REPORT BEYOND BORDERS Power Grid Interconnections and Regional Electricity Markets for the Sustainable Energy Transition REPORT BEYOND BORDERS Power Grid Interconnections and Regional Electricitvy Markets for the Sustainable Energy Transition About ESMAP The Energy Sector Management Assistance Program (ESMAP) is a partnership between the World Bank and over 20 partners to help low- and middle-income countries reduce poverty and boost growth through sustainable energy solutions. ESMAP’s analytical and advisory services are fully integrated within the World Bank’s country financing and policy dialogue in the energy sector. Through the World Bank, ESMAP works to accelerate the energy transition required to achieve Sustainable Development Goal 7 (SDG7), which ensures access to affordable, reliable, sustainable, and modern energy for all. It helps shape World Bank strategies and programs to achieve the WB Climate Change Action Plan targets. Learn more at: https://www.esmap.org. © December 2024 | International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the World Bank Group, with contributions given by the staff, consultants, and experts listed in the acknowledgments. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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Contents List of Figures, Tables, and Boxes iv Acknowledgments v Abbreviations vi Executive Summary vii 1. Power Trade Across Borders 1 2. Evolution of the Power Grid and Market Integration 4 3. Drivers of Cross-Border Power Integration 12 4. Building Blocks of Regional Grid Interconnections and Electricity Markets 18 Interconnection Infrastructure 20 Planning and Investment Coordination 23 Technical and Operational Coordination 28 Commercial Arrangements and Market Design 30 Institutional Architecture 36 5. Challenges of the Power Grid and Market Integration 42 Political Commitment and Cooperation 43 Financing Interconnections Infrastructure 44 6. Looking Ahead 46 Bibliography 50 BEYOND BORDERS iii List of Figures, Tables, and Boxes Figures Figure ES.1: Building Blocks of Power System Integration and Key Challenges viii Figure 2.1: A Cycle of Building Block Development 9 Figure 3.1: Drivers of Regional Integration 13 Figure 3.2: Net Present Value (NPV) of the Total Costs Under Different Scenarios Over the 2017-40 Planning Horizon (SAPP) 15 Figure 3.3: Installed Capacity with 300MW/2GW Interconnection under the Decarbonizing Energy Scenario in SIEPAC 16 Figure 4.1: Building Blocks of Power System Integration and Key Challenges 19 Figure 4.2: European Resource Adequacy Assessment and Ten-Year Network Development Plan as Guides to Decisions 24 Figure 4.3: Data and Information Category 31 Table Table 2.1: Different Levels of Power System Integration 6 Boxes Box 2.1: ELMED Project 7 Box 4.1: SOUTHERN African Power Pool’s Regional Transmission Infrastructure Financing Facility 27 Box 4.2: Regional Electricity Market Pilot in Central Asia 34 Box 4.3: West African Power Pool’s Liquidity Enhancing Revolving Fund 35 Box 6.1: Power Secretaries Roundtable in South Asia 48 Box 6.2: IBRD Framework for Financial Incentives for Projects that Address Global Challenges with Cross Border Externalities 49 iv CONTENTS Acknowledgments This report was developed by the Energy Markets, Connectivity, and Regional Trade (MARCOT) program of the World Bank-administered Energy Sector Management Assistance Program (ESMAP). It is authored by Naoki Fujioka, Pedro E. Sanchez, and Mirlan Aldayarov, with contributions from our colleagues at the World Bank, Kwawu Mensan Gaba, Waleed Saleh I. Alsuraih, Moez Cherif, Manuel Berlengiero, Debabrata Chattopadhyay, Tatyana Kramskaya, Nicholas David Elms, Mohamed Zakaria Kamh, Kabir Malik, Claire Nicolas, as well as from Alberto Pototschnig and Ignacio J. Pérez-Arriaga, who are affiliated with the Florence School of Regulation. The report also benefited from a review and inputs by the team of Delivery Partners of the Regulatory Energy Transition Accelerator (RETA), including Rena Kuwahata (International Energy Agency [IEA]), Camille Paillard (IEA), and Gayathri Nair (International Renewable Energy Agency [IRENA]). Overall guidance was provided by Chandrasekar Govindarajalu and Fannie Missfeldt-Ringius (Practice Managers, ESMAP). BEYOND BORDERS v Abbreviations Abbreviations Definition AC alternating current ACER Agency for Cooperation of Energy Regulators BtB back-to-back CASA-1000 Central Asia-South Asia Electricity Transmission and Trade Project DAM day-ahead market DC direct current EAPP Eastern Africa Power Pool ECOWAS Economic Community of West African States ENTSO-E European Network of Transmission System Operators for Electricity EOR Regional Operating Entity (Ente Operador Regional) ERAA European Resource Adequacy Assessment EU European Union FERC Federal Energy Regulatory Commission GCCIA Gulf Cooperation Council Interconnection Authority HV high voltage IGC Inter-Governmental Council JV joint venture MDB multilateral development bank MER Regional Electricity Market (Mercado Eléctrico Regional) MOU memorandum of understanding NTC net transfer capacity NEW North-Western Europe PAEM Pan-Arab Electricity Market PPA power purchase agreement SADC Southern African Development Community SAPP Southern African Power Pool SIEPAC Central American Electrical Interconnection System (Sistema de Interconexión Eléctrica de los Países de América Central) SPV special purpose vehicle TSO transmission system operator TYNDP Ten-Year Network Development Plan UCPTE Union for the Coordination of Production and Transmission of Electricity UCTE Union for the Coordination of Transmission of Electricity VRE variable renewable energy WAPP West African Power Pool All currency is in United States dollars (US$, USD), unless otherwise indicated. vi ABBREVIATIONS Executive Summary The report aims to establish a foundational guide for integrating power grids and markets across borders, particularly in developing and emerging economies. Targeted towards policymakers, regulators, utilities (including transmission system and market operators), regional institutions, and other stakeholders, the report provides a broad basis for dialogue on regional energy integration. This will be supplemented by a series of guidance notes, developed under the Regulatory Energy Transition Accelerator (RETA) initiative, on specific elements of the five core building blocks discussed below. There is a growing recognition that infrastructure connectivity across countries can play a pivotal role in advancing sustainable development and shared prosperity. The power grid is one of the key infrastructures, and many countries are at the cusp of power grid and market integration initiatives that would bring much-needed efficiency benefits, improve the quality of power supply, diversify energy resources, build trust, and enable greener growth potential. However, developing and sustaining integrated regional infrastructure, market-based trade, and institutions pose enormous challenges. The drivers of cross-border power trade are multifaceted, but the core ones include economic value, enhanced power supply security, and climate change mitigation. The economic value is mainly derived from economies of scale in system development and operation, access to less expensive resources for importing parties, and revenue opportunities for exporting parties. All of these result in more affordable power for consumers. The security of supply is enhanced through the aggregation of power systems with a greater diversity of resources complementing both supply and demand, resulting in increased reliability of supply to consumers. Finally, grid interconnections can play a critically important role in optimizing investments by maximizing the use of existing renewables and helping integrate larger shares of new renewables and, therefore, reduce the overall carbon intensity of power production. Ultimately, from these angles, the deeper the integration among countries’ power systems, the better the opportunities to advance progress toward Sustainable Development Goal 7. The power grid and market integration can range from early stages where little coordination occurs between countries to deeply integrated power systems backed by well-functioning institutions and competitive markets. The development of integrated power systems requires both physical infrastructure (often called hard infrastructure) such as transmission lines, and regulatory, operational, market, and institutional infrastructure (often called soft infrastructure). Successful regional schemes have both types of infrastructure, which reinforce each other when enough political commitment and cooperation among participating countries are in place. In other words, while physical infrastructure and basic agreements may start some level of electricity trade, a conducive environment is necessary to increase BEYOND BORDERS vii FIGURE ES.1 Building Blocks of Power System Integration and Key Challenges Hard Infrastructure Soft Infrastructure Building Blocks Planning and Technical and Commercial Interconnection Institutional Investment Operational Arrangements & Infrastructure Architecture Coordination Coordination Market Design Challenges Financing Political Commitment & Coordination trade volume and utilization of interconnectors. The process toward a successful advanced level of integration has been and remains gradual, adaptive, and varies across different regions. There are several building blocks required to achieve optimal levels of integration and reap its benefits. The cornerstone of regional energy integration lies in establishing interconnection infrastructure that links power grids across multiple countries, while also reinforcing national transmission infrastructure to support electricity trade, ensuring sufficient transfer capacity for the long term. It is critical to maintain coordinated outputs and common oversight among participating countries and utilities from preparation through implementation of cross-border transmission projects, which necessitate close coordination in areas such as technical compatibility, regulatory compliance, financing, and risk management, among others. In this light, it is generally preferred for participating governments/utilities to jointly form an entity and pool their resources for the development of interconnector(s), rather than adopting a model where each country is solely responsible for infrastructure on its side of the border. Such entities can be public (e.g., GCCIA), private, or public-private (e.g., EPR in Central America). The integration of multiple power systems into a single synchronized network can heighten the risk of major blackouts that may affect interconnected areas. Consequently, close coordination in technical and operational aspects among participating utilities is essential. While extensive harmonization, such as the establishment of regional grid codes, is not a prerequisite for initiating cross-border transmission and electricity trade, common technical and operational standards should be formulated in accordance with the specific requirements of the regional grid and gradually implemented. For example, the Regional Electricity Market (MER) of Central America began operations under transitional codes before establishing transmission codes, and other rules, alongside regional institutions, over several years. Additionally, to facilitate economically optimal electricity flows across borders, it is important to have an interconnector capacity allocation mechanism that ensures efficient, transparent, and fair use of interconnectors. Technical and operational coordination can be enhanced through systems that allow sufficient data and information sharing among participating utilities. viii EXECUTIVE SUMMARY As integration deepens, it is advisable to evolve from bilateral trading to multilateral trading within a regional electricity market to enable more cost-efficient, competitive, and integrated trading, complementing power purchase agreements (PPAs) and national electricity markets. A regional electricity market facilitates the economically optimal dispatch of energy resources at the regional level and allows generators to access multiple buyers, thereby reducing the off-taker risk associated with PPAs and attracting private sector investment in generation development. Such a market may be initiated through a pilot with a small set of willing countries, with the prospect of incremental expansion of participants and market segments over time. Another crucial element is transmission pricing which is independent of commercial transactions and avoids tariff pancaking, which can distort the market and discourage efficient network usage. This should also ensure that grid owners can recover their costs and earn a fair return on their investments without undermining market efficiency. SAPP, for example, has transitioned from a postage stamp approach, which charges equally on a per MW basis of transaction, to an approach that is more appropriate for sending correct market signals to network users. The establishment of a robust institutional framework is key to successful regional energy integration. In particular, a regional regulator with clearly defined execution authority and enforceable legal backing is critical for the effective functioning of a regional electricity market. Equally important are regional system and market operators, who are tasked with overseeing the regional electricity market and ensuring the reliable operation and maintenance of the regional transmission infrastructure. While political support is a fundamental cornerstone for the initiation of regional energy integration, it is crucial that, upon the successful establishment and operationalization of key regional institutions, specifically, a regulatory body and system/market operators, political involvement should give way to entrusting these institutions with autonomy. Successful regional integration and electricity trade may face, among other issues, two fundamental obstacles: political commitment and financing. Cooperation among countries requires strong political will and commitment to shared objectives, which can be challenging amid differences in political priorities and regulatory approaches. When it comes to supply security, trust is a critical factor. Cooperation can be especially difficult in inter-regional integration as it involves a larger number of countries or regions with diverse interests, varying levels of economic and power sector development, as well as in deep integration that requires extensive harmonization efforts for infrastructure and market development. A transition is needed from a national perspective to a regional one that maximizes the benefits to be shared among all countries participating in the integrated market of a given region. Regarding financing, in general, developing countries struggle to secure funding due to factors such as no/poor credit ratings, insufficient legal and regulatory structures to attract private investments, and instability (political, economic, and other). Moreover, financing cross-border interconnection projects tends to be more challenging than financing renewable projects due to long lead times, revenue uncertainty, and regulatory complexities. Hence, there are generally limited private investments in such projects. Addressing the challenges of political commitment and financing would realize the full potential of cross-border power integration, and advance progress toward the world’s BEYOND BORDERS ix shared goals of a sustainable energy future. Cooperation and collaboration regionally and globally are essential to tackle the inherent challenges. It is necessary to boost awareness and promote knowledge sharing, joint research, technical assistance, and evidence-based studies to advocate and build the foundations of the regional power grid and market integration. Increased concessional financing, including through climate funds and multilateral development banks, and encouraging innovative financing mechanisms, such as green bonds and public-private partnerships are also needed. Establishing dedicated financing mechanisms aimed at promoting regional grid integration and supplementing lending could bring much-needed accelerators to support cross-border transmission infrastructure. x EXECUTIVE SUMMARY ONE POWER TRADE ACROSS BORDERS The importance of infrastructure connectivity in attaining sustainable development and shared prosperity has been long acknowledged by both developed and developing economies, along with international organizations and other