The potential gains from regional trade in energy are substantial. This is best seen by looking at Map 4 that shows South Asia’s potential sources of hydro-power (blue) and its demand (gold). The Map tells a powerful story. Afghanistan, Bhutan, and Nepal are sitting on water resources that could potentially generate some 24000 MW of electricity from Afghanistan, 30,000 MW from Bhutan and an estimated 83,000 MW from Nepal. These together account for 90 percent of South Asia’s presently installed capacity<sup>20</sup> . Bangladesh, India, and Pakistan are all power deficit countries, especially India. The growing electricity constraint is threatening the ability to sustain rapid growth. Yet, less than two percent of this potential has been used so far. The reason is lack of cooperation and absence of energy trade among South Asian countries. Indeed, if one were to imagine South Asia without borders, perhaps the highest priority investment would have gone to develop the hydro-power resources. While all countries would benefit from the development of South Asia’s hydro-power resources, Afghanistan and Nepal, the two poorest South Asian countries, would benefit most.

After decades of insignificant cross-country electricity trade and the absence of any trade in natural gas through pipelines, regional political leaders and businessmen have recently evinced a great deal of interest and enthusiasm in cross-border electricity and gas trade, not only within South Asia but also with its neighbors in the west (Central Asia and Iran) and in the east (Myanmar). There are two regional energy clusters in South Asia. The Eastern market includes India, Bangladesh, Bhutan, Nepal, and Sri Lanka, extending to Myanmar, and the Western market includes Pakistan, Afghanistan and India, extending to Central Asia and Iran. India bridges the two clusters. Some activities are underway including a very successful hydro-power trade between Bhutan and India in the Eastern market and an ongoing project in the Western market that will bring electricity from Tajikistan and Kyrgyzstan to Afghanistan and Pakistan<sup>21</sup> .

What can governments do to promote energy trade? They need to continue reducing political and security tensions; consider energy trade as enhancement of energy security and political and economic cooperation; continue energy sector reforms; improve commercial performance of the utilities; improve the credibility, competence, and accountability of regulation; adopt sustainable (cost-reflective) tariffs and a social protection framework; promote commercial approach to energy trade; encourage private sector participation in the form of public-private-partnership (PPP) structures in crossborder investments; help the transit countries—especially Afghanistan—integrate; engage in reaching water sharing agreements; seek accession to international agreements (such as Energy Charter Treaty); strengthen regional institutions at both political and technical levels; and identify priority trade-oriented investment projects and pursue their implementation. The success of India-Bhutan electricity trade should offer useful lessons to other countries.

> 20 South Asia’s installed generation capacity is estimated at 152K MW.  See World Bank 2008e.

> 21 This is the Central Asia-South Asia (CASA) energy project that seeks to sell 1000 MW of surplus power from Tajikistan and Kyrgyzstan to Afghanistan and Pakistan.  The project is being developed in cooperation with a number of multi-lateral financial institutions including the World Bank.

26