elements that need to be addressed: Non discriminatory open access to the transmission system s spare capacity: few countries have this possibility, and it is generally through arrangements with the government. Trade requires the possibility to access transmission systems when there is spare capacity. Transmission tariffs, wheeling charges, conditions of access to the grid: the use of infrastructure must be remunerated somehow, therefore, agreements on this remuneration are required and they must be non discriminatory and transparent; same for the conditions of access to the grid. Licenses: import/export of electricity in some countries is subject to licenses or authorizations. Possible actions to eliminate / mitigate the barrier The above mentioned barriers are possibly the ones that will require more work for reaching agreements and building up consensus. On the other hand, it can be said that although they are important barriers to a fluent trade, there is time to work them out during the initial stages, since in those stages their negative impact is not so harmful.

48 Non discriminatory open access to the spare capacity of the transmission system Initially, trading has begun as cross border trading between neighbouring countries, where the corresponding utilities that trade will be either integrated ones or the transmission system owner. In this case, non discriminatory open access is not necessary for trading; therefore, not having open access will not represent a barrier for trading. Moreover, the utilities will be responsible for maintaining their systems parameters, the agreed parameters at the point of delivery and their systems stabilities. However, when trading evolves to further stages and involves transit through third countries, then for a fluent and dynamic trade, open access would be desirable. Since this may represent a major modification in the countries regulations, it can be substituted by a mechanism for determining the cross border trading transmission capacity together with a mechanism for allocating this capacity. If countries are not capable to process the required modifications and achieve non discriminatory open access in their grids, then an agreement on the above mentioned mechanisms will be sufficient to allow trading according. Transmission tariffs, wheeling charges, conditions of access to the grid Transmission tariffs, wheeling charges and non discriminatory and transparent conditions of access to the grid are necessary once non discriminatory open access is put in place. These are the means to remunerate the transmission facilities owners for hosting energy flows. Open access is not indispensable, it is sufficient with agreeing on a mechanism to determine the cross border trading transmission capacity and the way to allocate this capacity. So, it will be required at least to agree on this mechanism for making trading possible (this for the 3rd of the proposed phases). Wheeling charges are proposed to be agreed by countries if necessary, or considered as zero. A decision by the countries is needed on this proposal.

49 Regarding conditions of connection to the grid, the model proposes that each agent connected to a domestic grid, be considered as agent for regional trade if allowed by the country s regulation. Licenses Licenses can be a real barrier for power trading from the very initial stages. Countries with strict requirements regarding licensing should review their position if regional integration is valued as an objective. This does not mean at all that licenses should be eliminated, rather that they should be shaped in such a form so as to not turn into a barrier for trading. They may be even helpful if correctly designed from the point of view of information production and sharing. Among some recommendations regarding the licenses and the procedure to give a license the following principles can be mentioned: 1. Licenses should be given in a non discriminatory way. 2. Licenses should be as simple as possible from the point of view of the requirements from the licensee. 3. The license itself should be standardized and public. 4. The procedure for obtaining a license should be simple, reducing as much as possible the number of steps required. 5. The maximum period that may take for the organization issuing the license to decide in each step of the procedure must be pre established. In case this period is exceeded it must be understood that the decision is in favour of the applicant. 6. The cost of the license (if any) should be minimized. 7. An agreement among the countries of the region for the general conditions of a license would be desirable. The Domination of one or few Countries The barrier In some contexts it is possible that one or few countries in the region have a dominant behaviour over the rest. For example, the more developed or bigger

