- Potential additional transmission interconnections between national grids and the five regional grids in India.

- Existing policies, particularly related to renewable energy targets (though we do not include the Government of India’s latest 2020 target of renewable energy).

- Unit costs in the region of various types of electricity generation technologies including coal/lignite, natural gas combined cycle and simple cycle gas turbine, diesel or other oil firing internal combustion engine, run of river and storage type hydro power, wind power, solar, biomass and nuclear power.

- Costs of electricity dispatching – fuel costs and variable operation and maintenance O&M) costs.

- Costs of maintaining electricity supply reliability standards (through an implicit target margin for capacity planning).

To represent the load duration curves (LDCs) for electricity demand, the model divides the year into six “seasons” and then looks within each season at seven different demand “blocks” corresponding to different degrees of capacity utilization (from low to peak, for that season). In meeting electricity demand, each country faces zonal “reliability constraints” which state that the firm capacity installed in the zone, plus firmly contracted imports minus firmly contracted exports, should be greater than the peak demand.<sup>7</sup> Candidates for new generation and transmission can be considered as discrete or continuous investment. For example, wind generators are relatively small, so wind expansion can be considered as a continuous investment decision, while big hydro projects are project-specific discrete decisions. Capital expenditures are allocated uniformly across the construction period (or lead time). If the economic life of the asset exceeds the optimization horizon, capital expenditures are scaled down to take into account the residual value of the investment.

The model chooses cost-minimizing combinations of building new power plants and strengthening the transmission network to more fully exploit existing generation capacities. In order to allow increased cross-border electricity trade, the model configures both additional transmission capacity between “zones” (national grids or, for India, regional-sub-grids), and the location and type of generation capacity increments. Power flows with increased cross-border electricity cooperation and trade are not limited to adjacent grids in the model. For example, if it is cheaper to supply power to the East India grid by developing new hydro generation capacity in the Northeast India grid and then transmitting that power across Bangladesh, perhaps with power sales to Bangladesh as well, the model will utilize that option – just as would actual power companies and traders in a well-organized regional market. Similarly, hydropower from Nepal could in principle flow through India to meet demand in Pakistan.<sup>8</sup> To assess the potential gains from increased cross-border cooperation and trade, we start with a baseline scenario in which we assume no increased interconnections across countries beyond what are currently in place or are already committed to build. In this baseline, each country independently makes its own capacity investments (including increased internal grid connections,

> 7 As noted, trade flows can move in different directions across seasons, with a particular area being an importer at one time and an exporter in another.

> 8 A detailed technical description of the model is available at

> <u>http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAMS/EXTEAER/0,,co ntentMDK:22205467~menuPK:6477885~pagePK:64168182~piPK:64168060~theSitePK:5991650,00.html.</u>

5