A Study On GMS Power Trade Arrangement And Risk Management

In recent years, there is a growing demand for energy and electric power in the Greater Mekong Subregion(GMS) with the rapid economic development of GMS member countries. To a certain extent, GMS countries are complementary in power demand and supply. Through power trade across countries, it is beneficial for GMS countries to achieve the optimal allocation of resources between them and contribute to mutually beneficial cooperation. Although the GMS member countries have been pursuing increased cross-border energy sales with each other, much of the energy sales that occur to date cannot be characterised as “trade” as such, as they most often occur in a context of “point-to-point” energy sales from an IPP to a utility on a bilateral basis with a dedicated transmission line for that Power Purchase Agreement. Such arrangements do not allow third party access even when the transmission line may have excess capacity that allows for it technically, which cannot meet the need of further development of GMS power trade. In addition to trade arrangement, there is a problem of risks, which in most cases are caused by unreasonable institutional arrangements. In the absence of a comprehensive framework of institutional arrangements, regulation and legal systems, there are high risks in cross-border trades, especially those involving third-party transit countries. These can both raise the cost of financing and delay development, thus reducing the potential benefits of trade. Risks in power trade projects fall into three main areas: country risks; commercial risks; and financing risks. These risk areas are interrelated, in particular by the state of the institutional, legal and regulatory frameworks for carrying out projects, as well as the legal system for enforcement of contracts.The main aim of this dissertation is to design a reasonable institutional framework for future GMS power trade and provide corresponding policy recommendations. At the same time, trade risks, which constitute main obstacles to power trade, cannot be ignored. In order to design an institutional framework conducive to sustainable development of power trade, such risks should be reviewed closely and tackled properly.To attain above two aims, this study, on the literature analysis basis, has reviewed the opportunities for increased power trade within the GMS region, considered the types of trade that would be most likely to develop in the short and evolve over the medium and longer term, and made an assessment of the risks and obstacles to further trade development. Drawing on international experience of national and regional trading arrangements, as well as three case studies of regional trade, the study has reviewed the financing options including risk mitigation products, considered the requirements for good governance of international trade including dispute resolution procedures. Drawing on all aspects of the research, the dissertation finally presents suggestions for development of GMS power trade. Above study is the multi-knowledge crossed research realm which involves economics, law science and politics.The findings by analysis reveal that there exist following problems in the current GMS power trade: a) the lack of enforceable and binding commitments; b) ignorance of country risks; c) the absence of a formal trade policy coordination body; d) the absence of trade regulatory body; e) the absence of special dispute settlement mechanism; f) ignorance of the impact of private sector investment patterns to regional power trade. g) insufficient emphasis on the externality. Combining the problems and the experiences and lessons in other regions, the author designs the institutional arrangement for future GMS power trade from four aspects: rules, risk mitigation, organizations and dispute settlement.The main areas where institutional support for trade can be strengthened and extended to promote trade and mitigate some of the risks are as follows: a)Putting in place enforceable intergovernmental agreements for specific trade arrangements; b)Building on existing institutional and multicountry agreements in GMS; c)Expanding participation in the Energy Charter Treaty and other external frameworks to support trade deals; d)Building regional institutions to further cooperation on technical, environmental, and regulatory issues.The new trading arrangements in the GMS will need to address a number of risks and constraints to trade. In order to facilitate expansion of electricity trade within the GMS, it is necessary to make major efforts in the development of international cooperation and supporting institutional structures. Many of the risks can be simultaneously addressed by careful structuring of the projects.A problem in sustaining progress has been the absence of a permanent body to follow up and monitor activities. To address this issue, a well-run organization with well-functioning systems should be established. From top to bottom, the organization can be divided into three levels, they are the Ministerial conference, Regional Power Trade Coordination Center and Regional Power Trade Center.For dispute settlement, the author hold that WTO rules about dispute settlement cannot be applicable to GMS power trade dispute settlement, although GMS countries are all WTO members. Again, the dispute settlement mechanism of Energy Charter Treaty cannot be applicable as GMS countries are not the members of the Treaty. Therefore, it is necessary for GMS to establish special dispute settlement mechanism.Although many of the trade options will inevitably take a long time to come to fruition, there is much that GMS governments can do immediately to create an enabling environment and be prepared for the type of complex project structures that are likely to emerge in due course. The measures suggested here are oriented to preempting concerns about risk and move the agenda of risk mitigation forward in parallel with the development of the projects themselves. The steps that GMS countries might take in this regard can conveniently be divided into four aspects: 1) Improve the trade and investment environment; 2) Ensure the electricity sector operates on a commercial, business-oriented basis; 3) Prepare to negotiate complex projects; 4) Participate in strengthening regional institutions.It should be noted that as the largest country in GMS, China, who is of great advantage in technology and resources, should play a leading role in forming the Regional Power Trade Coordination Center. On one hand, it is conducive for china to play a leading role in power supply, safeguard the peace and stability in GMS and create a favorable international environment for China’s development. On the other hand, it is convenient for China to make better use of the resources in GMS and ensure China’s energy supply.