There are distinct advantages for South Asian countries to cooperate in the energy sector. These countries together possess vast stores of energy mostly in the form of water resources, oil, forest, coal and gas. However, these countries continue to be characterised by poor quality of energy infrastructure, skewed distribution and inaccessible and costly energy availability. These countries have remained largely energy importers and increasingly faced a serious energy shortfall. This is likely to deepen further both because of ongoing economic liberalisation-led activities and rise in income level-led steady switching over of the rural and urban families from bio-fuels to more efficient and convenient modern fuels. The inability to cater to the increasing industrial and other commercial energy needs has adversely affected their productive activities, social development and investment climate. This is exacerbated by structural, institutional and financial problems.

Most of the South Asian countries have introduced massive reforms in the energy sector, focusing on the following strategy in power sector reforms:

Segregation of the regulatory functions from the Government and vesting them in an Independent Regulatory Commission
Unbundling the various activities from a vertically integrated unit to distinct and separate units based on functions
Corporatisation of various units,
Tariff reform
Private sector participation
This restructuring is aimed at making their utilities more efficient and financially viable. The private sector including the foreign investors can now set up thermal, hydel and wind or solar energy based projects. A large number of private sector investors have entered into the energy sector. At the same time there has been realisation that availability and accessibility to energy can transform the quality of life and work substantially, help raise health and educational standards and retard rural-urban migration by enhancing the level and pace of income and employment generation.
There are clear options emerging. The cross border power trading is one of them with Bhutanese success story spreading to Nepal, Bangladesh and even Pakistan. This is further corroborated by the strong seasonality factor in both generation and demand that is noticeable in the South Asian countries. This has, in turn, generated a lot of interest in the cross border power trading in the region. In some cases the imprudent use of power during a typical day and season could lead to major losses also. For instance, in Bangladesh a sizable generation capacity to the tune of at least 1200 MW remain unutilized during the off-peak hours and in effect they remain shut for these hours. They produce power only when they are requisitioned to produce. If possible, this available capacity can be a ready source for regional cooperation for import-export of electricity from neighboring countries.

In India, there exists clear seasonality in power generation. It particularly becomes clear in the hydel power generation. The peak months for hydro power generation are August-September while the lean remains from January to June. The thermal plants generation has been mostly designed to match and balance the trough months created by the hydel plants in winter and the pre-monsoon season.

In Nepal, the peak demand of the Integrated Power System is usually during Dec/Jan. This is the period when generation from the hydro power-plants is low. Power demand is maximum during the month of December and is minimum during the month of August. The supply capacity in turn is maximum during the wet months and minimum during the dry months of February/March. The seasonality in energy supply and demand indicate energy surplus. This is where the complementarity in cross border power trade emerges. It is during this period of hot summer months the Indian system is starved of energy and capacity.

There have been negotiations going on between India and Pakistan on the possibility of power trading and gas pipeline from Iran and the Central Asian countries passing through Pakistan. Given the demand and supply situations in the sub-continent, it is rational to believe that the trade in power and gas will be mutually beneficial in terms of both economic and political gains.
Economic gains based on regional cooperation in the energy sector is now a firmly established practice across the regional groupings. Many developing countries, because of their low income and resulting small market size, are unable to capture by themselves the inherent economies of scale of major infrastructure investments. Cross border exchanges and power trading will bring the entire issues of cooperation in the energy sector on a regional basis to the forefront.

The choice of a model to trade or exchange electric power and other energy varieties between countries is a crucial issue. There are successful instances of international power trading mechanisms in some regions across the world. One notable enabling feature in the power markets in these regions is the prevalence of competitive electricity trade legislation.

South African Power Pool (SAPP) created in 1995 encompassing among others South Africa, Lesotho, Mozambique, Namibia, Malawi, Zimbabwe and Zambia under the regional cooperation organization viz., Southern African Development Community (SADC) is one example which matches very well with South Asian situation. They trade in power with a view to provide a reliable and economical power supply consistent. SAPP countries have a diverse mix of hydro and thermal generation plants serving a population of over two hundred million people.

It has a coordination center located in Harare, Zimbabwe, which carries out a number of functions including monitoring the operations of SAPP, collecting data, undertaking planning studies and training activities, and disseminating information to members. The Pool is working very satisfactorily with immense gain to all the participating countries.

Interconnection of power systems of contiguously located countries and their coordinated operation provide immense technical and economic benefits. All these interconnections allow each electrical utility to make savings on power plant investment and operating costs as a result of the improved use of the interconnected system. It also contributes to the quality of electricity supplied to customers as well as reduces environmental damage. Reducing losses in the power system is often more cost effective than constructing more generation capacity.
There already exist considerable network of inter-connections among the South Asian countries. India's Power Grid Corporation has worked out the inter-connections required, their feasibility and the cost and benefits to the participating countries in the South Asia Growth Quadrangle (SAGQ) region consisting of Bangladesh, Bhutan, North East region of India and Nepal. All these inter-connecting channels will very well match the Indian effort to have integration of all regions to form a National Grid in near future.

