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Power Trading and Renewable Energy Certificate, Shri R V Shahi, Former Secretary, Ministry of Power

India Energy Exchange (IEX) organised a day long workshop on "Power Trading and Renewable Energy Certificate" at Mumbai on 14th May, 2010. I had the privilege of addressing the Conference. In the Inaugural Session we had Presentations from the Executive Director of Western Regional Load Despatch Centre, Managing Director, Tata Power Trading Company, and Director (Operations) of Maharashtra State Electricity Transmission Company. I would like to briefly highlight the points that I made in my address and also some of the important points made by other Speakers during the Inaugural Session:

  • Indian power sector continues to be severely constrained by extreme shortages. In the Western Region Maharashtra experiences the worst situation of power shortage. In fact, from the point of view of shortages, perhaps it is the worst affected among the large States in the whole country. At present the extent of shortage in Maharashtra is of the order of about 6,000 MW. It is indeed excessive if we consider that the maximum demand is of the order of over 15,000 MW only.

  • I recall, about twenty years ago, Maharashtra used to have the best of power supply, a significant surplus, not only among the Western Region States but also among all the States in the country. Western Region used to supply surplus power invariably to South for which during those days a dedicated transmission system between Chandrapur and Ramagundam was created.

  • To develop the electricity market, several instruments have been envisaged under the Electricity Act 2003, whose primary objective is to facilitate and create competition in the larger interests of consumers.

  • Power Trading is one such instrument that has been provided in the electricity industry architecture, under the Act, to make significant contributions towards developing electricity market. Electricity industry, over a long period time, has been organised in a manner which is predominantly characterised by long term contracts (Power Purchase Agreements). This system writes the rules of the game over a long term period like twenty five years or so, thereby leaving little scope for market to develop. In fact, the long term Power Purchase Agreement mechanism for central sector generating capacities and for private sector power plants have, in a way, throttled the process of market development. Even the 15% of capacity of the central sector generating plants, for example power plants of NTPC, NHPC etc., which are supposed to be unallocated, in fact, get reallocated under the PPA dispensation. There is a case for allowing either full or part of this to be out of PPA.

  • The revised Hydroelectric Project Policy of the Government of India has a very facilitative provision, according to which 40% of the capacity of the private hydroelectric projects could be kept outside the purview of long term PPA. In recent weeks issues have been raised that for a level playing field similar dispensation should be allowed even to the public sector power projects. There is a strong case for revisiting the Policy to bring public sector hydropower projects at par with those of private sector in so far as allowing them 40% of the capacity as merchant capacity. No doubt, the effect of this provision will be experienced after four to five years because of long gestations in case of hydro projects, but it would be a preferred strategy with potential to create significant impact on developing electricity market.

  • At present, more than 90% of power is transacted through long term PPA. About 5% is dealt with under the mechanism of Unscheduled Interchange (U.I.), and the balance less than 5% is transacted through short term trading (both through Trading Licensees and Power Exchanges). Unless the volume of transaction outside the PPA increases upto a critical mass, we will not really see the visible change towards the market development.

  • National Electricity Policy (2005) provides that atleast 15% of capacity should be kept outside the long term PPA. When the transactions outside PPA improve to around this proportion, we will experience the positive impact this phenomenon will create when the industry would be in a position to establish a transparent and acceptable mechanism of price discovery. Gains of competition would be visible. In spite of shortages even consumers will have choices. Today, the price that emerges cannot be branded as price discovery because these prices are the outcomes of a distress situation caused on account of extreme shortages.

  • In 2006, the Ministry of Power came out with a Scheme on Merchant Plant providing for facilitation like fuel linkage, water linkage etc. The objective was that in a period of three to four years such merchant plants or merchant capacities as a part of a larger plant could be encouraged, so that in a short period of time the volume of power supply through arrangements other than PPA could be enhanced. It is important that this stream of capacity addition is provided required facilitation by all concerned agencies and authorities. Quite often people compare power sector reform with the happenings in the Telecom sector. Power professionals tend to dismiss this comparison on the ground that power sector is entirely different. It is different indeed. However, this approach may not take forward power industry and, unless competitive structure is facilitated to be developed, the expectations of consumers would not be met.

  • The concept of Power Exchange has been provided in the National Electricity Policy (2005). The Ministry of Power initiated the process of studies on the subject on a global basis. The initiative finally culminated in establishment of India Energy Exchange which got operationalised in 2008 followed by another Exchange - India Power Exchange. These developments in Indian power sector have attracted global attention among developers and investors, as highly progressive initiative. We need to see that this initiative is not only allowed to stabilise, but is provided with necessary assistance and encouragement by all concerned including various authorities.

