Taking Stock of Wholesale Power Markets in Developing Countries: A Literature Review

# 3. What Is the Role of Regional Power Markets?

_Regional integration of electricity markets is a growing trend among developing countries with large potential benefits_ . Such markets are being developed in Southern and West Africa, Central America and the South Asia region.<sup>_15_</sup> Regional markets are at varying stages of development, but typically evolve from bilateral contracts (such as the West Africa Power Pool ‐ WAPP) towards organized power pools (such as the Central American Power Market – SIEPAC)<sup>_16_</sup> (Table 3). Economic studies suggest that the benefits of cross‐border power exchanges can be substantial, including arbitrage between high and low‐cost sources of electricity in neighboring countries, optimizing the use of existing resources, and improving supply adequacy, among others (Raineri et al., 2013).

_Regional power markets may provide an opportunity for smaller countries to enjoy some of the benefits of power trade, as long as other conditions are met_ . For countries whose power systems are too small to meet the necessary structural preconditions for a domestic wholesale power market in the foreseeable future, participating in a regional market can bring a number of similar benefits, including competitive price signals, and sharing of reserve margins. In South Asia, for instance, Nepal is increasingly involved in trading power into the Indian wholesale power market. In West Africa, a number of smaller economies benefit from importing power from larger neighboring systems. Nevertheless, to participate effectively in a regional power market, it is still relevant to ensure that the power sector is financially solid and creditworthy to undertake cross‐ border trading transactions.

_Several institutional and market design challenges need to be addressed in order to exploit the benefits of regional integration in developing countries_ . Challenges and lessons related to wholesale power markets design and implementation are discussed next, drawing heavily from (Oseni & Pollitt, 2016). Issues related to regulation and political economy are not developed in depth here.<sup>17</sup> _First, a broader pre‐commitment to free trade is an essential prerequisite for regional integration of electricity markets to be successful_ (Oseni & Pollitt, 2016, pp. 633–4). It is not clear that electricity can be traded easily without a prior commitment to the creation of a free trade area, notwithstanding the additional parallel trading arrangements needed to support electricity trade.

> 15 Regional integration of markets is considered to be a recently growing trend because Besant-Jones only briefly comments on the benefits of integration for smaller countries; while literature references on regional integration of electricity markets in developing countries tend to be more recent.

> 16 An integrated market may encompass various markets (e.g. spot and day-ahead) with differing trading arrangements (e.g. bilateral trading, and power pools), just as any power market.

> 17 For further details on subjects not directly related to power markets (such as the broader free-trade arrangements; and negotiation issues between multiple countries), refer to (Oseni & Pollitt, 2016) and the other references cited above.

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