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Trading of Electricity through Power Exchange Begins, Shri R V Shahi, Former Secretary, Ministry of Power

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 pages).

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 :

  1. 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.

  2. In 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.

  3. 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:-

Features

Voluntary participation: 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.

De-mutualized form of organization: The power exchange is not in any case a mutual concern. The member -broker represents trading and not any ownership interest.

Regulated: The physical market of electricity would be regulated by CERC.

Restricts Manipulation: Power exchange maintains strict anonymity about market participants which prevents exercise of market power and conspiracy.

Transparent Market: Market transparency would be ensured in the exchange, by computerized trading system and immediate dissemination of all relevant information related to any trade.

Dual bidding Process: 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 them.

Day ahead spot market: The spot physical market defined for power exchange is a day ahead market (contracting for the next day).

Fosters Competition: 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.

Uniform Pricing: It offers uniform pricing for the same product offered at the same time and place.

Clearing 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.

With IEX, 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 price-signals.

  • 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.

The power 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.

  • Payment security.

  • 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:

  1. Over 13,000 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.

  2. 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 expectation.

  3. 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.

  4. The process 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).

  5. 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.

  6. Another 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.

  7. 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 finalization.

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 be allowed.

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.