77307 v1 Briefing Note 004/10 Regional Power Sector Integration Lessons from Global Case Studies and a Literature Review Regional Energy Integration Strategies Program Solving Energy Challenges through Regional Cooperation Lessons from Global Case Studies and a Literature Review | c REGIONAL POWER SECTOR INTEGRATION 1 CASE STUDIES | An Overview 2 LITERATURE REVIEW | An Overview 10 FINDINGS | By Theme 11 Levels of Regional Power Integration 11 Optimization of Investment on a Regional Basis 15 Regional Institutions 20 Technical and Regulatory Harmonization 23 Power Sector Reform 25 Role of Donor Agencies 26 Carbon Emission Savings from RPSI 28 RPSI and Renewables 29 ABBREVIATIONS AND ACRONYMS 32 d | Regional Power Sector Integration Regional Power Sector Integration D eveloping countries are increasingly pursuing—and benefitting from—regional power system integration (RPSI) as an important strategy to help provide reliable, affordable electricity to their econo- mies and citizens. Increased electricity cooperation and trade between coun- tries can enhance energy security, bring economies-of-scale in investments, facilitate financing, enable greater renewable energy penetration, and allow synergistic sharing of complementary resources. At the same time, many RPSI efforts around the world are currently facing challenges that slow progress and mitigate the full benefits of greater integra- tion. These challenges include: difficulty aligning national and regional invest- ment decisions; differences in regulatory environments between countries; insufficient regional institutions; dearth of financing; changes in political frameworks; and national sovereignty and energy independence concerns. This briefing note draws from the experiences of RPSI schemes around the world to present a set of findings to help address these challenges. It is based on case studies of 12 RPSI projects and how they are dealing with key aspects of RPSI, such as: • Finding the right level of integration • Optimizing investment on a regional basis • Appropriate regional institutions • Technical and regulatory harmonization • Power sector reform and integration • The role of donor agencies • Reducing emissions through RPSI • RPSI and renewable energy By demonstrating what has and has not worked in different regions around the world, this report explores findings and develops guidelines in these key areas to help RSPI practitioners—politicians, utilities, governments, regula- tors, financiers, aid agencies, and others—identify strategic solutions to pur- sue. While there is a commonality of themes among different RPSI projects, all guidelines would need to be adapted to local conditions. The findings demonstrate how persistence and constancy are often needed to deal with the nonlinear progress and lengthy timelines of RPSI. Many factors can impede progress but nothing in the RPSI schemes studied undermines the many essential benefits of RPSI that many countries are already receiving. The RPSI process requires—and warrants—both perseverance and flexibility of approach to succeed. CASE STUDIES | An Overview1 The 12 case studies span a broad spectrum, from simple bilateral trade, through multi-country trading around a set of regional rules, to fully inte- grated competitive markets in industrialized countries (Figure 1). The case studies cover the technical, political, financial, regulatory, and contractual as- pects of RPSI and comprise a mix of regional markets and of cross-border power projects: Regional Markets • Central American Electrical Interconnection System (SIEPAC) • Greater Mekong Sub-region (GMS) • Gulf Coast Countries (GCC) • Nile Basin Initiative (NBI) • Pennsylvania-New Jersey and Maryland Interconnection (PJM) • South East Europe (SEE) • Southern Africa Power Pool (SAPP) • Union for the Coordination of the Transmissions of Electricity/ European Network of Transmission System Operators for Electricity (UCTE / ENTSO-E) Cross-Border Projects • Argentina-Brazil (Garabi Project) • Cahora Bassa • Manantali • Nam Theun 2 (NT2) Key characteristics of the schemes are shown in Table 1. The entries are chron- ological by when the scheme began, with some double entries signifying a subsequent fresh start (formalization of regional trading in the case of the Greater Mekong Subregion (GMS) and resumption of electricity transmis- sion after a 20-year break due to sabotage of the transmission lines in the case of Cahora Bassa). The top part of the table summarizes the transmission and trade schemes studied, while the second portion gives data on three generation projects established specifically to serve regional markets (Cahora Bassa in Mozambique, Manantali in Mali, and Nam Theun 2 (NT2) in Laos). Data on the developed country case studies, which are also the longest established schemes, are given in the final portion. The transmission and trade case studies are located in transitional and developing countries in South East Europe, Latin America, Africa, and Asia. They generally have small numbers of participants and have been developed relatively recently, gathering momentum in recent years. The MW and GWh in the table refer to maximum demand and energy consumed in the countries belonging to the regional scheme. As indicated in “Max Trade %� column, other than in PJM (which is self-contained), only a small proportion of the energy consumed in the countries participating in regional schemes origi- nates in other countries. SEE has the highest net import figure (14%). Most of the transmission and trade schemes involve some degree of pri- vate sector participation (PSP), the exceptions being SAPP, GCC, and NBI. 1  The complete Case Studies can be accessed on the enclosed CD and at www.esmap.org. 2 | Regional Power Sector Integration Table 1: Key Characteristics of the Case Studies # GWH MAX TRADE SCHEME YEAR PARTICIPANTS MW PA TRADE % PSP1 AGREEMENTS TRANSMISSION & TRADE GMS 1971 (1995) 6 88,000 366,000 1% ✓ Bilateral SAPP 1995 12 (9) 46.000 274,000 7% STEM, now DAM Argentina-Brazil 2000 2 (3) 125,000 480,000 13% ✓ Bilateral SEE 2005 9 43,600 183,000 14% ✓ EU single market SIEPAC 2010 6 9,700 32,000 ✓ MER regional market GCC 2010 6 73,000 290,000 Spinning reserve NBI 2010 9 27,400 142,000 Bilateral GENERATION Cahora Bassa 1977 (1997) 3 2,075 13,000 Bilateral Manantali 2002 3 200 767 Bilateral NT2 2009 2 1,070 5,636 100% ✓ Bilateral DEVELOPED COUNTRIES 10% PJM 1927 14 163,500 700,000 ✓ Multiple markets UCTE/ENTSO-E 1951 24 (29) 672,000 2,300,000 ✓ EU Single Market 1 Private sector participation. The Garabi project, interconnecting the 50 Hz Argentine system to the 60 Hz Brazilian network via two 1,000 MW transmission lines and inverter sta- tions, is the only wholly private sector regional transmission interconnector amongst the case studies. The developed country case studies—PJM and UCTE—have large num- bers of participants and operate in sophisticated market-oriented environ- ments. PJM is an independent regional transmission organization offering a variety of energy and transmission capacity markets to its utility members. UCTE, now absorbed into a new organization called ENTSO-E, for nearly six decades was a technical organization managing the expanding synchro- nous system in Europe. In parallel with UCTE, other regional organizations developed market structures for the trading of electricity, these being framed with the European Union’s (EU) commitment to establishing a single market for electricity in Europe. In all of the case study schemes, there are some successful aspects, together with some more problematic features. Table 2 provides an illustrative sum- mary of the persistent problems, even in the sophisticated OECD country systems. The positive and negative mix is also evident when performance is tracked over time, with unsustainable periods of successful operation. This is illustrated most dramatically by the Garabi scheme, but other cases also prove progress is by no means linear or guaranteed. Lessons from Global Case Studies and a Literature Review | 3 All of the schemes are seeking to address the problem areas. Additionally, each has a number of specific plans for the future Table 3. These plans include expanding the area of coverage and/or undertaking new generation and trans- mission investments. In a case like NBI, the completion of the interconnector ‘backbone’ is fundamental to the scheme becoming fully ‘regional’. In addition to investments, there are other issues the various schemes intend to address. These range from sectoral reform issues in SEE to the development and harmonization of rules and expansion of short-term trade in GMS, SAPP, and NBI. Specific timetables are rarely given for these ac- tions, although in the case of GMS the second of the five phases laid out for regional power system integration (rules for cross-border trade) is due to be completed by 2012. Figure 1: 12 Case Studies of Regional Power Integration Schemes UCTE Balkans PJM Manatali GMS SIEPAC NT2 GCC NBI SAPP Cahora Basa Brazil-Uruguay- Argentina 4 | Regional Power Sector Integration Lessons from Global Case Studies and a Literature Review | 5 Table 2: Successes, Problems, and