Evolution of Indian Power Market & Future Prospects

The Power sector in India has undergone fundamental transformation of its institutional structure after the enactment of Electricity 2003. One of the most important transformations has been the introduction of Open Access in Indian power sector and further creation of Power Market. This brought a chunk of advantages to the power industry which was primarily vertically integrated; controlled by monopolistic state electricity boards.

Evolution of Power Exchange 

Open Access in inter-state transmission was introduced in May 2004 which facilitated the development of the bilateral market in the country which opened up very encouraging results. However, in order to further streamline the bilateral transactions and to facilitate the implementation of trade of Power in India, Central Electricity Regulatory Commission (CERC) took several significant initiatives. In July 2006, the commission took a giant leap forward in developing the electricity market in the country and floated a discussion paper on “Development a Common Platform for Electricity Trading”.

As Open Access in Inter State Transmission Regulation 2004 provided only for the bilateral transaction, the transactions discovered through anonymous bidding on a Power Exchange were not envisaged. The system of application of transmission charges was in Rs/Megawatt/day. A single regional postage stamp was applied in case of intra-regional transactions for transmission charges and losses. These methodologies for transmission charges & losses were not conducive to the operation of a common platform for electricity trading or Power Exchange.

In view of above shortcomings, CERC revised the Regulation for Open Access in Inter-State Transmission” to include collective transactions discovered on a power exchange and the new regulation became effective on 1st April 2008.

With the above provisions in place, Indian Energy Exchange (IEX), the country’s first Power Exchange, made an application for grant of permission to setup a Power Exchange in March 2007 and an in-principle approval was accorded by the CERC on 31st August 2007. IEX commenced operations from the 27th June 2008 after the Rules and Bye Laws were approved by CERC and permission was granted to commence operations. The second Power Exchange, Power Exchange of India (PXIL), was granted in-principle approval on 27th May 2008. PXIL went through a process of Regulatory approval similar to IEX and commenced operations on 22^nd October 2008.

Power Exchange: Changes that Followed

Introduction of power exchanges has acted as a catalyst for the short term power market in India. Short term market which is being constituted by bilateral transactions, power exchange transaction and UI transactions has witnessed a CAGR of 23.60 percent since 2008-09. Share of short term transaction as a percentage of total power generation in the country, has also increased from 6 percent in 2008-09 to around 11 percent in 2012-13. The chronology of short term power trade vis-à-vis total electricity generation in the country has been represented in figure 2.

Among the various transactions driving the growth of short term market in India, it is found that those associated with power exchange have played a major role in development of short term power market in India. Out of an overall growth of 23.60 percent, since 2008-09, power exchange transaction have grown with a rate of 71 percent, while bilateral and UI transactions have grown with their respective share of 19 and 15 percent. Transaction wise details of short term power market have been represented in figure 3.

It is also evident from above figure that since 2008-09, overall quantum of bilateral and UI transaction is higher in comparison to the power exchange transactions. However, in last two years it has been seen that the transactions under the UI and Bilateral have witness a significant dip, while transactions in power exchanges are on continuous rise.

Huge surge in power exchange transactions owes to the fact that, the exchange provides a transparent mechanism, which is completely driven by demand and supply of electricity, thereby promoting competition in mechanism of power trading. Due to competition, electricity prices in short term market has also witnessed a significant dip, which is driving beneficiaries to schedule more and more power from exchange rather than drawing through UI mechanism, resulting dip in UI transactions. With low UI transactions share in power trading, more disciplined grid operations can be expected. Therefore, it can be anticipated that, power exchanges are not only promoting competition, but they are also bringing more discipline into electricity grid.

Opportunities growing forward

Power exchanges have offered a dynamic environment to operate the sector through market forces of demand and supply. Nonetheless, there is a lot of ground yet to be covered, which includes improving and enhancing the reliability and security of the power system through ancillary services and implementation of regional power trade in SAARC countries (similar to one in Nord Pool).

In April, 2013, CERC has introduced the staff paper on “Introduction of Ancillary Services in Indian Electricity Market”. Under this, the commission has sought to introduce three types of ancillary services, mainly Frequency Support Ancillary Services (FSAS), Voltage Control Ancillary Services (VCAS) and Black Start Ancillary Services (BSAS) for enhancing the reliability and security of Indian power market. In this overall framework, the commission has assigned a significant role to power exchanges in modalities of ancillary services. The commission has envisaged the implementation of ancillary services would be facilitated through bidding in the power exchanges. Further, it also contemplates that a separate product could be constituted for this purpose, comprising of sellers interested in participating in the ancillary service market.

Besides this, there still exists the need to learn lessons from the experience  of already developed power markets, such as Nordic Power Market – the world’s first international commodity for electrical power, in organizing trade with standard physical and financial power contracts both in spot and derivative markets. Similar to Nordic Power Market, there are huge prospects for integration of SAARC region for regional power trade. On this front, the Planning Commission of India through Integrated Energy Policy has already indicated the import of hydro power from Nepal and Bhutan (eliciting the combined potential of about 55000 MW) as possibly the major source of energy security for India.

With integration of SAARC regional power market, there would be a significant market for financial power contracts in future, which would allow power exchanges to capitalize on these financial contracts.

                            

        Infraline Energy Power Research Team