50 systems may dominate over the smaller ones. More than a barrier, this is a risk because the existence of bigger and developed systems can also function as leaders for the regional development. In this case China, Vietnam and Thailand are dominant but at the same time they are acting as the engine of the integration process. Dominant behavior can not be considered as a barrier ex ante ; it can be no more than a risk to be avoided. Dominant behaviors need to be proved before considering them an actual barrier. However, it is worth addressing the risk and try to avoid it from the very beginning. This dominant behavior can be exercised in two ways: during the commercial relationship (when actually trading) or during the decision making process, when key issues for power trade in the region are being decided. Possible actions to eliminate / mitigate the barrier In both cases the best way to avoid this undesirable behaviour is proceeding by written rules. The first risk, exercise of dominant position during actual trading: this problem needs to be addressed in the design of the trading rules. In a general way, the avoidance of dominant position in the markets or market surveillance is an issue treated specifically in the market rules. An institution (normally the regulator) is in charge of overlooking the behaviour of different agents in a market. Transparency and public information are key tools to avoid these undesirable behaviours. The second risk, exercise of dominant position during decision making process: in this case, it is the design of the decision making process itself which ensures that no country or group of countries can exercise a dominant position. However there is no possible mechanism that can completely ensure this fact, because the decision making process is a human process and therefore subject to human nature forces. For the case of the Great Mekong countries, the Treaty is the first document to address this problem, establishing how the decision making process should be carried out at least for key issues. Different alternatives can be envisaged: total consensus, special majorities, etc.

51 Nonetheless the bigger systems are those more concerned over the integration process since they are the systems which demand more energy and those which would get more benefit since the energy supply is in the medium term constrained their national economic development. Summary of barriers and mitigation measures The following table summarizes the identified relevant barriers for the Great Mekong region and the corresponding mitigation measures proposed. BARRIERS AND MITIGATION MEASURES Barriers Geographical region and power sector sizes: extended region: extended region (long distances), several countries, difficult landscape, power sectors with different size and different degrees of development. Measures 1. The Power Trade model must be flexible, able to recognize subregions that better accommodate its features. Initial development of power trade in sub regions. 2. Planning: gradually introduce the concept of indicative regional planning starting with coordinating country planning to take into account the regional factor. 3. Regional institution to coordinate and promote regional power trade, regional planning and especially the link between domestic planning with regional objectives and regional planning. Gradual development.

52 BARRIERS AND MITIGATION MEASURES Barriers Lack of infrastructure: few and weak existing interconnections; domestic transmission systems with difficulties to host transit flows. Institutional basis and Governmental commitment: need of a regional institution to take the responsibility of coordinating and promoting regional power trade; governmental commitment with power trade articulating self sufficiency policies. Measures 1. Develop infrastructure in sub regions foreseeing that later they will be interconnected with other sub regions. This reduces distances and therefore investment needs. Lao-Thailand and Lao-Vietnam are good examples showing that infrastructure can be developed through an effort carried out by several countries. 2. Planning at sub regional level. 3. Coordinating sub regional planning with domestic planning. 4. Establish regional standards for planning. 5. Agree on common methodologies and instruments for planning. 1. Explicit and transparent commitment of the Governments with regional power trade and coordination with other existing initiatives. 2. Creation of a regional institution with the capacity and objectives to coordinate, overlook and promote the process. 3. Acceptance to process in the respective countries the modifications needed to develop power trade. 4. Planning G&T from a regional optic and not only taking into account domestic needs and domestic market.

53 BARRIERS AND MITIGATION MEASURES Barriers Financing cross border interconnections: countries considered as high risk for credit, utilities not credit worthy, bad performance of utilities and vicious circle (low tariffs, lack of investment, lack of credit worthiness to develop investment) Measures 1. Transmission line linked to generation regional project: a. Consider Best Practices in PPAs b. Enforce open access to spare capacity of line to use it for cross border trading. c. Consider possibility of incrementing capacity of decided line with marginal investment, to use this additional capacity for international trading. 2. Pure interconnection project (opportunity identified at regional planning or by group of countries): a. Analysis of project feasibility with cost reflecting tariffs for the line. b. Involved countries owners of the project and responsible for it. c. Development and exploitation of the project individually. d. Search for funding the project once previous points are achieved. If previous points are achieved, this provides credibility to the project. ADB, Swedish public aid, France Government grants, Japan Bank for development seem interested in investing in the region

