Challenges and Opportunities of Electricity Trade: A Roadmap for Success

Cross-border electricity trade refers to the exchange of electricity between neighboring countries. This trade is becoming increasingly important as countries look to increase access to reliable and affordable energy. Similarly, this trade has the potential to provide a range of significant benefits for participating countries. This includes increased energy security, improved economic growth, enhanced resource utilization, and reduced greenhouse gas emissions. However, there are also many challenges, such as political challenges, regulatory barriers, and technical issues.

Global Overview

Electricity trade is an integral part of the global energy market. According to the International Energy Agency, global electricity trade was 728 terawatt-hours (TWh) in 2018. This accounted for nearly 2.8% of total electricity supplied, where the majority of this trade occurred in Europe. EU states have long been connected through an extensive power grid and have established agreements for sharing resources. The EU electricity market incentivizes the clean energy transition while delivering key objectives, such as energy security and affordability. European Energy Exchange AG (EEX) provides a platform for international traders to buy and sell various commodities, including power and natural gas.

Electricity trade in Southeast Asia has been gaining momentum in recent years due to increased demand for renewable energy sources. Accordingly, ASEAN countries are exploring ways to increase cross-border electricity trading through regional initiatives. These initiatives include Greater Mekong Sub-region (GMS), the South Asia Sub-regional Economic Cooperation (SASEC) and the Central Asia Regional Economic Cooperation (CAREC). Asian countries are looking to increase their access to reliable and affordable energy, mainly renewable energy sources. Enerdata’ s World Energy & Climate Statistics provides the latest data and trends in the energy industry by browsing intuitive maps and graphs.

Benefits

Cross-border electricity trade can provide numerous benefits for both buyers and sellers. For buyers, it can help reduce costs by allowing them to purchase electricity from various sources at competitive prices. For sellers, it provides an opportunity to expand their customer base and generate additional revenue from selling excess generation.

Increased Power Systems Reliability

Electricity trade can provide backup power to each other of participating countries in case of an outage or other disruptions. This redundancy helps ensure a more stable and reliable supply of electricity. The Memorandum of Understanding (MOU) between Indonesia and Singapore on Renewable Energy Cooperation has opened up opportunities on cross-border electricity trading projects. This MOU will bring mutual benefits through increased reliability and security of energy supply as well as improved access to energy in both countries.

Improved Energy Security

Electricity trade can improve energy security by allowing countries to access a diversified mix of energy sources. This will reduce their dependence on a single energy source and reduce the risk of supply disruptions. ADB's Regional Cooperation on Increasing Cross-Border Energy Trading within the Central Asian Power System project is an example of a successful initiative that has achieved outcomes, such as improved energy security and access to energy in Central Asia.

Improved Energy Access

Electricity trade can provide access to electricity for remote or underserved areas, particularly in developing countries. This can improve living conditions and promote economic development. In Europe, the development of cross-border grid interconnectors has allowed for increased transmission capacity between countries. These electrical interconnections allowed for increased reliability and security of energy supply. For example, the Key Cross Border Infrastructure Projects initiative by the European Commission has seen the development of 98 projects. This initiative included 67 electricity transmission and storage projects, 5 smart grid projects, 20 gas projects and 6 cross-border CO₂ network projects. It has also improved energy access in Europe by providing more reliable and secure energy supplies across borders.

Enhanced Resource Utilization

Electricity trade allows for the sharing of renewable energy resources across a wider geographical area. This increased resource utilization can help reduce the overall cost of generation and decrease the carbon footprint of electricity sector.

Improved Integration of Variable Renewable Energy

The integration of variable renewable energy sources can be challenging for individual power grids. Interconnection of power grids provides more diverse energy system that can better balance the intermittent supply of renewable energy sources. It also helps to manage the oversupply of renewable energy during peak generation periods by sharing electricity across different regions.

This is especially beneficial for areas that have high levels of renewable energy production. If a region experiences a high level of solar production during a certain time, it can share its excess with another region that lack generation at the same time. This helps to ensure that all areas are able to access a reliable and sustainable source of electricity anytime.

Increased Environmental Benefits

Electricity trade can have significant environmental benefits as it allows countries to reduce their greenhouse gas emissions. According to a study by the European Environment Agency, the increased use of renewable energy across the European Union has reduced pressures linked to climate change and air pollution. The study found that emissions of nitrogen oxides (NO_X) were reduced by up to 40%, sulfur dioxide (SO₂) by up to 60%, and carbon dioxide (CO₂) by up to 20%. The U.S. Environmental Protection Agency (EPA) estimates that renewable energy can reduce greenhouse gas emissions by 50% compared to traditional electricity generation.