Future RSPI Plans SCHEME SUCCESSES PROBLEMS FUTURE OTHER AND INVESTMENTS EXPANSIONS ISSUES TRANSMISSION & TRADE GMS Bilateral trade a Imposition of social and Bilateral export schemes: Rules for cross-border proven model environmental problems about 60 projects are power trading to be on poor countries proposed. introduced by 2012 (Stage 2)—the start of market-driven power exchanges in GMS SAPP Regional interconnec- Failure to implement Pool Implementation of 2009 Make DAM fully operational; tors being developed/ Plan; regional capacity Pool Plan, involving 57,000 promote cross-border rehabilitated shortfalls; failure to attract MW of new generation by distribution projects to financing for regional 2025 plus regional increase access to electricity; generation projects transmission, including increase harmonization of interconnecting nonopera- rules, regulations, and codes tional members, if suitable financial resources can be mobilized Argentina-Brazil Regional transmission Banning of exports by Hydropower project at Southern Cone electricity project promoted and Argentine government Garabi (2,800 MW) is trade is based on bilateral owned by private destroyed basis of Garabi under consideration projects; regional market is sector project and set back still a long-term ambition market develop- ment in Southern Cone SEE Progressive moves Next logical regional Lignite plant in Kosovo Completion of national towards wholesale investment is in region under consideration; trade obligations under EU and retail competition with uncertain status expansion through Directives in market open- (Kosovo) developing competitive ing, transparency, and cross-border trading, non-discriminatory pricing; regional balancing coordinated transmission capability, and congestion development planning is management needed SIEPAC Creation of market Long process (23 years Interconnectors to Mexico Efficacy of MER will be institutions; creation from feasibility study) and Colombia under study proven once the SIEPAC of 7th (regional) would allow development transmission line is market on top of 6 of regional generation commissioned national ones that are projects at different stages of development GCC Power Exchange World liquefied natural Trade-off between gas and Level of electricity trade Trading Agreement gas (LNG) market coal expansion of uncertain will emerge once distorting regional trade generation capacity (gas the GCC interconnections in gas, resulting in then going to LNG exports) are complete and the imports of coal for to be resolved reserve margin obligation electricity generation system is in place NBI Investment projects Lack of defined allocation Completion of NBI Operational and market underway of responsibilities transmission backbone, rules are to be developed to between NBI and EAPP linking the Eastern Nile to facilitate full use of physical Egypt and to the Great infrastructure for electricity Lakes region; hydropower trade to be developed in DRC, Ethiopia, and Sudan GENERATION Cahora Bassa Consistent supply Reliability: 18 years out of Interconnector with Malawi; HCB to become a full since 1997 service development of north bank member of SAPP, providing power station at Cahora greater access to regional Bassa would add 850+ MW market 6 | Regional Power Sector Integration Table 2, continued SCHEME SUCCESSES PROBLEMS FUTURE OTHER AND INVESTMENTS EXPANSIONS ISSUES GENERATION, continued Manantali Operated Low tariffs and financial Other schemes modeled on Coordinating expansion satisfactorily since sustainability loans Manantali being developed under WAPP Masterplan commissioning e.g., Felou (60 MW), Gouina (140 MW) Export revenues for Controversy over share of Similar hydropower export Financing constraints on NT2 Laos; well planned private participants projects being planned in Government budget environmental and GMS region intended to ensure Laos social safeguards revenues from NT2 are put to specified use DEVELOPED COUNTRIES DAM and real time Locational marginal Expand by cooperation with Price differentials between PJM markets, transmis- pricing does not give systems operators in New regions remains to be sion auctions sufficient investment York and the Mid-West addressed signals Legally binding Lack of coordinated Expansion of the UCTE UCTE absorbed into UCTE/ agreement after regional planning and synchronous area around ENTSO-E ENTSO-E 2003 supply failure investment the Mediterranean and the Former Soviet states Lessons from Global Case Studies and a Literature Review | 7 Two further summary tables are provided below. Table 3 shows the own- ership and financing of regional interconnectors developed in the different case studies. Table 4 shows the pricing arrangements adopted for intercon- nectors in the case studies. Given the uniqueness of each regional market, different solutions in each of these areas are likely to be appropriate in each RPSI initiative. Table 3: Ownership and Financing Scheme Ownership Financing TRANSMISSION & TRADE GMS Interconnections owned by national National utilities, IFIs, international developers, transmission companies commercial banks SAPP Interconnectors are publicly owned, some via IFIs, and development banks, national SPVs; only private investor is Copperbelt governments Energy Corp (Zambia-DRC link) Argentina-Brazil Garabi interconnectors and frequency IFIs, equity, commercial and development bank converter stations privately owned loans SEE Transmission assets are in public hands, National governments and utilities, development growing number of IPPs in generation banks and IFIs SIEPAC SIEPAC transmission line owned by SPV Equity, development bank loans (EPR), which is a public-private partnership GCC Public ownership of transmission assets, National contributors (equity and debt) in including interconnectors proportion to net present value of estimated reserve capacity savings NBI Interconnectors owned by national utilities National governments, development banks, and IFIs GENERATION Cahora Bassa Mozambique and Portuguese governments Portuguese and South African colonial own SPV (HCB); Eskom owns assets located governments, export credit agencies, commercial in South Africa banks; EU banks financing Mozambique government purchase of HCB shares Manantali Public ownership by 3 countries via SPV IFIs, bilateral donors (SOGEM) NT2 Public private partnership via SPV (NTPC) Equity (28%), IFIs, and international loans from developers, bilateral agencies, commercial banks (with guarantees), and export credit agencies DEVELOPED COUNTRIES PJM Investor-owned utilities dominate; large Investor and publically owned utilities raise equity number of federal and cooperative-owned and loan finance for investment projects utilities have small market share UCTE Public ownership in various forms still Mixed financing dominant 8 | Regional Power Sector Integration Table 4: Pricing of Traded Electricity Scheme Ownership Comments TRANSMISSION & TRADE GMS Bilaterally negotiated prices in PPAs Wheeling charges not an issue in Phase 1 of GMS regional market development SAPP Bilaterally negotiated prices in PPAs; some For DAM, nodal pricing mechanism is in place market trading Argentina-Brazil Bilaterally negotiated contract prices Tariffs for trade due to differential generation costs is at midpoint of marginal exporter generation & transmission costs and higher domestic generation cost SEE Cross-border compensation mechanism for EU zonal pricing for wholesale electricity; transit of electricity progressive expansion of eligible customers at the retail level SIEPAC Cost recovery transmission use of service Long-run locational signaling short-term market tariffs based on nodal pricing GCC Bilaterally negotiated prices in PPAs Interconnection capacity rights may be auctioned NBI Subproject-specific bilaterally negotiated Avoided costs in importing country also prices through PPAs pricing reflecting costs considered in the negotiation of prices GENERATION Cahora Bassa Bilaterally negotiated tariffs under PPA HCB negotiated more favorable tariffs with denominated in Rand Zimbabwe Electricity Supply Authority and now sells in SAPP short-term markets Manantali Bilaterally negotiated tariff under PPAs Amounts due are now always paid by national indexing and tariff adjustment provisions utilities; contingency fund has not been built up as envisaged NT2 Bilaterally negotiated tariff under PPA Tariffs include currency split and escalation formula; most of the energy is contracted on a take-or-pay basis DEVELOPED COUNTRIES PJM Wholesale prices and ancillary service prices Locational marginal pricing and the longer term are set by inter-regional competitive markets Reliability Pricing Model is used in generation and transmission planning but in practice has not given sufficient reward to congestion-reducing investment Transmission tariffs (calculated in various Energy is predominantly sold under bilateral UCTE ways) charged separately from energy tariffs contract (either as physical contract or using a financial instrument) Lessons from Global Case Studies and a Literature Review | 9 LITERATURE REVIEW | An Overview3 The purpose of the review is to