54 Barriers Regulatory barriers: non discriminatory open access to spare capacity of transmission, remuneration of transmission services, licenses. Domination of one or few countries: exercise of dominant position during trade or during decision making process. BARRIERS AND MITIGATION MEASURES Measures 1. Countries should at least agree on the mechanism to determine cross border trading transmission capacity and its allocation. 2. Non discriminatory open access to spare capacity of cross border lines that are constructed by PPAs dedicated to exportation must be established from the beginning (even if some agents have priority on the capacity, like PPAs that finance the line). 3. Remuneration to transmission systems hosting transits must be agreed. Initially there can be no remuneration. Other cases may be agreed on a case to case negotiation basis. 4. Licenses should be designed so as to not become a barrier to trade. 1. The (regional) regulator or the institution acting as regulator should perform market surveillance. 2. Proceed by written rules 3. Establish a decision making process that minimizes the possibility of domination during the process itself by one or few countries. 4. Nonetheless this can be assumed as an opportunity rather than a barrier Table 7: Summary of Barriers and Mitigation Measures According to the proposed model for power trade, the different mitigation actions can be organized according to each phase of power trading. In other words, it can be established which of these actions are required to be achieved in each of the proposed phases.

55 The next table shows correlation between power trade phases and the actions required to mitigate barriers to power trade. Power Trade Phases and Actions Required Power Trading Phase Actions to be achieved Phase I: Initial Stage 1. Regional institution creation through a Preparatory Stage treaty among governments, which would also include the governments commitment in favour of regional power trade. 2. Establishment of the concept of regional planning, coordination of domestic planning with a regional view. 3. Definition of regional standards to meet, and the transition to achieve, these standards within a timeline. 4. Harmonization of planning methodologies and standards. 5. Agreement to use Best Practices for PPAs for future cases and common standards. 6. Agreement on information exchange and Phase II: Bilateral Cross Border Trading establishment of regional data base. 1. Regional and sub regional planning tightly coordinated with domestic expansion planning. 2. Development of regional projects that involve two or more countries by the incumbents. 3. Define what will be the regional network (or sub regional) and establish the principle of non discriminatory open access to the lines spare capacity in this network. This will be a condition to begin Phase III. 4. Advances towards regional standards. Common methodologies and tools for planning should be developed. 5. Requirements for import / export licenses should be minimized.

56 Power Trade Phases and Actions Required Power Trading Phase Actions to be achieved Phase III: Multilateral 1. Non discriminatory open access or Trading or Parties agreement on mechanism to determine Transactions. Transits cross border trading transmission capacity and its allocation. 2. Domestic sub regional and regional planning functioning in coordination. 3. Agreement on remuneration to transmission systems that host third parties flows (transits). 4. Harmonized regional technical standards. Table 8: Power Trade Phases and Actions Required

57 The case of the MER region MER region is formed by Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Panama. Currently there is a regional market undergoing among these countries even if Costa Rica and Honduras have no internal wholesale market up to date. This initiative was formally launched in 2000 and the definitive market rules settled in There are already two institutions that contrary to the two previous initiatives have active rules in the regulatory and market aspects (CRIE and OER respectively). The region has a total length of approximately 1800 km. The geographical region and the power sector s size The barrier The Central American Region is a narrow band of land that leads through 1750 km long. This geographical characteristic makes that up to date the interconnections are made with a point to point (country to country) topology. Thereof the interconnections are constrained at 50 MW (interconnection between Nicaragua and Costa Rica). The size of the countries power sectors can be seen in the following table. Installed Capacity Total Countries (MW) Guatemala 2100 El Salvador 1106 Honduras 1392 Nicaragua 640 Costa Rica 1700

58 Panama 1285 Table 9: Installed Capacity in the Region s Countries Source: Information provided by countries during info. In this case systems are quite homogeneous in size but Nicaragua which is significantly lower. Possible actions to eliminate / mitigate the barrier The actions to mitigate the barrier are already designed. The SIEPAC project is already designed and expected to enter into operation in the next years. This 220 kv OHL interconnection will enforce the transmission capacity up to 300 MW that according the size of each system it represents between 15 % and 50 % of the total capacity of each subsystem. Interconnections The whole region is interconnected. The following cross border connections can be mentioned (existing and planned: SIEPAC): Guatemala El Salvador El Salvador Honduras Honduras Nicaragua Nicaragua Costa Rica Costa Rica Panama