  • In the recent months, some of the States have adopted restrictive policies and practices which go not only as counter productive activities in respect of Power Trading through Power Exchanges or otherwise, but, in fact, these are indeed in conflict with letter and spirit of the Electricity Act. Some of the States have taken recourse to invoking Section 11 of the Electricity Act and have prevented Power Trading. Section 11 of the Act is to deal with a situation of emergency. Obviously there is a case to revisit the approach of such States on the subject. Every State needs to recognise and appreciate that a restrictive policy may appear to be giving them a short term gain but in the long term they would be the losers. Investors, developers, lenders will all develop an attitude towards such States which may not be very satisfying to them.

  • Open Access in transmission is provided in the Act right from the beginning of this legislation. This has been happening. The constraining factor has been the inadequacies of transmission systems. In the Working Group on Power for Eleventh Plan, which I presided, it is clearly stipulated that about 30% of cushion in the transmission capacity should be created to cater to unforeseen transmission of power. It is gratifying that with some degree of debates and discussions this is being accepted by various States. A highly conservative approach by the State Utilities, in the past, in not allowing Power Grid to develop required redundancies in the system has been responsible for bottling up of power flow from surplus areas to areas of deficit. A few years back, State Utilities felt that they were doing a great service by being conservative and more than necessary economical in their approach, little realising that they were damaging a very important cause of the power sector. Fortunately this realisation and wisdom has dawned on many of them, many others continue to be conservative to the detriment of their own interests. A few State Transmission Companies point out that even when they are convinced, State Regulators are becoming highly conservative. This also needs to change.

  • Open Access in transmission can be a success when we overcome fully the constraints caused by congestion in transmission system. Even with low volume of Power Trading, quite often transmission congestion stands in the way of power being available but not being able to be reached to the destination. It is expected that with more pragmatic and somewhat positive approach of State Utilities, in a few years time, this problem should be behind us.

  • For Open Access to succeed not only Regional and National Grids have to be augmented, with the cushions mentioned above, but also the State level transmission and sub-transmission systems should be expanded to receive and absorb such power which are transmitted through Open Access arrangements. This appears to be a major area of concern. Except very few States - perhaps none - this problem is being faced and will continue to be faced unless serious efforts are made to develop and strengthen State level transmission and sub-transmission systems. Here again State regulators also need to have a positive view.

  • Open Access in distribution is another powerful instrument provided in the Electricity Act. It is a fact that a large number of State Regulatory Commissions have come out with their Notifications on Open Access in distribution for consumers beyond 1 MW. In reality, however, Open Access in distribution has not taken off. Some of the reasons include - (a) Somewhat negative approach of the State Government which gets transferred to State Load Despatch Centre and also to State distribution companies, (b) Cross-subsidy surcharge, which in many cases, is excessive. Tariff Policy provided a clear direction that by January 2011 cross-subsidy should be brought within a range of plus and minus 20% of average tariff. The Policy also obliges the State Regulators to draw a Road Map, so that by January 2011 progressively the above range of cross-subsidy is achieved. Not much seems to have been done in most of the States in so far as management of cross-subsidy is concerned. Accordingly this also has an adverse impact on Open Access in distribution, affecting, in turn, Power Trading and Power Exchange operations and growth.

  • When Power Exchanges commenced their operations, after a few months, a perception emerged that this process leads to escalation of prices. Many tended to believe that it was so. However, the fact of the matter seems to be that during the year 2009-10 the weighted average price of power through Trading was of the order of Rs. 6.45 per Kwhr. while the corresponding figure in respect of Power Exchanges is Rs. 5.03 per kwhr. No doubt, sometimes the price level is excessively high. But the sector should not be unduly disturbed and concerned. As we go along, and more capacities get into this system, prices will stabilise at more reasonable levels. The initiative of the Central Electricity Regulatory Commission on allowing different time slots for Open Access will also go a long way in not only development of new generation capacities, but also in development of market. Till recently the Open Access was allowed either upto three months or beyond twenty five years. The recent Notification permit various durations, thus facilitating and creating a new scope for development of electricity market.

  • In coming couple of years, I see the role of Power Trading to be graduating into dealing with transactions of different durations beyond one year and Power Exchanges occupying the space for transactions of upto one year. This will be a more balanced profile.

In conclusion, if we have to develop electricity market, which we need to do in the larger interest of consumers, each of the stakeholders has to revisit his present approach. Generators have to develop capacities outside PPA's. Lenders need to appreciate the need for such an approach. Transmission utilities have to provide enough cushion. State Load Despatch Centres have to see the larger picture rather than looking at short term outcomes. State Governments need to recognise that restrictive policies and approaches would go counter to the interests of the State in the long run. Regulators have to set right the issue of cross-subsidy, cross-subsidy surcharge, enough transmission systems, and play a more proactive role in seeing that Open Access in distribution becomes a reality. Power Trading and Power Exchange agencies also have to perform their responsibilities in an objective and transparent manner.