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Power Trading through Power Exchange, Shri R V Shahi, Former Secretary, Ministry Of Power

Power Trading through Power Exchange
[R V Shahi's Weekly Column for Infraline, March 10, 2008]

Recently in January, 2008, the Central Electricity Regulatory Commission finalized and notified new Regulations for Open Access for inter-state transmission. Salient features of these regulations which are improved versions on the earlier regulations are as follows :

  1. This would facilitate traditional bilateral transactions as well as collective transactions discovered in Power Exchange.

  2. The emphasis is on scheduling rather than reservation because from the perspective of an open access customer what ultimately matters is that his request is included in the dispatching schedules notified by the Regional Load Dispatch Center (RLDC).

  3. The types of transmission services which will be available to open access customers are given below:

  1. Under bilateral transaction category :

  • Scheduling and open access upto three months in advance.

  • Scheduling and open access for the current month upto four days in advance.

  • Scheduling and open access for the day ahead and upto three days in advance.

  • Scheduling and open access for the same day in the event of a contingency.

  1. Under collective transaction category :

  • Scheduling and open access for collective transactions discovered in a Power Exchange through simultaneous competitive bidding by purchasers and sellers, presently on a day ahead basis.

  1. Greater role has been assigned to State Load Dispatch Centers (SLDC) to bring them at par with RLDC.

  2. Provision of standing clearance by SLDC has been introduced with the objective of accessing intra-state sources of generation of power.

  3. National transmission charges for open access customers have now been fixed in terms of rupees per mwh instead of rupees per mw per day as had been provided earlier.

  4. In case of bilateral transactions the transmission charges for inter-state transmission system have been notified as given below:

  • Bilateral but intra-regional - Rs. 30 per mwh.

  • Bilateral but between the adjacent regions Rs. 60 per mwh.

  • Bilateral but wheeling through one or more intervening regions Rs. 90 per mwh.

  1. In case of collective transactions, charges at the rate of Rs. 30 per mwh for each point of injection and each point of drawal shall be applicable for the inter-state transmission system.

  2. The intra-state entities shall pay transmission charges for the use of state network also as decided by the concerned State Regulatory Commission. Wherever the State Commission has not decided the transmission charges, the charges for the use of the State network shall be at the rate of Rs. 30 per mwh. If the State Commission has not decided and notified the rate, it will not be the reason for not providing open access.

  3. Besides, operating charges for bilateral transactions and for collective transactions have also been fixed in the range of Rs. 2,000 to Rs. 5,000 per day for each RLDC and SLDC.

  4. Real time deviations from the net schedules for a State shall be settled by the RLDC in accordance with the established mechanism of unscheduled interchange.

  5. The State utility designated for the purpose of collection and disbursement of unscheduled interchange shall also be responsible for timely payment of the composite bills of the State to the regional pool account for unscheduled interchange.

  6. An open access customer can exercise exit option by giving five days notice and payment of charges upto five days.

  7. The transmission charges recovered from open access customers will be utilized for reduction in monthly transmission charges payable by long term customers of the region after allowing 25% to be retained by the Central Transmission Utility. The charges for use of state network will be paid to the State Transmission Utility.

  8. Separate guidelines will be issued for long term and medium term lien on the inter-state transmission system requiring creation of new transmission facilities.

The new regulations have brought under the coverage the transactions through Power Exchange also. Based on experiences of working with the regulations notified earlier a number of modifications have been provided. This will definitely further facilitate the process of open access in transmission, particularly the provision which states that non determination and non notification of transmission charges for the State network by the concerned State Regulatory Commission cannot be taken as a reason for refusing open access on the State transmission network.

The Central Electricity Regulatory Commission accorded approval, in August, 2007, for the Indian Energy Exchange to be set-up and to undertake trading of power. In fact, this was in pursuance of the guidelines issued by CERC in February, 2007, on power transmission through open access, which also provided for setting up and operation of Power Exchanges within the overall regulatory framework.

The Indian Energy Exchange has made necessary preparation in last few months after it got the approval in August, 2007, and is now ready with its platform to carry out operations in next couple of months. With a view to disseminating all the details relating to Power Exchange the Indian Energy Exchange organized a one day international conference on the subject on February 20, 2008, at New Delhi. The conference was inaugurated by Shri Sushil Kumar Shinde, Union Power Minister. Prior to the inaugural address I had the privilege of making a few, introductory remarks which are briefly outlined below:

  • The thrust of the Electricity Act 2003 is unambiguously clear to promote competition in the larger interest of consumers. Electricity sector particularly the Distribution segment, under a monopolistic system, we must all admit, has not been able to provide the quality of service to its consumers which they deserve. Experiences of several sectors emphasize that it is the competition alone which offers choices to customers and it is such options which, under competitive environment, inspire, motivate and quite often compel the service providers to offer the best quality of service to their customers.