59 The next figure illustrates part of these interconnections and their characteristics Guatemala Honduras 100 MW 100 MW 80 MW 70 to 110 MW 50 MW El Salvador Nicaragua Costa Rica Panama SIEPAC Interconnection (220 kv Single circuit 300 MW) Figure 3: Interconnections in the MER Region Domestic transmission systems In this case and contrary to the previous cases (Nile Basin and GMS), the electrification rates are rather high (over 75 % as an average, Honduras and El Salvador reach roughly a 60 %) and consequently their transmission systems are quite developed even their current transmission capacity do not allow extra flows over them at least not significant terms. Nonetheless even the electrification rates are rather high, in comparison with developed countries the demand is very low (Spain 44 million inhabitants has a peak load of 45,000 MW and the Central America region has 40 million inhabitants and a roughly 9,000 MW peak load for the whole system) Possible actions to eliminate / mitigate the barrier As above already mentioned the action to mitigate the transmission capacity limitation is already designed and under development; The SIEPAC (Central America Countries Interconnection System) construction. This project will allow transferring up to 300 MW from one country to another apart of building a ring among Guatemala, Honduras and El Salvador (these latter ones net importers).

60 Institutional basis and Governmental Commitment The barrier A regional institution Currently some region-wide institutions are operating both at regulation level and at operative level. The following chart depicts the regional wide institutions: MER (Electricity Regional Market) Electricity Interconnection Regional Commission (CRIE: Regulatory Body) Regional System Operator (EOR) Figure 4: Regional Institutions These institutions interact with the domestic-wide system and market operators and therefore international exchanges are properly coordinated with the domestic market whatever their internal operation. Governmental policy The governmental commitment in electricity integration was achieved and ratified through a treaty in Afterwards that preliminary treaty was deeply developed by pervious regional institutions created between 2000 and Nonetheless the individual governmental policies are summarized in the following table:

61 Country Energy Policy Guideline 10 Guatemala Private participation promotion. Enhance the development of rural electrification (achievement the 90% of electrification rate). Integration and cooperation with rest of the countries in the region El Salvador Rural electrification development plan through the use of isolated photovoltaic isolated generators. Promotion of medium and mini hydro projects through the joint participation of private and public sector. Integration and cooperation with rest of the countries in the region Honduras Provide sustainable quality energy services and promote conservation measures. Rural electrification development Commitment with the environment and Demand Side Management (improve the load curve) Nicaragua Improvement of Rural electrification No accurate policy defined apart uf the use of natural resources and general ideas Costa Rica By the year 2021 Costa Rica is committed to achieve the higher degree of percentage of renewable sources dependence all over the world Panama N/A Table 10: Countries Power Policies Provide legal support to the regional institution: The initial treaty was a mere MoU that pursuit the promotion of the electricity regional market. This treaty was a part of a wider scope regional cooperation in other trading fields as transportation of goods and services and common cooperation among country members. As long as this treaty has been 10 Source: Special Subregional Energy Forum held in March 2009

62 developed, the local institution in energy matters has accommodated their legal provisions and procedures to converge with the aim of the initial treaty. Thus legal supports have been granted and strengthen as long as the domestic legal frameworks have been adapted to the new challenge. Regardless the common commitment with the integration project, as shown in the previous summary table, not every country has under their political purposes the integration and common cooperation as pillars of their development. None withstanding every country has differentiated institutions (whether regulatory bodies or utilities directly) that even being no policy makers are committed with the integration process and therefore their development plants are under the above mentioned common integration process and operation. Regarding the domestic reforms, every country member even not completed so far, are undertaken reforms in the deregulated process arisen from the regional-wide market and competitive based since this latter has enhance the whole sector all over the region, and definitely the whole domestic structures will converge in the mid term. Possible actions to eliminate / mitigate the barrier As already pointed out in the present document, even if governmental support is granted, this issue is not granted in the future since eventual political distortions within the region might arise. Hence, one the systems are dependent one from the others, and start working jointly, the political support remains in a second stage. Some cases all over the world have shown that political support do not last for ever and nonetheless Integrated Electrical Power System remain together, since are physically connected, even for mere security purposes must remain connected and in many cases their competitive or centralized operation makes useless or harmful for every party to try to renegotiate or disrupt the common operation (i.e. CIS countries, Ecuador-Colombia-Peru, litigations in Europe etc ).

