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Enhancing Energy Infrastructure Connectivity in the APEC Region

Executive Summary


EXECUTIVE SUMMARY

1. Prospects and Challenges of Enhancing Energy Connectivity in the APEC

Region

The APEC region is endowed with abundant but highly unevenly distributed

energy resources.

1) In the APEC region, the total proven reserves of crude oil, natural

gas and coal resource are 55 billion tons, 64 trillion cubic meters

and 743 billion tons, accounting for 23%, 33% and 72% of total

global reserves, respectively. About 85% of the proven crude oil

reserves are in Canada, Russia, and the United States. About 68%

of the proven natural gas reserves are concentrated in Russia and

the United States. About 93% of proven coal reserves are in the

United States, Russia, Australia, and China.

2) In 2017, the production of crude oil, natural gas and coal in the

APEC region accounted for 41%, 57% and 79% of total global

production, respectively, and the region took up 52% of global crude

oil consumption, 55% of global natural gas consumption and 75%

of global coal consumption. Although these numbers indicate that

the APEC region is self-sufficient on oil and gas, its geographical

enormousness renders many of the economies (especially those in

East and South-East Asia) relying on oil & gas import from outside

the region.

3) The fossil fuel endowment in many developing economies in the

APEC region is insufficient to meet their ever-increasing energy

demand. Particularly, the economic ascendance of East and

Southeast Asia economies requires more and more energy to

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Executive Summary

support their economic growth. Thus, the scaling up of energy flow

among APEC economies becomes prominent.

Oil & gas pipeline is the foremost form of energy interconnection in the APEC

region and economies on the eastern Pacific Rim have far less interconnections

than their counterparts on the western Pacific Rim.

1) Currently, there exist 29 cross-border oil and gas pipelines among

economies in the APEC region. These land-based pipelines play an

important role in mitigating the risks of many economies’ growing

dependence on oil & gas maritime transportation and conducive to

ensuring their energy security thanks to the diversification brought

by these pipelines.

2) The cross-border oil & gas pipelines are well developed in North

and Latin America. In comparison, the economies on the eastern

Pacific Rim are still scarcely connected by oil & gas pipelines. This

also indicates the great potential of building new oil & gas

interconnection among economies on the eastern Pacific Rim.

The electricity interconnections in most of the sub-regions is still in its infancy, but

enhancing electricity interconnection has received growing recognition from

governments and investors.

1) North America is an exceptional case in the AEPC region in which

many AC and DC high voltage transmission lines connect the power

systems in United States and Canada. The power interconnection

among economies in most of sub-regions in the APEC region are

very limited, characterized by very few transmission lines and low

transmission capacities. If compared with oil & gas pipelines in

terms of Joule flowed through, the electricity interconnection in the

APEC region is minimal.

2) There is a growing recognition by governments and investors, that

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Executive Summary

by strengthening electricity connectivity, the Asia-Pacific region

could reduce the total cost of energy, mitigate environmental

problems and enhance power supply reliability.

Manifold benefits of cross-border power interconnection

1) Cross-border power interconnection provides new options for

remote areas to access to modern energy service and thus is

conducive to improving energy accessibility. In some cases of

remote regions with low electrification ratio, sourcing electricity from

the power grid in adjacent economies is more cost-effective than

constructing long distance transmission lines to its own national

power grid.

2) In the 11th APEC Energy Ministerial Meeting, APEC economies

pledged to double the share of renewable energy in the APEC region

by 2030. To fulfil this ambitious target, the installed capacity of

renewable energy in the APEC region is expected to reach 2.51 TW

by 2030. As the renewable continues to grow, the intermittent nature

of wind and solar power (their variability and uncertainty) will

become increasingly challenging for the power system. Without

proper measures, renewable curtailment is almost inevitable, which

has already been witnessed in many regions. With a power grid

covering larger geographical area, the variability of wind and solar

power could be substantially mitigated, and the forecast accuracy

on the larger geographical area for wind and solar generation is

usually much better than that of a small region. Greater grid

interconnection also enables system operators to dispatch

hydropower across river basins, and thus to better leverage on the

complementarities of hydro, thermal, wind and solar power

generation.

3) More electricity flow (from low price region to high price region) on

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Executive Summary

interconnections will lead to net economic gains, which mainly

stems from the replacement of expensive generation in one region

by cheaper generation on the other region. The economic gains are

also manifested as the enlargement of consumer’s surplus in

regions with higher price, and as enhancement of producer’s surplus

in regions with lower price.

4) The cost of balancing power systems will also be reduced by

integrating more isolated grids. System operators usually need to

procure various ancillary services, such as reserves and frequency

response services, to maintain the real-time balance of power grid.

