The covering letter on the six page ‘Guidelines on Cross Border Trade of Electricity’

Much apprehension and confusion over India’s new electricity trade guidelines

A 5th December 2016 ‘Guidelines on Cross Border Trade of Electricity,’ issued by India’s Ministry of Power, in consultation with the Ministry of External Affairs has led to deep concerns and also a certain degree of confusion within Bhutan’s vital hydropower sector.

The concerns are that since currently Bhutan is the only electricity exporting country to India these guidelines effectively curtail the types of investments in Bhutan’s hydropower sector, lead to its tariff continually being on the lower end and also restrict Bhutan’s entry into India’s energy trading markets.

It has been learnt that the guidelines have caught energy officials of Bangladesh, Nepal and Bhutan by surprise, with all of them saying they were not consulted in the framing of the guidelines.

Though India has promised to consult the three countries while coming up with the regulations, the feeling in all three capitals is that the rules cannot go against the already set policy or guidelines.

For Bhutan, the only energy exporting country to India, there are six major areas of concern as well as some confusion in the guidelines.


No Trilateral cooperation

Though the guidelines introduction mentions the SAARC Framework Agreement for Energy Cooperation on electricity, and its objective talks of promoting electricity trade between India and its neighbors, there is no mention of trilateral cooperation in the actual guidelines.

This is important for Bhutan and also Bangladesh as both countries have proposed the 1,125 MW Dorjilung project to India whereby Bangladesh invests in a project in Bhutan which in turn exports energy to Bangladesh through India. This also flies in the face of assurances given to both Bhutanese and Bangladeshi leaders from New Delhi on the project.

It is feared that in the long term the absence of mentioning such types of trilateral cooperation could restrict Bhutan’s energy trading options only to India.


Restriction on investment models

The guidelines state that only those power projects which are fully owned by the Indian government or its Public Sector Undertakings (PSUs), owned fully by the Bhutan government  or controlled by it, or having 51% Indian company ownership can do cross border electricity trade, after a one time approval from India’s Central Electricity Authority of India (CEA).

Even any change in the equity ownership of the above parties can happen only after seeking approval from the CEA.

Any other participating entity is eligible to participate in cross border trade of electricity only after obtaining approval from the (CEA) on a ‘case by case’ basis.

The confusion here is if the four joint venture projects between India and Bhutan fall in the above category as Indian entities have only a 50 percent equity ownership.

The long term concern is that such a stipulation could restrict the type of investments in Bhutan’s hydropower sector. For example, if the Bangladesh government or if a foreign financial

institution wants’ to invest in Bhutan’s power sector to export power to India.


Indian owned power trading companies only

The Druk Holding and Investments last year announced that it was exploring the setting up of a Bhutanese power trading company that takes power from projects in Bhutan and trades it in India. This could lead to better prices in the long run with more bargaining power and also by exploring the Indian market.

Currently Bhutan sells all its power to Power Trading Corporation of India which acts like a power middleman.

However, the latest guidelines from India says that power can be taken only from a power trading company in another country that has more than 51 percent Indian ownership.

To put it simply DHI’s proposed company would have to have more than 51 percent ownership by an Indian company.


Tariff setting for perpetuity

On electricity tariff, a particular sentence that has lead to concern in Bhutan is, “Provided that tariff of participating entity of the neighboring country is already determined through Government to Government negotiations it shall continue to be determined through Government to Government negotiations.”

The concern here is that such a clause would prevent the liberalization of tariff rates between the two countries by locking it into a government to government negotiation mode for perpetuity. This would decrease Bhutan’s chances of getting higher tariff rates as its government projects in the future may not be able to explore the commercial market in India.

An example is the Chukha projects which has a 99 year agreement after which it was understood that it could take a different course. Other projects like Punatsangchu 1 and 2 have no such agreement and so here it was hoped that after a certain project term is over these projects cold explore the market in India.


A power bidding disadvantage

Currently the 118 MW Nikachu project which is a Druk Green Power Corporation (DGPC) project and not a bilateral government to government project was able to get a competitive rate for its power by going to the Indian market and asking for bids.

However, this will remain a one off success as the guidelines now effectively says for projects like Nikachu that are not government to government, instead of power suppliers 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 to get the highest price for non bilateral power 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.


No access to the primary power market

Even if the power projects are Bhutan government owned or have majority Indian ownership they still do not have access to India’s Primary power exchange market, according to the guidelines.

The primary power market is where the best power tariff rates are available as power buyers come and buy what power is available from the power market. Once the primary market purchase is done then only the secondary market is left where good rates are not available.

Currently Bhutan’s majority owned Dagachu has not been allowed to trade on India’s power market at all affecting Tata Power that is buying the power from Bhutan.

Government officials said that various related government agencies are still studying the guidelines and will be discussing with their Indian counterparts to know the full extent, meaning and implication of the guidelines.

The Prime Minister, Lyonchhen Tshering Tobgay said that the current government to government projects would not be impacted. The PM said that even if there are implications on Bhutan’s hydropower sector there is nothing that could not be discussed and negotiated with the Indian government.

A hydropower sector expert on the condition of anonymity said that hydropower is Bhutan’s main resource which is why the most amount of investment was being made into it.

He said that the expectation and aspiration for Bhutan was that eventually there will be a more developed regional energy market including a more competitive Indian market giving more scope and tariff rates for Bhutanese power. He said that the above guidelines essentially restrict all of this and give the Indian government a strong say over Bhutan’s hydropower future.

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  1. That’s how Osama Bin Laden was born.

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