Pandemic boosts cross-border power trade
… The tariff benefits India
Although the contraction of the Bhutanese economy by 10% with the Covid-19 pandemic is hitting all major sectors of the economy, 2020 has been a big year for the energy sector in Bhutan, the obvious reason being the commissioning of the Mangdechhu hydropower project and improvement of hydrology.
However, there is another side to this. Domestic electricity demand fell by 14%, mainly due to the disruption of the manufacturing sector caused by the pandemic. This means that Bhutan has been exporting more electricity across the border since the power purchase agreements between India and Bhutan guarantee the surplus electricity market that Bhutan generates, after meeting its local demand. .
According to Bhutan Power Corporation (BPC) annual report, domestic sales fell by 14% from 2,280 million units (GWh) in 2019 to 1,961 million units in 2020. This is largely attributed to the Covid-19 pandemic, which led to subdued demand from high voltage, medium voltage and low voltage large consumers, with industrial consumption continuing to dominate domestic load at 72%.
While the Druk Green Power Corporation, the generation company, saw a 30% increase in production from approximately 8,600 million units to 11,300 million units of electricity, this is mainly due to the commissioning of the Mangdechhu project. Subsequently, BPC transported around 9,200 million units in 2020 to India, an increase from 6,163.19 MU in the previous year.
Excluding the Mangdechhu project from the equation, the DGPC still generated 7,628 million units of energy in 2020. This is now attributed to improved hydrology and the consequent increase in power plant output Tala, Chhukha, Kurichhu and Basochhu hydropower stations. Excluding Mangdechhu, a significant increase of 10% was observed at the level of production units against 5% the previous year.
Given the increase in generation and moderate domestic load, the country’s electricity exports hit an all-time high, earning INR 27 billion in 2020 from INR 16 billion in 2021. Even without Mangdechhu, the export of electricity could have easily reached INR 18 billion.
Since all of Mangdechhu’s production is for export, its tariff being almost double that of Chukha and Tala, it has generated adequate INR revenue for the country.
However, in the face of growing demand for energy, especially when industrial parks are being developed in the country, the DGPC predicts that local demand will reach over 7,500 million units by 2025 and approximately 2,100 million units of energy must be drawn. of Mangdechhu to meet local demand.
If there is no capacity addition in power generation, as local power demand increases in the near future, export volume will eventually drop.
However, Bhutan’s competitive advantage for its industries is access to cheap electricity and this is the only reason why many energy-intensive industries have been set up along the southern foothills of Bhutan near the Indian border. The Free Trade Agreement (FTA) with India allows Bhutanese industries to export their finished products to a large market in India with relatively lower import tariffs than other countries.
It is also estimated that for every unit of energy sold to energy-intensive industries, there is an added value of about Nu 7 to GDP. On the other hand, the export tariffs are much lower than those of the energy market in India.
This gives India the advantage to invest in Bhutanese hydroelectric projects and India stands to gain whenever Bhutan produces excess electricity. According to Power Trading Corporation of India (PTC) tariff filings, electricity from Bhutan is much cheaper than that produced by other distributors in India.
For example, according to PTC power prices for April this year, the government of Andhra Pradesh purchased power at INR 11.3 per unit from SembCorp Energy India Ltd. in the same state. The cheapest energy comes from Gujarat, Tamil Nadu and Odisha, mainly exploited from renewables and some thermal power plants. However, the selling price, even for renewables, is at least INR 3.5 per unit, which makes hydropower from Chukha and Tala cheaper.
Compared to hydro power plants in India, where the minimum tariff starts from INR 5 per unit, electricity from Chukha and Tala are sold in the Indian market at INR 2.59 and INR 2.27 per unit, respectively. PTC records show that Tala and Chukha power plants in Bhutan are making electricity cheaper in the Indian states of Jharkhand, Odisha, West Bengal, Sikkim, Bihar, Rajasthan, Jammu and Kashmir, Haryana, Punjab and Delhi. This is consistent with Form IV published by the PTC on a monthly basis highlighting the source and destination of energy and reflecting both the selling and buying price.
On the other hand, Mangdechhu’s tariff is a bit higher at just over INR 4 per unit, but it is still competitive on the Indian power exchange. The Indian side stands to gain from the prefixed tariff for a certain period of time, facilitating price predictability and this also determined under the cost plus model.
This, in turn, gives the hydro loan a self-liquidating and INR-generating status on the Bhutanese side, while the Indian side harnesses the benefits of cheap power. However, the rising cost of constructing the upcoming hydropower plants and the subsequent increase in tariffs could discourage India.
The story is covered by the Institute of
Happiness for research conducted on the effects of cross-border energy trade