global communities. A power system1 is one of the various infrastructures that are fundamental to the greater interconnectivity of economies, communities, and nations. With the greater emphasis on the energy transition as a top priority on the global agenda and the increased need for affordable, reliable energy for expanding economies and populations, countries around the world are increasingly investing in grid interconnections and pursuing power trade across borders. The term ‘border’ can refer to different types of boundaries in the context of cross-border integration of power grids and markets. This report refers to borders as political boundaries that separate territories of countries or subnational entities, such as states and provinces. Another type of border is the jurisdictional boundary of transmission system operators (TSOs). TSOs’ jurisdictional areas often align with the territory of a specific country. Larger countries may have multiple TSOs operating within their national borders (e.g., Australia, Germany, India, Japan, and the United States). The report primarily focuses on power system integration across the borders of countries with different TSOs, but it also draws lessons from cases of integration across subnational borders when relevant. Countries have been working together to improve their power systems through enhanced cooperation and coordination across borders. Collaborative efforts may involve the development of shared power grids and markets, harmonization of regulatory, operational, and commercial frameworks, and joint development of renewable energy projects. The aims of grid interconnection are typically to enable countries with electricity surpluses to expand revenue streams through exports, improve access to reliable and affordable electricity in energy-deficient countries, enhance energy security within a region, and accelerate the deployment of variable renewable energy (VRE) resources. Looking ahead, amid a global surge in economically competitive solar and wind technologies, grid interconnection on a greater scale involving more than one region and across continents is becoming more relevant. Connecting wider regions with different time zones and weather patterns will facilitate better utilization of growing VRE while mitigating the impacts of their intermittency on system operations and market outcomes. Despite significant challenges in establishing and sustaining regional infrastructure, markets, and institutions, countries are on the cusp of important power system integration initiatives that would bring efficiency gains, energy supply diversification, trust-building, and green growth. This report aims to establish a fundamental guide for the cross-border integration of power grids and markets, with a particular focus on the context of developing and emerging countries, to further streamline global efforts in accelerating the sustainable transition to low carbon economies while ensuring the security of power supply. The report first provides an overview of the different levels of power system integration. It then lays out the drivers of integration, the building blocks required for deeper integration, and the key challenges that hinder the establishment of these blocks. Finally, the report concludes with a discussion of potential solutions to overcome these challenges and promote deeper integration. BEYOND BORDERS 1 Targeted towards policymakers, regulators, utilities (including transmission system and market operators), regional institutions, and other stakeholders, the report provides a broad basis for dialogue on regional energy integration, and it is complemented by guidance notes2 developed under the Regulatory Energy Transition Accelerator (RETA) initiative. These notes offer detailed and practical advice and examples of good practices on how to implement specific elements of the building blocks, helping key stakeholders navigate the complex challenges of regional energy integration and ensure that successful practices are shared and adopted widely. Endnotes 1. A power system refers to the infrastructure and processes involved in the generation, transmission, and distribution of electricity. 2. The notes are published in a series, with topics determined considering the interests of energy regulators around the globe, by delivery partners of the RETA. For more details, visit https://retatheaccelerator.org/regional-interconnection/. 2 POWER TRADE ACROSS BORDERS UNSPLASH TWO EVOLUTION OF THE POWER GRID AND MARKET INTEGRATION The integration of power grids and markets across borders has been shaped by both technological advancements and evolving policies. In the latter half of the 20th century, significant progress was made in high-voltage (HV) transmission lines and grid control systems, enabling the transmission of electricity over longer distances, and laying the groundwork for regional power systems. Cross-border electricity trade traces its origins back to the early 20th century when the world’s first interconnection transmitted hydropower electricity from the United States side of Niagara Falls to Canada (Molburg et al. 2007). Over time, the focus shifted from bilateral grid interconnections to the development of regional power pools. In the 1990s and early 2000s, many countries embraced the principles of open markets and competition in their electricity sectors, facilitating cross-border trade through market mechanisms. During this period, the European Union (EU) made significant strides in harmonizing energy policies and creating a unified electricity market among its member states, while power pools began to emerge in Africa and other regions. Power system integration varies in its degree and can be broadly categorized into three levels. It is important to note that integration does not always follow a linear progression through these levels, meaning that it does not necessarily initiate from the first stage and evolve stage by stage. Additionally, the following description of each level is for discussion purposes, and a power pool classified under a specific level may not exhibit all the characteristics associated with that level or may display features from multiple levels. The early stage of integration often involves limited transmission capacity between neighboring countries with little planning and operational coordination. This stage is characterized by a low level of electricity trading, which primarily happens on a bilateral power purchase agreement (PPA) basis and is not inclusive of countries across the region. The interconnections between the Lao People’s Democratic Republic (Laos) and its neighboring countries are good examples to portray this level of integration. The hydropower-rich country exports its surplus electricity to Thailand1 under long-term PPAs. Laos has also been working on a two-way power trade with China, which would allow China to consume excess hydropower from Laos during the wet season, while Laos can import electricity from China during the dry season.2 India’s electricity trade with its neighbors can be viewed as transitioning from the early stage of integration to a shallow integration as, while the majority of trade occurs bilaterally, these neighbors also participate in the Indian Energy Exchange’s day-ahead market (DAM)3 and real-time market.4 At the next level—shallow integration—physical infrastructure and rules are for the most part in place so that most countries, albeit not all, in a region are interconnected and can participate in trading. This stage usually involves some limited level of coordination in regional planning and efforts to harmonize regulations and operations. Short-term wholesale markets may emerge to supplement trade based on PPAs. However, there can still be issues with the enforcement of agreements and regulations at a regional level, resulting in a low volume of regional trade. The Southern African Power Pool (SAPP)5 is at this stage. The Eastern Africa Power Pool (EAPP),6 the West African Power Pool (WAPP),7 and the Pan-Arab Electricity Market (PAEM)8 can also be considered to be in an embryonic phase of shallow integration. BEYOND BORDERS 5 Deep integration is the most advanced level of regional integration, where all participating countries have open access to the regional grid and market-based electricity trading. This level of integration often entails coordination in planning and investments, developing a regional generation and transmission masterplan from a regionally optimized perspective while ensuring energy security at the national level. The most distinctive feature of this stage is well-developed institutions and governance structures that are capable of developing and effectively enforcing agreements, regulations, and market rules, forming specific regions with strong political and economic ties through supra-national regional institutions. A good example of this level is the EU’s internal energy market with the principles of open access, non-discrimination, and cost- reflective pricing. The Central American Electrical Interconnection System (SIEPAC)9 can similarly be considered to have reached this level. A summary of the degree of the depth and size of physical interconnection together with the market is presented in Table 2.1. TABLE 2.1 Different Levels of Power System Integration EARLY STAGE SHALLOW INTEGRATION DEEP INTEGRATION Interconnection Typically starts between two Interconnected grids link several Extended infrastructure connects all Infrastructure countries, with a low level of neighboring countries with some or most countries in the region and electricity flow. Transmission countries lacking, access to the enables them to participate in trade. lines may be used to trade regional grid and trade. In some cases, The utilization level of interconnection electricity only from specific regional infrastructure is fragmented gradually increases as the regional power plants, without the and consists of isolated blocks. market develops and power demand plants being connected to Interconnection capacity is often increases. their domestic network. underutilized. Planning and Planning happens at a Some coordination of national Regional master plans are optimized Investment national level, possibly with investments with an optimized from a regional perspective. Coordination specific regional agreements regional investment plan is in place. Investment in regional infrastructure to develop priority National plans increasingly take may be coordinated. Harmonized infrastructure. account of regional opportunities to scenarios and planning methods may import and export power. be used for national-level planning. Technical and Simple rules are agreed Efforts are taken to harmonize A large body of harmonized Operational upon for the operation of regulatory practices and technical and regulations, as well as common Coordination the interconnected grids. market rules. Common data acquisition technical and market rules, including and supervision protocols may be used. grid codes, exist and are enforced. Commercial Long-term bilateral PPAs Long-term PPAs may be supplemented Fully competitive and cost-reflective Arrangements predominate. with short-term markets. Simple regional markets exist with various and Market transmission pricing methods that do products being traded, in addition to Design not reflect costs are often employed. PPAs. Transmission pricing approach evolves to a more granular one sensitive to the location on the grid. Institutional Primarily based on bilateral Regional regulatory bodies and/or Regional regulatory bodies and/or Architecture agreements with no strong steering committees may be in place steering committees can effectively supra-national entity being but face enforcement challenges. enforce rules. involved. Example Bilateral links (e.g., Laos- SAPP; EAPP; WAPP; PAEM. EU’s Internal Energy Market; Western Thailand and Laos-China); Energy Imbalance Market in the US; India and its neighboring SIEPAC. countries. Source: World Bank. Note: This table is for illustrative purposes only. It should be noted that regional power markets/pools in each stage do not necessarily meet all the requirements of the stage. 6 EVOLUTION OF THE POWER GRID AND MARKET INTEGRATION In recent years, there has been a trend toward seeking inter-regional interconnections that link geographically distant regions or countries with diverse political and economic backgrounds, going beyond intra-regional connections.10 While such examples are less prominent, they demonstrate the potential for further expanding the scope of the power grid and market integration as an accelerator of the energy transition. One notable example is the interconnector under construction between Tunisia and Italy through a direct current (DC) submarine power cable linking the African and European power grids. Other examples include the interconnections in progress between EAPP and SAPP via the Tanzania-Zambia alternating current (AC) link and the Central Asia-South Asia Electricity Transmission and Trade Project (CASA-1000) (Box 2.1) that will allow the Central Asian countries of the Kyrgyz Republic and Tajikistan to channel their seasonal surplus hydroelectricity to Afghanistan and Pakistan through a combination of AC and DC lines. Furthermore, some initiatives ambitiously explore ways to integrate grids at the global level, including the Regional and Global Energy Interconnection (RGEI) Initiative, established in 2018 under the leadership of China, and the Green Grids Initiative-One Sun One World One Grid (GGI-OSOWOG), jointly launched by India and the United Kingdom during COP26 in 2021. BOX 2.1 ELMED PROJECT In June 2023, the World Bank approved $268.4 million in financing for the Tunisia-Italy Interconnector (ELMED) project, which will link power systems between North Africa and Europe and support the renewable energy trade essential to Tunisia’s sustainable development and climate change strategy. ELMED will be the first DC link between the two continents. It will have a total length of 220 kilometers, 200 of which will be undersea cable, a capacity of 600 MW, and a maximum depth of approximately 800 meters along the Strait of Sicily. The project is currently under construction and is expected to commence operations in 2028. The ELMED project also receives support from the Government of Italy, the EU, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), and the German Development Bank (KfW). Additional funding includes $25 million of concessional financing from the Green Climate Fund (GCF), mobilized through the ESMAP’s Sustainable Renewables Risk Mitigation Initiative (SRMI). BEYOND BORDERS 7 The process of successful cross-border grid and market integration is complex and may vary depending on the specific regional or country context. It requires a shared vision among involved countries and stakeholders, clear goals and objectives, and a commitment to working together toward them. Once they are established, the integration typically follows a series of steps, starting with the development of an initial physical interconnection infrastructure, or hard infrastructure. In many developing countries, governments and/or utilities may initially require concessional financial support from the public sector, including multilateral development banks (MDBs) to embark on interconnection projects and cover the identification, development, and financing of the infrastructure. There are cases where significant investments in physical infrastructure, including both interconnectors and domestic transmission capacity that enables trade, have been made, yet countries are not fully reaping the benefits of interconnections, indicating that scarce public resources have not been efficiently utilized. In some cases, interconnectors remain underutilized due to insufficient transmission capacity within countries,11 while in others, despite adequate capacity in both interconnectors and national networks, trade volumes remain limited.12 While high utilization of interconnectors is desirable, it is crucial to ensure that these flows justify the investment.13 Hard infrastructure must be complemented by institutional, operational, and commercial arrangements, or soft infrastructure, which serve to ensure and expand the economically efficient usage of interconnectors and create an enabling environment that facilitates further investments in expanding the hard infrastructure, if economically efficient to do so. SIEPAC’s expansion is a good illustration of this approach. The first phase of the project involved the construction of a 300 MW