assess the literature relevant to RPSI in the World Bank’s client countries. The resulting document has an introductory discussion of cross-cutting themes, an annotated bibliography (with more than 80 entries), and extended bibliographic treatment of six documents of special significance to RPSI. The themes discussed in the discursive part of the Literature Review are divided in three areas: • Motivations and barriers to integration – Benefits of integration (the expected outcomes) and how these are to be shared – Barriers to integration (technical, political, economic) • Outputs of regional integration – Institutional infrastructure and market development (agreements, rules, and institutions that make electricity trade possible) – Physical infrastructure (interconnectors, etc., that make trade in elec- tricity physically possible) • Facilitation of the regional integration process – Political will and desire for integration and trade – Coordination at the regional level with appropriate delegation to the national level – Sequencing of the regional integration process The papers in the annotated bibliography are divided into nine categories: 1. RPSI major overview papers 2. Economics of RPSI 3. RPSI institutions and markets 4. Technical aspects of RPSI 5. Hydropower 6. Environmental aspects of RPSI 7. Support of outside agencies for RPSI 8. Region-specific papers 9. Case studies from ESMAP projects 3  The full Literature Review is available on the enclosed CD and at www.esmap.org. 10 | Regional Power Sector Integration FINDINGS | By Theme The circumstances in which RPSI is being carried out varies enormously. Countries have diverse motivations for joining RPSI schemes; the electricity sectors are at different stages of reform and development; financial capabili- ties; and orientations to private sector involvement differ and social/environ- mental impacts vary. Against this background, an overarching finding is effec- tive RPSI approaches must be tailored to the circumstances at hand. Political factors and historical evolution of the regional arrangements are equally as important as the ‘objective’ technical and economic factors (Box 1). 1. LEVELS OF REGIONAL POWER INTEGRATION Regional power sector integration (RPSI) in its most integrated form involves robustly interconnected national electricity networks to enable trading of sub- stantial power across countries; systems operation rules and control proce- dures that ensure high quality, reliable supplies originating in another country to be delivered to domestic consumers; and a market framework which en- courages competitive international trading of capacity and energy. As system demand grows, generation and transmission expansion should be planned in- Box 1. One Size Does Not Fit All in RPSI Schemes The case studies differ in their immediate characteristics, such as size, stage of electricity sector reforms, ownership, resource usage, and environmental impact. They also differ in the framework conditions, such as the objectives of political leaders, the commitment to regional integration (in all sectors, not just the power sector), and the type of regional institutions alredy established or can be established as part of the RPSI process. These differences point to the need for all aspects of RSPI strategies—ownership, fi- nancing, pricing, planning, and regulatory harmonization—to be tailored to local circum- stances. Adapting to local circumstances should not just be a feature at the start of an RPSI initiative, but should result in reassessments and redesigns of the approach as the scheme develops over time. If it were possible to guarantee an orderly, predictable pro- cess of deepening of regional integration and concomitant growth in electricity trade, then it would just be a question of determining where to start. In practice, RPSI is almost always a more fractured process, with temporary reversals as well as periods of progress and consolidation. The design, approach, and phasing of regional integration efforts must adapt to local realities, with considerable room for flexibility and adjustment as conditions and attitudes change. This means that there are no unique RPSI institutions or processes, and no hard-and- fast rules about issues, such as ownership, financing, and pricing, that will ensure the success of regional integration efforts. The best case would be one in which early regional integration provides tangible benefits, helping build consensus and momentum towards deeper forms of integration. Typically, though, the next stage may be far more difficult than the early success, and reversals may have to be weathered before further progress is sustained. Lessons from Global Case Studies and a Literature Review | 11 12 | Regional Power Sector Integration dependently of national boundaries, minimizing investment and operation costs for the region as a whole, while also contributing to regional environ- mental and social objectives. In practice, only the regional power schemes in a few industrialized coun- tries, after developing and maturing over many decades, approach ‘full’ RPSI. Schemes amongst developing countries are loosely described as RPSI, but are often at lower levels of integration. Different schemes are at different stages of integration because of various driving motivations. The case studies illustrate that the variety of motivations, or objectives, impelling greater trade and interconnection can lead regions to achieve a variety of stages on the way towards full RPSI. As shown in Table 5, Table 5: Diverse Motivations in the Regional Power Case Studies Scheme Motivations/Objectives Comments TRANSMISSION & TRADE GMS Efficient, environmentally sound development Planned stages: (1) bilateral export projects (well of the power sector to aid economic growth; advanced); (2) trade between any pair of GMS support to regional projects and electricity countries; (3) interconnections expressly for trade, trade as means for these objectives with third party access effective; (4)integrated, competitive regional power market (still conceptual) SAPP Development of a safe, efficient, reliable, and Subsidiary objectives are harmonized standards stable interconnected electrical system and of and regulations (well advanced) a regional power trading mechanism Argentina-Brazil Reduce drought vulnerability of Brazil’s In practice, following political and economic crisis hydropower-dominated system and expand in Argentina and suspension of electricity exports, Argentina’s trading opportunities power flows have been from Brazil to Argentina (and also to Uruguay), but the system is fulfilling its energy security purpose SEE Create a regionally integrated electricity Political commitment to join the EU provides market, forming part of the wider EU single motivation for aligning with EU energy directives; market economies-of-scale and access to lower-cost regional resources also a consideration for generation and transmission investment SIEPAC Create an integrated regional electricity Regional market seen as means to improve market in Central America efficiency, security of supply, lower costs, attract foreign investment, and contribute to economic development GCC Share reserve capacity, thereby reducing Shared reserves is effective; trade in electricity is generation investment requirements still under development NBI Ensure coordinated power investment in Nile The power integration component is part of a Basin to meet social and economic broader scheme for the optimized management development objectives in the region of water in the Nile Basin with irrigation as the main concern GENERATION Cahora Bassa Import of clean power for more reliable Objectives fall within those of SAPP, but the electricity supplies in South Africa project was initially developed on a purely bilateral basis Manantali Contribute to meeting the power needs and Initially, the purpose of the project was the increase the efficiency and reliability of power regulation of Senegal River for irrigation purposes; systems in Mali, Mauritania, and Senegal power generation was a secondary aspect NT2 For Lao PDR, revenues from hydropower One of a number of Lao PDR-Thailand hydro- exports; for Thailand, access to cost power projects in operation or under develop- competitive and diversified electricity supplies ment Lessons from Global Case Studies and a Literature Review | 13 some schemes are specifically oriented to deep forms of RPSI (e.g., the re- gional market of SIEPAC) while others have more limited objectives (e.g., sharing spinning reserves by GCC). The objectives also change over time, as do the consequent institutional arrangements. This is illustrated by UCTE, which in the first five decades was committed to technical and operational coordination of a synchronous sys- tem via a loose arrangement involving voluntary horizontal coordination with no hierarchical control or subordination. After a major shut-down of the syn- chronous system following a disturbance in Italy in 2003, UCTE required par- ticipating transmission system operators (TSOs) to sign a Multilateral Agree- ment legally enforceable in the European Court of