Energy trade in South East Asia

South Asian nations need to see the comparative advantages they hold in various energy sectors, and must come together to benefit each other via trade links

The missing transmission link between India and North West Sri Lanka can save Sri Lanka $180 million annually in generation cost.

By Gaurav Bhatiani & Sanjeev Ahluwalia

South Asia must invest at least $1 trillion over the next decade to develop energy infrastructure, enhance energy security, and reduce carbon footprint. While investments within each of the countries have increased, investments enabling cross border energy trade lag. Regional investments promoting cross border energy trade will allow optimisation of differentiated energy resources across countries, develop mutually beneficial interdependencies, apart from mitigating geopolitical and climate risks across the region.

South Asian countries are physically adjacent, but political and institutional distances remain significant. Prof Kaushik Basu, former chief economist, World Bank, notes that “Trust promotes trade; and trade fosters trust, interdependency, and constituencies for peace”. Trust is best created through collaboration and trade. South Asia remains the least interlinked region. India’s regional trade is just 3% of its global trade against the regional average of 5%, well below the 22% in Sub Saharan Africa and 50% in East Asia.

The opportunity for trade in energy services arises from the differentiated natural resource endowments. Nepal and Bhutan have hydropower potential far more than their demand. All South Asian economies are deficient in oil and gas, which makes collaboration in gas import cost-effective, and all have significant potential for new renewable power (solar, wind and biomass). But, management of intermittent supply can best be done through connected regional infrastructure.

Trade-in energy is recognised as a pathway for greater regional cooperation. But practise has lagged theory, as reflected by the near dormant South Asian Free Trade Agreement 2006, which remains bogged down by discriminatory import duties, high transaction costs, and poor infrastructure. However, three mutually advantageous opportunities present themselves.

First is co-development of Nepal’s hydropower potential of 60GW, of which, only 2% is being used. Co-development via storage dams will enhance Nepal’s electricity supply and income and revenue from the export of power. Importing countries will gain from enhanced clean energy supply; lower riparian areas of Uttar Pradesh and Bihar will benefit from better flood management.

The proposed Sapta-Kosi and Sun-Kosi projects on the Kosi river are prime examples. For an estimated investment of $4-5 billion, these projects will generate hydropower, prevent frequent floods in India, provide irrigation and drinking water in both countries, enable in-land navigation channel with direct sea-port connectivity from Nepal to Kolkata, and generate large spinoffs in livelihoods in both countries. India should look at the Columbia River Treaty where the US (being the lower riparian partner) paid Canada for power benefits and up-front one half the value of the estimated, avoided future flood damages.

The second opportunity is a large LNG facility on the Bay of Bengal coast with participation by India, Bangladesh and possibly Nepal. India has been importing LNG since 2004, Bangladesh since 2018. India proposes to expand the share of natural gas in its primary energy profile from 6% to 15%. New LNG terminals at Haldia and Dhamra are being developed. A private gas spot market was launched this year. The coverage of its gas pipeline network is being extended with spurs reaching Bangladesh.

Bangladesh’s domestic natural gas reserves meet 50% of its energy demand, but declining production and the absence of major discoveries indicate import as the likely option. This is evidenced by the bids it has invited for an onshore terminal. India is committed to exploring the potential for a natural gas pipeline to Nepal. A trilateral partnership between Bangladesh, India, and Nepal to develop shared pipelines, terminals, and gas storage facilities can enhance the economic viability of these investments and move the region towards a net-zero pathway.

Energy market development follows a pattern of organic growth, starting with intra-regional markets, culminating in international integration. Since gas usage is projected to double in all three countries, time is ripe for investments and collaborations.

By 2040, the demand for energy will double and treble for electricity. A net-zero pathway points to significantly enhancing the share of renewable electricity, the third opportunity. India has developed a competitive renewable energy market, in which electricity is traded at 3.5c/kWh. The ambition is to increase renewable capacity to 450 GW. Sri Lanka relies on imported fossil fuels and domestic hydropower. It plans to generate 100% electricity through renewables by 2050. This provides an investment opportunity to develop utility-scale wind and solar, including for the Indian private sector.

The missing transmission link between India and North West Sri Lanka can save Sri Lanka $180 million annually in generation cost. Sri Lankan wind power, abundant in the North West, can complement Indian solar power. For India, exporting renewable power to Sri Lanka can enhance flexibility in grid management and reduce the curtailment of 400 GWh surplus renewable power. Sri Lanka would also be able to link in its offshore wind projects along the axis of the proposed transmission link. Shared energy infrastructure can spark regional cooperation in South Asia and help enlarge areas of trust and trade. India must lead by facilitating financing, developing harmonised technical regulations, deepening professional networks, and enhancing regional business opportunities.