Grid interconnection leads to the natural netting out of imbalances

due to their stochastic nature. The reduction of imbalances also

lessens the need of fast frequency responses. The time zone

differences also make the combined load curve more flattened than

each individual curves, thus less reserves are needed thanks to the

reduction of peak demand.

Enhancing electricity connectivity in the APEC region still faces multiple

challenges, most of which are rooted in the lack of political willingness.

1) Concerns over domestic energy security. The real-time balancing of

the supply and demand is the crux of the power system stability.

Compared with gas & oil, electricity cannot be stored at a large

scale. Thus, many governments worry that relying too much on

external electricity would render their domestic power systems

vulnerable to the capricious relations among countries.

2) Uncertainties in financial return. Transmission grid projects are often

capital-intensive, most of which require substantial up-front

investments and usually a long construction period. Unlike many

power generation projects, which are financially secured by PPAs,

there does not exist a well-established long term pay-back

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Executive Summary

mechanism for cross-border transmission lines. The main reason

behind the absence of such a mechanism is that transmission line

projects usually have positive externalities, which different parties

involved have difficulties in reaching agreement on how to reimburse.

3) Heterogeneity of power market regulatory frameworks. Economies in

the APEC region are at different stages of their power market reform.

The power sectors of some economies are still of the vertically

integrated model in which governmental plans guide the electricity

production and consumption, while other have already been

liberalized with market playing a decisive role. Different regulatory

frameworks lead different parties to weigh gains and cost differently.

In some cases, even a project seems a win-win cooperation from

one’s perspective, the regulatory framework on the other side could

not distribute the gain effectively to key stakeholders involved, and

thus could not get them motivated.

4) Lack of well-recognized and fully-participated work-stream and

consultations. Various electricity connectivity proposals have

surfaced in the past few years. This indicates the growing interests

in promoting connectivity in this region. However, there still lacks

enough substantive consultations on these connectivity proposals

among relevant economies and key stakeholders. Moreover, the

political environment, technologies and priorities of different

economies change from time to time, a continuous work-stream

with effective representations of all stakeholders is needed.

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Executive Summary

2. Feasibility and Pathway of Enhancing Electricity Connectivity in Northeast

Asia

A great proportion of the Northeast Asia’s energy resources is concentrated in

Russia, Mongolia and China.

1) Russia embraces the largest proven natural gas reserves worldwide,

which are mainly distributed in Western Siberia. Its coal reserves are

rich and are mainly in the Far East. The economically exploitable

hydropower resources are mainly concentrated in the Yenisei River

Basin and the Lena River Basin, which unfortunately have a long

freeze period.

2) Mongolia abounds with coal resources characterized by very low

mining cost. The coal resources in the southern Gobi desert region

and the eastern region account for 1/3 of the total national

resources. This region is also particularly rich in solar and wind

energy, and thus is suitable for developing large-scale electricity

generation bases associated with bulk outbound transmissions.

3) North China region is endowed with plentiful coal resources, wind

energy and solar energy resources. After meeting its own huge

power demand, it has the spare resources for outbound

transmission. In comparison, Energy demand and supply in

Northeast China is largely balanced, and thus this region is unlikely

to take in or output electricity in the near future.

The technological progress, the ameliorated political relations on the Korean

Peninsula, the growing willingness to reduce dependence on external fossil fuels

and the aspiration for a low carbon energy future have significantly boosted the

feasibility for the Northeast Asia power interconnections (NEAPI).

1) The electricity generation in Japan and South Korea still depends on

imported oil and gas and coal, and thus the electricity prices of the

two countries are at a relatively high level. One of the options to

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Executive Summary

lower the electricity prices is to replace expensive fossil fuels with

external low-carbon electricity. Thanks to the technological

advancement of renewable energy and economies of scale, the

power generation costs of Russia, Mongolia and China have

decreased significantly. The financial feasibility of the NEAPI and

cross-border electricity trading is becoming increasingly prominent.

2) There exists a certain level complementarity of energy generations

among economies in Northeast Asia. Russia is rich in hydropower

resources which are exceptionally flexible and could balance with

intermittent wind and solar generation in Mongolia and North China.

In the winter time, there is usually a generation surplus in North China

and Northeast China due to the commitment of combined heat and

power generations, strong wind and also low consumption. This

surplus could make up for the power shortage caused by Russian

hydropower outage due to the frozen river.

3) As the Korean Peninsula Issue being gradually ameliorated, a land-

based solution for power interconnection becomes increasingly

promising. Compared with the previous maritime cable solutions,

the cost of overhead line interconnection is significantly lower, and

thus the financial feasibility of interconnection projects is further

improved.

NEAPI should prioritize the large-scale utilisation of renewable energy. With

developing renewable energy bases in Northeast Asia and the base-to-grid HV

transmission lines, the cost of energy could be significantly reduced. In order to

handle the volatilities of renewable energy generation, the power system in

China could take the role of “flexibility pool” in Northeast Asia and balance

fluctuations of renewable generation.

