The Bhutanese Leading the way.
The Cross Border Trade of Electricity Guidelines (CBTE) issued by the Government of India (GoI)India on 5th December 2016 was meant to govern cross border electricity trade between India and all its neighbors.
However, Bhutan objected to certain provisions of the CBTE as it felt was not in the interest of its hydropower sector and even declined to sign the final Concession Agreement of the 600 MW Kholongchu project due to issues with it.
Now the, Hydropower Committee set up to provide long term policy suggestions for Bhutan’s hydropower sector has said that the CBTE will have a major impact on hydropower development in Bhutan.
The report says the CBTE memorandum refers to the SAARC Framework Agreement for Energy Cooperation (Electricity) and mentions the intention of CBTE to facilitate cross border trade of electricity between India and the neighboring countries by promoting transparency, consistency and predictability in regulatory approaches across jurisdictions and minimize perception of regulatory risks.
However, the report found that CBTE is an internal country guideline and so the Government-to-Governments Agreements supersede the CBTE. The CBTE seems to be designed more for projects outside of the government to government framework.
While reference has been made to the SAARC Framework for Agreement in Energy Cooperation, the CBTE guidelines essentially seems to address issues at a bilateral level.
At the non government to government bilateral level, cross border trading will be allowed only if India benefits disproportionately as electricity will only be imported from companies that have 51% Indian ownership, electricity trading will only be allowed through companies that have 51% Indian ownership, tariffs will be based on CERC regulations and bidding-in process and there are restrictions in accessing some of the categories of contracts in the Indian Energy markets.
The report says though there is a provision for case-by-case considerations, it defeats the stated goal of improving transparency, consistency and predictability in regulatory approaches across jurisdictions and minimize perception of regulatory risks.
It says while the CBTE seems to be a concrete step forward being taken by the GoI to open up its market to electricity imports from neighboring countries beyond the bilateral framework, but with the restrictions imposed, other than the Indian private sector, other investors may not find it attractive.
The report point out that though the CBTE is an internal GoI policy, it may be appropriate for the RGoB to take it up, as the CBTE will have a major impact on hydropower development in Bhutan.
It says that CBTE has no mention as to the conditions applicable for participation of entities from other countries as minority shareholders. The restrictions imposed by the CBTE are not conducive for investment by multilateral financing institutions, which generally promote private sector investment and regional economic integration.
Under the regional energy cooperation initiatives (SAARC, BIMSTEC, BBIN and SASEC), the endeavor is to facilitate cross border electricity trade amongst the Member States through non-discriminatory access to transmission grids and move towards an integrated regional/sub-regional energy market that will enhance energy security for the region.
It says such a regional vision can only be achieved if, India as the biggest electricity market, and also as the key transit point for transmission lines, looks at cross border trading from a regional perspective than the current bilateral perspective.
It says by restricting the trade to bilateral mechanism, the CBTE appears to foreclose regional or sub-regional trading options through grant of transit access that could hinder regional initiatives towards market integration, which is not in keeping with the spirit of SAARC Framework for regional and sub-regional energy cooperation.
The report point out that the guidelines have both short and long term adverse consequences on the development of hydropower projects in Bhutan.
For the existing bilateral Inter-Governmental projects under operation and those under construction, the CBTE prescribes that the government-to-government negotiations would continue perpetually for determination of export tariffs.
While this could be a long term assurance of a mechanism for tariff setting, much will depend on Bhutan’s capabilities to negotiate and India’s willingness to agree to prevailing market conditions.
The useful life of a power plant is normally considered as 30 years as per Bhutan’s Electricity Act and 35 years as per CERC norms of India. While government-to-government negotiation could be opted for the useful life of the plant, the expectation is that Bhutan should be able to get market-determined tariffs after the economic life. It is assumed that the energy markets would have favorably evolved by then, as has been the experience elsewhere in other energy markets.
For the bilateral Joint Venture projects, while the market mechanisms were not elaborated in the Inter-Governmental Agreement for JV projects (IGA), the understanding during negotiations of the IGA was that the 70% of saleable energy would be sold through long term PPA to be procured through a competitive bid-out process to realize the highest tariffs from the market, and the 30% of balance energy would have full access to the Indian Electricity Spot Markets.
The report says this needs to be reconfirmed by the RGoB before the JV Concession Agreements are signed.
India, Bangladesh and Bhutan are discussing the development of the Dorjilung project under a tri-lateral cooperation.
Since the CBTE is meant for only India’s bilateral electricity trade, a separate guidelines or mechanism would have to be framed to enable implementation of Dorjilung project under this mode.
Therefore, the report says, it is recommended that the RGoB at the highest levels take up these concerns regarding CBTE with the GoI on a priority basis.