Improved Economic Growth

Electricity trade can provide economic benefits to both the exporting and importing countries. The sale of excess energy can generate revenue for the exporting country, while the importing country can benefit from lower energy prices. This can lead to reduced energy costs, more adoption of renewable energy and job creation.

Challenges

Despite its potential benefits, cross-border electricity trade also faces several challenges. A major issue is the lack of standardization across different energy markets, where each country has its own regulations and policies. Additionally, there are significant infrastructure costs associated with connecting grids between countries. This extra cost can make it difficult for small countries to enter such markets without significant investments in equipment and technology upgrades. Finally, there is also the risk that one country may use its control over transmission lines or pricing mechanisms to manipulate the market in its favor at the expense of other participants.

Political Risks

Political tensions between countries can lead to delays in the implementation of cross-border electricity trade projects. Also, changes in government policies, trade disputes and energy security concerns can affect electricity trade. These challenges can create uncertainty and make it difficult to establish stable energy trade relationships.

Technical Challenges

Electricity trade involves the integration of different power systems and the synchronization of power flows. This can be technically challenging, especially when electricity grids of neighboring countries have different voltage levels and frequencies.

Economic Challenges

Electricity trade can face economic challenges, as the cost of building the necessary infrastructure can be high. Moreover, it can lead to a loss of revenue for domestic energy producers, which can impact the domestic economy.

Regulatory Barriers

Electricity trade can be hindered by differences in electricity market design and regulatory frameworks, such as tariffs or trade restrictions. These barriers can limit the potential benefits of electricity trade and create market distortions.

Transmission Losses

Electricity trade can result in transmission losses due to long distances involved, where these losses can reduce the energy system's efficiency and increase costs.

Roadmap

Political Will

Political cooperation and understanding common goals and ambitions is essential to address energy security concerns. This requires building trust among neighboring countries, leading to intergovernmental agreements aimed for the establishment of stable energy trade relationships.

Feasibility of Electricity Interconnection

This includes the evaluation of geographical and socio-economic factors between countries, the availability of generation capacity and electricity demand patterns.

Policy and Regulatory Frameworks

A policy framework should be established that supports cross-border electricity trade and provides a stable regulatory environment for investors. Harmonization of regulatory frameworks and electricity market design is necessary to facilitate cross-border electricity trade. This can be achieved through the development of common standards and guidelines for energy trade.

Regulatory Authorities

Establish institutional framework to ensure the independence of the national regulatory authority and provide it with the ability to acquire relevant data from utilities on a regular basis. Also, provide training and technical capacity building for regulatory authorities in key areas, such as functions of various market models.

Technical Interconnections

This requires the coordination of technical standards, the development of regional cross-border electricity grid master plan, the harmonization of wheeling charge methodologies, the definition of capacity calculation regions (CCR) methodology and the definition of third-party access procedures.

Market Integration

Creating competitive energy markets and determining appropriate market models is necessary to promote competition and enable efficient energy trade. This requires the development of transparent and non-discriminatory market rules and the establishment of mechanisms for cross-border electricity trade.

Investment in Infrastructure

Cross-border electricity trade requires the mobilization of investment in transmission infrastructure. This includes the development of new transmission infrastructure, the upgrading of existing transmission and generation infrastructure and the coordination of operations and maintenance of interconnected grids.

Risk Mitigation

Developing risk mitigation strategies is essential to address the political, regulatory, and technical risks associated with cross-border electricity trade.

Institutional Arrangements

This includes the definition of settlement/payment mechanism, the development of dispute resolution measures and the development of regulated tariffs.

Governance and Financial Viability

This includes the performance improvement of electricity state-owned enterprises (SOEs) through restructuring and resolution of their long-term debts.

Establish Investment Laws in Power Sector

This includes the definition of investor’s legal status (the right to transfer profits abroad), income tax exemptions, tax and customs benefits, and capital protection.

Knowledge Sharing

This includes sharing lessons learned, best practices and increase of data transparency by enabling unrestricted access to key operational data. Such data may include demand and supply conditions, planned/emergency works on generation and transmission assets, and forecasts data, such as reservoir water levels, generation expansion plans and financial statements of utilities.

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