India’s CEA declines Bhutan’s requests on CBTE

The Bhutanese government around two months ago, through diplomatic channels, sent a letter to the Indian government over Bhutan’s various concerns over the Cross Border Trade in Electricity (CBTE) guidelines issued on 5th December 2016.

The CBTE guidelines, though meant to govern electricity trade between India and its neighbors, had several disadvantages for Bhutan on setting of tariff rates beyond the government formula, access to India’s primary power market, type of hydropower investments and also a 51 percent Indian ownership in any power trading company among others.

A reply to the issue had come on 26th July 2017 from the Central Electricity Authority (CEA), India’s main electricity regulator, which according to sources does not address Bhutan’s concerns. The CEA falls under the Power Ministry of India.

One main issue pointed out by Bhutan in its initial letter was that the CBTE guidelines restricts Bhutan’s access to the Indian Power Exchange as Bhutan cannot get access to the prime ‘day ahead’ market where power bidders bid competitively for energy rates.

Instead Bhutan was given to access to only ‘term ahead’ contracts and contingency contracts which come in only later and there is no competitive bidding.

Bhutan pointed out that this CBTE stipulation also violated the Inter Government Agreement (IGA) between Bhutan and India on Joint Venture projects.

The IGA, which was signed in April 2014 between both the governments, says that 70 percent of the power would be sold as per the long term power purchase agreement route between the two governments.

It says the remaining power which is 30 percent can be sold through the market mechanism which would mean accessing India’s energy market to aim and get higher prices.

However, the CBTE exactly restricts this market access for the 30 percent of the power as stated above.

The Bhutanese government’s letter stated the IGA agreement and said that JV projects and Bhutan government owned and controlled projects and trading companies should be allowed full access to all categories of India’s power markets.

The CEA in its reply said that trading through the Indian Power Exchanges is being developed in a phased manner to facilitate smooth export and import of power and it restates that the CBTE covers only the term ahead and contingency contracts.

Without providing a clear answer CEA says that all other categories of contracts in the power exchange market can be considered on review by the Power Ministry in consultation with the Central Electricity Regulatory Commission (CERC). It says the guidelines, therefore, does not provide any restriction.

However, the Bhutanese side is not happy with this answer as both the larger CBTE policy and its rules formulated by India’s Power Ministry in consultation with the Ministry of External Affairs already restrict access to the primary market. The issue is of clear rules versus verbal assurances that Bhutan’s case can be considered.

Bhutan had written saying that access to all categories of contracts in the power exchange market should be a clear rule saying so instead of saying exceptions could be made so that there is certainty on access to the market.

Already the 126 MW Dagachu project owned 74 percent by the government and 24 percent by Tata Power is not allowed to even trade in India’s energy market though a request was made to the CERC by Tata Power from September 2014.

The National Load Dispatch Center (NLDC) of India which is a fully owned subsidy of the Power Grid Corporation of India Limited, an Indian government owned company, opposed the entry of Dagachu into the Indian power exchange market at the time saying that when multiple sellers from Bhutan sell power at Power Exchanges in India, ‘the discovery of the real price of power’ from Bhutan will happen in India.

The CERC at the time decided to await future directions on the issue from the Ministry of Power and requested it to issue necessary guidance with regard to cross border trading in electricity through the Indian Power Exchange.

Therefore, the CBTE restricts the handful of Bhutan’s government owned projects from getting access to the power market.

Another issue raised by Bhutan is that the CBTE says that power by India can be bought only from a power trading company in another country that has more than 51 percent Indian ownership. This would put an end to the government owned Druk Holding and Investments’ (DHI) plans announced last year of exploring the possibility of setting up of a Bhutanese power trading company that takes power from projects in Bhutan and trades it in India. The aim was that it could lead to better prices in the long run with more bargaining power and also by exploring the Indian market.

Here the CEA says that there is no provision where any licensed power trader from a neighboring country even if it is 100 percent owned or even controlled by the government of that country can trade with Indian entities. The CEA says that for such cases such entities are eligible to participate after a case by case basis.

Bhutan also requested that for the removal of a particular provision in the CBTE which says, “The regulations so framed by the CERC shall be binding on all the participating entities.

The CEA here said that the regulations would be binding on Indian soil to all participating entities and as such would not be applicable in neighboring countries.

Bhutan pointed out that India, Bangladesh and Bhutan are discussing the development of hydropower projects under trilateral cooperation mode but since CBTE is for bilateral electricity trade, a separate framework is needed for the three countries.

Here CEA said that transmission of electricity through Indian territory would be governed by CBTE even for such projects as multilateral trade of electricity is extended through

Bhutan pointed out that in the introduction of CBTE a clause refers to the spirit of the SAARC Framework Agreement for Energy Cooperation and also a need to frame guidelines on cross border trade with neighboring countries by India. Bhutan pointed out that the CBTE appears to cover only India’s bilateral electricity trade.

CEA said that the SAARC framework says that trade of electricity across a country is to be governed by the laws of the respective countries. It says that therefore electricity trade between India and Bhutan will be as per the respective laws of both countries. The CEA goes on to say, the CBTE guidelines are framed keeping in view that any trade across or through India is to be governed by these guidelines irrespective of whether it’s a trade between two countries or through the territory of India.

Bhutan has also asked for a clarification on the CBTE clause which says that Indian entities can import power from projects confined to RGoB and GoI owned, funded or controlled projects and also private companies that have 51 percent Indian ownership. Bhutan has asked what constitutes government owned or controlled as it could have implications on JV and other projects by Bhutan.

Here the CEA has given a bland reply stating ownership by the government is as per the laws of that country.

Bhutan is concerned that this clause could restrict the hydro investment model in Bhutan. An example, is if the Bangladesh government or a foreign financial institution wanted to invest in Bhutan’s hydropower sector.

The sub text of the above points by Bhutan is that that it is unhappy with the current form of the CBTE which disadvantages Bhutan’s power sector.

Apart from the above points raised in the reply by CEA, Bhutan is also concerned with other issues in the CBTE.

One is that the CBTE says that the government to government negotiations on tariff will be adopted for perpetuity leaving out the scope for market mechanisms.

Another issue is that the CBTE says that instead of power suppliers from outside India (like Bhutan) asking for bids they have to put in their bids when Indian entities want the power.

For Bhutan this means instead of inviting bids from the Indian power market to get the highest price projects, it would have to give its lowest bid while competing with other power suppliers within India and the region. This would mean bottom rates for such projects.

According to sources the government is expected to draft a reply soon but this communication by CEA would likely mean that the JV projects would still be in the freeze mode as they would not be commercially viable without a clear and full access to the power market.

The whole issue is also complicated by the fact that in the 2017-18 fiscal year India is projected to by power surplus by 8.8 percent and tariff rates even in the power exchange are low.

Though nobody has made an official statement there is surprise in Thimphu that such restrictive rules are being applied in a sector which is vital to Bhutan’s economic interests and are not just economic projects but also ‘political’ projects between the two nations.

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