Justice. Recently, a desire to broaden the approach to RPSI beyond the narrow confines of synchronous operations, led by EU legislation, has resulted in UCTE being incorporated with other RPSI schemes (including Nordel) into the new ENTSO-E thus cre- ating a supra-national agency with statutory powers. Heterogeneous members of schemes can initially be coordinated in loose ‘club’ type arrangements, but deeper RPSI requires some form of subordinating arrangements. The expectation in many cases is that regional schemes, which start with limited technical objectives, will eventually develop into competitive mar- kets. Regional cooperation in the power sector generally commences with the building of transmission interconnectors and the negotiation of long-term bilateral power purchase agreements (PPAs). As interconnection increases, more countries join in trading. Short-term markets develop to take advantage of trading possibilities arising from noncoincident load profiles and different cost structures. As confidence grows, there may be progressive development of more comprehensive competitive markets for energy and capacity. Over time, countries develop common technical and economic rules, paving the way for regional electricity markets. Table 6: Levels of Regional Power Sector Integration Area of Regional Inter- Trading Planning and Case Study Cooperation connectivity Arrangements Harmonization Investment Examples Interconnection Typically starts Long-term bilateral Simple rules agreed National planning Cahora Bassa, with two countries, PPAs for the operation of and investment Manantali, NT2, later a wider the interconnected GMS, Argentina- interconnected system Brazil, GCC grid Integration— Interconnected Long-term PPAs Harmonization of Some coordination SAPP, SIEPAC shallow grid involving a supplemented with rules, grid codes, and of national number of short-term markets transmission tariff investments with neighboring optimized regional countries investment plan Integration— Full synchronous Competition Regional regulatory Regional PJM, UCTE, SEE deep operation of a achieved through a agencies, systems, and integration body multi-country range of markets market operators empowered to interconnected (spot, day ahead, require investments system transmission capacity in agreed regional auctions, etc.) plan to be implemented* Note: Schemes exhibiting some, but not all, deep integration characteristics are shown in italics. * Full delegation of powers to enforce regional investment plans is yet to be made in any scheme. 14 | Regional Power Sector Integration This general sequence is not always followed. For instance, SIEPAC delib- erately developed Mercado Eléctrico Regional (MER), the Central America regional electricity market, before building the interconnector to make trade physically possible. Amongst the other developing country schemes, SAPP is in some respects more advanced than GMS and NBI, which are still clear- ly at the interconnection stage, but all three have expressed the intention to move to deeper forms of regional integration, including competitive markets. Amongst the case studies, only GMS has a roadmap for this transformation: • Phase 1: Bilateral export projects • Phase 2: Trade between any pair of GMS countries • Phase 3:  Interconnectors built expressly for trade, with third party access assured • Phase 4: Integrated, competitive regional power market Findings • There are many levels and types of RPSI. These range from simpler forms of interconnection, which may only include individual cross-border generation projects, to more advanced forms, which may include some combination of unified multinational power markets, technical and regulatory harmoniza- tion, a single power exchange, high interconnection levels, regional coordina- tion of investment, and competition across borders with few impediments. • Full integration of multiple national electricity systems into a regional electricity market offers the greatest benefits from RPSI. Few regions have achieved this as yet; Nordpool in Scandinavia is probably the closest. • Substantial benefits can still be achieved at all levels of RPSI. Simple inter- connections between national systems and one-off, cross-border electricity trade projects can offer substantial benefits, and countries may be content to stay at this or other intermediate levels of integration. • Moving from no integration to full integration can take decades, but mov- ing from intermediate to higher levels of integration can be relatively rapid. The rate at which progress is made towards full power sector integration depends on many factors, including the institutional capacity of participat- ing countries. 2. OPTIMIZATION OF INVESTMENT ON A REGIONAL BASIS The potential benefits of a regionally optimized generation and transmission expansion plans typically offer significant savings over the sum of the national power development plans designed to meet the same projected demand. Put- ting planning onto a regional basis is therefore a crucially important aspect of deepening RPSI. However, there are often problems following through with the actions identified in a regional least-cost plan, with investments reverting to the sequence specified in national power development plans. The figures for the latest SAPP Pool Plan provide a good example of po- tential savings through a regional approach to investment (Box 2). The real- ity is regional power integration plans are seldom implemented, despite the consequent economic costs. In the Nile Basin area, for example, failure to ex- Lessons from Global Case Studies and a Literature Review | 15 ploit hydro-based regional power development potential has led to chronic shortages of capacity and the leasing of emergency diesel generators in several countries at costs well above what power from the regional plants could have provided. Shortfalls nonetheless persist: the Africa Infrastructure Country Dialogue report documents costs of outages in recent years of around two percent of the gross domestic product (GDP) in Kenya and four to five per- cent of GDP in Tanzania and Uganda. An underlying reason for the ‘national bias’ that leads to failure to imple- ment regional investment strategies is the unwillingness of countries to accept optimized regional investment plans. This applies as much to highly devel- oped countries in UCTE as to developing countries in the regional schemes studies in Latin America, Africa, and Asia. It is common for there to be uncertainty and skepticism about regional ar- rangements and little feeling of ownership of regional plans. Part of the reason for this is so-called ‘optimal’ plans are not robust, but depend on the particu- lar set of assumptions adopted for the final run of the scenarios. If changes in assumptions can radically alter the sequencing of projects for a particular country, it is understandable that decisionmakers retreat to the comfort of a national investment plan. Concerns over energy supply security are often cited as a reason for favor- ing national over regional investment strategies, despite the lower costs of the latter. In some cases, notably SEE, countries rely on other countries for their supplies, especially countries with whom they have recently been at war or are unrecognized by other countries in the region. For example, there is general acceptance that the lowest-cost new baseload generation would be located in Box 2. Failure to Realize Regional Power Investment Gains—The Case of SAPP The Southern African Power Pool (SAPP) has nine interconnected operating members (Botswana, Democratic Republic of the Congo, Lesotho, Mozambique, Namibia, South Africa, Swaziland, Zambia, and Zimbabwe) and three nonoperating members (Angola, Malawi, and Tanzania). SAPP’s latest 2025 Pool Plan requires an investment of US$89 bil- lion to construct 57,000 MW of new generation capacity, plus additional funding for the associated transmission lines. The cost is US$48 billion less than the sum of the national power development plans to meet the same projected level of demand. A capital cost saving of 45% should be sufficient to galvanize SAPP members to implement the regional investment strategy, but past experience is not encouraging. The previous regionally optimized Pool Plan, announced in 2001, was ignored because there was surplus capacity in the region at the time. By 2007-08, the surplus capacity had been exhausted and even South Africa suffered blackouts and load shedding. President Mbeki apologized publicly, admitting the politicians failed to listen to the utilities and SAPP. However, the same fate could lie ahead for the new Pool Plan. With the regional shortages, countries are now investing in electricity but are keener than ever to pursue their own na- tional investment strategies. The lack of adequate reserves in the region is predicted to last at least until 2013. Special regional cooperative arrangements have been made in SAPP to ensure the lights will be on in the stadiums during the 2010 World Cup matches. 