27th June, 2008 becomes a historic
date for Indian power sector. Electricity trading through Power Exchange had an
excellent start when the Indian Energy Exchange (IEX) began their operations on
last Friday. On the very first day, as much as over 13,000 MWHR were
requisitioned or offered for sale. A few years back even Power Trading was a
totally new concept for the Indian power sector. The sector was used to sale
and purchase of electricity on the basis of long term contracts with outside
agencies or within. The State Electricity Boards had simple systems of power
generating stations supplying power to the grid and distribution wings taking
care of supply of electricity to consumers. As a matter of fact, even the
concept of contract viz. Power Purchase Agreement emerged much later. I recall,
when the first power plant of NTPC had already been commissioned in February
1981, the PPA's with the Northern Region Electricity Boards were yet to be
finalized. And when they were finalized, these documents were less than half a
dozen pages. Subsequently commercial considerations started occupying better
space and therefore they started having comprehensive representations of various
concerned issues. In subsequent phase of commercial arrangements, even NTPC
Power Purchase Agreements became much longer and larger in terms of coverage and
contents. We all know the post IPP's developments when the structure of Power
Purchase Agreements became significantly different (the PPA between Maharashtra
Electricity Board and ENRON promoted Dhabol Power Project ran into a few hundred
Therefore, in last few years power sector has
seen different phases of commercial transformations. Power Trading is a
distinct licensed activity under Electricity Act, 2003. Some of the advantages
that this approach has brought, notwithstanding its slow progress due to variety
of reasons, could be enumerated as below :
It has served as a good instrument
between the generating facilities who could enhance electricity generation at
different points of time during different seasons and those electricity
distribution companies or large consumers who need such power, in a dynamic way,
in varying magnitudes. This platform, therefore, has served the needs of both
- those who can produce and supply and those who need.
view of (a) above, trading has enabled additional efficiency in the system
by way of improved utilization of generation capacities on the one hand and
has provided to consumers much needed electricity with its multiplying
effect on overall economy.
Power could cost, and could cost much more, thereby leading to a beginning
of a process of price discovery could be brought about only by trading. A
lot of learning has taken place in last few years that cost of power, in
times of need, could be significantly different and higher than the usual
price of power contracted through long term PPA with NTPC or other power
generating companies. Various stakeholders, political system, administrative
apparatus, press and media, consumers and above all public at large now know
that while the power through PPA could be priced between Rs. 1.50 to Rs.
2.50 per KWH, trading in times of need, particularly during peak hours,
could mean power at Rs. 6 to Rs. 8 per KWH and sometimes even more. This has
brought a better understanding about need for commercial consideration and
appreciation in respect of power industry.
There are a number of issues
which need to be resolved to further refine the process of trading and
facilitate this mechanism to help bring about much needed reform in the sector
towards building a sustainable electricity market. These include (a)
orientational changes in regulatory interventions, (b) better empowerment in
terms of technical capability of transmission systems to handle movement of
power across the country and (c) commercial changes to take care of demand and
supply mismatches leading to gradually a situation of parity between the two. I
have written separately a piece on the issue of needed changes in respect of
Power Trading. These relate to (a) permitting trading between generator to
trader to distributor company, trader to trader etc., (b) implementation of open
access principles, (c) favourable dispensation wheeling charges etc. All these
would be equally relevant for sale and purchase of power through Power
Exchange. Transactions through Power Exchange at present is a sub-set of
overall sale/purchase transactions through trading. However, it has better
capability since this would be propelled by latest hardware and software to
handle day ahead demand and supply. It could capture, in a more sensitive way,
these transactions which normal trading may be unable to handle. We have said
elsewhere that trading volume at present is merely 3% of the total purchase and
sale of electricity. In such a situation prices arrived at will obviously not
be the real price discovery of power in view of the large mismatches between
demand and supply in our electricity sector (in last one year itself the peak
shortages have increased, now to more than 15%). This type of sharp deviations
in prices from normally established prices are visible in any segment of energy
which is characterized by shortage situation - we are witnessing this in a big
way in petroleum sector, it happened similarly in case of coal when a small