1) The foremost priority of the NEAPI should be to scale up renewable

energy utilization in this region, particularly the development of

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Executive Summary

hydropower generation base in Russia, and wind and solar power

generation base in Mongolia and North China.

2) In order to balance the seasonal fluctuation of hydro power

generation and intermittency of wind and solar generation, NEAPI

should leverage on the enormousness of the power system in North

and Northeast China, which could function as a “flexibility pool” for

the NEAPI. After systematic retrofitting with heat-power decoupling

technologies, thermal power plants in North and Northeast China

can operate in an extremely flexible way. Thus, generations from

Russian and southern Mongolia can be packed together with flexible

generations in North or Northeast China before being sent to load

centres in South Korea and Japan.

3) Economies of scale also significantly lowers the cost of generation

and transmission. Our calculations show that the price of electricity

landed in South Korea's is around 7 US cents/kWh, and around 9

cents / kWh in Japan, which are slightly higher than the national on-

grid nuclear power price, but lower than that of the coal power, gas

power and renewable energy generation.

Proposed roadmap for Implementing NEAPI

NEAPI should respect and accommodate participating economies’

core interests in energy security, adhere to the principle of inclusiveness

and win-win cooperation, and give full play to the market.

1) Optimize transmission line project by prioritizing the energy security.

The capacity of cross-border transmission line should be designed

under the premise of guaranteeing the stable operation of power

systems involved. Factors such as the availability of fast response

reserves and robustness of local grid should be factored in.

Supporting infrastructure (such as low grids for disseminating the

imported electricity, units providing fast contingency reserves,

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Executive Summary

reactive power supporting devices, etc.) for the transmission line

projects should be planned simultaneously.

2) Coordinate the generation and transmission planning. Power

generation and power transmission usually involve different

stakeholders. The former one attracts interests and participation

from generation companies, while the latter one intrigues grid

companies. Coordination between these two sides in the planning

stage is usually necessary and even crucial, as the timing and

sequence for construction of power supply and power grid should

be concerted after all. Thus, a mechanism should be established to

facilitate the substantive dialogues between generation investors

and grid investors.

3) Encourage merchant transmission line projects and third-party

investment. Most of domestic grid projects are regulated because

they usually receive governmental authorized prices that guarantee

a reasonable investment return for the projects. However, this

regulated model fails to work for cross-border transmission lines.

On the other hand, the merchant model, in which investors profit

from the price difference of two sides, is suitable for cross-border

transmission lines, as seen in North America and also Europe.

Moreover, transmission line projects are similar to renewable energy

projects in a sense that the most of their cost is upfront. Thus,

investors interested in renewable energy are most likely also

interested in transmission lines. Curbs on merchant high-voltage

transmission line should be lifted and third-party investors or power

producers should be encouraged to invest in cross-border

transmission lines.

4) Establish a sustainable reimbursement mechanism for transit

economies. HVDC transmission, which is the most used technology

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Executive Summary

for long-distance power transportation, is direct flight. Transit

countries, which provide right of way for HVDC lines, do not benefit

from the project directly, and thus are usually lack of incentives to

support cross-border transmission line projects. To encourage

transit economies to participate in regional power grid cooperation,

a reimbursement mechanism should be established. One existing

paradigm to emulate is the mechanism used in the aviation industry,

in which transit economies along the aviation route are reimbursed

based on the established and well-recognized international

standards. Economies in Northeast Asia should jointly initiate a

work-stream to research on standards for reimbursing transit

countries along transmission lines.

5) Make full use of existing intergovernmental dialogue and cooperation

mechanisms. One of the cornerstones of cross-border power

interconnections is the political willingness and support, which

entails substantive dialogues and consultations among

governments. Intergovernmental platforms, such as APEC, ESCAP,

and GTI, could play a more important role in facilitating such

dialogues and consultations among economies so as to enhance

mutual trust and dispel doubts.

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Executive Summary

3. Feasibility and Pathway of Enhancing Electricity Connectivity in Southeast

Asia

The backdrop of the energy development and transition in Southeast Asia is the

raising energy dependence on imported fossil fuels, incurred by falling local

production and ascending demand in the region. Renewable energy could play

a role in mitigating the dependence on external fossil fuel.

1) Energy reserves such as oil, natural gas and coal in the Southeast

Asia region account for a small proportion of the world’s total. The

proven reserves of petroleum is 2 billion tons, accounting for 0.8%

of the world's total reserves. The proven reserves of natural gas is

6 trillion cubic meters, which is mainly distributed In Indonesia,

Malaysia and Myanmar, accounting for 3.3% of the world's total

reserves. The proven reserves of coal is 32.2 billion tons and is

mainly in Indonesia, accounting for 3.6% of the world's total

reserves. The fossil fuel production has been flattened in this region.