single-circuit line, which reinforced existing interconnections. Since the signing of the Framework Treaty in 1996, the principles, rules, procedures, and institutions for regional trade have been developed in parallel with interconnector construction, and the Regional Electricity Market (MER) began operating in 2013. As trade increased substantially—from less than 700 GWh in 2013 to over 3,000 GWh in 2019 (ECLAC cited in AESA & EY 2023), the necessity of hard infrastructure expansion was founded. The second phase of investments plans to double the interconnection capacity to 600 MW to ensure the smooth and reliable transmission of electricity across the region. To further enhance the trading environment, efforts have also been made since 2015 to develop the Third Protocol to the Framework Treaty, which includes strengthening governance, planning coordination, regulatory harmonization, and cooperation with neighboring markets (IRENA & KEEI 2021). By applying this dual approach to infrastructure development, a virtuous cycle emerges, in which soft and hard infrastructure complement and reinforce each other (Figure 2.1). Initially, physical infrastructure along with basic agreements may initiate a certain level of trade, but a conducive environment must be in place to enhance trade volume and interconnector utilization. This, in turn, necessitates further advancement of soft infrastructure, which can again boost capacity usage, potentially leading to the expansion of cross-border grids. However, the process of reinforcing each other is not straightforward and could be undermined by several factors, which demand well-coordinated planning across various 8 EVOLUTION OF THE POWER GRID AND MARKET INTEGRATION FIGURE 2.1 A Cycle of Building Block Development Hard Infrastructure Soft Infrastructure Source: World Bank. levels at the outset of defining the scheme of integration (including, political, regulatory, technical, operational, commercial, and legal dimensions). The depth of both hard and soft infrastructure among involved countries will affect the success of regional grid integration and trade. Realizing the full potential of regional electricity trade is gradual and would require the hard and soft infrastructure to be fully developed. Therefore, at the heart of the development cycle is the need for strong political commitment, trust, and cooperation among participating countries. Effective collaboration fosters a supportive environment for regional integration, streamlined decision-making processes, and the ability to overcome potential barriers throughout the cycle, all of which contribute to the successful development and operation of interconnected power grids and markets. Expanding on this concept, countries would be able to leverage regional synergies, foster the development of clean and reliable energy, and promote sustainable growth. Endnotes  1. The interconnections between the two countries involve multiple 115 kV lines connected to the domestic network and independent power producer (IPP)-dedicated lines of 500 kV or 230 kV (JICA 2020). Laos also imports power from Thailand during the dry season, but the volume is very small, only a single-digit percentage of the amount exported (World Bank 2022).  2. A Chinese state-owned grid company and a Lao state-owned utility signed a PPA in March 2022 for a 115 kV interconnection project, whose line itself has been in operation for over a decade, to exchange electricity between the two countries (Xin 2022).  3. Power trade with Nepal and Bhutan in the IEX’s DAM started in April 2021 and January 2022, respectively.  4. The Nepal Electricity Authority obtained permission from India to participate in the IEX’s real-time market in September 2023.  5. SAPP, founded in 1995, comprises 12 member countries of the Southern African Development Community (SADC). The short-term energy market was created in 2001, and a competitive electricity market for the region has been developed since 2004. BEYOND BORDERS 9  6. EAPP was established in 2005 and currently has 13 member countries. Its power market is under development. The shadow market, a pilot project to simulate short-term trade based on DAM principles, started operation in 2014.  7. WAPP was created in 1999 and currently consists of 14 member states of the Economic Community of West African States (ECOWAS). It is yet to finish developing regional infrastructure, a phase that will be followed by market formalization and liquidity enhancement.  8. A memorandum of understanding (MOU) was signed by 16 member countries of the Arab League in 2017. It aims to establish a fully integrated regional grid and a competitive wholesale market by 2038. The signing of the legally binding PAEM agreements by the member countries is now critical to operationalizing the PAEM. Currently, there is no region-wide institution or market in place, and the Middle East and North Africa region consists of three different interconnected sub-regions, namely, Maghreb, EIJLLPTST, and GCC interconnections.  9. The Central American Electricity Market Framework Treaty was signed in 1996 by six Central American countries. Construction of the SIEPAC interconnection was completed in 2013. 10. In this report, a region is a group of countries under a specific geographical location (e.g., Europe, Middle East and North Africa, South Asia, Southern Africa, and so on). An intra-regional activity (e.g., connectivity or trade) occurs between countries in a specific region, while an inter-regional activity occurs between two or more regions. 11. Nepal and Bhutan have not been able to fully export their capacity partly due to transmission constraints in India. 12. For example, in the Pan-Arab region, only a fraction, estimated at 5 to 7 percent, of the cross-border interconnection capacity of 7.7 GW is utilized (World Bank 2021). This underutilization is attributed to interconnectors being primarily designated for emergency backup and spinning reserves, with insufficient soft infrastructure in place to support expanded regional electricity trade. Similarly, in India, projections for its 2030 power system reveal that approximately 71 percent of interstate transmission corridors experience an average annual utilization rate of only 30 percent or below, with 9 percent of lines having zero power flow for over a quarter of the year (Rose et al. 2020). 13. In the cases of India-Nepal and India-Bhutan, current flows justify the investment, while in the case of the Pan-Arab region, the benefits of providing emergency support and spinning reserves outweigh the costs. 10 EVOLUTION OF THE POWER GRID AND MARKET INTEGRATION UNSPLASH THREE DRIVERS OF CROSS-BORDER POWER INTEGRATION Cross-border power system integration can support several political objectives for regional cooperation and integration between neighboring countries, leading to greater political stability and economic development. It can create opportunities for diplomatic and economic engagement between countries, providing a platform for dialogue and cooperation on other issues of mutual interest, and serving as a confidence-building measure to improve relations and build trust. It is important to note the need for a transparent, fair, and unbiased mechanism for integration among countries that are not affected by political differences. Such a mechanism should ensure that the fundamentals of regional integration are driving the cooperation process with an upfront political commitment to shared goals. Global experience shows that the primary drivers of regional power system integration have traditionally centered around pursuing economic efficiencies through trade opportunities. This often involves earning revenues by selling electricity surpluses for exporting countries or accessing more cost-effective resources for importing countries. Furthermore, interconnections can offer power system security and reliability benefits by providing access to a more diverse and therefore more resilient mix of energy resources, while also allowing a larger and more responsive load. In recent times, as the global community accelerates efforts to achieve the goals of the Paris Climate Agreement, responses to climate change have emerged as an increasingly important driver (Figure 3.1). It should also be mentioned that power grid and market integration contributes to Sustainable Development Goal 7 (SDG 7) of ensuring access to affordable, reliable, sustainable, and modern energy for all. FIGURE 3.1 Drivers of Regional Integration Cli Res lue ic m po Va om at e C nse on Ec ha Regional ng Energy e Integration Security of Supply Source: World Bank. The economic value of the power grid and market integration across borders is derived mainly from (1) lower overall operating costs due to enhanced system efficiency and BEYOND BORDERS 13 (2) lower generation development costs to meet demand requirements resulting from increased economies of scale. Cross-border power trade can help to promote the optimal mixing of the most cost-effective resources available in the region in the short and long run. In the longer run, the aggregation of multiple power systems with diversity in supply and demand allows peak demand to be met with fewer resources and lowers the total reserve requirements, thereby reducing investments and maintenance expenses in costly power units. It also enhances the financial viability of large-scale energy projects that may not be feasible if relying solely on the demand of one country, such as hydroelectric dams and wind farms. The result is a more efficient and cost-effective market, leading to more affordable electricity for consumers. Countries with excess capacity can leverage cross-border trade to gain earnings from their surplus electricity. For instance, hydropower is the largest export item in Bhutan, accounting for 26 percent of the country’s total exports in 2018–19 and is predicted to rise to 57 percent by 2026–27 (IMF 2022). There is a wealth of literature on the economic benefit analysis.1 Timilsina et al. (2021) estimates the potential savings on electricity supply costs (i.e., operating costs) in 20 Latin American countries, showing that if unrestricted power trade were allowed among these countries—or the trade volume was increased by 7 times the existing level—without generation capacity expansion, the region could gain almost $2 billion annually. Similarly, a study by the World Bank (2021) suggests that power trade through existing and planned interconnections under the Pan-Arab Electricity Market (PAEM) would bring massive system cost savings estimated at $107 to 196 billion, or 8.1 to 13.1 percent, in 2018–35 compared to a scenario without trade, largely attributable to the reduced costs of meeting reserve requirements and using fuel. The same study estimates that a $7.5 billion investment in new and reinforced interconnectors in the region could lead to a $35 billion increase in total system cost savings, indicating that a $1 investment to enhance regional cross-border trade results in savings of $4.6 in system costs.2 Given the current state of integration and the presence of constraints on full regional trade, the above examples can be said to be based on somewhat ambitious assumptions. On the other hand, the SAPP Plan 2017 provides a relatively realistic estimation. According to the Plan, the coordinated planning under the “realistic integration” scenario, which takes into account certain constraints, would allow meeting demand in 2040 by reducing investment and operational costs by $36 billion (23 percent) and $3 billion (2 percent), respectively, against the benchmark that combines country-by-country plans (Figure 3.2). In Europe, increasing cross-border capacity by 64 GW with an annual investment of about €2 billion after 2025 would lead to a generation cost reduction of €5 billion per year in 2030 (ENTSO-E 2023). The cost reduction is largely due to a decrease in thermal generation, mainly gas. Another key factor is the security of power supply. The integration of power systems can facilitate the sharing of infrastructure and resources, including backup power generation capacity and reserves, across geographically spread countries. Larger power systems with diverse energy resources and varied load patterns across different countries are capable of handling greater fluctuations in generation and demand compared to smaller ones. These make it easier to balance the system and ensure a reliable and secure power supply during periods of high demand or energy shortages and to quickly respond to unexpected supply 14 DRIVERS OF CROSS-BORDER POWER INTEGRATION FIGURE 3.2 Net Present Value (NPV) of the Total Costs Under Different Scenarios Over the 2017-40 Planning Horizon (SAPP) 294 254 259 ($bn) 128 200 Unserved Energy Cost 123 125 Operational Costs Investment (Transmission) 100 154 Investment (Generation) 114 118 0 Benchmark Full Integration Realistic Integration Source: World Bank based on SAPP 2017. disruptions caused by weather events or equipment failures, reducing the risk of blackouts, load shedding, and price spikes. The resilience aspect has become more important than ever before, as electricity supply disruptions have become increasingly common due to the rising frequency of extreme weather events caused by climate change. Moreover, electricity trade can indirectly improve energy security for countries or regions that heavily depend on imported fossil fuels by encouraging the utilization of locally produced renewable energy. Despite the fact that there are significant benefits to trade even if countries take a nationalistic view to security of supply, an overreliance on regional electricity trade has the potential to compromise national sovereignty and energy security, leaving a country vulnerable to external pressures. Consequently, achieving the optimal balance between regional cooperation in electricity supply and preserving energy independence emerges as a strategic imperative, demanding careful consideration and decision-making from each nation. For example, the monthly load profiles of India’s several regional grids and Bhutan’s and Nepal’s grids indicate a high degree of complementarity and the high potential for enhancing power supply security across them due to the hot summers in India and the cold winters in the latter two (Vaidya et al. 2021). In fact, the establishment of a 400 kV India-Nepal interconnection contributed to addressing the load-shedding issue that hydropower-dependent Nepal was experiencing during the dry season, with up to 14 hours of planned outages daily before 2017 (Timilsina et al. 2018). Besides, one of the primary objectives of the Northeast Asia Power System Interconnection (NAPSI) is to guarantee the security of the energy supply while increasing renewables and reducing dependence on fossil energy imports. Multiple studies have shown that a power interconnection in Northeast Asia can reduce the required capacity reserve while maintaining the same level of reliability of the power supply (ESCAP 2020). The third driver, climate change mitigation, is becoming ever more relevant as governments focus on operationalizing the Paris Agreement commitments. Renewable resources such as hydro, solar, and wind vary in abundance from country to country, and various renewable energy sources can be shared across different locations by integrating power grids. If there is BEYOND BORDERS 15 excess solar or wind energy in one country, that energy can be transmitted to another country that may have a shortage of renewable energy, resulting in an increased overall share of renewable energy in the regional power supply mix. Regional power exchanges can also help integrate greater shares of VRE by allowing grid operators to leverage varying supply and load patterns across large geographic areas to balance power grids. As a result, cross-border power grid integration reduces the need for renewable energy curtailment and leads to the decreased carbon intensity of power production. Furthermore, in addition to a lower risk of curtailment, it may contribute to enhanced access to HV transmission lines for large-scale renewable projects, both of which optimize and encourage private investments in renewables. In SIEPAC, for instance, increasing interconnection capacity to 2 GW with an additional investment of $1.7 billion, in comparison to keeping the current capacity of 300 MW, under the most ambitious decarbonization scenario,3 would expand the installed capacity of renewables by 9.6 GW and eliminate the need for 900 MW of natural gas-fired plants by 2050, resulting in a carbon emission reduction from about 60 grams to 20 grams of CO2 per kWh generated (IRENA 2022b) (Figure 3.3). In Europe, the European Network of Transmission System Operators for Electricity (ENTSO-E)4 estimates that 88 GW of additional cross-border capacity with storage and peaking units after 2025, with an annual investment of $5.6 billion, would avoid 31 million tons of CO2 emissions in 2040 (ENTSO-E 2023).5 The power grid and market integration reduce emissions at a lower cost. Regionally optimized generation and interconnection plans are estimated to help EAPP meet a 30 percent CO2 emission reduction target by 2030 at 3.8 times lower cost than the business-as-usual case (Remy & Chattopadhyay 2020). FIGURE 3.3 Installed Capacity with 300MW/2GW Interconnection under the Decarbonizing Energy Scenario in SIEPAC 60 Hydropower 50 Hydropower Geothermal, Installed Capacity (GW) 40 Biogas, Biomass Geothermal, Biogas, Biomass 30 PV, Wind 20 PV, Wind 10 Fossil Fuel Fossil Fuel 0 300 MW 2 GW Interconnection Scenario Source: Adjusted from IRENA 2022b. 16 DRIVERS OF CROSS-BORDER POWER INTEGRATION Endnotes 1. Chattopadhyay (2021) synthesized findings on the benefits of regional electricity trade from a collection of studies conducted by the World Bank and other institutions over the past decade. 