The two generally accepted power trading mechanisms are:
i) Bilateral power trade and
ii) Pool based

Cross border power trade on a bilateral basis already takes place widely between India and Bhutan and to a certain extent between India and Nepal. The West Seti power project in Western Nepal is a third type of power exchange which is likely to take place in the region. A unique feature of this arrangement is the involvement of a private agency for the first time as a power generating unit meant primarily for exports to India. This indicates a changing paradigm of power exchange.

However, currently the power trading is in its infancy in South Asia region. Whatever 'trade' takes place as of today is basically bilateral exchanges or apportioning of power from surplus areas to temporarily needy regions. Neither any power purchase agreement (PPA), for the purchase of power by India from these projects, was signed between India and Bhutan/Nepal, nor any principle for fixing the rates for purchase of power have been evolved. In most cases, the tariff has been fixed mostly on the basis of negotiations and to a large extent determined by political consideration, diplomatic goodwill and convenience. In the emerging situation, from the Indian side PTCI is likely to be entrusted with the job of handling power trading with its neighbouring countries.

Such an adhoc arrangement based on negotiations and goodwill could work in the past mainly because the quantum of power purchase was limited. However, in years to come the size of power purchase would be substantial. Power trading will be on bulk supply and will have to have a more detailed framework of contracts and operating procedures.
The pool based approach also known as agent based integrated simulation can possibly provide support to develop a competitive long run market equilibrium in regional power trade. This approach involves working together of a set of agents (manufactures), a monitoring, advisory and channelising regional body in close harmony. These agents develop their own strategies to explore and exploit the capacity and other constraints of plant and market. They also evolve their own market clearing as well as settlement mechanisms. Each of the agent represents one of the generating firms. A key feature of this model is that it uses a micro level, bottom-up representation of the market with each generating firm (public and private) represented at the level of its individual plants.

In this context establishing a Regional Power Trading Corporation (RPTC) would be highly beneficial to launch this type of market mechanism in South Asia region also. This could be called "SAARC-RPTC". The SAARC-RPTC could provide market feed-back to individual power producers (agents) as well as the power consumers. The SAARC-RPTC can maintain and disseminate information on plant structures, avoidable cost of production, plant sales prices, sales volume, rate of utilization, profits generated, target utilization and market conditions, consumer behaviour, and ongoing plant building and future investment in the sector.
This, in essence, would be pooling of surplus power generated by individual plants in the participating countries and transporting into deficit ones by a coordinated exchange mechanism depending on demand and consumer categories (estimating consumer surplus). However, information asymmetry in this type of a model can create market havoc and thereby serious aberrations. Therefore, a major task of the SAARC-RPTC is to gather and analyse information on generation, demand, transmission and payment modes well in advance and arrange for the smooth operation of markets. The idea should be to evolve an effective bidding system for individual plant generators depending on the plant capacity, fuel use etc. across the entire spectrum of its activities.

Against the backdrop of vast energy related potentials including gas and hydel power in the region, this paper examines the potentials of cooperation and larger gains that could accrue to the member countries of South Asian Association for Regional Cooperation (SAARC). This would also look into the vital question of designing new confidence building measures particularly by designing layers of economic exchanges and interactions in areas like energy, trade, investment and technology transfers. The changing nature of economic actors and their increasing support base in the civil society will rather force policy designers in South Asia to procreate modalities for a substantive and lasting interaction. This paper discusses the opportunities, strategies and modalities of energy cooperation in the region.
To facilitate the process of setting up of SAARC-RPTC, it is rather essential to assess and understand the nature, direction and extent of intra-country power exchange of the South Asian countries. This gives broad indications about the nature of power trading within a country and various regions of a country and also indicate geographical locations of load centers within a country.

The possibility of power purchase has opened new vistas of cooperation. Cross border power trade will lead to:
i) effective utilisation of natural resources,
ii) increase in reliability of power supply,
iii) economy in operation and mutual support during contingencies,
iv) bring about large scale transformation in the sectors contributing to economic growth and
v) will act as the single most effective building measure through the participation of multiple stakeholders.

The studies conducted till now reveal some important regional projects, which merit serious consideration. They also provide a range of options. At the same time, these options in the various identified projects need to be prioritized for quicker implementation and realisation.

The creation of a South Asian energy market and cooperative development of the available diverse energy sources in the region can help increase the level of energy security in the region and thus can subsequently contribute to achieving a sustained higher economic growth. This could lead to a South Asian regional power and gas market and competition among power and gas producers both public and private that ensure economic and efficient delivery of services to the consumers in the region. At the same time, the power system networks of Bangladesh, Bhutan, India, Nepal, Pakistan and even Sri Lanka can be interconnected to achieve greater efficiency and economy in the overall system.

Dr Mahendra P. Lama is Professor of South Asian Economies at the School of International Studies, Jawaharlal Nehru University, New Delhi. He has extensively worked on the issues of trade, investment and energy cooperation in South Asia and has produced very widely acclaimed reports on cross border power trading among the South Asian countries