63 Financing cross border transmission interconnections The barrier Financing cross border interconnections is in general subject to the same type of hurdles as the power sector in developing countries: big difficulties to find financial sources to fund their expansions in the power sector, mainly because: Some countries are considered as high risk ones for investments and credit. Some utilities are not credit worthy, nor have resources to invest. High losses and low tariffs in some cases that do not reflect cost of service and therefore impact in the companies credit worthiness (this fact in the region is at a certain term controlled since their regulatory Authorities are in charge survey the tariff methodologies to overcome this issue). Possible actions to eliminate / mitigate the barrier The action/solution adopted by the MER region has been to create a separated company that owns and operate the planned SIEPAC interconnection. This company (EPR Company Owner of The Network in the Spanish spelling) will have the right to receive connection and wheeling charge that will be cost reflective (CAPEX and OPEX) apart of receiving an agreed ROE fixed by consensus among the affected parties (countries interconnected). By separating in a different company the construction and operation of the interconnection mitigate the single country and utility risk apart of considering that the whole market moves an amount of 2,300 million USD per year with an average growth of 5%, what makes feasible to get loans at acceptable rates 11. Therefore the solution adopted in the MER has been the development of a pure interconnection project. 11 It is not clear who owns the shares of the EPR, but it seems that every country will have a weighted participations on that

64 Regulatory barriers Regardless the policy guidelines the more important issue and that concretely might derive in eventual barriers at institutional level are the regulatory framework of the different participants of the region. The barrier The domestic regulation relies on energy or electricity laws (or so called Acts), and these are contractual barriers that might deter the integration of the electricity sector. Eventually the differences among the Regulatory Authorities might be: 1. Power and nature of the Agencies: From the differences of the essence of the Energy agencies some problems might appear at the time of fixing common rules. These differences might be the degree of independence, the power endowed (licensing, tariff, etc ). From these differences many problems might appear apart of rules settlement (i.e. negotiation power etc ) 2. Huge divergences in the regulations out of the electricity market and licensing: There might be some divergences problems in environmental matters, and consequently this issue might damage or discourage both the interconnections development and other generation projects. Nonetheless, some of these divergences might be an opportunity for some of the country members in case of generation projects (i.e. huge dams which project can be allocated somewhere else when its generation is needed to meet the demand or the case of nuclear power plants). Possible actions to eliminate / mitigate the barrier Even if regulation is quite different from one country to others, and even if desirable common rules should exist, this might be an opportunity to develop some projects in countries with more flexible rules if they are eventually economically feasible.

65 On the other way around the difference among regulatory schemes can be overcome if at the main points there is agreement or willingness to match the common rules to be applied by every participant (country or company) Therefore, and for sure it is what has been done at MER, the deal-breakers are to be identified and to be adapted even if remaining certain local-wide rules as they exist. Non discriminatory open access to the spare capacity of the transmission system This point is more important when developing local markets and to foster competition at a domestic level that at regional-wide case. Obviously it would be desirable to apply the same non discriminatory scheme for the whole Central American market (apart of applying location signals and so on). Nonetheless at a regional level, given the disparity of the country members rules, this barrier might be overcome from a natural operation of local domestic markets and rules. Transmission tariffs, wheeling charges, conditions of access to the grid The transmission tariffs and other charges (wheeling charges and access conditions to the grid) shouldn t be discriminatory from one countries to others in order no to deter competition. Nonetheless even if not equal (what should be the ideal condition for a fully competitive integrated market), at least should be transparent in every country whether for generators or consumers (distributors or great consumers) according the methodology adopted by every country member (or their regulatory commission). Licenses The licensing process usually relies on the Energy Authorities. But this procedure is no totally followed by every Country Member of the MER.