proportion of total coal production was subjected to e-auction. I have always
held the view that particularly in energy group, where we have shortages in all
the areas, be it coal, power, petroleum etc., the approach for developing market
during the transition period has to be a mix of calibrated regulation and
allowing a reasonable in flow of supply to facilitate market development in a
deregulated way. But, the caution would be that even for the deregulated portion
certain degree of regulatory oversight will be essential. It is therefore
appropriately in place, as required under the Electricity Act, that even the
Power Trading through Power Exchange has gone through the process of regulatory
interventions. If it is totally left to the market forces, there could be
danger of derailment with the process ultimately not meeting the desired
deliverables. I have written to a large number of concerned agencies during
this month itself for their active participation in sale and purchase of power
through the Power Exchange. I am convinced that this instrument, in the medium
and long term, will contribute significantly to the reform process in the power
sector that was initiated a few years ago. An extract (given below) from the
communication that I have sent briefly highlights the essential elements of the
Indian Energy Exchange and the process of trading through Power Exchange. I
propose also to write to the Energy Secretaries of various States for their
active interest to facilitate its faster progress, so that development of
electricity market in India receives the desired momentum.
"IEX is promoted by
Financial Technology India Limited & PTC Financial Services, a wholly owned
subsidiary of PTC India Ltd. Leaders from power sector like REC, IDFC, REL, TPC,
Lanco and Adani are also among the list of equity stakeholder, as expected the
response to participate in IEX is encouraging. Leaders from different dimensions
of the sector have already registered with the exchange and others have shown
the keen interest for the same by submitting their expression of interest.
Being a demutualised,
nationwide, electronic exchange it offers an instrument to hedge price risk more
efficiently at a reasonably priced cost. The focal point is ensuring fair trade
practices to increase market reliability. It aims to help the distribution
licensees in precisely adjusting portfolio as a function of consumption or
generation profile and make the sector more pulsating and unlock untapped power.
Its endeavor is to provide a market for captive, co-generation and renewable
power to sell power.
The salient features of
India's first power exchange are mentioned below:-
The participation in the power Exchange is on voluntary basis. This means that
there will be ample scope for electricity trading on bilateral basis. Old PPAs
will not be altered.
form of organization:
The power exchange is not in any case a mutual concern. The member -broker
represents trading and not any ownership interest.
The physical market of electricity would be regulated by CERC.
Power exchange maintains strict anonymity about market participants which
prevents exercise of market power and conspiracy.
Market transparency would be ensured in the exchange, by computerized trading
system and immediate dissemination of all relevant information related to any
The power exchange would allow bids to be submitted by both buyers and sellers
of electricity so as to eliminate the chances of market domination by one of
The spot physical market defined for power exchange is a day ahead market
(contracting for the next day).
It brings the various players, connected through a grid covering large
geographical area, into a common marketplace and thus reduces the possibility of
scarcity price enjoyed by sellers in a deficit area, and unfair consumer surplus
enjoyed by buyers in a surplus area.
It offers uniform pricing for the same product offered at the same time and
system and Guarantee System:
The power exchange would have clearing system. It means, once a trade is
cleared, exchange would become buyer to all sellers and seller to all buyers.
The exchange would provide performance guarantee to all the contracts executed
on the exchange.
Power sector can be rest assured to be benefited in many ways:-
Attracting capacity addition by providing
readymade market to interested parties.
Ensuring payment security.
Promoting competition among stakeholders
leading to better capacity utilization.
Smoothening of prices for consumers.
Reducing transaction costs, by providing a
common platform to buyers and sellers.
Empowering demand-side responses to
Leading to more economic grid operation.
Providing long-term and short-term price
signals in the market which cannot be seen in the current bilateral markets.
exchange would go a long way in maturing of the Indian power trading market and
would assist in bringing in the required depth, transparency and structure to
the market. The emerging scenario is more competitive where we are moving from
the present electricity market of long-term power purchase agreements (PPAs),
short-term agreements, bilateral markets and UI to one which encompasses all
these along with a common electricity marketplace for standard contracts with a
nationwide reach, assuring a better price and payment security.
