Energy Market Integration in the ASEAN: Economics, Technology and Welfare Implications

Energy Market Integration (EMI) in the ASEAN through the ASEAN Power Grid (APG) is considered to improve the welfare of the economy. However, the EMI through power grids incurs some costs due to transmission losses, among others and the pricing of transmission losses ought to consider the marginal effect of demand and supply of both generators and consumers. Charging only a tariff as a function of the distance transmitted as access costs ignores the effect of a marginal change in demand or supply from consumers and generators respectively on the transmission grid. This leads to a poor signal to the market, leading to suboptimal decisions made by economic agents. The marginal cost pricing of transmission losses would reflect the opportunity costs of alternative options better and provide better incentives for investment, consumption and generation, leading to increases in welfare. This study aims to analyze how the locational marginal pricing (LMP) of transmission losses influences an optimal energy mix and energy trading in the ASEAN and derive policy implications for completing the APG. Four energy trade scenarios of 0%, 25%, 50%, and 75% with LMP mechanism of transmission losses appear to provide benefits to the countries under the APG as the total cost of electricity generation declines when power trade increases among ASEAN countries. The underpinnings of positive results strongly suggest ASEAN member countries seriously consider to enhance grid interconnection to realize the efficiency of power trading infrastructure.