2. These values can be theoretically achieved assuming no grid congestion exists and excluding the grid investment needed within the national transmission networks to facilitate this unconstrained trade. 3. Decarbonizing Energy Scenario (DES). 4. ENTSO-E, formally established in 2009, is a cooperation of TSOs from 35 countries, including all EU member states and several non-EU countries. 5. It is important to recognize that the reduction of greenhouse gas emissions represents just one aspect of the broader benefits associated with regional energy integration, which encompasses economic benefits due to the reduction of system costs. BEYOND BORDERS 17 FOUR BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS Being interconnected does not mean being integrated. While grid interconnections offer obvious economic, security, and environmental benefits, reaping the greatest benefit from them requires several enabling factors to achieve sufficient levels of integration and cross-border trade. There is a lack of evidence if any of the existing or developing regional integration schemes got the model right at the initial stage—a market needs to adopt an agile approach allowing for flexibility and a stepwise implementation. The more successful schemes are the ones that pursued an adaptive approach and adjusted the course when needed, and the ones that remained persistent in dealing with foreseen and unforeseen challenges across different building blocks. It is, therefore, important to recognize that the process toward a successful advanced level of grid integration and regional electricity markets is gradual, adaptive, and varies across different regions and the political commitment of the participant countries. These building blocks (see Figure 4.1) can be broadly divided into two categories related to (1) physical infrastructure—or hard infrastructure—and (2) a proper enabling environment facilitating greater power trade— or soft infrastructure. FIGURE 4.1 Building Blocks of Power System Integration and Key Challenges Hard Infrastructure Soft Infrastructure Building Blocks Planning and Technical and Commercial Interconnection Institutional Investment Operational Arrangements & Infrastructure Architecture Coordination Coordination Market Design Challenges Financing Political Commitment & Coordination Source: World Bank. Regional energy integration hinges on developing interconnection infrastructure linking multiple countries’ power grids alongside sufficient national transmission capacity. Coordinated outputs and oversight among participating countries and utilities are critical from preparation through implementation of cross-border transmission projects. A joint entity formed by participating governments/utilities is a preferred implementing modality, rather than each country handling its side of the border independently. A joint approach to transmission planning at the regional level, while harmonizing with national plans and respecting the sovereignty and energy security of each individual country, is indispensable to realize the full potential of regional energy integration. An investment coordination is also critical to prevent bottlenecks in project implementation. Instituting a regional funding mechanism, setting forth clear guidelines for cost allocation, and forming an arbitration body for resolving disputes are practical approaches to facilitating consensus among participating countries and project advancement. BEYOND BORDERS 19 Technical and operational coordination should be formulated in accordance with the specific requirements of the regional grid and gradually implemented. To facilitate economically optimal electricity flows across borders, it is important to have an interconnector capacity allocation mechanism that ensures efficient, transparent, and fair use of interconnection capacities. Furthermore, enhanced data and information sharing among utilities is essential. As integration deepens, commercial arrangements and market design become more critical. Transitioning from bilateral trading to a regional market can enhance cost efficiency, competitiveness, and integration, complementing PPAs and national markets. It is recommended to start this with a pilot involving select willing countries and expand incrementally. Mechanisms for monitoring transactions and enforcing trade settlements are crucial. Transmission pricing must be designed to avoid market distortion and ensure grid owners recover costs and earn fair returns. A robust institutional architecture is also essential for successful regional energy integration. This includes a regional regulator with clear execution authority and legal backing, as well as regional system and market operators. Additionally, national institutions with the authority and commitment to promote cross-border electricity trade are vital. Interconnection Infrastructure Regional power system integration is a process that involves the construction of physical infrastructure, including HV transmission lines that link two or more power systems, substations, and control and supervisory systems that enable effective management of electricity flow. Cross-border transmission infrastructure can also serve as national transmission backbones. Interconnection Technologies: AC versus DC While AC transmission predominates globally for interconnectors due to its relative ease of conversion into different voltages, DC is becoming increasingly common for some types of interconnectors, especially as the cases of inter-regional interconnection increase. DC transmission offers several advantages over AC transmission, such as lower transmission losses for long-distance interconnections, the ability to connect power systems with different frequencies, and better control over electricity flow. HVDC interconnections can be asynchronous and can adjust to various levels of rated voltage and frequency, whereas AC systems must be synchronized to be connected. An HVDC back-to-back (BtB) network can also link two AC networks asynchronously. HVDC is also becoming more relevant to enable large-scale VRE integration. The future development of regional grid integration necessitates higher voltage equipment, now manufactured by a small number of companies, highlighting the importance of securing a robust supply chain. 20 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS Examples of HVAC interconnectors include transmission links between India and Nepal, India and Bhutan, and Thailand and Laos to access hydropower resources in Nepal, Bhutan, and Laos, respectively. HVDC interconnectors have been built between the Netherlands and Norway (NorNed), the United Kingdom and Norway (North Sea Link), as well as the United Kingdom and Denmark (Viking Link)—the longest submarine HV cable in the world. A combination of HVAC and HVDC BtB regional integration was developed by the Gulf Cooperation Council Interconnection Authority (GCCIA) to connect the six Gulf States, between India and Bangladesh, and is being contemplated for the CASA-1000 project. Cross-Border Interconnection Capacity Ensuring adequate transfer capacity is paramount to realizing the full advantages of electricity trading. It is important to underscore that it is not only about building interconnectors, but it is equally vital to ensure sufficient transmission infrastructure within countries to facilitate the flow of electricity from generation sites in one country to demand locations in another. If there is insufficient domestic transmission infrastructure or if there are issues with transmission congestion, even with interconnectors in place, electricity cannot flow effectively, and the benefits of regional electricity trading cannot be fully realized. The EU set an ambitious target in 2018 for its member countries to achieve a cross-border transmission capacity equivalent to at least 15 percent of their domestic production capacity by 2030, up from the previous goal of 10 percent established in 2014 (EC n.d.-a). Europe benefits from well-developed power networks in each country, a harmonized regulatory framework, closely coordinated planning, and well-designed markets, facilitating the establishment of high interconnection capacity. Additionally, the synchronous operation of continental Europe’s grid further enhances its ability to achieve high interconnection capacity compared to other regions. One effective strategy involves starting with a modest capacity and gradually expanding it in accordance with electricity demand and the maturation of regulatory and market frameworks. SIEPAC exemplified this approach by initiating operations with a capacity of 300 MW representing 12 percent of the domestic capacity by 2013 and contemplating a potential increase to 600 MW by doubling the circuit on existing towers (see Section 2). While this staged approach mitigates the risk of underutilized assets, it may entail additional costs and time, particularly when developing new transmission infrastructure rather than reinforcing existing circuits. These additional costs often arise from studies, land acquisition, and construction during the expansion of interconnection capacity. Small countries with surplus power or significant deficits, such as Nepal, Bhutan, and Laos, have greatly benefited from establishing substantial interconnection capacity to facilitate regional electricity trade. These nations often possess unique energy profiles, characterized by abundant renewable resources which exceed domestic consumption capacity. By investing in interconnection infrastructure, these countries can leverage their surplus generation to generate revenue through exports while alleviating domestic energy shortages by importing BEYOND BORDERS 21 electricity from neighboring countries during periods of low generation. For example, Nepal’s construction of the 400 kV Dhalkebar-Muzaffarpur transmission line with India enables the import/export of 800 MW, which is significant compared to Nepal’s existing generation capacity of 2,800 MW. Project Preparation Once identified in a regional master plan or through an agreement between governments or utilities, participant countries must agree on defining the various studies to be implemented, securing financing for these studies, and ensuring coordinated outputs and common oversight. An interconnector project begins with the development of an initial project concept. This concept defines the project’s scope, potential benefits, a preliminary assessment of costs, funding considerations, and other relevant aspects. Following this, a pre-feasibility study is conducted to evaluate technical options, including optimal route selection, perform a high-level cost/benefit analysis, assess the regulatory landscape, and anticipate social and environmental impacts. This study helps identify significant challenges or obstacles that may arise during project development. Moving forward, the feasibility study represents a more in-depth analysis, exploring economic and financial aspects, market conditions, detailed engineering and technical designs, social and environmental impacts, and risk factors associated with the project. Collaboration with experts, including engineers, social and environmental safeguard specialists, and financial experts, is crucial during this phase. The feasibility study provides comprehensive initial design and cost estimates, an economic and financial business case, an environmental and social impact assessment, and procurement recommendations. This thorough analysis forms a solid foundation for decision-making, assisting stakeholders in determining whether the project should progress to subsequent stages. Upon confirmation of feasibility, a detailed project plan is formulated, outlining specific timelines and the organizational structure required for successful implementation. This phase also involves engagement with relevant authorities, obtaining necessary permits, and addressing any legal or regulatory requirements. Concurrently, negotiations for financing contracts take place, involving discussions with investors, financial institutions, and other funding sources to secure the essential capital for the project. Subsequently, the project advances to the implementation stage, initiating construction activities. Implementation Modalities The implementation approach for a cross-border interconnector project can vary, and different models exist to address the complexities involved. One prominent approach is the decentralized model, where each country’s utility assumes responsibility for constructing and operating transmission facilities on its side of the border. This decentralized strategy is globally prevalent and is exemplified by the CASA-1000 project. In CASA-1000, transmission utilities within each country develop and own assets within their respective borders. For oversight and coordination purposes, the Inter-Governmental Council (IGC), comprising 22 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS ministerial-level representatives, was established to make key decisions, including the formulation of crucial legal documents to develop, construct, operate, and maintain the project. Furthermore, a Secretariat was also established to facilitate communication among all project stakeholders, including national transmission companies in all four involved countries, and assist in the coordination of the work conducted by working groups and committees on behalf of the IGC. An alternative approach involves establishing a special purpose vehicle (SPV) or joint venture ( JV) dedicated to building and operating the entire portion of the interconnector(s). The SPV or JV may involve equity participation from the governments of participating countries or be partially or entirely private.1 The GCCIA exemplifies this approach, functioning as a joint-stock company subscribed to by the six Gulf States, allocating shares in proportion to their expected benefits from the grid. In SIEPAC, the Regional Operations Entity (EPR) was created to finance, build, and maintain the regional transmission system. It operates as a public-private partnership, with equal ownership by six Central American state-owned utilities and three external partners, including the private sector. The decentralized model offers autonomy and local control, while the SPV/JV model provides a centralized mechanism for coordination and resource pooling. The choice between these approaches depends on factors such as the regulatory environment, the level of collaboration desired, and the specific circumstances of the participating countries. The decision-making process, governance structure, funding mechanisms, and risk-sharing arrangements will differ based on the chosen model. Nonetheless, the SPV/JV model is often considered an optimal and effective structure for the successful development, financing, and operation of interconnector projects. This model excels in centralizing decision-making, fostering efficient coordination, and facilitating streamlined communication among participating countries, thereby enhancing overall project governance. By consolidating resources within the SPV/JV framework, participating countries can efficiently pool financial, technical, and human resources. Additionally, this model offers the advantage of accommodating equity participation from