Cross-Border Energy Trade Addresses Current Account Imbalance in Bhutan
Bhutan is the only country in South Asia with an energy surplus exporting more than 80% of its hydroelectricity production to India.
For Bhutan, cross-border electricity trade was launched with the investment of the Indian government in Bhutanese hydroelectric projects, following the power purchase agreements, guaranteeing the kingdom’s energy market in India.
Through bilateral hydropower development and facilitation of cross-border electricity trade, Bhutan has shifted to a higher growth trajectory since the commissioning of the 1,020 MW Tala hydropower project in 2006-07. Bhutan’s average economic growth rate increased from 6% between 1993 and 2002 to an average of 8.7% over the following ten years. The commissioning of the Tala hydroelectric project in 2006 boosted GDP growth to nearly 13% the following year and 10% the following year.
Since the country started harnessing its hydroelectric power, it has not only enabled economic growth and industrialization but has also played a vital role in the socio-economic development of the country. Hydropower has become a major economic sector in the country, contributing over 14% of GDP and 27% of national income after 2002.
The benefits of cross-border electricity trade are further explained by Bhutan’s balance of trade. Cross-border electricity trade has absorbed at least Nu10 billion of the trade deficit since 2016. In 2019, for example, Bhutan would have suffered a trade deficit of Nu44 billion without the Nu16.23 billion of exports of electricity. energy to India. Similarly, in 2020, although the import bill reached a record high of Nu 67 billion, electricity exports had made up for a deficit of over Nu 27 billion.
Moreover, Bhutan’s current account balance largely depends on cross-border electricity trade.
According to Bhutan’s trade statistics, energy exports to India can be estimated at 5,242 million units (MU) on average per year between 2016 and 2018, or nearly Nu 12 billion. The country also imports a small amount of electricity during the lean winter months, when the river flow is not even sufficient to sustain domestic consumption. This leaves a net profit of approximately Nu 11.6 billion.
Concerns were raised when hydropower development peaked between 2010 and 2012, which led to a shortage of rupees in the country due to huge outflows of INR on the back of the booming construction sector . The country’s export diversification has been underpinned by fears of putting all eggs in one basket and the sort of Dutch disease surrounding the hydropower sector.
Despite concerns, the full commissioning of 720 MW at Mangdechhu in 2019 resulted in a 31% increase in power generation, generating record revenue of over Nu 27 billion. Of course, this was complemented by improved hydrology, but the year also saw its energy trade balance improve. In the year 2019, the country experienced an energy trade surplus despite importing an import bill of petroleum products worth $11 billion.
It is obvious that the country’s energy basket and energy trade balance are the ultimate beneficiaries of cross-border energy trade.
But there are more opportunities given the seasonal demand for electric power among countries in the Bangladesh-Bhutan-India-Nepal (BBIN) region and a favorable system in place to further influence cross-border power trade. A study conducted by the World Bank said that hydroelectric power in Bhutan and Nepal plays a critical role in determining the feasibility of trade. During the monsoon season, a large amount of energy is available from hydroelectric resources in Bhutan, where demand is moderate and can be sold to India and Bangladesh. For the first time during the lean winter months and due to an unexpected maintenance overhaul of the Tala hydropower station, Bhutan bought power from the India Power Exchange.
Additionally, Bhutan’s status as the first and only carbon negative country can also be partly attributed to its focus on clean, renewable energy extracted from its rivers. Aiming to encourage developing countries to invest in greenhouse gas emission reduction projects, Bhutan has also successfully constructed hydropower projects under the Clean Development Mechanism, offsetting the level of carbon emissions. from fossil fuels in India.
The story is covered by the Happiness Institute for research conducted on the effects of cross-border energy trading.