66 Even with thought, the scarcity of generation (bigger problem in the region) might make the government to release the connection conditions for generators and for the development of the network. In any case, the licensing procedures are a powerful tool for governments for planning. In most developed countries, the licensing might change according to their Energy plans and policies. Actually, this is not a major barrier in the MER case up to now. The Domination of one or few Countries The barrier There is no domination of any country but the case of Guatemala-El Salvador. The former one acts as a net exporter and the latter one as a net importer. There should be assumed that El Salvador is Energy dependant from Guatemala. But given that Guatemala operates with a quite high degree of competitiveness (more the thirty generating agents) the possibility of exercising market power is quite small. Possible actions to eliminate / mitigate the barrier The SIEPAC project will increase the transmission capacity among every country an therefore, if better prices are offered by distinct countries than currently have net import/export positions, the competition will raise and consequently the liquidity of international transactions. Summary of barriers and mitigation measures The following table summarizes the identified relevant barriers for the MER region and the corresponding mitigation measures proposed. BARRIERS AND MITIGATION MEASURES Barriers Measures

67 BARRIERS AND MITIGATION MEASURES Barriers Geographical region and power sector sizes: extended region: extended region (long distances), several countries, difficult landscape, power sectors with different size and different degrees of development. Lack of infrastructure: few and weak existing interconnections; domestic transmission systems with difficulties to host transit flows. Institutional basis and Governmental commitment: need of a regional institution to take the responsibility of coordinating and promoting regional power trade; governmental commitment with power trade articulating self sufficiency policies. Measures 1. The Power Trade model must be flexible, able to recognize subregions that better accommodate its features. Initial development of power trade in sub regions. 2. Planning: gradually introduce the concept of indicative regional planning starting with coordinating country planning to take into account the regional factor. 3. Regional institution to coordinate and promote regional power trade, regional planning and especially the link between domestic planning with regional objectives and regional planning. Gradual development.: CRIE; EOR and EPR institutions 1. SIEPAC project. 2. CRIE s duty

68 BARRIERS AND MITIGATION MEASURES Barriers Financing cross border interconnections: countries considered as high risk for credit, utilities not credit worthy, bad performance of utilities and vicious circle (low tariffs, lack of investment, lack of credit worthiness to develop investment) Measures 1. Pure interconnection project (opportunity identified at regional planning or by group of countries): e. Analysis of project feasibility with cost reflecting tariffs for the line. f. Involved countries owners of the project and responsible for it. g. Development and exploitation of the project individually. h. Search for funding the project once previous points are achieved. If previous points are achieved, this provides credibility to the project. ADB, Swedish public aid, France Government grants, Japan Bank for development seem interested in investing in the region

69 BARRIERS AND MITIGATION MEASURES Barriers Regulatory barriers: non discriminatory open access to spare capacity of transmission, remuneration of transmission services, licenses. Domination of one or few countries: exercise of dominant position during trade or during decision making process. Measures 1. Countries should at least agree on the mechanism to determine cross border trading transmission capacity and its allocation. 2. Non discriminatory open access to spare capacity of cross border lines that are constructed by PPAs dedicated to exportation must be established from the beginning (even if some agents have priority on the capacity, like PPAs that finance the line). 3. Remuneration to transmission systems hosting transits must be agreed. Initially there can be no remuneration. Other cases may be agreed on a case to case negotiation basis. 4. Licenses should be designed so as to not become a barrier to trade. 1. The (regional) regulator or the institution acting as regulator should perform market surveillance (CRIE). 2. The new interconnection (SIEPAC) will overcome this potential problem Table 11: Summary of Barriers and Mitigation Measures According to the proposed model for power trade, the different mitigation actions can be organized according to each phase of power trading. In other words, it can be established which of these actions are required to be achieved in each of the proposed phases. The next table shows correlation between power trade phases and the actions required to mitigate barriers to power trade.