governments, private entities, or a combination of both, providing the flexibility needed to secure essential funding. Furthermore, the SPV/JV can be strategically structured to handle long-term operation and maintenance responsibilities, ensuring a seamless transition from construction to sustained operation. Planning and Investment Coordination Effective coordination in planning and optimizing generation and transmission investments across participating countries is essential to fully realize the economic benefits of regional connectivity and trade. Power grid integration at the initial stage may lack such cooperation, where each country often has its own plans and priorities for the energy sector, resulting in coordination issues and suboptimal outcomes for the regional power system integration as a whole. Hence, there is a need to implement some joint planning mechanisms to maximize BEYOND BORDERS 23 the benefits for all involved parties, while harmonizing with national plans. This should not be seen as foregoing national sovereignty or undermining energy security at both the national and regional levels. Generation and Transmission Planning To fully reap the advantages of reduced costs through sharing generation reserves and lower cost energy resources, regional planning should go beyond just combining country plans and instead focus on generating a comprehensive regional planning framework, including generation and network investment plans and resource adequacy assessments. In competitive markets, centralized generation planning may no longer be feasible. Instead, a capacity expansion forecast based on economic dispatch in a regional model is essential as an input for regionally optimal transmission planning. A comprehensive regional transmission plan involves studying various scenarios and assessing the economic benefits associated with different levels of regional transmission development. The plan should consider a range of scenarios reflecting diverse future conditions, including variations in load growth, changes in generation capacity and renewable energy integration, and evolving regulatory landscapes. Each scenario should account for different levels of interconnection development, encompassing both physical infrastructure and market-related aspects. The economic benefits associated with each scenario include but are not limited to, total system savings, encompassing capital expenditure (CapEx), fixed operating and maintenance (O&M) costs, fuel costs, VRE curtailment costs, and reserve costs, as well as avoided carbon costs through reduced greenhouse gas emissions. In Europe, ENTSO-E produces a non-binding Ten-Year Network Development Plan (TYNDP) every two years based on national investment plans provided by TSOs and regional investment plans. The plan intends to identify investment gaps, including cross-border FIGURE 4.2 European Resource Adequacy Assessment and Ten-Year Network Development Plan as Guides to Decisions Adequacy Assessments Week Seasonal ERAA TYNDP Ahead Operational Investment Policy Decisions Decisions Decisions < 1 year < 10 years > 10 years Source: Adjusted from ENTSO-E n.d. 24 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS capacity, enable effective interconnection, promote competition, and improve the transparency of the region’s grid network (ACER n.d.). The European Resource Adequacy Assessment (ERAA) is also developed by ENTSO-E every year as a monitoring evaluation of regional resource adequacy up to 10 years in advance, supplementing more granular national and regional assessments, to guide investment and regulatory intervention decisions. The consistency of TYNDP and ERAA is ensured by harmonizing the scenarios and data used, allowing them to complement one another (ENTSO-E n.d.) (see Figure 4.2). The implementation of new interconnection investments, including the progress of TYNDP, is carried out by the countries and monitored by the Agency for Cooperation of Energy Regulators (ACER)2 from both cost and schedule perspectives. If any inconsistencies are identified, ACER provides recommendations to TSOs, national regulatory authorities, or any other relevant bodies (ACER n.d.). Similarly, PJM3 releases the Regional Transmission Expansion Plan (RTEP) annually to consider and evaluate a cost-effective transmission plan at the regional level for a 15-year horizon. The process includes extensive modeling and analysis of the transmission system to identify areas of congestion and other challenges that could impact reliability or efficiency. The projects resulting from the process are classified into four groups: baseline projects that aim to meet the national and regional reliability standards; network upgrades which refer to equipment enhancements necessary for new customers seeking long-term transmission service and grid connection; immediate-need reliability projects that aim to solve urgent reliability violations or system conditions that need to be resolved within three years; and supplemental projects that are transmission expansions or upgrades implemented by transmission owners to meet local reliability requirements (PJM 2022). In an example of a lower integration level, SAPP developed Pool Plans to identify key generation and transmission projects in the region that can boost power integration and trade while ensuring an efficient and sustainable energy supply. While the Pool Plans have been updated and revised a few times since its first publication in 2001, the Pool Plan 2017—the latest one as of today—is the first Pool Plan adopted by the Southern African Development Community (SADC) (SADC 2017). The Pool Plan 2017 compares three components: Component A builds on individual country master plans; Component B determines the least cost order of generation and transmission expansion projects, treating the region as a single system; and Component C ensures that each country has enough installed or imported capacity to satisfy its maximum demand and reserve requirements by 2040. The third component takes into account political economy and practical constraints to create a realistic and implementable master plan. The Pool Plan is designed solely as a reference for member countries to consider, and the responsibility of implementing the priority projects is left to individual countries and private investors (Elabbas 2023). SAPP’s Planning Sub-Committee is supposed to assess a regional generation and transmission plan based on individual country plans every two years to identify the room for cost saving through coordinated actions (SAPP n.d.). WAPP, on the other hand, is mandated to be involved not only in regional planning but also in the implementation of regional projects (Elabbas 2023). The Economic Community of West African States (ECOWAS) Master Plan for the Development of Regional Power BEYOND BORDERS 25 Generation and Transmission Infrastructure 2019–33 was approved by the Authority of Heads of State and Government of ECOWAS in 2018. This determined the priority regional projects (both generation and transmission) required to achieve power integration in the region and outlined the major actions to be undertaken by WAPP. Subsequently, the 2020–23 WAPP Business Plan was developed with the aim of updating the Master Plan, implementing priority investments identified in the 2018 Master Plan, and establishing a regional electricity market, among other objectives (ECOWAS 2020). However, there are no enforcement mechanisms to implement the plan. Investment Coordination Building sufficient transmission infrastructure requires large investments and may take several years, or even decades, to complete, and typically involves numerous stakeholders. The absence of clearly defined and mutually agreed-upon cost-sharing methods can cause uncertainty in investment returns and potentially delay project commencement. It is advisable that investment costs be allocated among involved countries according to a beneficiary criterion principle, where the costs are shared in proportion to each party’s benefits derived from the transmission line. For example, Gulf Cooperation Council (GCC) countries decided to distribute the costs of interconnection investments by considering the savings in reserve capacity. Taking into account the time, value of money, and the varying realization of benefits over time, an agreement was reached to allocate costs in proportion to the present value of capacity savings (Al-Mohaisen 2012). In the United States, the Federal Energy Regulatory Commission (FERC) issued Order No. 1000,4 which defines standards for interstate transmission planning and cost allocation for public utility transmission providers. The FERC recommends a “beneficiary pays” approach based on six principles: (1) costs should be distributed roughly in proportion to the benefits received; (2) costs should not be involuntarily imposed on non-beneficiaries; (3) when assessing interregional transmission facilities for cost allocation using a benefit-cost threshold ratio, ensure the ratio is not excessively high to avoid excluding facilities with significant positive net benefits;5 (4) cost allocation should be restricted to the affected transmission planning region(s), unless outside parties agree to share a portion of the costs; (5) benefits are quantified transparently, and recipients recognized; and (6) different cost allocation methods may be used by a transmission planner for different types of transmission infrastructure. In reality, it can be challenging to reach a consensus among all involved parties regarding a uniform methodology for identifying beneficiaries and determining the impacts on each of them. In Europe, interconnector projects are often funded equally by the two relevant TSOs (IEA 2019b). Nonetheless, a central institution assists with cost-benefit tests and cost distribution in cross-border transmission projects. A process for cross-border cost allocation agreements has been developed, with ACER acting as an arbiter for any disputes (IEA 2021). Introducing a regional funding mechanism specifically designed to support essential studies, such as pre-feasibility and feasibility assessments, for regional priority projects and possibly extending to procurement and construction phases could partially streamline 26 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS cost-sharing considerations and expedite the implementation speed of these projects. For quicker approval and financial support, the EU developed a “Project of Common Interest,” which requires a prospective developer to submit a cost-benefit analysis that fulfills the standards of ENTSO-E and ACER. Projects are selected based on five criteria: significant impact on at least two EU countries, improving market integration, fostering energy market competition by providing consumer alternatives, enhancing the security of energy supply, and contributing to the EU’s energy and climate goals, with a focus on facilitating the integration of renewable energy sources. Projects of Common Interest are eligible for public funding from the Connecting Europe Facility (CEF). The budget for energy infrastructure projects, including interconnectors, over the period 2021–27 is €5.84 billion (EC n.d.-b). Another recent example is SAPP’s new Regional Transmission Infrastructure Financing Facility (RTIFF) (Box 4.1). The facility will serve as a funding platform that leverages public funding to facilitate the participation of private capital in priority regional transmission projects, including interconnectors and national transmission lines. This means that utilities lacking adequate capital will no longer need to participate as investors in such projects (SADC 2022). BOX 4.1 SOUTHERN AFRICAN POWER POOL’S REGIONAL TRANSMISSION INFRASTRUCTURE FINANCING FACILITY The Regional Transmission Infrastructure Financing Facility (RTIFF), an innovative blended finance fund, mitigates the inherent high-risk and substantial capital requirements of transmission infrastructure projects, which are typically too burdensome for sovereign capital to shoulder alone. By leveraging public funds to balance risk, the RTIFF paves the way for private investment. It will cover the development/preparation and construction of priority transmission projects. The World Bank, with ESMAP support, has provided technical assistance to support the development and operationalization of the RTIFF and financing for cross-border and national transmission projects within the SAPP region. In March 2024, SAPP, in collaboration with SADC, announced the appointment of the Climate Fund Managers (CFM) to oversee the RTIFF. The Facility commenced with a commitment of $20 million from SAPP and aims to achieve a first close of $500 million by 2025, with contributions from both public and private investors locally and internationally. The goal is to reach a final close of $1.3 billion within a 24-month timeframe. It is designed to have a fund lifespan of 20 to 25 years. BEYOND BORDERS 27 Technical and Operational Coordination Integrating multiple power systems into a single synchronized system can increase the risk of major blackouts that can spread to interconnected areas, making effective coordination among system operators crucial at both national and regional levels. While it is advisable to define technical and operational standards like common grid codes, these rules should be developed according to the specific requirements of the interconnection and progressively harmonized along the integration process. From the perspectives of developing countries, achieving advanced harmonization of rules should start with achieving minimal requirements to enable integration and market-based trade. In other words, such requirements should offer enough incentives for countries to advance power sector reforms for greater benefits of trade. Grid Codes Grid codes—a set of technical rules that govern the operation of generators, networks, and markets—are important in grid integration as they ensure that different power systems can operate together seamlessly, efficiently, and reliably. The goal of regional network codes is often to maintain system stability and security of supply in synchronous areas while integrating larger amounts of VRE sources into the grid. It is imperative to highlight that the mere existence of grid codes is not sufficient; rather, the emphasis should be on establishing a robust framework for compliance monitoring and enforcement, holding market participants accountable for adhering to the regional grid codes. However, there are instances where significant technical disparities exist in power system operations across countries, necessitating that grid code compliance be implemented gradually over time. For countries that lack a comprehensive grid code, the regional grid code can serve as a reference to improve their national codes. ENTSO-E and the ACER have developed legally binding EU Network Codes. Five connection and system operation codes and guidelines and three market and trading guidelines have been put into effect since 2015. The former set includes network codes on emergency and restoration; demand connection; requirement for grid connection of generators; requirements for grid connection of HVDC system and DC-connected power park modules, as well as a guideline on electricity transmission system operation. The latter set includes guidelines on transfer capacity allocation and congestion management (CACM); forward transfer capacity allocation; and electricity balancing. The ACER and the ENTSO-E are mandated to monitor the implementation of these network codes. In the case of the Regional Electricity Market (MER) of Central America, even though the regional grid code is comprehensive and legally binding, there is still flexibility for each system to operate under its own rules. The responsibility for implementing the regional requirements falls to the operator of each power system, who must prioritize the stricter of any overlapping regional and national requirements (IRENA 2022a). The regional rules 28 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS were developed by a working group consisting of the regulatory authorities, national utilities, and other stakeholders of the participating countries. The foundational design of the MER, rooted in the principles set forth in the Framework Treaty, was developed over a span of two years and ratified by the six participating governments in 2000. MER first commenced its operations under the transitional codes endorsed by the governments in 2002. The evolution of the market continued with the establishment