  • Electricity Act has recognized trading as a distinct licensed activity. So far the Regulatory Commission has already given trading license to as many as 27 licensees. This number has grown gradually from 13 as in 2004-05. However, as against 27 trading licensees granted permissions by CERC hardly a dozen are active. There are also others granted licences by State Regulators.

  • Though power trading has been in existence for over six years, even now the volume of trading has remained stagnant at below 3% of the total power supply.

  • As a result of such a poor volume of trading, quite often the electricity utilities have to pay excessively high price for power purchased under the trading arrangement. Out of the 800 billion units which are generated and supplied, if the trading volume is less than 30 billion units, what needs to be appreciated is the amount of pressure on price this low volume on offer for purchase will create. In any case, the recent change by the CERC for the rate at which the utilities will be charged for unscheduled interchange, which is now Rs. 10 per unit, the rate for traded power between Rs. 7 to 8 per unit gets fully vindicated. If the volume under trading increases to say 10 to 15%, this will result in substantial reduction in price to the relief of distribution utilities and in turn to consumers. Consequently the volume of overdrawals by various States, warranting penal rates of unscheduled interchange, will also reduce.

  • How will it happen? The most crucial role would be introduction of open access in distribution together with open access in transmission which has already happened right from the beginning of Electricity Act. A large number of State Regulators have yet to put in place workable and effective mechanisms to make open access in distribution a reality. The Act provides the deadline of January, 2009. But, this important and powerful tool of competition could have been put in place even earlier. What is needed is a friendly framework which could facilitate for consumers of 1 MW and above demand to choose their suppliers. Regulators need to ensure that by doing so the suppliers' benefit, the concerned consumers gain and the availability of distribution infrastructure by the distribution utilities does not pose to be a problem. This of course will require a fine balancing of various interests.

  • Having said this, it is equally important that the amount of power which could be offered for such transactions through trading has got to be increased. In a situation when the system is confronted with the peaking shortage of the order of about 14%, the obvious consequence is limited availability, excessive tariff with inevitably unbearable burdens on distribution utilities. In such a situation, all options to source additional power, such as power from captive plants, from utilities particularly in the Eastern region who quite often have surpluses, could be workable strategies. Long term strategy however has to be development of a reasonable proportion of merchant capacities.

  • Ministry of Power must be complimented for introducing an element of 40% capacity as the merchant capacity in the new hydro electric project policy. This obviously has a huge potential to offer large volumes under medium to short term trading. However under this policy it would take a minimum of five years for these projects to fructify and supply electricity to the system. Therefore, other options of developing merchant power plants, and certain merchant capacities even in projects which are otherwise for long term PPA, could perhaps provide quicker relief.

  • Developing merchant capacities to about 15% of the capacity could be a desirable goal. This will require sufficient amount of cushion in the transmission capacity both in the National Grid as well as in the State Grid. It is gratifying that the Central Electricity Authority and the Central Transmission Utility are fully alive to this requirement and it is understood that they are providing for about 30% additional transmission capacity in the system. Similar approach needs to be followed in the case of State transmission systems as also in the sub-transmission networks.

  • Power Exchange is going to bring power trading into an altogether different orbit. Fully equipped with electronic systems and sophisticated software, this could emerge as an important instrument of quicker decisions, faster relief, sale transactions at competitively determined optimum price and, above all, it would provide an objective and transparent process.

In his inaugural address the Union Power Minister, while highlighting the importance of Power Exchange made a number of other observations:

  • The new Electricity Act and various policies have deregulated the power sector through a number of policy reforms. It has paved the way for setting up of a competitive, nationwide power market under the regulatory framework.

  • One of the most tangible results of the objective to set up the nationwide power market is the establishment of Power Exchanges. The first of such Exchange is the India Energy Exchange (IEX).

  • It is good to learn that the India Energy Exchange places the Indian power market at par with the most sophisticated markets in the world. The Exchange technology which comes from an alliance between Financial Technologies (India) and OMX Technology of Sweden is believed to be one of the most efficient in the world.

  • ? Though approximately only 3% of power is being traded on short term basis in the country, even this works out to almost 4,000 MW. It is not very big, but a big enough volume of power to be traded. As the Indian electricity market grows, short term market will also grow on the lines of those in developed countries. We are also facilitating merchant plants to come up. In the new hydro policy a very meaningful provision has been made for merchant capacity.