70 Power Trade Phases and Actions Required Power Trading Phase Actions to be achieved Phase I: Initial Stage 1. Already accomplished Preparatory Stage Phase II: Bilateral Cross 1. Already accomplished Border Trading Phase III: Multilateral 1. Quite degree of maturity at this stage. Trading or Parties Transactions. Transits Table 12: Power Trade Phases and Actions Required

71 Institutional road-book According to this Master Thesis, the institutional road book that a regional power pool should follow is the next one: Stage #1 Stage #2 Stage #3 Stage #4 PTOA Share of limited benefits Share of benefits Limited competition Full competition Regulator Concensous Extended concensous Limited independent Regulator Independent regulator Planning Developing of regional planning Implementation of planning Recommendations Regional Network Figure 5: Institutional Road Book Nonetheless as shown in this document there is not a unique way to promote the electricity markets further than at domestic level. In fact when this is a necessity (whatever the cause: scarcity of sources, lack of financial capacity, common sources exploitation etc ), then the regional integration becomes the single way to promote the development of a developing region. What means that the market becomes a solution for non market based regions. The example of African Nile Basin Initiative is an extreme case that shows the evidence of this above mentioned fact. Countries with resources (hydro potential mainly) are seeking to export electricity to more developed areas (Ethiopia to Kenya etc ) in order to make economically feasible the construction of huge dams that otherwise would be senseless to fit a very poor local demand.

72 Obviously these kind of markets are not the ones that usually are found in developed areas, but nonetheless, these kind of initial interactions will lead to integration at regional level and consequently to future developed regional markets that will lead to the optimal use of the sources and that might achieve (if market operates efficiently) the optimum costs of electricity. By the other hand to achieve a regional-wide political agreement might become a tough task because of many reasons: 1. Conflicts within the region (Great lakes area at the Nile Basin region) 2. Political Issues (Communist or dictatorships might be temporal barriers, i.e. China Vietnam) 3. Protectionist policies (short term policies to promote domestic development of power sector Very common all over the world; Myanmar and Sudan) Therefore, and in order to overcome these above mentioned examples of barriers to accomplish with the road book depicted in the previous figure, it should be taken into account the bilateral agreements regardless the common entire integration. These bilateral agreements are a powerful tool to enhance the integration at a regional level. Obviously the agreements among two or three countries are easily to achieve that a regional wide at a time. Hence and for the three regional initiatives dealt within the present document, in case of the Nile Basin the Uganda, Kenya, Tanzania and Ethiopia integration would be the seed of a further and wider integrated system. Once these system became integrated according the above figure, the rest of countries would joint the system as long as the initial requirements settled at initial stage would be fulfilled. Regarding the Greater Mekong Region, the same would be achieved through the axis Thailand, Lao, Cambodia and Vietnam. These four systems are interested in the integration since, Thailand and Vietnam are suffering a high demand growth and Lao and Cambodia are willing to develop their hydro potential To certain term this is being made by the joint development of hydro power plants in Lao to supply Vietnam and Thailand.

73 Finally, when trading among countries starts to operate, depending on the domestic market structures (single buyer or deregulated environment), it would be necessary to settle the commercial rules by: 1. Deposit of guarantees corresponding a certain amount of payments due for a certain period (three months, six moths a year) in international banks Whether clearing houses or simple financial guarantees 2. Settlement of dispute resolution procedures Usually international arbitrage chambers are used for this purpose

