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Economic and legal aspects behind energy cooperation.

Byline: Rudi Baroudi

Summary: Energy in all its forms is the most widely traded commodity in the world, and shows our interdependence as a global community, and the cooperation, through the market, between the producing countries with the reserves, and the importing/consuming countries.Cooperation in energy among countries may take


Editor's note: This commentary was part of a speech in Cairo during the Third International Conference on Advanced Technologies and Energy

Energy in all its forms is the most widely traded commodity in the world, and shows our interdependence as a global community, and the cooperation, through the market, between the producing countries with the reserves, and the importing/consuming countries.

Cooperation in energy among countries may take any of the following forms:

Oil and gas pipeline infrastructure across international borders linking one country to the other, mainly from the producing country to the importing country, generally based on bilateral contractual arrangements. There are cases of multi-country arrangements, where pipelines go across many country borders, which allow for off-takes, as well as tolling arrangements. Such arrangements are prevalent in the Middle East and North Africa, as in many other parts of the world;

Riparian rights arrangements on international rivers for sharing of water rights among the riparian countries for electricity production, among other uses. There are several examples world-wide, such as the Nile-Basin Initiative involving Egypt, Sudan, Ethiopia, and the six other countries in Eastern and Central Africa (Uganda, Tanzania, Democratic Republic of Congo, Kenya, Rwanda, and Burundi); the Zambezi River in southern Africa, the Danube in Europe, etc;

Power transmission lines linking power systems of countries in some cases leading to the integration of power systems into market pools, such as found in Europe, North America, the Nordic countries, and the emerging ones in southern, eastern and western Africa; for power exchanges among two countries on the basis of long-term contracts, such as, Morocco- Algeria- Tunisia among several others; and, for providing reserve capacity to meet emergency situations and as additional security of supply, such as Egypt-Jordan- Syria-Lebanon to mention a few.

All the above cooperation arrangements fundamentally require comprehensive underlying legal agreements to make them happen and to hold. The legal arrangements can be simplified into main categories: (i) those of political nature; and (ii) and those pertaining to regulations for efficient operations of energy markets, and provide the basis of economics of the cooperation.

In the first category falls:

Political protocols, which are undertaken at the highest level of country governments, usually by the heads of state, and underscores the political willingness to cooperate;

International treaties among riparian rights countries in an international river basin;

Inter-governmental memorandums of understanding, usually entered into by country finance ministers or ministers of energy, which among other things spell out organizational and the financial arrangements for managing the cooperation;

Inter-utility agreements that define the technical, financial, and developmental aspects of the cooperation.

In the second category falls:

The codes, rules, guidelines, licenses, and permits, often referred to as secondary legislation that provide a level playing field for all the actors in the market, and freedom of choice, which varies with the market structures sector and market structures that provide for

clear and transparent rules for open or third-party access to transmission lines to enable competition tariffs and price setting, and power purchase agreements consumer protection and consumer rights.

Here I would like to take this opportunity to hail the efforts of AREF "Arab Regulatory Electricity Forum" for their continuous and remarkable work in disseminating and spreading knowledge in the Arab world.

The economic aspects show how the participants in the cooperation derive the benefits of that cooperation, which is under-pinned by the political agreements, and effected by the regulations of the market. Cooperation reduces cost to the members of the arrangement, even for the case of bilateral arrangements.

I will dwell mostly on the case of cooperation in electricity, mainly on the benefits of systems integration, and compared with the situation in the Middle East and North Africa. In both Europe and North America, the benefits that accrue to the members of the power pools range from $3 to 5 billion a year. The benefits arise from:

The utilization of the lowest cost production sources to meet demand in the pool, which leads to a significant drop in bulk power prices, and, consequently, the pass-through to the retail level;

Improved regulation and stabilization of system-wide frequency for efficient utilization of production and supply infrastructure;

Competition in the market with resulting efficiency improvements;

Greater opportunities for purchases by large and eligible consumers;

Improved security of supply;

Systems cross-support for stabilization and improved reliability at lower cost than maintaining adequate domestic reserve capacity;

Seasonal swaps of electricity between peak-off-peak periods to take advantage of different national resource endowments for power generation, lags in peak demand, and different climatic conditions;

Development of new generation and transmission capacities that are based on the needs of the large pool, and, therefore, enables the capture of economies of scale.

Critical to realizing these benefits, is the type of industry market structure that members of the pool adopt in their individual systems, so that benefits of the integrated pool system can reach consumers at the lowest level of supply. The industry market structure should be aimed at eliminating monopolistic tendencies. Power systems should be unbundled to create open-access transmission system that would provide equal access to sellers and purchasers, as well as a number of generating companies to enable competition. These are necessary prerequisites in the cases of large markets, and not necessarily applicable to small systems, which by their own cannot create the competitive environment.

Although, there are transmission interconnections among a number of country power systems in the Middle East and North Africa, these interconnections appear to be utilized mainly as emergency stand-byes, except in cases that are based on unidirectional-bilateral-supply arrangements. In my view of the significant disparities in resource endowments for power generation, it is my recommendation that countries in the region should give serious consideration to beginning the transition from the existing cooperative arrangements toward more integrated pool market systems across the region, which will not only bring about the realization of most of the benefits mentioned above, but will also contribute to the competitiveness of the region, and enhancement of economic growth.

Roudi Baroudi is the secretary general of the Lebanon Member Committee of the World Energy Congress.

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Publication:The Daily Star (Beirut, Lebanon)
Date:Dec 12, 2007
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