Tantra Narayan Thakur, Chairman and Managing Director, PTC India Limited

Earlier, electricity was highly regulated by the Government and was managed only by the Government utilities. The power produced was also 100 percent tied up under long-term allocation with no correlation to the paying ability of the purchasers (SEBs). There was no time value attached to the electricity, i.e., the price was same throughout the day and concept of peak power, off-peak power or different time durations of the day was absent.

But after the enactment of the Electricity Act, 2003, the power market has indeed developed in a short span of time, which enabled movement of bulk power from surplus to deficit areas resulting in better utilisation of existing power assets. With this, new products came into the market and pricing shifted to market-based pricing mechanism from cost-based regime. This helped the utilities better recognise the value proposition that the power market brought with it. They started looking at electricity as a revenue generating commodity rather than a social service, especially in energy rich states like Himachal Pradesh, Uttaranchal, Andhra Pradesh, Chhattisgarh, Orissa, among others.

The private players also started seeing the value in the sector and are playing a vital role in generation and trading of electricity. This growth and development of power market and the fact that we are the only country with two fully functioning power exchanges (and the third one coming up shortly) shows maturity in the country's perception towards electricity as a commercial commodity.

Yes, there is a huge capacity of 100 GW planned to be added in the next Five-Year Plan. And though, we missed the initial target of 79 GW in the current Plan, but still the capacities added are higher when compared to the previous Plans, which is good for the power sector as a whole, not only for the traders. A good trend that has come up in the capacity addition is that the private developers are rubbing shoulders with the PSUs and even, outperforming in some cases.

In the mid-term appraisal of 11th Plan, only the private developers had achieved more than their targets. About 2,300 MW capacity of projects from the private sector are expected to be commissioned in the second half of 2011.

The National Electricity Policy (NEP) states that a part of the new generating capacities (15 percent) may be sold outside the long-term PPAs to promote market development and captive generators should be permitted to sell power to licensees and consumers. This means that a significant part of the new capacities are proposed to be available for short-term trading.

Some merchant generators are selling their power through traders and now the small captive generators are also increasingly being able to sell through Open Access and Power Exchanges. Therefore, the country is moving towards competitive tariff regime. The future of power trading is bright in the country.

The State Power Ministers' Conference held last month highlighted the need for urgent steps to arrest and reverse the growing losses in power distribution. A resolution was adopted, which requires the state governments to ensure that the accounts of utilities are audited up to 2009-10 and for future, by September of every financial year. Also, the states are required to ensure that the subsidies are released in advance. The resolution also addressed some of the other issues of utilities in the distribution sector.

However, it being a very recent event, it is too early to see or measure the progress because of the adopted resolution. Such things take time to implement. There cannot be overnight changes in the distribution sector; rather the reforms must ensure sustained progress.

PTC is actively involved in cross-border trade with our neighbouring countries. We procured about 5.6 BUs from Bhutan in FY11 under long-term PPAs for supply of power to the beneficiaries of Eastern and Northern region and supplied 46 MUs to Nepal on commercial terms.

Some positive developments have taken place in building the transmission links with Nepal and Bangladesh. We are under active negotiation with Nepal Electricity Authority (NEA) to initially supply 150 MW of electricity and later on, import power from upcoming hydro-electric projects of Nepal.

The Bangladesh link is expected to be up and running by 2013-14, which would provide another promising possibility of power trading. We are trying to seize that opportunity too.

A JV company named Chenab Valley Power Projects Pvt. Ltd. has already been formed for the purpose of implementing Pakal Dul and other hydroelectric projects with an aggregate installed capacity of about 2,100 MW. PTC's share is two percent while NHPC and JKSPDC, each have 49 percent share in the JV company. The work on the projects is in initial phase and the preliminary work at the site is being taken up.

Within a particular region, there is no congestion, but across the regions also, there seems to be very less congestion for advanced STOA (Short Term Open Access) applications, i.e., STOA applied three months ahead. However, there is some congestion observed for FCFS (First Come First Serve) application, i.e., STOA application for next month.

The recent report on short-term power market by CERC shows that the transacted volume on exchanges could have been five percent higher, had there been no congestion in the system.

Congestion is observed mainly in WR-SR and ER-SR corridor. In some months, only 450 MW power could be scheduled against total applied quantum of 1,150 MW.

However, definitely some improvement is observed in the past few months. There is a plan of building a robust transmission system with some spare capacities. If implemented, it will help a lot in tackling the problem of congestion.

As I stated earlier, the NEP categorically states that a part of new generating capacities (15 percent) may be sold outside the long-term PPAs to promote market development, but still public utilities don't have that freedom to sell in the short-term market. Open Access regime in intra-state transmission, is also different in reality than on paper. Many states having power shortages don't allow open access, sometimes by invoking emergency protocols, which is very serious. In addition, many states have limited paying capacity due to poor financial health of utilities and prefer to restrict their demand through power cuts and load-shedding rather than sourcing power available at competitive tariffs from short-term market. The electricity produced from renewable sources is infirm power and hence, it is difficult to trade it across regions. But it will get a boost with the trading of RECs (Renewable Energy Certificates).