The rising demand will turn this region into a significant importer of

fossil fuels.

2) The Southeast Asian region is rich in hydropower resources, which

are mainly originated from the Ayeyarwady River, Salween River, the

Mekong River and the Red River. Currently, large amount of

hydropower resources in Ayeyarwady River and Salween River have

not been developed yet. Most of Southeast Asia region have

sufficient sunshine and a solar radiation value in the range of 200-

250 watts/m2. Southeast Asia has excellent offshore wind resources.

The average wind speed in the coastal areas of Myanmar, Thailand,

Vietnam and the Philippines is in the range of 8~11 m/s, which is

suitable for the development of offshore wind farms.

3) To mitigate the growing dependence of imported fossil fuels and

also pursue a low-carbon energy future, many economies in this

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Executive Summary

region strive to accelerate the uptake of renewable energy. In the

future, the scaling up of renewable energy will require a systematic

optimization of the power systems in this region.

The need for stronger Southeast Asia Power Interconnections (SEAPI) arises from

the increasing uptake of renewable energy and the pursuit of higher power

supply reliability and better energy accessibility in the region. The economic

integration process in this region will also bolster the roll-out of SEAPI.

1) One of the major challenges of integrating renewable energy is its

variability. Hydro power generation in this region has a certain level

of seasonal variation due to the lack of enough reservoirs, while

wind and solar generation has even prominent intermittency. The

expansion of balancing area through interconnecting adjacent

power systems is one of the key measures to tackle the stochastic

variations of renewable energy generations.

2) Southeast Asia has a plethora of islands, and correspondingly,

many islanding power systems. These isolated power systems are

usually in small scale and require higher reserves ratio to maintain

the power supply reliability. High reserve capacity leads to extra

capital cost and low utilization rate of generation fleet. Moreover,

power supply of many of these islands relies on expensive fossil

fuels transported by ships. As the cost of maritime cable continues

to drop, there is a financial advantage of connecting these islanding

power systems by maritime cables, compared with building extra

generation units.

3) The electrification ratios of many economies are still very low. For

many remote regions, sourcing electricity from the power grid in

adjacent economies is more cost-effective than constructing long

distance transmission lines to its own national power grid.

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Executive Summary

Soft interconnections, i.e. the integration of power markets of different

economies, are just as important as infrastructure interconnections in Southeast

Asia. Transitional trading mechanisms could be established before attaining a

fully unified power market. More capital resources should be allocated to

transmission line projects.

1) Enhance soft interconnections. The priority of SEAPI is to tap into

the potentials of the existing power interconnection infrastructures.

By increasing cross-border trading and allowing more flexible power

flow, the overall social welfare will be enlarged without incurring

much new cost. There have already existed a number of cross-

border interconnections in Southeast Asia. Most of these

transmission lines are bonded with long-term contracts specifying

base-load power flow. As both the supply and the demand become

more and more stochastic, the need for more flexible power flow

grows. To fully unleash the potential of these interconnections,

short-time period trading (day-ahead, intraday, and real-time)

should be introduced to complement the existing long-term

contracts.

2) Introduce transitional trading mechanisms. Since the progress of

integrating power markets still lags far behind the aspiration of a

unified power market in Southeast Asia. Transitional trading

mechanisms could be introduced to facilitate the power flows

among economies. As different economies inherits distinctive power

sector institutions, trading products tailored to accommodate

different market contexts could be introduced. Models to emulate

include the Energy Imbalance Market in western U.S. and the

incremental cross-provincial spot market in China, both of which

derive their successes from the soft mythologies employed. To gain

support of key stakeholders, the transitional mechanisms should

respect their concerns.

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Executive Summary

3) Attract investment from different parties. On one hand, capital

inadequacy is still the key factor hindering power interconnections

in this region. Domestic state-owned grid companies always

prioritize investment for domestic transmission line projects and

many of them lack the financial capability to develop cross-border

transmission lines. On the other hand, cross-border transmission

line projects are still attractive to many foreign investors who seek

to invest in generation assets in this region (as a more integrated

power grid will reduce the risk of power congestion). Thus,

restrictions on cross-border transmission lines should be reduced

so as to facilitate the investment from different stakeholders.

4) Scale up interconnections in medium- and low-voltage levels. In

some cases, the extension of existing distribution network from one

economy to another economy is the most cost-effective way to

provide electricity for remote regions. On the border between China

and Myanmar, there exist dozens of 10kV distribution lines, which

play an important role in improving energy accessibility in remote

regions of Myanmar. As witnessed in Europe and North America,

the scaling up of interconnections in medium and low-voltage level

also paved the way for high-voltage interconnections.

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