I feel that
esteemed organizations like yours will immensely benefit from the association as
a Member or Client of the Power Exchange. The benefits include:-
Most competitive price.
Lower cost of transaction (only 1p/kWh).
Scheduling coordination by IEX.
Priority to IEX for transmission capacity
over bilateral trade.
Wide choice of bidding (Portfolio bidding)."
In the last two days of
transactions i.e. on Friday, the 27th of June and Saturday, the 28th
of June the following picture emerges:
MWHR means approximately 500 MW for 24 hour period. Obviously the demands
requisitioned were for varying durations. While the demand raised was above
10,000 MWHR the supply offered was about 3,000 MWHR.
It will take
time before players on both the sides - those who produce power and offer for
sale during different hours of the next day and those who need power during
different time slots - really are in a position to converge on price
On the first
day, while a number of produces expected as high a price as Rs. 10 per KWHR, the
agencies which needed power quoted in the range of Rs. 2 to Rs. 8 per KWHR for
different time slots. As a result, though the transactions which were bid from
both the sides were as high as more than 13,000 MWHR, convergence was in the
range of only 60 MWHR. Obviously when the trend of the market is better
understood by both the sides the domain of convergence will enlarge.
will also need to be refined based on the feed back and the outcome. Unless
buyers know clearly the range of offered prices it would be difficult to
increase the area of agreement. On the first day the total transactions
(offered for sale and bid for purchase) as mentioned above, was for over 13,000
MWHR. When feed back went to them about the range of prices within which for
different durations and timings the transactions happened, on the second day
i.e. on Saturday 28th June for purchase/sale to be effected on Sunday
29th June, the overall quotations have increased for about 22,000
MWHR (17,000 MWHR offer to purchase and 5,000 MW offer for sale).
As a result of
better understanding the area of convergence has improved within one day
resulting in 225 MWHR of transactions having been finalized as against less than
60 MWHR finalized just a day earlier.
parameter to explain the impact of dissemination of developments of the previous
day is the fact that transactions decided on Saturday for the next day were for
13 hours of duration in different time slots as compared to only 6 hours of
duration of supply finalized on Friday for Saturday.
The website of
the Exchange immediately gives the details of offers made for purchase and price
bids for sale, and also the outcome. This helps the likely producers and buyers
to make well informed decisions in the next round.
One of the problems that is
being experienced is that in the transactions through Exchange there is no scope
for a second thought either to the power producer or trader who can offer or to
the buyer so that they can refine their relative positions in terms of prices
expected to sell or to purchase. There could be two ways to handle this
situation - (a) during the period when the bids are being collected i.e. 10 A.M.
to 12 Noon certain amount of dissemination of information happens to both the
groups and they are allowed to reformulate their offers or (b) on the same day
after the finalization of the first round on the basis of convergence
established, when full details are available to all concerned, a second round of
bidding is repeated, may be 3 to 5 P.M. for bidding and 5 to 6 P.M. for
At present the whole
transaction through Power Exchange is for a day ahead sale/purchase. When the
experiences are gained, may be during next few months, the scope of such
transactions could be extended to beyond being day ahead, say weekly, monthly,
quarterly etc. in a progressive manner.
We have seen the adverse
consequences of future trading in the petroleum sector. Today crude price going
beyond $ 142 a barrel is now unanimously agreed to be not only because of demand
- supply phenomenon but largely because of manipulations by speculators who have
indulged in blocking these purchases for future and they go n severely
influencing the market. In case of Power Exchange since there is considerable
regulatory intervention, it is expected that this type of development will not
Captive plant operators, merchant plants being developed, merchant capacities
being set up in existing power plants are all going to substantially influence
the shape of market structure in next 2-3 years. Power Exchange is definitely
going to make its meaningful contribution in this process.