Apart from the above difficulties, the power produced in the country is mostly tied up in the long-term and only about 6-7 percent of the total energy generation is traded in the country, excluding UI. But with the new projects coming in, particularly from the power sector, this trend of long-term tying up of power is changing and more trading volumes will be seen in the future.

Price volatility is important for the market sometimes, as it gives signals as to how the price will move in future. But, it has to be properly managed. In the last fiscal, bilateral trades were more or less stable in terms of both volume and price, but volatility seen in the short-term market was about 12 percent in case of exchanges. Price volatility raises level of risks and the market then looks for ways to hedge such risks by locking on to prices for future. CERC has begun to project forward prices curves.

With increasing private investments, merchant capacities and perceived risks of price volatility and other related issues, there will be a need to hedge volatility risk in future and a stage will come when market players will expect financial hedging instruments. Main trigger for such things has always been the entry of private players as seen in other markets in the world (not necessarily power markets). Now that the private sector participation is increasing, we may see the introduction of necessary tools and instruments as the market grows.

There is always a first mover advantage to the first player in every market. And sustaining that advantage and market share also depends on marketing capabilities of the organization, i.e., to convince the customer about the benefit of trade in this case.

IEX claims that their client-exchange interface is quite good and no complaints of errors have been received yet. Also, there are minimal transaction overheads/charges. This could be another reason for their sustained high market share. They also have our support as a co-promoter and we ourselves are a major player on IEX.

As I explained earlier, the price risk may be curtailed by introduction of hedging instruments as and when the market is ready for the same. Some of the instruments widely used in international power markets are electricity derivatives such as futures and forwards, options, contract for differences, index price products, etc. In the coming years, we will see the development of electricity derivatives market in India.

The power is tied up for old power plants. The new ones have significant level of flexibility in selling their power, though it is not much in case of public sector generators. Whereas the National Electricity Policy (NEP) recommends 15 percent of new generation capacity to be offered to the short-term market to unleash competitive price regime the national hydro policy permits up to 40 percent of power to be retained as merchant capacity for remotely located hydroelectric projects, such as in north-eastern region. Also, as Open Access regime will ease out, more captive generators and industry hubs would be able to access national power market. So, the volumes will increase and there will be ample opportunities for trading.

Medium Term Open Access being allowed will also give some opportunities as well as predictability to the market. And, as the size of the market increases, flexibilities in terms of tenure, tariffs, etc., will provide further fillip to power trading.

In general, it is not in the hands of private players to standardise or commoditise the product. It depends more on the regulators and the market design. How regulators shape the market design and how much standardisation they allow in the products would be the guiding factor.

However, the private players can also contribute towards improving efficiency of the market. First of all, they should avoid taking long-term view on prices by seeing short-term trends. The prices are firming up in the market, which is giving rise to second thoughts. Long-term outlook on the sector is positive; hence, they should focus on decreasing their costs, completing projects without any delays and improving on several other aspects - technical, manpower to megawatt ratio, O&M expenses, specific oil/fuel consumption per kilowatt of generation, etc.

Focussing on the above aspects will increase efficiency with resultant volumes and make their tariff competitive. That is the mantra of success in future for them.

It can be ensured only when a few fundamentals are right. First of all, there should be a level playing field for all kinds of players. No special treatment or preference should be given to public sector enterprises or anyone else for that matter.

The provisions of The Electricity Act, 2003 and the National Electricity Policy should be implemented in true spirit. As I stated earlier, Open Access has not been implemented on full-scale in intra-state transmission system and is acting as a major barrier in most of the cases. The generators should be free to choose whom to sell their power. Though bulk consumption above one megawatt also qualifies for open access, the discoms are reluctant to permit them on the ground that they will lose paying customers, whereas they will have to continue to provide them with back-up grid support.

There should be certainty in the regulatory environment of the country. Long- term visibility is necessary to sustain the interest of private players. All kinds of sops, tax holidays, fiscal benefits, etc., should be decided keeping a long-term view. The private players should feel as equal partners in the development of the sector.

Losses of state electric utilities are another concern. The government is aware of these issues and is addressing them, but a lot needs to be done.

Though these issues are beyond the scope of a developer to address, but a developer can, through the industry associations like, ASSOCHAM, CII, FICCI, etc., and proper advocacy, keep raising critical issues and reminding the government about addressing the same. Also, various ministries and government departments such as environment, railway, coal, port and petroleum, need to have better coordination. They should work as a well oiled machine; working in silos will create more problems.

Industry associations are alive to the issues of power sector and are taking these up with the government and before the regulatory commissions at national/state levels. Such kind of interaction between various bodies will definitely help in reducing the risk and create a synergy for structured and rapid growth of power industry, so vital to sustain the economic growth on higher trajectory.