As summer approaches, the demand for power will soar once again. India’s power sector has slowly been evolving out of the loosely linked series of electric fiefdoms. The commissioning of the 765 kV transmission link between the Southern Grid and the North-East-West Grid, coupled with the new cross-border link with Bangladesh, marks a dramatic escalation of that trend and provides the subcontinent with opportunities for greater efficiency and reliability in electricity. It also means that the door has been opened to a more robust, more competitive electricity market. The challenge for policymakers and market participants is to make optimal use of the new resources.
This significant progress in energy integration in South Asia tracks similar developments in Brazil, North America and Australia. There have been no downsides to these efforts, with the possible exception of increased vulnerability to cyber attacks or human operating error. But the degree to which they have changed the electricity markets varies, and they provide India with some useful examples of how the new interconnections might be used. The North American and Australian improvements in interconnectivity have led to more efficient, highly competitive generation markets, while in Brazil, the system has become more reliable, but not necessarily more competitive.
The Brazilian electricity system, originally a state-by-state, balkanised system, much like India’s, had evolved into three sub-markets by 2000: the south-south central region, the northeast and the Amazon. The first two were interconnected, but not with each other, while the third was simply an array of isolated distribution systems. About a decade ago, the two interconnected regions were linked together (parts of the Amazon are now being connected).
The primary purpose of the link was to enhance reliability by providing transmission access to dams on multiple river valleys and to capture the value of seasonal differences between regions in order to reduce the effects of periodic droughts on a hydro-dominated power sector. Thus, while one region might have diminishing reservoirs, the risk of that shortfall would be obviated by access to regions with plenty of reservoirs. There are some parallels to India in that there are regional disparities in the availability of capacity and energy, and better interconnections help to level the access to resources.
The benefits of access to all generating resources were further assured by the creation of a single, independent system operator. In terms of overall market efficiency, what Brazil has produced is a wider area from which to draw generating capacity, but it has not turned the broader geographic scope into a more efficient energy market. Thus, while the system is more reliable and provides wider access to generating resources, it is not as robustly competitive as it might be.
In North America and Australia, too, the industry has evolved from state-by-state isolated systems to more fully integrated grids, although in neither case are the grids truly national in scope. In Australia, it encompasses the five easternmost states. In the US, there are three separate grids (east of the Rocky Mountains, west of them, and Texas), with interconnections with most of the Canadian provinces.
The US system is further divided into a number of tightly integrated regional transmission organisations (RTOs), each with its own independent system operator. Parts of the southeast and west are interconnected but less tightly integrated. Within the RTOs, the market is highly competitive for both the capacity to generate electricity and the sale of the energy produced. The pricing is largely market-based for energy. There is very sophisticated pricing for transmission, which reflects both the fixed costs of the system and the costs associated with actual use. Australia, too, has a highly competitive market within its integrated network. The interconnections in both countries have also improved the reliability of the systems and diversified the resource mix for generating electricity.
For India, indeed, for the interconnected parts of the subcontinent, the question is how to make use of its new electrical interconnectivity. The ample hydro resources of the north are now linked to the markets of the south. The potential for trading and arbitrage between the markets is enormous. The challenge for India is how to deploy these new assets in ways that optimise both reliability and efficiency.
What governance institutions and processes need to be in place, what will be the most efficient and effective pricing system for the grid, will market forces be allowed to flourish, what market rules need to be in place? India has made very significant hardware progress with the new interconnections. That is no small accomplishment as it shows the triumph of national (even international) vision over parochialism, of integration over separation, and of increasing choice and opportunities over historically limited options. The question now is whether there is the will to put in place the software, namely the rules, institutions and processes, that will allow India to optimise its investment in hardware.
Ashley Brown is executive director of the electricity policy group, Harvard University and counsel to law firm Greenberg Traurig