of transmission codes, market rules, and the further structuring of the regional regulatory body as well as the regional market and system operator. The transitional regulations were superseded in December 2005 with the ratification of revised regulations by the regulatory body (ESMAP 2010). Interconnector Capacity Allocation Regional grid codes typically include provisions for interconnector capacity allocation, among other important components, to ensure efficient, transparent, and fair use of interconnection capacities among market participants. The principal aim is to enhance the efficiency of electricity markets by facilitating economically optimal cross-border electricity flows, ensuring that the available capacity is used in a manner that maximizes the overall benefit to the market. Net transfer capacity (NTC), which takes into account the static physical conditions of transmission lines, is a widely used method to measure available interconnector capacity. However, as cross-border trade expands, more advanced computations, such as flow- and model-based approaches, may be introduced to account for actual conditions (IEA 2019b). In the Nordic region and the EU, the NTC is calculated through a rigorous process that involves assessing various factors, such as network topology, operational constraints, and market conditions. In the Nordic region, the NTC calculation considers thermal limits, voltage stability margins, and other technical constraints on the interconnected transmission grid (Nordic RCC n.d.). Similarly, in the EU, they are calculated at least at annual, monthly, day-ahead, and intraday timeframes and according to a flow-based approach. TSOs conduct load flow simulations and security analyses to determine NTC values, which reflect the grid’s ability to transfer electricity between different countries or regions while ensuring system stability and reliability. These calculations are essential for facilitating efficient cross-border electricity trading and market integration, with NTC values regularly updated to reflect changes in network conditions and market dynamics. The allocation of interconnection capacity is often done through market mechanisms, such as auctions, to reflect the true value of transmission capacity and to ensure that it is allocated to those who value it most. A relevant example is the capacity allocation mechanism employed by MER, which uses a regional auction system where market participants can bid for available cross-border capacity. The auction takes place through the regional electricity market operator’s online platform, which allows market participants to submit their bids and receive the results in real time. The allocation is based on a nodal pricing system, meaning that electricity prices vary according to the location of the generator and the demand center. The transmission capacity is usually fully allocated by the end of day-ahead BEYOND BORDERS 29 trading, but the increasing share of VRE necessitates greater capacity allocation in intraday and balancing timeframes (IEA 2016). An alternative approach involves granting market participants access to the grid on a first-come first-served basis, subject to availability.6 Data and Information Sharing Facilitating maximum information flow among participating members and ensuring transparency and accessibility of information to all relevant stakeholders are critical for effectively coordinating the operation of integrated girds and markets. The digital component of hard infrastructure plays a crucial role in providing information on physical infrastructure, electricity flows, and other system characteristics that inform both planning and operational activities. It involves the deployment of technologies such as Supervisory Control and Data Acquisition (SCADA) systems, real-time monitoring and control systems, advanced metering infrastructure, and interconnected data networks, typically at the national system level. Phasor Measurement Units (PMUs) and Wide-Area Monitoring Systems (WAMS) are used for real-time system monitoring, control, and analysis. These advanced technologies provide accurate and synchronized measurements of voltage, current, and phase angle across different locations in a power grid. They allow for seamless data exchange, coordination of operations, and efficient management of cross-border power flows. To ensure effective information sharing, it is also important to establish agreements on which data and information should be shared and which should be kept confidential, as well as on common communication protocols and data formats. IEA (2019a) suggests making certain data publicly available on a regional basis according to their levels of sensitivity, as shown in Figure 4.3. To enhance operational coordination and information sharing with TSOs of member countries, some power pools have coordination centers at the regional level. Commercial Arrangements and Market Design Regional electricity trading requires a well-functioning market design and commercial arrangements that provide the necessary framework for efficient transactions and resource allocation. Robust commercial arrangements establish clear terms for buying and selling electricity across borders, including pricing mechanisms, contract durations, and dispute resolution procedures, thereby fostering trust and transparency among trading parties. Market design, on the other hand, encompasses the structure and rules governing electricity markets, such as market mechanisms, bidding processes, and settlement procedures. A well-designed market promotes competition, enhances price discovery, and ensures 30 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS FIGURE 4.3 Data and Information Category REGIONAL DATA Public Available Capacity REGIONAL DATA Private Dispatch Schedule NATIONAL DATA Private Cross-border Power Flows Contract Critical Information Infrastructure Generation- specific Bids & Offers Average Prices Source: Adjusted from IEA 2019a. efficient utilization of generation and transmission assets, ultimately leading to optimal resource allocation and cost-effective electricity supply. Moreover, a sound market design seeks to align short-term market dynamics with long-term supply requirements. While the immediate focus is on day-to-day electricity trading in the most cost-effective manner, it is important to strike the right balance with the long-term supply requirements of the region. These arrangements are essential for ensuring that the electricity supply meets demand and that resources are allocated efficiently. Long-Term PPAs and Market-Based Approach The specific trade arrangements can vary depending on the level of integration. In some instances, especially at the early stages of integration, long-term PPAs between two countries or utilities may be sufficient. This is the case in South and Southeast Asia regions where most of the trading happens bilaterally between neighboring countries under long-term PPAs. In other cases, multilateral trading markets have evolved into a common energy market with a single set of rules for power trading and sophisticated regulation. This is the case of the EU’s or the Nordic’s electricity market. Long-term PPAs offer stability and predictability for both electricity producers and consumers, protecting against market volatility and fluctuations in electricity prices. However, long-term PPAs involve negotiations between two parties, resulting in intricate BEYOND BORDERS 31 and time-consuming processes. Each agreement necessitates separate negotiations, terms, and conditions, contributing to high transaction costs. This complexity may impede the scalability and interoperability of regional power trade initiatives. This approach can also lead to fragmented markets with limited coordination among different parties, potentially resulting in suboptimal resource utilization and inefficient energy trading practices. Interconnectors tied to long-term PPAs often allocate fixed volumes of electricity for trading between connected countries or power plants. These fixed volumes agreed upon in PPAs may not align with actual market demands, leading to missed opportunities for trading and underutilization of transmission capacity. As integration deepens, transitioning from bilateral trade to multilateral trade in regional power markets is recommended to create a more cost-efficient, competitive, and integrated regional electricity trading environment, which allows electricity prices to be determined by market forces, introducing flexibility and efficiency into the integrated power system. Market-based trading, characterized by spot markets, forward markets, and trading platforms such as day-ahead, intraday, and balancing markets, allows generators to sell electricity directly to traders, retailers, and other market participants through auctions, bilateral contracts, or market platforms, enabling efficient price discovery and allocation of electricity resources across borders. With multiple participants engaging in a transparent and standardized market, there is increased pressure for efficiency, cost effectiveness, and innovation. Market mechanisms encourage participants to adjust their production and consumption patterns based on market forces, optimizing resource utilization, and ensuring electricity is produced and consumed at the lowest possible cost at the regional level. Moreover, regional markets allow generators to access multiple buyers, which, as the market matures over time, reduces the risk associated with a long-term PPA that relies on a single financially unsound off-taker. This, in turn, contributes to attracting the private sector to generation projects. It should be noted, however, that advocating for market-based trading does not necessarily imply the abolition or avoidance of long-term PPAs. Instead, both approaches can coexist and complement each other, while the emphasis should be placed on a market-based approach. Primary and Secondary Market Models Power markets in the context of regional power system integration can either be those where all electricity in the entire regional territory is pooled together and traded (so-called primary models) or those that coexist alongside national markets (so-called secondary models) (IEA 2019a). The former type of market model would need the harmonization of the domestic power market structures of the participating countries. Hence, the latter is considered more feasible when two or more countries with already relatively developed domestic energy markets are to interconnect their power systems, while the former could still be an option in the long run. For example, in MER, national system operators do a day-ahead least-cost dispatch of their individual domestic generation. Once the individual dispatches are made, the countries 32 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS place offers to buy and sell at some prescribed nodes in their power systems and the regional system operator develops a day-ahead regional dispatch based on these offers. Generators cleared in the regional market are reimbursed at the regional clearing price, whereas generators cleared in national markets are paid based on their local methods (IEA 2019b). In South Asia, India utilizes its existing domestic marketplace, the Indian Energy Exchange, for cross-border power trading with Nepal and Bhutan since April 2021 and January 2022, respectively, with the two countries selling their surplus electricity at competitive rates. The approaches adopted in these regions ensure that participating countries can prioritize meeting their domestic demand, encouraging regional power trade without jeopardizing energy supply security. Market Evolution A regional electricity market can start with a pilot involving a small number of willing countries and gradually evolve by expanding its participants as well as products or market segments over time. For example, in 2014, the EAPP conducted a shadow market operation, implementing a pilot project to simulate short-term trade based on day-ahead market (DAM) principles using the Kenya-Uganda and Ethiopia-Sudan interconnectors (EAPP n.d.). While the development of the regional power market is still in progress, a roadmap published in 2022 outlines that the DAM will be established first. Following this, the decision to introduce the intraday market will be made once electricity trading in the DAM has successfully begun and liquidity is increasing. In the future, other market segments, including the Forward Physical Market, Financial Forward Market, and Balancing and Ancillary Service Markets, could also be introduced (EAPP 2022). SAPP opened its Short-Term Energy Market, where electricity was traded at the sellers’ offer prices, in 2001 as a precursor to full competition and subsequently initiated the formation of a competitive electricity market for the SADC region (ECA 2009). The DAM was established in 2009, followed by Forward Physical Markets (monthly and weekly) and Intra-Day Market in 2016. Most recently, a Balancing Market was introduced in 2022. Other market segments, such as the Ancillary Services Market, Financial Markets, and a Capacity Market, are also considerations for future additions (Mbuseli 2022; SAPP et al. 2023). Yet, most of the current trade volume is conducted through bilateral agreements. Even in Europe, which has the world’s largest interconnected grid today, the journey towards an integrated electricity market began with a small collective of countries. The process commenced with the trilateral coupling of DAMs between Belgium, France, and the Netherlands in 2006. This initial step expanded into the Central West Europe (CWE) market coupling by 2010. A significant leap was made in 2014 with the North-Western Europe (NWE) Price Coupling, which interlinked the power markets of 15 European countries. Following the NWE’s inception, the price coupling area was further extended, resulting in the Multi Regional Coupling (MRC), which now includes 19 countries. BEYOND BORDERS 33 BOX 4.2 REGIONAL ELECTRICITY MARKET PILOT IN CENTRAL ASIA In Central Asia, a regional electricity market that draws on a diverse energy mix, including hydropower and other renewable energy sources, can strengthen supply, boost domestic and regional economic growth, and support decarbonization. The World Bank, with ESMAP support, is working with Central Asian governments to scale up energy interconnectivity through a mix of investments, technical assistance, advisory services and analytics, and capacity-building activities. A key feature of this initiative is a proposed pilot for a DAM that would provide a template for a more permanent solution. The pilot will demonstrate proof of concept while encouraging cooperation that balances different levels of domestic market development. The concept of the pilot was endorsed at a high political level by governments during the World Bank-organized Central Asia Energy Trade and Investment Forum, which took place in London in March 2023. Nord Pool Consulting announced in September 2023 its selection to spearhead the creation of the pilot. Additionally, a step-by-step roadmap will be developed, outlining the transitional arrangements necessary to evolve from a pilot to a fully operational market. Transaction Settlement When establishing multilateral electricity markets, it is crucial to agree on requirements with regard to transaction settlements and payments to ensure that trading is efficient and financially secure. Most existing regional electricity markets incorporate the function of a central counterparty, commonly referred to as a central clearinghouse, that acts as an intermediary in transactions to facilitate financial settlement between buyers and sellers of electricity and minimize overall counterparty risk (IEA 2019a). A clearinghouse can also be set up as a separate entity from the market. Settlements for short-term markets involve daily combined settlement of DAM and intra-day market, with many also adopting daily invoicing. Balancing markets are similarly settled on a daily basis, although there is no uniform approach for forward markets (Nord Pool 2021). For example, SAPP operates on a daily settlement cycle, settling all markets based on a D+1 cycle, with monthly invoice preparation. Serving as the central counterpart to all markets, SAPP can conduct a common settlement and issue invoices for all markets, allowing for netting between them (SAPP et al. 2023). In this context, the commercial discipline of market participants, meaning that participants are financially healthy and