Finally, we have assumed a uniform 5% real discount rate for all countries. As is often the case, the choice of discount rate in this research was subject to various arguments. We initially selected a real discount rate of 8%, but were then advised that this rate was higher than what was typically used to evaluate social benefits and costs (e.g. from public investment) in at least some of our countries of interest. Since it is social benefits and costs, not private benefits and costs, that are relevant to our analysis, we updated our assumption to the lower 5% rate.<sup>12</sup>

# **3.4  Electricity Load Projections**

Our electricity load projections are exogenously specified. While the price elasticity of demand for electricity certainly is not zero, assuming exogenously specified demands allowed us to utilize national load forecasts to the extent available. The electricity loads in 2013 were 5898MW for Afghanistan, 8,349MW for Bangladesh, 417MW for Bhutan, 159,177 MW for India, 1,185MW for Nepal, 24,989 MW for Pakistan and 2,451MW for Sri Lanka. National load forecasts are available in Bangladesh until 2030 (MPEMR, 2011), in Bhutan until 2020 (RGB, 2010), in India until 2022 (CEA, 2012e), in Nepal until 2027 (NEA, 2012) in Pakistan until 2030 (NTDCL, 2011) and in Sri Lanka until 2032 (CEB, 2012). The load forecast for Afghanistan is from ADB (2013a).

For the remaining period between the last year for which a national load forecast is available and 2040, we have projected the electricity load growth to be the same as the growth of per capita GDP. There is debate about the extent to which electricity demand growth will be faster than income growth for lower-income populations, or whether demand growth may start to slow down relative to income growth as incomes rise, especially in India. Our assumption is a simple compromise among these competing influences. One of our sensitivity analyses examines the implications of more rapid electricity demand growth.<sup>13</sup> With these assumptions, loads are projected to grow annually at average rates of 4.6%, 6.6%, 1.7%, 5%, 6.2%, 6.1% and 4.5% in Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan and Sri Lanka, respectively during the 2013-2040 period. Total electricity load for the region as a whole will grow at an average rate of 5.2% annually during the 2013-2040 period. We assume the differences across demand blocks in each country remain the same as they are now.

# **4.  Key Results – Baseline and Full Regional Trading Scenarios**

The full regional trading scenario assumes that there would be unrestricted flow of power from any part of the region to any other parts as determined by the markets. The scenario assumes the entire South Asia region has a system of fully interconnected grids. Below we present results under this scenario as compared to the baseline scenario. In the baseline scenario, each country optimizes its power systems individually incorporating all existing policies including cross-border interconnections already connected. For example, the 1000 MW Central Asia South Asia (CASA) transmission interconnection is part of the baseline. Renewable energy targets are also the part of the baseline.

> 12 The results with 8% were as might be expected:  a decided switch in the mix of generation investments toward those with lower capital costs, including significantly less hydro investment.

> 13 Slower demand growth had very limited impacts on the general findings.

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