16 | Regional Power Sector Integration Lessons from Global Case Studies and a Literature Review | 17 Kosovo to take advantage of its lignite resources. However, countries, such as Serbia, would prefer to develop their own resources rather than rely on a region they still recognize as part of their national territory but outside their direct control. An example of RSPI between countries with a long history of good co- operation is Argentina and Brazil. Originally planned during the 1990s, the Garabi Interconnector was to export electricity from Argentina to Brazil. The 2002 economic and political crisis in Argentina led to a collapse in energy sector investment and, by 2004, in response to growing energy deficits, the Argentinean government banned exports of electricity. The interconnector’s owners have since recovered from this financial shock with the interconnector now being used for exports from Brazil to Argentina. Still, this example shows the political risk associated with regional projects where governments are not necessarily committed to their implementation. The SEE market also shows the potentially adverse consequences for na- tional system operations of regional investment plans. Many countries were left with unbalanced generation mixes following the breakup of Yugoslavia and its integrated grid. For example, Kosovo’s generating capacity is almost entirely comprised of inflexible baseload lignite generators making load-following very difficult, while Albania’s capacity is largely comprised of hydropower plants with large seasonal differences in output. Another common barrier to regional planning is the desire of countries to either maximize their exports of energy or to minimize domestic supply costs by retaining the benefits of lower cost domestic energy resources for them- selves. Countries need to be convinced that they will all benefit from any re- gional plan. Within GMS, for example, the large numbers of proposed cross- border generation projects reflects the combination of lower income countries, such as Lao PDR and Myanmar, which have large low-cost hydropower re- sources, and higher income countries, such as Thailand and Vietnam, which want to increase electricity supplies at least cost. The small size of the domestic electricity markets and national economies in Lao PDR and Myanmar means that their hydropower resources would not be exploited, unless for the regional market. There is no conflict between developing these for regional export or for domestic supply. In other regions, this conflict may be less easy to resolve. The ‘brittleness’ of regional power planning is a reality RPSI participants need to confront. Once there is consensus on the scenario that is to become the regional plan, there must be a firm commitment to adhere to that plan. Countries otherwise forfeit the enormous collective gain of the regional ap- proach to investment. Having Heads of State (or other high-level political fig- ures) formally endorse and sign regional power investment plans, as is done in the West African Power Pool (WAPP), can ensure visible political buy-in and increase chances of following through with regional planning investments. Findings • The optimization of generation and transmission investment on a regional rather than a national basis can offer substantial cost reductions. • These cost reductions often go unrealized when countries follow national priorities, including domestic energy supply security, economic national- ism, and sovereignty concerns. 18 | Regional Power Sector Integration • Recognizing as legitimate and appropriately addressing these and other important national priorities is essential to achieving regional investment optimization and the full benefits of RPSI. Approaches for achieving this will differ depending on local circumstances and the combinations of planning and market forces that drive investment decisions. • With the exception of PJM, none of the regions studied implement man- datory regional planning although several encourage the use of indicative regional plans with buy-in from politicians to ensure commitment to de- livering these. • Explicit mechanisms to share benefits, such as allocating shares in cross- border projects, may help overcome reluctance to implement regional plans. Lessons from Global Case Studies and a Literature Review | 19 3. REGIONAL INSTITUTIONS RPSI schemes are often initiated through some political initiative, giving them initial momentum. To sustain the schemes, it is necessary to establish regional institutions. These typically are of two main forms: • Special purpose vehicles (SPVs): a corporate structure established to exe- cute and operate a specific regional project (such as a large export-oriented hydropower plant). • Regional bodies: groups charged with deepening RPSI through working with governments, regulators, and utilities from member countries on an on-going basis. Examples would include power pools and their secretariats, regional regulators (or regional associations of national regulators), and re- gional transmission/system/market operators. SPVs are a feature of five case studies—Argentina-Brazil, SIEPAC, Cahora Bassa, Manantali, and NT2. For the implementation of individual projects, SPVs have a number of advantages, including a transparent and workable framework for the ownership of shared assets and the employment of well- qualified personnel (Box 3). The alternative of national ownership of com- ponents of a regional system is best avoided because it makes political inter- ference much more likely, including national demands for priority use of the assets during shortages. The other case studies provide examples of schemes with different kinds of regional bodies and RPSI mandates. The kind of regional power institu- tion established is strongly related to the existing overall regional integration framework. SAPP, for example, falls under the Southern African Development Community (SADC), which is one of the eight regional economic communi- ties (RECs) recognized by the African Union. SADC has a strong regional inte- gration agenda across the whole spectrum of socioeconomic development of its 15 member states. The power sector is just one aspect of SADC’s integration ambitions. SAPP’s strength is that is has always been a utility-driven institution that also benefits from the political guidance of SADC. Similar to SADC, NBI is a broad regional integration institution, but it does not have the same political mandate and cohesiveness of a REC. The member countries of NBI belong to at least one, but typically several overlapping RECs (notably COMESA, East African Community, and Intergovernmen- tal Authority on Development). The GMS regional market forms one part of the overall GMS integra- tion initiative promoted by member countries and external bodies, such as the Asian Development Bank (ADB). However, GMS’s cohesion is somewhat reduced by the multi- plicity of other regional initiatives and institutions active in the same geographical area and sector, partic- ularly the Association of South-East Asian Nations (ASEAN). 20 | Regional Power Sector Integration Box 3. Nam Theun 2 Power Company The Nam Theun 2 project (NT2) involves the construction of a 1,070 MW hydroelec- tric storage project in Lao PDR with the capacity to deliver 5,600 GWh annually to Thailand via a dedicated interconnector. A small portion of production is supplied to customers in Laos. NT2 is an enclave project in which output from a new-build generation facility is almost entirely devoted to export. Most of the contracted out- put is on a take-or-pay basis at prices agreed upon in a power purchase agreement. A special purpose vehicle, the Nam Theun 2 Power Company (NTPC), was cre- ated to build, own, and manage the facility. NTPC is incorporated in Laos under Lao law as a foreign investment company. It is a joint venture between: Electricité de France International (35%), Lao Holding State Enterprise (25%), Italian-Thai De- velopment Public Company, Ltd. (15%), and Electricity Generating Public Company (EGCO) of Thailand (25%). NTPC brings together the project developers, repre- sentatives of the host governments ,and (indirectly) the power purchasers. (EGCO is partially-owned by the Electricity Generating Authority of Thailand—the power purchaser.) The type of REC or other overall regional arrangement is an important determinant of the institutions that have emerged to promote RSPI: • Loose cooperation: GMS is yet to establish a full-time secretariat for region- al power. Instead, various working groups bring together representatives of national utilities and regulatory agencies and act as secretariat rotating between members. This is reflective of both the wider GMS initiative and other regional institutions, such as those under ASEAN. • Harmonized, uniform approach: In SEE, countries are either already members (Bulgaria and Romania) or aspire to be members of the EU and in pursuit of that overall political objective, are willing to fulfill the nec- essary requirements of the stringent EU Directives in the power sector. This requires extensive subordination of national interests to regional re- quirements. A regional Energy Community Secretariat exists to oversee and manage the integration