trustworthy, is of paramount importance. Market participants 34 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS may be required to provide credit guarantees to mitigate the risk of default. These guarantees can be in the form of cash deposits or letters of credit with banks, covering a specific period of financial obligations. Credit guarantees play a crucial role in ensuring the financial stability of the market and limiting the participants’ exposure to payment default. BOX 4.3 WEST AFRICAN POWER POOL’S LIQUIDITY ENHANCING REVOLVING FUND The West African Power Pool (WAPP) is in the process of establishing a Liquidity Enhancing Revolving Fund (LERF), a collective guarantee mechanism designed to enhance commercial discipline and support payment assurance and supply security for regional electricity trade. The inception of this fund is expected to diminish the prevalence of outstanding bills. A dedicated working group has been engaged in discussions concerning the LERF’s formation since 2021. The World Bank, with ESMAP support, has been providing assistance to WAPP and its member utilities in preparation and establishment of the Fund. Transmission Pricing Another important element is the transmission pricing mechanism that does not distort the market. It is important that transmission charges are independent of commercial transactions to prevent any misalignment with the physical realities of electricity transmission, which could send incorrect economic signals. Furthermore, it is essential to avoid tariff pancaking—the layering of tariffs in transactions that notionally cross multiple borders—which can distort the market and discourage efficient use of the network. Furthermore, to ensure that grid owners can recover their costs and earn a fair return on their investments, transmission pricing must be established so that the costs associated with constructing, operating, and maintaining the transmission network are covered. However, in a regional power system, there may be multiple network owners, each operating under different jurisdictions with different methods for calculating transmission charges. It is ideal to define common methodologies to calculate and allocate costs of regional infrastructure to each country to ensure consistency and fairness in the charges across the region, thereby promoting transparency and reducing disputes. Standardized transmission pricing helps reduce the risk associated with transmission investment by providing more predictable revenue streams for the network owners, which can attract more investment. BEYOND BORDERS 35 The SAPP experience is relevant to various regional initiatives in developing countries because its transmission pricing approach has evolved over time. This evolution was driven by differences in sector development in each country involved and the need to facilitate cross-border trade while ensuring fair compensation for the use of each country’s transmission system. Initially, the region relied on a postage stamp approach, which applied a uniform scaling factor (7.5 percent or 15 percent when wheeled through one or more countries) to the value of the energy transmitted across the entire network. However, this approach did not incentivize transmission efficiency and did not accurately reflect the costs associated with transmitting electricity. As a result, SAPP developed a new approach using MW-km flow-based charges. Under this approach, all assets that facilitate at least 1 MW of transit flow are identified on the transit host’s network, and electricity transmission is charged in proportion to the value of the assets used for wheeling. This method is effective when the starting and ending points of trade are clearly defined. However, as SAPP’s trading platforms expanded beyond long-term physical bilateral trades to include other market products (e.g., DAM), an alternative methodology was needed for trading parties without specific counterparties. Currently, SAPP is in the testing phase of a new approach called “nodal pricing” that takes into account the specific location of generators and loads within the system, as well as the physical constraints of the transmission infrastructure. Under this approach, generators incur a defined entry charge per exported MW capacity for each settlement hour, while demands pay a defined exit charge per imported MW capacity. This approach sends market signals to network users, indicating more efficient locations for siting new generation or load. Congested areas attract higher prices, encouraging users to consider alternative locations (Owen 2017; SAPP et al. 2023). Similarly, in India, the Central Electricity Regulatory Commission (CERC) issued a new regulation on the sharing of inter-state transmission charges and losses in 2010 in response to the expansion of cross-state grids. Before the regulation, transmission charges were shared among beneficiaries using a regional postage stamp method.7 The new regulation introduced the Point of Connection methodology that made inter-state transmission charges sensitive to distance, direction, and quantum of power flow (CERC 2019). Institutional Architecture Robust institutional frameworks and cooperation for managing the power grid and market integration need to be established and empowered, and legal and regulatory barriers must be addressed to enable the free flow of electricity across borders. The institutional architecture for power grid and market integration typically involves a combination of international agreements to facilitate cross-border power trade, national regulatory frameworks, and market-based mechanisms, as well as the entities that oversee power system operation and trade. For deeper integration, close coordination with national-level entities is necessary, and it is imperative that national regulatory frameworks align with the regional one. Likewise, deep integration needs regulators that oversee and sanction participants in the event of rule violation. 36 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS The Political and Legal Foundation for Power System Integration The first step in cross-border grid integration often involves negotiating and signing a cooperation agreement (an intergovernmental agreement, a memorandum of understanding [MOU], a directive, etc.) between the involved parties outlining the terms of cooperation. Once the agreement is ratified and internal legislation is passed, these instruments become legally enforceable regulations. The development of regional integration depends on binding and enforcement-based agreements because binding rules create a secure basis for investment and allow for the raising of capital with confidence. It is also crucial to clearly specify the governance structure of an interconnection project during the design phase to ensure that all parties understand their legal responsibilities throughout project development, construction, and operation, and to minimize conflict and ensure project success. The EU has been at the forefront of the regional power grid and market integration. The Union for the Coordination of Production and Transmission of Electricity (UCPTE), which embodied national integrated electricity utilities, was inaugurated in 1951—preceding the economic and political integration in the region. With the unbundling and privatization of generation in many of the countries, UCPTE was transformed into the Union for the Coordination of Transmission of Electricity (UCTE) in 1999. UCTPE and UCTE dedicated efforts to fostering coordination and crafting common rules to expedite cross-border power trade and transmission services. Before 2005, adherence to UCTE rules was voluntary, hinging on the mutual interests of members in maintaining secure operations within the synchronous zone. Nevertheless, the major blackout of 2003, coupled with the geographical broadening of the membership base, underscored the increasing intricacy of system security. Consequently, UCTE initiated the establishment of a legally binding framework. From 2005, membership in UCTE necessitated the signing of a Multilateral Agreement, whose main terms being compliance with an Operational Handbook (ESMAP 2009). In 1996, the Internal Electricity Market Directive8 was adopted. The Directive aimed to establish a competitive and integrated electricity market in the region. This was followed by the Second and Third Internal Market Packages in 2003 and 2009, respectively (Westphal et al. 2022). The Third Package introduced two key regional entities—ACER and ENTSO-E. ACER has strong oversight authority regarding cross-border electricity trade, including a role in reviewing draft network codes and overseeing the implementation of network codes and guidelines as well as the power to approve and modify EU-wide terms, conditions, and methodologies. ENTSO-E is responsible for developing regional network codes and guidelines to ensure the efficient and reliable operation of the regional grid, as well as coordinating cross-border electricity flows. At the national level, each member country has its regulatory authority and TSOs that are responsible for the domestic power sector. As all operational responsibilities were transferred to ENTSO-E, UCTE was subsequently dissolved.9 Another example is EAPP, which is based on a set of agreements as opposed to formal laws. It was formed in 2003 with the Inter-Utility MOU and the Governmental MOU being drafted in 2004. After the Inter-Governmental MOU was approved in 2005, the Common Market for Eastern and Southern Africa (COMESA) Summit endorsed EAPP as a specialized BEYOND BORDERS 37 institution of electrical power in the region in 2006. The EAPP’s governing structure is made up of: the Council of Ministers, which is the highest decision-making body of the EAPP and comprises the Ministers responsible for energy from each of the member countries; the Steering Committee, which consists of the heads of the member utilities for policy formulation and monitoring of execution; the Independent Regulatory Board, which is composed of the heads of the national regulatory authorities in each member country, and five technical committees that deal with planning, operations, markets, the environment, governance and human resources, and the General Secretariat that handles day-to-day activities (EAPP n.d.).10 Regional Regulators and Market/System Operators Well-functioning regional institutions, such as regulators, market operators, and TSOs, play a crucial role in fostering a favorable environment for regional electricity trade. Regional regulators are tasked with overseeing and regulating electricity markets at a regional level, ensuring fair competition, compliance with rules and standards, and maintaining the overall integrity of the market. A regional regulator with clearly defined execution authority and enforceable legal backing is critical for the effective functioning of the regional electricity market. A common arrangement Involves the coexistence of a regional regulatory entity alongside national regulators. In Europe, for instance, the ACER plays a significant role in coordinating regulatory authorities among participating countries. ACER is instrumental in developing and implementing regional network codes and guidelines. In cases where competent regulatory authorities disagree on terms, conditions, or methodologies for new network codes and guidelines, ACER is empowered to make decisions. Still, individual countries’ regulators retain control over their national transmission systems. In the context of the ECOWAS Regional Electricity Regulatory Authority (ERERA), which regulates regional trade in the WAPP, the institution holds the authority to make its implementation regulations, resolutions, and decisions binding on the territories of all ECOWAS member states.11 Conversely, the Regional Energy Regulators Association of Southern Africa (RERA) in the SADC region primarily focuses on facilitating coordination in the development of regional energy regulatory policies and legislation as well as on monitoring and evaluating energy regulatory practices. However, it does not possess delegated authority to define or enforce regional regulations and rules. Equally important are the market operators responsible for managing regional electricity markets, as well as the system operators tasked with ensuring the reliable operation and maintenance of regional transmission infrastructure. A regional electricity market may feature distinct entities for system and market operations, or a single entity covering both functions. In the case of Central America’s MER, the regional transmission system and electricity market are managed by a regional operating entity (EOR). This entity, established by the Framework Treaty signed by the six governments in 1996, operates with support from 38 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS national entities in each participating country. The EOR bears responsibility for operational and economic dispatch functions, management of commercial transactions, and other related tasks. To ensure equitable representation, the EOR’s Board of Directors comprises two directors from each member country. On the other hand, the SAPP makes a distinction between the roles of the market and system operators. Concerning the system operator, SAPP is divided into three control areas, each having its own control area system operator. Eskom of South Africa serves as the operator for Botswana, Lesotho, southern Mozambique, Namibia, South Africa, and Swaziland. Zimbabwe Electricity Supply Authority (ZESA) operates for Zimbabwe and northern Mozambique, while Zambia Electricity Supply Corporation (ZESCO) is the operator for Zambia and the Democratic Republic of the Congo (DRC) (Rose et al. 2016). The SAPP Coordination Centre serves as the market operator, coordinating market activities as well as system operations from Harare, Zimbabwe. Moreover, a regional power grid and market integration cannot be successful without strong national institutions that are authorized, empowered, and committed to facilitating cross-border trade. Relevant national bodies—including domestic regulatory agencies, TSOs, and traders—must work in tandem with regional institutions to ensure a seamless and efficient regional power grid integration and trade to benefit all parties involved. On top of it, institutional capacity and technical expertise need to be built and strengthened among participating countries. Hence, capacity building and technical cooperation to exchange knowledge and practices are important for successful integration and regional market development, particularly in the least developed and developing regions where the level of sector development at the country level varies significantly. Endnotes  1. The SPV model has been used in Peru, Chile, Brazil, and India to implement privately financed transmission projects.  2. ACER was established in 2011 under the Third Energy Package of 2009 as a decentralized agency of the EU to promote the integration and completion of the European Internal Energy Market for electricity and natural gas.  3. Pennsylvania-New Jersey-Maryland Interconnection is a regional transmission organization in the United States.  4. https://www.federalregister.gov/documents/2011/08/11/2011-19084/transmission -planning-and-cost-allocation-by-transmission-owning-and-operating-public-utilities  5. Interregional Cost Allocation Principle 3: If a benefit-cost threshold ratio is used to determine whether an interregional transmission facility has sufficient net benefits to qualify for interregional cost allocation, this ratio must not be so large as to exclude a transmission facility with significant positive net benefits from cost allocation. The public utility transmission providers located in the neighboring transmission planning regions may choose to use such a threshold to account for uncertainty in the calculation of benefits and costs. If adopted, such a threshold may not include a ratio of benefits to costs that exceeds 1.25 unless the pair of regions justifies, and the Commission approves a higher ratio. BEYOND BORDERS 39  6. For instance, the first-come first-served approach is adopted in Japan. When different power utilities (TSOs) seek to exchange electricity between regions through interconnectors, priority is given to those who submitted their requests first.  7. All users within a system were charged equally for the allocated transmission capacity, regardless of their individual usage.  