74 Optimal network development To develop an optimal network at a regional level, the first point would be to settle a common regulatory authority that would manage generation licensing and network planning apart of settling tariffs and charges. Another way to achieve the optimal network would be by ensuring long term contracts among countries. For instance if Ethiopia signed a 10 years supply contract with Kenya by whatever mean (construction of hydro power plants or others), then Kenya would accommodate their network development plans and would change the reinforcement of the network at Mombassa port where Gas is being imported through vessels. The same would happen between Lao and Thailand. Nonetheless, even if long term contracts are a natural risk hedging tool (and very common in Africa RDC and South Africa) and this would seem to become a counter measure through the deregulated market based contract, the development of those long term contract will reinforce the interconnections and therefore will promote the interchanges between countries that would have agree these contracts. Consequently the optimal network might not be affected by the interregional power interchanges, contrary might promote the traded among interconnected countries encouraging the efficiency (guarantee of supply and lower costs): The optimal Network is the one that can conduct the electricity from generation points to the consumption points in a reliable manner and at lowest cost

75 Economic benefits The economic benefit of integration arises from the optimized use of resources. The optimal utilization by market integration means would appear from the next logical path: 1. Each country own different natural resources and different degrees of development with different technologies 2. Hydro generation and thermal generation are a complementary mix that ensure the long term guarantee of supply (cover seasonality of hydro availability) 3. In the long term is more efficient (to certain term) to interconnect systems that to transfer certain fuels The limit would be: NPV ( pipelines, transport) = NPV ( trasnmission _ losses, Lines _ construction) ; assuming that the Power Plan is constructed in any case and their efficiency is similar. 4. The bigger is the system the higher economies of scale can be developed: Development of big hydro power plant and extra high voltages networks instead of the current weak 220 kv links 5. The bigger is the system the more stable (regardless stability limits concerning with the inertia of the generation) Consequently the benefit of integration is common for every participant and the whole system. An eventual barrier would be that depending on the dispatching rules the marginal cost of an exporter might be higher if interconnected and therefore the demand in the exporter country will suffer this over cost. Nonetheless the economic theory says that in the long term the price would decrease when the optimal balance point would be reached (the higher the marginal cost the most investment and the lower the price). Regardless theoretical points of view, in some interregional trading the over costs are not reflected to the domestic costumer. In the case of Ecuadorian- Colombia interconnection, they use two marginal prices, with and without imports/exports, and in case over cost appear because of the interchanges they are allocated them as follows:

76 1. Country A export following price signals (prices higher in the country B): Then the country A maintain a local marginal price (without exports) and the exporting units receive the price of country B. 2. Country A export following non price signals (i.e. emergency supply reserve to country B), the over cost is computed and is allocated to the participants that caused the new more expensive dispatch (generator trips, transmission system failures etc ). Even if this procedure is not a market based approach form a theoretical point of view, this might be used to deter the local rejection to the interchange of electricity (political controversial).

77 Conclusions The regional power pools have been conceived traditionally to foster competition among different systems participants that belonged to countries that already had trading agreements in other goods and for mere cooperation in security of the interconnected systems. Regarding developing areas the integration is not a matter of a formal competition directives or laws (North America and Europe cases), is a matter of development. The scarcity of financing and the need of monetizing their natural resources make the integration of their regional system an essential issue to meet their demand in the future and not to deter the development of other activities apart of improving the social welfare of their societies. Even that formally the integration of the systems in a unique power pool (or market) is only possible if the structure of their individual markets is similar. Nonetheless, this thesis show that at certain term, this requirement is not need (at least is not essential) to initiate regional power markets. At the Nile Basin, most of their systems are based on single buyer models with vertically integrated companies and where private initiative is only possible through IPP. The same happen in the Great Mekong Region, but in this case the integration arises from joint initiatives of generation projects to supply the demand of countries (Vietnam and Thailand with Lao and Cambodia). The MER (Central America) is a paradigm of how even if no common convergence in their internal market structures every country is committed with the regional initiative. The following table shows how ones from the others differ: Guatemala El Salvador Honduras Nicaragua Costa Rica Panama Unbundled Unbundled Vertically Unbundled Vertically Unbundled Integrated Integrated

78 Suppliers Suppliers No No No Only to Suppliers Suppliers Suppliers Import and Export Notwithstanding, their degree of integration is rather high: Figure 6: Annual interchanges And consequently the private participation evolution: Figure 7: Evolution of installed capacity Orange public; yellow private