Indian power sector reforms started in the early 1990’s and with the key objective of improving the financial and operational performance of utilities and gradually introduce competition in the market. While the generation and transmission sectors have witnessed major changes and become extremely competitive, power distribution companies have continued to struggle and are in precarious financial condition. While the results of reforms have been mixed, power market development in the process has emerged as a silver lining. India currently boasts of a robust bilateral along with two functional power exchanges on which 10%-12% of total power is consumed in the country.
Electricity distribution companies (DISCOMs) engaged in the retail supply of electricity in India procure power either from generators or from trading companies for long (up to 25 years), medium (up to 5 years) and short-term (less than 1 year) modes. Long-term contracts ensure the reliability of supply at an optimized cost whereas surplus requirements are met from medium and short-term power purchases. Over the decade, the share of medium/ short-term power purchase has surged (6% in FY 09 to 12% in FY 19). In the current scenario, unpredictable demand along with a large amount of intermittent Renewable Energy, integration into the grid poses difficulty in grid balancing. These imbalances are met through the following real-time power trading instruments–
- Electricity traded under bilateral transactions through Inter-State Trading Licensees (only inter-state trades)
- Electricity traded directly by the Distribution Licensees (also referred to as Distribution Companies or DISCOMs)
- Electricity traded through Power Exchanges (Indian Energy Exchange Ltd (IEX) and Power Exchange India Ltd (PXIL))
- Electricity transacted through Deviation Settlement Mechanism (DSM).
Bilateral trade functions intra-day from 1 day up to 1 year whereas power exchange performs through spot contracts for the same day, next day, and weekly. The power exchange market is much more volatile and depends on market conditions. Presently, Intra-day purchase and sale of electricity is done based on Day-Ahead Market and most of the real-time imbalances are managed through the DSM. DSM is best suited to ensure grid security but fails in cost-effectively balancing the grid. Furthermore, the absence of gate closure and provision of ‘Right to recall’ breaks the sanctity of schedules as well as restricts the generators from selling the un-requisitioned surplus in the market.
To overcome the current challenges, Power Exchanges in India (PXIL and IEX) started offering a new ‘Real-time Market’ (RTM) power trading instrument successfully launched on June 1, 2020. It features a double-sided closed auction, half-hourly market (48 trading slots) with uniform price auctions with the concept of gate closure that will be operated on an hour-ahead basis. The objective of RTM is to support the DISCOMs in managing power demand-supply variation, depend less on DSM, and saving on huge penalties to enable the safe and secure grid. The current reform of the introduction of RTM shall increase certainty in the sector by the provision of gate closure and faster bidding mechanism.
The key implication of the real-time market for generators are provided below:
- Able to sell un-requisitioned surplus power by participating in RTM and maintain the better PLF for fuel optimization
- The generators having a long-term contract and participating in RTM will be required to share gains in 50:50 subject to the ceiling of INR 0.07/ kWh
- No sharing of losses between Inter-State Generating Station and beneficiary
- All the generators are expected to bid considering ramping and other technical capabilities
Similarly, there are many benefits that the RTM mechanism provides to DISCOMs
- It manages higher variability of increasing RE penetration in the supply mix
- Market discovered price is likely to be more efficient than the power procurement cost under the bilateral agreement
- Un-requisitioned surplus from suppliers of other DISCOMS is available
- DISCOMS can recall and sell in RTM
- DISCOMS can let the suppliers sell in RTM and share the gain without any sharing of losses
- DISCOMS can manage sign change requirement under DSM through RTM
Trading in the real-time market has picked up since its launch a month back. As the short-term market expands further, major efficiency gains can be expected. Going forward, the next logical step will be introduction of the derivative market mode which will enable improved price discovery and provide an option to DISCOMs and consumers to participate in such a market to hedge risk. Having a variety of power contracts for the trading of electricity is essential for the overall development of an efficient wholesale market. Moving ahead, the electricity regulatory authority might consider coming up with the right set of regulations and guidelines to promote the derivatives market in the power sector.