8. Directives are legally binding in the EU.  9. Originally, UCTPE was comprised of seven members (utilities of Austria, Belgium, France, Federal Republic of Germany, Italy, Luxembourg, and the Netherlands); by its final year, UCTE had expanded to include 29 TSO members, representing 24 countries (ESMAP 2009). 10 The Council of Ministers resolved to add two layers to the governance structure: an Executive Committee and a Senior Officials Committee. The details for the new structure are yet to be finalized. 11. ECOWAS Supplementary Act A/SA. 2/1/08 Establishing the ECOWAS Regional Electricity Regulatory Authority. 40 BUILDING BLOCKS OF REGIONAL GRID INTERCONNECTIONS AND ELECTRICITY MARKETS UNSPLASH FIVE CHALLENGES OF THE POWER GRID AND MARKET INTEGRATION Despite the benefits of integration, some challenges need to be overcome to integrate power grids across borders and create regional power markets. Establishing the necessary building blocks, from developing adequate transmission capacity to putting the appropriate technical, commercial, and institutional arrangements in place, itself is not only a fundamental requirement but also a significant challenge, requiring considerable effort from countries and regions to advance grid integration and electricity trade. Countries may face regulatory barriers, which can impede effective coordination among multiple countries in planning and investment, designing trade and market mechanisms, and creating institutional architecture. Technical and operational harmonization is another hurdle, particularly in developing countries that may lack the necessary technical expertise and resources. On top of these, countries, especially those in the developing world, face two fundamental obstacles that can impede the successful development of these building blocks: (1) a lack of political commitment, often rooted in socioeconomic challenges; and (2) financial constraints for physical infrastructure development. Political Commitment and Cooperation This is the basic foundation of successful power grid integration and regional market development. Cross-border grid interconnections involve coordination and cooperation among different governments. Cooperation among countries requires strong political will and commitment to shared objectives, which can be challenging amid differences in political priorities and regulatory approaches. Coordination may be more difficult to achieve in regions with complex political dynamics or historical tensions. Political and regulatory challenges can lead to delays and uncertainty, which can affect investment decisions and hinder the development of cross-border interconnections. To overcome these challenges, it is crucial to have political backing for empowered institutions at both national and regional levels, as well as a regional governance model that can tackle any emerging challenges and ensure consistent cooperation toward shared regional goals or a vision. On the other hand, once key regional institutions—specifically, a regulatory body and a system/market operator— are established and operating effectively, political involvement should give way to entrusting these institutions with autonomy. Trust is a critical success factor, especially when it comes to supply security. Trust enables countries to rely on one another during times of need, allowing them to access energy resources and maintain stable energy systems even in challenging operational circumstances. However, countries tend to prefer self-sufficiency and not depend on neighboring countries for security reasons. If every country installs local generation capacity without taking advantage of regional capacity, the benefits of sharing generation resources across the region during supply shortages diminish, and countries end up with more costly sector development. In that sense, a shift from a national perspective to a regional one is necessary to maximize benefits for the entire region while ensuring that each system within the market benefits BEYOND BORDERS 43 as well. There is a possibility that certain countries receive greater benefits than others, making it difficult to agree on cost allocation and other key decisions to develop both hard and soft infrastructure. The development of commercial trade arrangements and market designs that are agreeable to all participating countries may be challenging but doable when effective cooperation is pursued to ensure a fair outcome. Given these challenges, it is not surprising that all regional interconnections developed among the countries with an established history of trading with each other in other goods and services, and in groups of countries with a common political and economic background forming around so-called regional economic communities. For example, in advanced systems, regional electricity integration initiatives have been happening either within a larger federative country (e.g., Regional Transmission Organizations [RTOs] in the United States) or political integration of countries (e.g., the Internal Energy Market in Europe). Such a practice is observed in developing countries as well, albeit on a smaller and less politically binding scale. For example, SAPP has evolved from the initial trading happening between South Africa and neighboring countries that transformed into SADC. Similarly, the establishment of EAPP has been facilitated by the Eastern African Community (EAC), while WAPP is an institution under the ECOWAS. It should be noted that power system integration in Europe has been facilitated by extensive political integration under the EU with robust mechanisms to enforce its regulations and directives. This power system integration is situated within the broader context of a single market, ensuring the free movement of capital, goods, services, and persons. While anticipating similar levels of extensive political cooperation and integration in other regions may not be optimistic, even a minimal level of political commitment and cooperation within a smaller group of countries to establish regional institutions with enforcement authority can lead to realizing some of the benefits associated with the regional integration of power grids and markets. Financing Interconnections Infrastructure Power grid and market integration requires the development of new or strengthening existing infrastructure, such as interconnectors and generation plants, along with appropriate institutional, operational, and commercial arrangements. However, financing regional transmission projects can be more challenging than financing renewable projects, even though it usually costs a fraction of generation projects. This is partly due to the fact that governments or state-owned utilities, which are insufficiently creditworthy in many developing countries, are typically responsible for developing transmission infrastructure while the private sector may be restricted from owning and operating it given its natural monopoly characteristic. Even if private sector participation is legally allowed, long lead times associated with two or more countries involved in agreeing on financing modalities, ownership and operational models, addressing revenue risks, and technical/regulatory 44 CHALLENGES OF THE POWER GRID AND MARKET INTEGRATION complexities, as well as the added complexity of securing rights-of-way for the entire length of the lines can pose challenges for the access to finance. Interconnection projects despite lower initial investment than generation projects may be less attractive to private investors due to long payback periods and lower returns can deter potential investors. As an example, SAPP estimates that $121 billion ($117.7 billion of which is for generation and $3.3 for transmission) is needed for the “realistic integration” scenario to meet demand in 2040 (SAPP 2017). Compared to renewable generation (solar and wind) projects, interconnection projects have a longer lead time, making it difficult to attract investors who prefer shorter investment horizons. Furthermore, the revenue associated with transmission projects is typically more uncertain than those associated with generation projects that are tied to long-term PPAs because the former depends on more complex regulatory approvals, which can be subject to delays and changes. In the case of developing countries with limited domestic transmission infrastructure, national power grids need to be developed and strengthened in addition to interconnecting them with neighboring systems to unlock the full potential of cross-border power trade. Nevertheless, financing domestic transmission development may also be challenging. Developing countries may also face limitations in accessing affordable financing options due to their credit ratings or macroeconomic conditions. BEYOND BORDERS 45 UNSPLASH SIX LOOKING AHEAD Addressing the above challenges requires a greater level of partnerships, cooperation, and coordination among governments as well as with the private sector. Despite the widespread recognition of the regional grid integration’s positive outcomes for all participating countries and geographies, progress has been slow and uneven, particularly in the least developed and developing regions. The role of development institutions in addressing those challenges (e.g., facilitating dialogue, consensus building, technical assistance, financing, de-risking cross-border investments, etc.) is becoming more prominent—yet governments’ shared commitment and action, regionally and globally, are needed. Global recognition of the power grid and market integration as a key enabler for the sustainable energy transition and security of electricity supply needs to be fostered. As discussed in Section 3, cross-border power grid interconnection and trading would enable the integration of greater shares of VRE while benefiting all participating countries by enhancing the economic efficiency, security, and resilience of their power systems. Global and regional initiatives on power system interconnection are required to foster a spirit of cooperation, partnership, and trust among nations, prioritize transnational benefits, and adopt a more collaborative approach to regional energy policy coordination. Knowledge sharing, joint research and development, and technical assistance are among the actions that will serve as a foundation for fostering political commitment and coordination among countries. In particular, evidence-based studies would be of critical importance in advocating the benefits and building blocks of power integration. At the regional and country levels, the initial focus should be on garnering political buy-in to establish key regional institutions, notably a regulatory body and a market/system operator, with the authority to facilitate technical and operational dialogues essential for integration. Rather than waiting for all relevant countries to be fully prepared, those ready to cooperate on regional integration should commence the process, allowing others to participate as observers until they are ready to commit. While this approach may not immediately realize the full potential benefits of regional integration, initiating the process on a smaller scale serves as a crucial steppingstone toward greater integration. A practical approach involves starting with a pilot market with select interconnectors, as exemplified by EAPP. A pilot market can generate quick wins, demonstrating tangible albeit modest benefits, fostering confidence, and sparking interest among participating countries. This initial success can, in turn, attract increased political support, leading to a deeper level of regional integration of grids and power markets. Alongside securing political buy-in, there is equal importance in developing capacity and trust among officials and staff from relevant national bodies. These bodies include line ministries, domestic regulatory agencies, TSOs, and utilities in participating countries. While political commitment forms the foundation of the regional integration process, it is the collaboration of these individuals that is instrumental in developing the technical and operational details necessary for interconnector development and the operationalization of regional electricity markets. Hence, there is a critical need for institutional capacity building for relevant officials and staff at both the national and regional levels. Investing in the development of human capital and institutional capacity ensures that officials and staff possess the necessary skills and knowledge to navigate the complexities of regional integration. International BEYOND BORDERS 47 BOX 6.1 POWER SECRETARIES ROUNDTABLE IN SOUTH ASIA South Asia is one of the least integrated regions in the world in terms of grid interconnections and electricity trade, despite its significant potential for cross-border renewable energy trade. The World Bank has been supporting the South Asia Power Secretaries Roundtable (PSRT), which is attended by power secretaries and senior officials from countries in the region, as well as representatives from the World Bank Group and development partners. Since its launch in 2014, the PSRT has been serving as a platform to facilitate dialogue and promote collaboration among South Asian countries by: exchanging views on various sector development challenges and practices; fostering a vision and a strategic plan to promote regional cooperation in the electricity sector; and coordinating efforts to pursue needed joint measures to realize the potential benefits of enhanced regional electricity trade. and regional development institutions can play a pivotal role in providing technical assistance and knowledge transfer to enhance the capabilities of individuals engaged in the regional integration process. Scaled-up financing for cross-border infrastructure is necessary. This includes increased concessional financing through climate funds and multilateral development financing institutions, as well as encouraging innovative financing mechanisms such as green bonds and public-private partnerships. Despite the pressing challenges of energy and climate crises, borrowing costs are increasing. Therefore, it is particularly important to intensify collective efforts at the global and regional levels to attract funds for cross-border transmission investments. The financing sources for cross-border transmission projects may differ depending on the economic advancement of the countries involved, and the approach needs to be tailored accordingly. In developed countries, the financing is primarily from commercial banks, private investors, and other financial markets, while public funding may also be available strategically significant for projects. In contrast, developing countries often rely heavily on international financial institutions for financing power grid integration projects. In the least developed and developing regions, support from the development community is critical to nurture innovative business models and finance cross-border transmission infrastructure that leverages both public and private sources as well as climate finance. Together, the global community could work collaboratively to foster political commitment and financing toward integrated power grids and markets, realizing cross-border power systems’ potential to enhance energy security, economic growth, and the sustainable energy transition. 48 LOOKING AHEAD BOX 6.2 IBRD FRAMEWORK FOR FINANCIAL INCENTIVES FOR PROJECTS THAT ADDRESS GLOBAL CHALLENGES WITH CROSS BORDER EXTERNALITIES The IBRD Framework for Financial Incentives for Projects that address Global Challenges with Cross Border Externalities was launched in April 2024. This brings together the need for additional IBRD lending capacity with creating the right incentives for client countries to undertake projects that address any of the eight Global Challengesa at scale. These challenges are unique because they affect multiple countries and tackling them can yield positive cross-border benefits. However, the costs of addressing these challenges are often substantial and borne by individual countries, while the benefits are shared, thereby increasing the risk of them being under-addressed. Financial incentives are helpful in changing the cost-benefit analysis for investments with cross-border externalities, where the domestic cost-benefit ratio of projects is different from the global cost-benefit ratio. The package of financial incentives for IBRD clients includes additional volumes of financing, loans with extended tenors, grants for project preparation, and upfront grants to blend with IBRD financing, among others. 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