process and has power to rule on disputes relating to the regional market. Members are also required to conform to relevant EU legislation on electricity and gas markets, state aid, and competition. The institutions promoting power sector integration are crucial, but, as the above discussion illustrates, it is difficult to derive general rules about institutional design where the history and political framework are differ- ent and changing over time. Ideally, institutions need to evolve to encom- pass the wider cooperation between countries and reflect the established approach to such cooperation. Creating new institutions with no basis in existing cooperative arrangements are unlikely to succeed, as is trying to force a level of permanence and control exceeding that in other existing arrangements. Lessons from Global Case Studies and a Literature Review | 21 Table 7: Regional Power Institutional Forms Scheme Motivations/Objectives Comments TRANSMISSION & TRADE GMS Working Groups under the GMS Economic National regulatory agencies (in Lao PDR and Cooperation Programme (Secretariat ADB); Myanmar, Ministries of Energy) no permanent secretariat SAPP SAPP is part of the Southern African National regulatory agencies exist in most Development Community (SADC); main countries. Eight are members of Regional organs—Executive Management Committees, Electricity Regulators Association of Southern 5 technical sub-committees; permanent Africa (RERA) secretariat in Harare, Zimbabwe Argentina-Brazil Privately owned SPV: Companhia de National regulatory agencies—El Ente Nacional Interconexo Energetica, registered in Brazil Regulador de la Electricidad (Argentina); Agencia Nacional de Energia Electrica (Brazil) SEE Energy Community of South East Europe; National regulatory agencies, coordination permanent Secretariat is located outside through the South East Europe Electricity region (Vienna, Austria) Regulation Forum SIEPAC Project initiated by the Central American The 7th Market Regional Institutions are Electrification Council and formulated under superimposed over existing national ones; Marco Treaty and Mesoamerican Project regional regulator is Comisión Regional de Regional transmission line SPV is public- Interconexión Eléctrica; Marco treaty also created private partnership, La Empresa Propietaria regional system and market operator—Ente de la Red (EPR) Operador Regional GCC Gulf Cooperation Council Interconnection Regulatory Advisory Committee is to be set up to Authority—Planning and Operating deal with regional regulatory issues Committees, Secretariat in Saudi Arabia NBI NBI institutions have secretariats in Entebbe, All NBI countries except DRC have separate Kigali and Addis Ababa; East Africa Power regulatory agencies. Some belong to Regional Pool (EAPP) Secretariat is located in Addis Association of Electricity Regulators for East and Ababa; NBI countries belong to COMESA and/ Southern Africa or various other regional economic communities GENERATION Cahora Bassa SPV is Hidroelétrica de Cahora Bassa, Mozambique, South Africa, and Zimbabwe have registered as a company in Mozambique regulatory agencies and these belong to RERA Manantali SPV is Société de Gestion du Barrage de Mali, Mauritania, and Senegal have national Manantali (SOGEM); hydropower complex regulatory agencies; Economic Community of operated under management contract with West African States Regional Regulatory Eskom Energie Manantali Authority set up in 2008 has jurisdiction over cross-border electricity exchanges NT2 SPV is NTPC, incorporated in Laos, with Enclave project regulated via provisions of the majority private ownership structure PPA; national regulators have oversight role DEVELOPED COUNTRIES PJM PJM is a limited liability company: members Federal Energy Regulatory Commission for are utilities, customers and suppliers interstate matters and State regulators UCTE UCTE absorbed into ENTSO-E: members are National regulators and their associations—Agen- transmission systems operators (TSOs) cy for the Cooperation of Energy Regulators (replacing European Regulators’ Group for Electricity and Gas and the Council of European Energy Regulators); competition regulation overseen by European Commission 22 | Regional Power Sector Integration Findings • Regional institutions are vital for RPSI but there is no single institutional form that is appropriate for all regional power integration schemes. • The strongest institutions are those that grow organically from local initia- tives rather than imposed from outside. Opportunities to build on existing arrangements should be explored before creating new institutions. • SPVs provide a good model for projects serving multiple country markets. 4. TECHNICAL AND REGULATORY HARMONIZATION Harmonization is not a precondition for regional power integration, but is often the next step after simple coordination. Harmonization refers to estab- lishing common norms and rules in technical, economic, and legal matters pertaining to RPSI: • Technical—rules and procedures assuring access to and stable operation of interconnected transmission systems • Economic—rules for the operation of markets or for the adjustment of tariffs where prices are regulated • Legal—agreed common procedures and mechanisms for the resolution of disputes Harmonization is particularly important when there is an intention to at- tract the private sector into investing. Private investors will not invest with- out a high degree of certainty about transmission line access, revenue flows, and regulatory predictability. Public utilities should have the same concerns: whether they are purchasers or sellers, they benefit from greater transparency, consistency, and predictability. Harmonization is of general importance in improving conditions for initiating RPSI. Drawing on the experience of industrialized country power pools, such as PJM, UCTE, and NORDEL, the benefits of greater harmonization have also been recognized in many developing country schemes. SAPP, GMS, and NBI have harmonization projects underway. SIEPAC is the only developing coun- try scheme that has fully harmonized technical rules and common approaches to regulation in the regional market, although these coexist with different na- tional market rules and procedures in the six participating member countries. Although motivated by the desire to follow the requirements of becoming EU members rather than by power system integration considerations alone, SEE provides an interesting example of a regional organization with a strong drive for harmonization (Box 4). Other than in SIEPAC, the regional regulatory bodies in developing countries are associations for the exchange of information and experience. Deepening of RPSI would follow empowerment of regional regulatory bodies with discre- tionary powers to override national regulators. In Southern Africa, the regional regulatory association—Electricity Regulators of Southern Africa (RERA)—is trying to navigate around this restriction. Although, a reasonably conducive environment has enabled the development of the short-term markets (STEM) and day-ahead markets (DAM) in the SAPP region, RERA has recognized that Lessons from Global Case Studies and a Literature Review | 23 Box 4. Regional Power Harmonization in South East Europe The South East Europe (SEE) case study examines the regional electricity strategies of the nine contracting parties, which were signatories in 2005 of the Energy Community Treaty: Albania, Bosnia & Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia, Montene- gro, Romania, and Serbia. Significant drivers towards integration in the SEE region have been the need for reconstruction following a period of conflict and the small size of some of the countries, which necessitates cross-border trading if some of the large generation investment projects are to be feasible. In line with the aspirations of these countries to join the European Union (EU; which Bulgaria and Romania have joined), the Treaty seeks to further the implementation of the EU Acquis Communautaire. As a result of these drivers, important features of the process of regional power inte- gration in the SEE region are: • Evolution of competition in wholesale and retail supply fostered by a common regula- tory framework with independent national regulators, functionally and financially un- bundled transmission system operators (TSOs), and unbundling of integrated utilities • Establishment of a regionally integrated network linked to the wider EU market, in- cluding common rules for generation, transmission, and distribution • Coordination of regional planning and facilitation of competitive investment, although the Energy Community Treaty does not, of itself, mandate any investments a tighter regime is needed to expand electricity trade further and to attract pri- vate investors. It recently completed a project with ESMAP support—Guide- lines for Regulating Cross-border Power Trading in Southern Africa—to provide clear guidelines for regulating cross-border power trading in Southern Africa. The guidelines will be administered by the national regulators but on a har- monized basis—premised on the idea that the same objectives can be pursued in the region via de facto rather than de jure regional regulation. Findings • Harmonization of technical standards is needed to avoid endangering or loading excessive costs onto neighboring systems. • Harmonization of relevant economic regulations among participating countries is not a prerequisite for initial levels of RPSI, but is increasingly required as cross-border competitive power trade develops. • Deepening RPSI will require a gradual move towards uniform approaches by national regulators, creating a common regulatory framework for re- gional markets or possibly some form of ‘regional regulator’ with discre- tionary powers in the regional market. 