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Think Piece

Clean Energy and Access to Infrastructure: Implications for the Global Trade System

June 2015

To meet climate change and renewable energy targets and ensure security of supply, large amounts of renewable and other low-carbon generation have to be able to connect to electricity networks in the next decade. Timely grid access arrangements are vital to delivering new generation projects. Regulation of access on reasonable terms to transport and distribution networks is thus crucial for integration of clean energy trade into economies. Moreover, for such successful integration of clean energy in present and future energy systems, long-term investments in energy infrastructure are necessary. Most renewable energy resources are location specific, which means that the electricity generated using such resources may need to be transported over long distances. Therefore, it is expected that regional trade in clean energy will develop on a larger scale. This emphasizes the importance of rules for cross-border transportation of clean energy, especially through fixed infrastructure. Moreover, the efficiency of clean-energy systems would increase if the new infrastructure interconnections allow selling electricity at peak hours in different time zones. Interconnections between continents could take advantage of the total available power and transfer it where it is needed, increasing the potential of exploiting renewable energy. Promoting renewable energy in the power sector will require policies to address its integration into transmission and distribution systems.

Regulatory changes that accompanied energy sector reform in many countries have allowed independent power producers to operate in the market. In some countries, however, regulations protect the dominant, centralized production, transmission, and distribution system, making the introduction of alternative technologies, including renewable energy, difficult. While an examination of existing domestic laws and regulations is a first step in the introduction of renewable energy technologies, especially for integrating them into the electric power system, the focus of this paper is on how international trade rules could better accommodate renewable energy trade through fixed infrastructure. Outlining the characteristics of energy transportation, this paper proceeds to explain the World Trade Organization (WTO) disciplines relevant to trade in clean energy via fixed infrastructure, in particular General Agreement on Trade in Services (GATS) disciplines on energy services and General Agreement on Tariffs and Trade (GATT) transit rules. Finally, it suggests policy options to adopt existing rules to the challenges of integrating clean energy transported via fixed infrastructure.

There are two interrelated features of energy trade via fixed infrastructure that need to be taken into account. First, energy transport infrastructure possesses the characteristics of a natural monopoly. Second, infrastructure construction projects are highly capital-intensive investments. These characteristics render the regulation of trade in their respective products by existing multilateral trade rules challenging. The technical structure of the energy sector leads to the prevalence of natural monopolies in some of its segments, which are associated with high fixed costs and technical constraints. Regulation is necessary to minimize unproductive monopoly rent of the natural monopolies. In addition, to foster competition and promote clean energy supplies, regulation’s aim should be to ensure access to the fixed infrastructure by other energy suppliers, especially smaller independent producers of renewable energy. Given the lack of large extra capacity in energy infrastructure, third-party access rules will not necessarily be sufficient to address the problem. Rules for the expansion of network capacity and construction of new infrastructure are therefore necessary for the continued development of clean energy trade and investment.

Even if a foreign supplier of clean energy were granted market access and established a power trading and marketing company in a foreign country, he may still encounter obstacles related to access to the transmission network. An independent regulator controlling the behaviour of these incumbents as well as competitive safeguards are necessary to enable access to the transportation infrastructure. In the context of the multilateral rules embodied in the WTO, the problem with regulation of third-party access to transportation networks is related to that such infrastructure is mostly controlled by private companies, rather than by governments that are subjects of obligations under WTO Agreements. For this, additional pro-competitive disciplines would be necessary. General rules regarding energy transportation services under the GATS, with specific provisions for preferential access of clean energy to networks, would be a better option.

With respect to transit through fixed infrastructure, general transit rules are not as complete as they should be to address all the pertinent problems that cross-border clean energy trade faces. Also for the sake of clarity and predictability, adopting an interpretative note to Article V to the effect that transit disciplines cover electricity transit via fixed infrastructure could be envisaged.

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