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p. 10 of 21 BACK | NEXT Introduction: Looking ahead Past policies and operations Changing context of the policy review Poverty reduction Private sector participation and sector restructuring Regional and global environmental impacts Regional cooperation Impact of the financial crisis Future assistance in the changing context Conclusions

Energy 2000: Review of the Energy Policy of the Asian Development Bank : Changing context of the policy review

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Regional cooperation

64. Whereas regional cooperation in North America and Europe has involved formal cooperation arrangements (i.e., North American Free Trade Agreement and the European Union), the Asian initiatives, with governments playing an active, if largely informal role, have yet to result in significant free trade and economic cooperation. Undoubtedly, there is considerable potential for regional cooperation and trade in the energy sector to benefit the whole region.

Regional energy trade

65. ADB is a key facilitator and honest broker of regional and subregional cooperation in Asia, and toward this end it provides considerable support through regional TAs and complementary project investment in national infrastructure. The regional programs have involved the participation of several governments in planning and development of policies and projects to benefit all the participants. The most notable of ADB-supported cooperation programs have been in the Greater Mekong subregion, the Central Asian republics, the South Asia Growth Quadrangle, the Indonesia-Malaysia- Thailand Growth Triangle, and the Brunei-Indonesia-Malaysia-Philippines East Association of South East Asian Nations Growth Area. Information about these programs and other ongoing initiatives in the energy sector is provided in Appendix 6. In the energy sector, the focus of such cooperation is on promoting energy trade. Energy resources are not always close to demand centers. Often DMCs with a high level of resource endowments have small populations and low demand, while DMCs with high demand do not have adequate energy resources. Energy trade will benefit both groups of DMCs. In the power subsector, for example, by reducing reserve margins, overall system costs will be lower, and the importing DMC can often avoid adding to pollution.

66. In respect of traded commodities such as oil, coal, and petroleum products, governments should be encouraged to remove all tariff and nontariff trade barriers, so that indigenous production, if any, becomes rationalized and efficient as a result of international competition. In respect of traditionally nontraded commodities such as natural gas and electricity, policies should support construction of power transmission lines and gas transmission pipelines to enable cross-border trade. Hydropower and geothermal resources are best traded in the form of electricity, while natural gas can be competitively traded only if transnational gas transmission pipelines are in place. If that is not the case, natural gas, subject to achieving minimum economies of scale, can be supplied from one country to another in liquefied form under long-term take-or-pay contracts between a dedicated supplier and a dedicated consumer. Advances in the combined-cycle gas turbine technology have made even small-sized decentralized electricity generation efficient and economically viable, making gas transportation within and across national borders attractive. The distributed gas can be used for other purposes also.

67. Because of the small size of their respective energy sectors, DMCs in the Pacific present an excellent opportunity for ADB to contribute to regional cooperation in sharing information and resources for capacity building. The energy systems among these DMCs are similar to a large extent in terms of resource endowment, consumption pattern, and network design. Substantial learning is made possible by sharing performance data and identifying opportunities for improvements in efficiency and delivery standards. As the utilities operate with low staff levels, there is a case for pooling resources for skill development and other in-house functions like preliminary project design and inspection.

Export-oriented power projects

68. Many DMCs have proven energy resources with potential to generate power far in excess of the domestic energy needs, e.g., hydropower in the Kyrgyz Republic and Nepal and natural gas in Uzbekistan. Normally, natural resources of tradable goods attract private investments, and their exploitation brings considerable tax revenues that the government can allocate to economic development and poverty reduction. However, electricity exports based on hydropower or natural gas require major up-front investment. Many DMCs find it difficult to allocate funds for such a purpose, so the natural resources fail to provide their full benefit to the economy. The need for regional contracts substantially increases the developmental effort required for such projects, which deters the private sector. While recognizing that investments in such projects would be unnecessary to meet the domestic energy needs, assistance from multilateral institutions in project development, financing, and establishing regional trade can provide large export earnings to the countries owning the natural resources and release them for economic gains. In the small economies in the Central Asian region, South Asia, and the Greater Mekong subregion that do not have other major natural resources, regional trade based on hydropower and natural gas has the potential to generate considerable wealth²⁰.

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