24 | Regional Power Sector Integration 5. POWER SECTOR REFORM There is a clear theoretical connection between the introduction of markets in national electricity sectors and RPSI. The greater competition engendered by market-based reform is aided by the introduction of more (supply and de- mand) players through a regional rather than domestic market. The resulting international electricity trade, in turn, justifies the interconnections and the enabling rules and regulations. In this way, the two processes can complement one another. After unbundling previously vertically integrated national utili- ties, transmission operators would be the focal points for regional schemes. In practice, such synergistic momentum has not often developed, but a number of RPSI schemes have forged ahead. Indeed, it is possible for market reforms at the national level to create barriers to RPSI. Utilities with substan- tial domestic market power may seek to block increased competition from imports. Competitive markets can make long-term contracting and financing of regional projects more challenging. And there may be strong opposition to opening up domestic power markets to imports from countries that retain monopoly markets given the resulting perceived “unfairness� in competition between utilities in the two countries (although here the solution is to speed up power sector reforms in other countries). Linking RPSI to power sector reforms runs the risk that delays in reforms endanger the progress of RPSI. Africa provides a stark example of stalled elec- tricity sector reform. Widespread market-oriented reforms were expected, but today reforms are evident in only a few of the 24 countries covered by the case studies. In Latin America, the experience is mixed. Promising reforms in the Southern Cone are in sharp reverse while in Central America SIEPAC shows that RPSI can proceed even when countries are at very different stages of reform (Box 5). In other case stud- ies (such as SAPP, SIEPAC, and NBI), partial national electricity sector reforms have made some contribu- tion to the momentum for the deepening of RPSI. Findings • Competitive power markets are not a prerequisite for initial RPSI. Different levels of power sector reform amongst participating countries can be ac- commodated by careful design of regional integra- tion schemes. • Deeper levels of integration will require national power markets be at similar stages of reform in order to address concerns that the benefits of in- tegration are captured by countries where power monopolies persist. • Competitive power markets can facilitate and complement RPSI, but also can create barriers to electricity trade due to its potential to reduce the market power of incumbents and the added dif- ficulty of financing cross-border projects as long- term contracting becomes more challenging. Lessons from Global Case Studies and a Literature Review | 25 6. ROLE OF DONOR AGENCIES Multilateral and bilateral donor agencies have played significant roles in re- gional power integration in the developing world. The most prominent aspect has been in helping to finance regional projects, but donor agencies have also been involved in shaping or even creating regional institutions. Experience teaches that donors need to be cautious about imposing ambitious integration agendas. Instead, they should support gradualist approaches in line with local realities and the objectives of RPSI participants. The ambitions for the 44,000 MW Grand Inga project on the Congo River exemplifies this point: donors have committed large volumes of resources to a project that has failed to progress. Lower profile interconnection schemes in Central Africa and countries involved in the proposed Western Power Cor- ridor (WESTCOR) interconnector to Inga (Angola, Namibia, Botswana, and South Africa) could have been implemented to deliver regional benefits in much shorter time frames. 26 | Regional Power Sector Integration Box 5. SIEPAC: Regional Integration without Coordinated Power Sector Reforms The Central American Electrical Interconnection System (SIEPAC) project is an initiative to create an integrated regional electricity market among six Central American countries: Guatemala, El Salvador, Honduras, Costa Rica, Nicaragua, and Panama. It consists of two components, the first being a regional electricity market, which is based on a standard set of trading rules at the regional (supranational) level; and institutional structures, which includes a regional regulator and a regional transmission operator. These institutions have supranational legal status, granting them independence from any of the six national legal systems. The second component, developed subsequently, is a new 1,800 km interna- tional transmission line, running from Panama to Guatemala, to increase transfer capacity at all borders to 300 MW. In SIEPAC, the diverse range of institutional development and capacity in the national electricity sectors is recognized as an important element affecting the design of the re- gional market. To accommodate these differences, the Mercado Eléctrico Régional (MER) has been designed as a seventh market that connects the six national markets while remaining separate from them. The design deliberately allows the individual countries to develop their sectors at their own pace while enabling trade within the region. The focus on gradualism is explicitly required in the Marco Treaty, which is the intergovernment founding legal agreement for the regional power scheme. In several cases of already implemented projects, the World Bank and re- gional multilateral banks have played key roles in the financing of projects, including NBI (World Bank and African Development Bank), NT2 (World Bank and Asian Development Bank), and SIEPAC (Inter-American Develop- ment Bank). In the Manantali project, the World Bank worked closely with bilateral agencies, notably Agence Française de Développement and Kredi- tanstalt für Wiederaufbau. Large-scale donor financing can also have undesirable outcomes, particu- larly in less developed countries where financing has a significant concessional element. This may allow electricity tariffs to be set at subeconomic levels for long periods, making eventual adjustments more painful. To pre-empt this, donors may be tempted to add conditionalities but these can introduce other kinds of problems (Box 6). While the financing of regional projects can be problematic, donor agen- cies can play an important role by providing technical assistance and advisory support to RPSI institutions. As well as bringing the benefits of technical ex- pertise, donors can offer a ‘neutral’ and independent voice, fostering common understanding and encouraging consensus. For example, the SEE energy com- munity makes extensive use of donor-funded consultants to provide analyses of further development of and remaining national barriers to regional energy markets. The reports from these independent consultants are likely to carry more credibility and be more widely accepted than if they were produced by regional institutions alone. Lessons from Global Case Studies and a Literature Review | 27 Box 6. —Manantali and Nam Theun 2 IFI Financing­ The 200 MW Manantali hydropower project in Senegal was originally sponsored by a river basin organization, the Organisation pour la Mise en Valeur du fleuve Sénégal. The Manantali Dam was completed in 1987, with the expectation that the loans for the dam would be paid through electricity tariffs. Construction of the hydroelectric power plant and transmission lines began 10 years later and was completed in 2002. After the first phase of the project, the multilateral and bilateral development agency financiers of the dam wrote off loans and provided new financing for the hydropower project. This may have created a moral hazard precedent for the second phase in that payments based on the Tariff Protocol have not always been forthcoming. Loan pay- ments have been made in arrears and significant debt is carried by the special purpose company, Société de Gestion du Barrage de Manantali (SOGEM), which was created to be the asset holder and operator of the Manantali infrastructure. Moral hazard type problems with soft budget constraints could be avoided with care- fully designed financing conditionalities. These conditionalities can also produce un- intended consequences. In the case of the Nam Theun 2 (NT2) project, for example, concerns have been raised about whether the repayment conditions imposed by the fi- nanciers are too onerous for the Government of Laos. The involvement of international fi- nancial institutions (IFIs) was conditional on the implementation of financial management capacity building programs within the Government of Laos. The conditions also specify priority spending areas for the use of NT2 funds with associated reporting requirements. The response of countries, such as Laos, to such conditionalities may be to avoid ap- proaching IFIs and bilateral development institutions for financing, resulting in projects with lower levels of social and environmental safeguards. Findings • Donors can play an important role in developing RPSI, through financing, providing technical expertise, and acting as ‘neutral’ advisors. • In some cases, the involvement of donors can help RPSI participants rec- ognize and mitigate the environmental and social impacts of RPSI. • Donors must avoid imposing an overly ambitious RPSI agenda and allow RPSI to evolve at a pace determined by the participants. 