  • There are issues of concern for Power Exchange to be effective. For example the open access policy provided in the Electricity Act is yet to be implemented effectively by most of the States. It is expected that well before January, 2009, the State Regulatory Commissions will see to it that open access in distribution becomes an effective tool for introducing competition.

  • The States will definitely remove restrictions on trade. They are doing so in their agricultural markets. They will do it in power market as well. Not only Ministry of Power but even the Hon'ble Prime Minister is aware of the need for power market deregulation in the States. Market participants can definitely feel assured that a common Indian Power Market is coming sooner than many may think. This will be in the interest of all the stakeholders and ultimately consumers will benefit.

One of the sessions in this conference, that I chaired, was a panel discussion on "Strategies for Participants in Emerging Power Markets. The panelists included Senior Representatives from TATA Power, Lanco Electric Utility, West Bengal State Electricity Development Corporation and India Energy Exchange. Prior to this session there was a Technical Session on Power Trading and Power Exchange in which there was a comprehensive presentation from Power Grid. I summarise below the salient points of the Technical Session as also of the Panel Discussion :

  • Formation of National Grid, through the process of creating additionalities in transmission systems as also by interconnecting various regional grids, has been a continuous process. In March, 2003, Western region was connected with Eastern region and North-Eastern region for a synchronous operation in AC mode. When this event was being planned, I recall, there were serious apprehensions whether such a large grid of almost 50,000 MW capacity would lead to frequent grid disturbances on account of cascading effect of one fault leading to another. Time has shown that such an integration provided greater degree of stability. It needs to be underscored that regional grid interconnection towards formation of a strong National Grid is sine-qua-non for facilitating inter-regional transmission of power, which is essential for promoting open access. Similarly when North was to be connected with East which would have meant synchronous operation of North-East, East, North and West with a total capacity of almost 90,000 MW, the apprehensions were even greater. Obviously adequate preparations and necessary cautions become imperative when such operations have to be carried out. Finally, we had the combined grid of these regions a reality in August, 2006. This has indeed supported, in a significant way, in not only mitigating the shortage problems particularly in Western and Northern regions but have also assisted the comparatively under utilised capacities of power plants in Eastern regions. While there are enormous advantages of integrated grid operations in a large national grid, equally enormous is the nature of care and caution required in maintenance of the grid.

  • Reliability margins are essential and non negotiable. The expectation of grid operators is to have sufficient cushion in the system so that dynamically the operator is able to adjust to changing needs of demands as also of the system outages. The perspective of the consumer is the need for continuity of supply, common transmission reserves to take care of contingencies and availability as per need.

  • The ultimate beneficiary of the reliability margin is the larger group of consumers and therefore such margins over a large integrated grid do provide the required degree of freedom to take care of the concerns of the system operator on the one hand and expectations of consumers on the other.

  • v In the context of availability of open access, Congestion Management has assumed great relevance. This is an area of concern now and it is likely to continue to be an issue in future as well. Though sufficient actions have been launched to continually augment and upgrade the regional and national grid systems, the way power generation capacities are being added and demands are growing, Congestion Management would continue to be a challenge.

  • Open access in transmission was implemented, in a systematic way, in May, 2004, as the Electricity Act 2003 provided a non discriminatory open access to all generators right from the beginning of the Act. The scheme provided both for Long Term Access and Short Term Access (monthly, day ahead and intra day transactions).

  • Experiences gained over the years have constantly been assimilated by revisiting the approach and the procedure, the objective being that if there is no technical constraint access should never be denied. And, technical constraint removal should be a continuous process.

  • Generators' perspective during panel discussions did highlight that though payment security may not be a major area of concern (though we need to keep this issue under watch regularly), a number of other associated factors are relevant for developing merchant capacities. These include fuel tie-ups, State government support and most importantly timely development of additional capacities in the transmission system. Each of these areas will not only require pro-active government intervention and support but also hand-holding during execution.

Power Exchange is a timely development and definitely it is a proactive effort. Though, for many, it appears to be premature but time will show that this initiative played an important role in creating and developing a competitive electricity market. Aided adequately by latest hardware and software, this instrument is not only going to provide an objective and transparent mechanism to facilitate online trading but is going to assist distribution utilities and large consumers in accessing electricity at an optimal cost and in time. When volume increases, realistic price discoveries of power will take place. All stakeholders need to support this initiative in the overall interest of all concerned and of Indian power sector. Obviously, as in any new initiative, this will also go through a learning curve and experiences gained will go on fine tuning and refining the process. What would, therefore, be necessary is the understanding and co-operation of all the players in the game particularly during the period of such a learning curve. Similarly, it would be important for the Power Exchange managers to have a positive approach towards useful feedbacks during the period when Power Exchange as an instrument and as a process matures to become an acceptable and useful tool for power trading.