7. CARBON EMISSION SAVINGS FROM RPSI Participants in many RPSI schemes aspire to use increased electricity trade to reduce overall greenhouse gas (GHG) emissions by making possible more dispatch from less emitting plants. In the past, regional carbon emis- sion reductions have been associated with large hydropower schemes that often outsize the host country’s electricity needs but provide a regional sup- ply to meet the demand of national power markets. Despite some offsetting methane emissions from decay of submerged vegetation behind hydropow- er dams, the net GHG emission reductions from hydropower generation effectively displace high carbon emissions from the relatively small national fossil fuel power stations. 28 | Regional Power Sector Integration Estimates indicate that the savings in carbon emissions from the RPSI schemes studied here are likely to be relatively small. For the GMS, the Asian Development Bank has estimated that GHG emissions over the period to 2025 would be around 36 MtCO2e lower with a fully integrated regional en- ergy market. This represents a saving of three percent in emissions compared to the base case. This analysis suggests that integration alone is unlikely to de- liver large reductions in emissions. Major efforts to promote energy efficiency at national levels and expand the use of renewable energy technologies will also be needed. None of the regional power schemes studied have yet obtained Clean De- velopment Mechanism (CDM) certification. The first submission made by SIEPAC was rejected and a new submission awaits adjudication. One of the GMS projects, a 220 kV Vietnam-Cambodia interconnector, applied in 2008 and also awaits a decision. If successful, several other GMS projects will make applications for CDM funding in the near future. Findings • Carbon savings from international power trade have been modest and mostly result from increased imports of hydropower. • Several RPSI schemes are pursuing the use of the CDM as a means of mon- etizing emissions reduction due to increased regional trade, but none yet have been successful. 8. RPSI AND RENEWABLES Many forms of renewable power—like solar and wind—offer intermittent electricity generation following natural cycles.4 High shares of these nondis- patchable generators can create challenges for system reliability and require back-up capacity that adds to total system cost. Deeper levels of RPSI can help address these issues through shared reserves and a larger, more diverse gen- erating portfolio, which utilities can tap to meet their demand. Interconnec- tions and resulting power trade can also spur renewable energy expansion by providing markets willing to pay premium prices for “green power� that is ex- ported from one country to another. Trade can also bring economies-of-scale needed for large hydropower plants. In these ways, RPSI can act as an enabler for increased renewable deployment. In a number of cases, enhanced RPSI has been an essential driver for hydro- power plant development. Development and operation of NT2, Cahora Bassa, and Manantali, for example, all rest on successful interconnection and sales of power internationally. These relatively large hydropower schemes would have been too large to develop for their home country electricity markets alone. Both the host country of the plant and the importing country benefit from this arrangement. However, the case studies do not give many examples of how enhanced RPSI has enabled the widespread deployment of other renewable energies. Perhaps, the case studies selected have not dealt with this issue so far. Or 4 Hydropower can be a stable source of fully dispatchable electricity generation depending on hydro- logical regimes and water storage facilities. Lessons from Global Case Studies and a Literature Review | 29 30 | Regional Power Sector Integration there are other, more pressing barriers to widespread renewable deployment that can be addressed by enhanced integration. Nondispatchable renew- able energy generation must reach a certain minimum percentage of the national generation mix before it poses any challenges to system reliability that could be alleviated by stronger and more robust interconnection and trade. Not too many developing countries have reached that level and may have to overcome other challenges (e.g., high cost, need for new regulations, insufficient local expertise) before greater integration can play an enabling role for renewables. In the meantime, there are RPSI schemes on wind power integration in developed countries. PJM and UCTE are both actively researching problems integrating wind power. The experience gained from these sophisticated regional systems will help expand the use of new renewables in developing country regional schemes. Findings • With the notable exception of large hydropower projects, the case studies have not demonstrated RPSI to be a substantial enabler of renewable energy. • Lessons for future RPSI design can be gleaned from managing the expansion of cross-border renewable energy flows in more closely integrated regional markets (notably UCTE/ENTSO-E). Lessons from Global Case Studies and a Literature Review | 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank ASEAN Association of South-East Asian Nations CDM Clean Development Mechanism CO2e Carbon dioxide equivalent COMESA Common Market for East and Southern Africa DAM Day-ahead market DRC Democratic Republic of the Congo EAPP East African Power Pool EGCO Electricity Generating Public Company (Thailand) ENTSO-E European Network of Transmission System Operators for Electricity EPR LaEmpresa Propietaria de la Red Eskom (South African electric company) ESMAP Energy Sector Management Assistance Program EU European Union GCC Gulf Cooperation Council GDP Gross domestic product GHG Greenhouse gas GMS Greater Mekong Subregion GWh Gigawatt hour HCB Hidroeléctrica de Cahora Bassa (Mozambique) Hz Hertz IFI International Financial Institution km Kilometer kV Kilo volt LNG Liquefied natural gas MER Mercado Eléctrico Régional Mt Megatonne MW Megawatt NBI Nile Basin Initiative NT2 Nam Theun 2 (Laos) NTPC Nam Theum 2 Power Company OECD Organisation for Economic Co-operation and Development PJM PJM Interconnect, originally Pennsylvania, New Jersey, Maryland PPA Power purchase agreement PSP Private sector participation REC Regional Economic Community RERA Electricity Regulators of Southern Africa RPSI Regional power sector integration SADC Southern African Development Community SAPP Southern African Power Pool SEE South East Europe SIEPAC Central American Electrical Interconnection System SOGEM Société de Gestion du Barrage de Manantali (Mali) SPV Special purpose vehicle STEM Short-Term Energy Market (SAPP) t Tonne TSO Transmission system operator UCTE Union for the Coordination of the Transmissions of Electricity US$ United States dollar WAPP West African Power Pool WESTCOR Western Power Corridor WAPP West African Power Pool 32 | Regional Power Sector Integration Photo Credits Cover: iStockphoto Page 5: iStockphoto Page 7: stock.xchng Page 10: stock.xchng Page 12: Yosef Hadar / The World Bank Page 17: stock.xchng Page 19: stock.xchng Page 20: stock.xchng Page 25: stock.xchng Page 26: stock.xchng Page 31: stock.xchng Production Credits Design: Naylor Design, Inc. 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Lessons from Global Case Studies and a Literature Review | e The Energy Sector Management Assistance Pro- gram (ESMAP) is a global knowledge and techni- cal assistance program administered by the World Bank that assists low- and middle-income countries to increase know how and institutional capacity to achieve environmentally sustainable energy solutions for poverty reduction and eco- nomic growth. For more information on the Low Carbon Growth Country Studies Program or about ESMAP’s cli- mate change work, please visit us at www.esmap. org or write to us at: Energy Sector Management Assistance Program The World Bank 1818 H Street, NW Washington, DC 20433 USA email: esmap@worldbank.org web: www.esmap.org b | Regional Power Sector Integration