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Jayant Deo, Managing Director and CEO, Indian Energy Exchange

12 Oct 2011

Indian Energy Exchange (IEX) made its foray as India’s first ever power exchange on June 27, 2008. After three years of operation IEX holds a market share of over 85 percent. Power Exchange India Limited, promoted by NSE is the other company offering similar services.

Deo explains to InfralineEnergy’s Chhavi Tyagi the factors that built the foundation for the exchange’s market share, new products introduced by the exchange that expanded the market and delves on issues arising out of congestion in the transmission network.

Deo has over 34 years of industry experience and before joining IEX, he was a member of Maharashtra Electricity Regulatory Commission (MERC). He expounds the need for long-term products in the market for the trade to develop further and implores for a second wave of reforms to ensure the implementation of the Electricity Act.

Edited Excerpts

How has the arrival of competition in the form of PXIL changed the market for you?
A few years ago, the Central Electricity Regulatory Commission held a discussion on the subject of power exchanges, where we suggested that there has to be competition in the power sector. It was our view that there has to be more than one operational power exchanges in the country so that each one would be forced to do its best. It is recorded in the CERC paper that a healthy competition was not just desired, but was also demanded by our group. Healthy competition is good for any sector and we welcome that competition.
Do you consider PXIL a strong competition?
I will let our market share decide that. We have been maintaining a market share of close to 85-90 percent even though PXIL started its operation three months after we did. There is not much time difference in that but we are continuously maintaining our market share of 85-90 percent on a monthly basis.
What are the reasons for your continuing stronghold on the market?

A very important factor which has helped this exchange in maintaining its lead in the market share is that even though IEX was established in the year 2008, the back-end work had actually started in 2005 itself. Throughout the initial years, we travelled all over the country collecting stakeholders and discussing with them the need for a neutral market place. In the initial phase, there were a lot of apprehensions. Questions were raised like what was the need for such a market, who will come to trade in such a market, where is the power to trade in a scenario, where there is a shortage of power in the country. At that time, it was thought to be a very radical thing to have an exchange in a country, which has a supply shortfall. This moving around and talking to different sets of people helped us in acquiring extensive domain knowledge and laying a strong foundation.

"A speaker at a recently held seminar said that he receives different prices when he quotes a price on IEX, however when he quotes the same price on other exchange, he receives exactly the same quote. He went on to say that this can only mean that the other exchange is leaking the price to somebody, which is the reason he had stopped working with that exchange."

Incidentally, this is the first power exchange in the world operating in a negative supply scenario. Our spinning reserve is minus 21 percent and still this exchange is successful because it has a better market share.

Secondly, our technology is a very important factor, which has helped us in moving ahead. The technology was developed by Nord Pool (Nordic Power Market) and it was further customised for Indian conditions. So far, we have given 25,000 hourly options for power market with no complaints, no single minute delay and no rupee error.

This is a long-term economic infrastructure institution. Therefore, it has to have certain core values to help it survive and grow accordingly. Our core values are transparency and fair dealings. We have made sure to follow and nurture these values as time passes.

An anecdote shared by a speaker at one of the recently held seminars showcases our values perfectly. He said that he receives different prices when he quotes a price on IEX, which is the design of the exchange. However, when he quotes the same price on other exchange, he receives exactly the same quote. He went on to say that this can only mean that the other exchange is leaking the price to somebody. It is because of this reason that he had stopped working with that exchange. Therefore, there is a lack of trust and no trade or exchange can operate successfully unless there is trust.

At IEX, we take several measures to be transparent and build a confidence with our clients. For instance, if we have to extend market hours, we allow everybody to use those extended hours and not to our select members only. We have audit trails for the past five years showing who has done what bidding at what point in time. In addition to that, all the transactions are audio-video taped and the records for those are also maintained. Also, we have a system where only incoming calls are allowed and no external calls can be made out of the trading room. All of the calls are again recorded and logs maintained. All these checks and balances ensure that our systems are absolutely clean and transparent.

Discoms prefer to opt for power cuts instead of buying electricity from short-term market, as a power exchange. Why do they do so?

Many of the discoms have not yet improved their efficiencies or cut down on their losses. In some of the states, the tariffs are still much lower than what they should be. Because of all these reasons, even if the price of the short-term electricity is as low as INR 1.50, some of them do not have the required money to buy even such cheap electricity as they are unable to collect the tariff from the lower class of consumers. Moreover, the tariff collection system is not efficient which results in mounting losses.

"As far as the congestion affecting our business is concerned, the loss is almost five percent of our volumes on an average. However, on some days this figure goes up to almost 80 percent of the volume. This issue has been brought to the notice of the CERC that we are losing volumes because of the congestion."

A change in the mindset would result in the proper acceptance of the Act and its implementation in the right spirit. The regulators and the government are taking steps in that direction. A second wave of reforms is needed. If it is not done now, the confidence of the investing community in the power sector will be eventually lost. If that happens, this country will not get additional capacity from the private sector.

What are the new products that IEX has introduced and how have they been received in the market? What about long-tenure products and intra-state products?

This is a one-stop shop for buying power at any hour of the day, any day of the week and any week of the month. After introducing Day Ahead Market, our second product, Term Ahead Market (TAM) was introduced on September 15, 2009, which includes intra-day, day-ahead contingency, daily and weekly products. Though initially, there were a few hiccups with this product, as people are used to an economic cycle of either a day or a month, yet TAM is picking up, albeit slowly. For all this trade to move faster in the market, we need a standing clearance from the State Load Dispatch Centre, which we haven’t received as yet. While we do have a standing clearance for the Day Ahead Market, but for every contract in Term Ahead Market, we need to take a new permission from the State Load Dispatch Centre, which takes time.

"A change in the mindset would result in the proper acceptance of the Act and its implementation in the right spirit. The regulators and the government are taking steps in that direction. A second wave of reforms is required. If it is not done now, the confidence of the investing community in the power sector will be eventually lost. If that happens, this country will not get additional capacity from the private sector."

We had plans to introduce monthly contracts as well in the market. However, these are not yet approved by the authorities. Though we were allowed weekly products one month in advance, the Central Electricity Regulatory Commission and Foreign Market Commission got into a disagreement over the right to regulate. Though the matter went to the Mumbai High Court, yet things are not still clear. Because of this quandary over regulation, we are only doing 11 days contract and anything beyond that is yet to be approved.

There is a need for these long-term products. For instance, if a generating company is putting up a plant, it should know the situation and the prices that would prevail five years down the line. In other countries, there are contracts up to 68-70 months, which helps in providing an understanding of the future conditions.

Unlike most of the countries, which have financial as well as physical market like spot market, in India, we only have a physical market. Moreover, even in the physical market, we are not allowed to go beyond 11 days. The technology company from where we got this model has 60 percent of their generation coming in Day Ahead Market. The way they operate is by hedging their prices in the financial market and moving with the physical electricity in the physical market.

There is a reason for such a model. In any power system, there is a parameter called frequency using alternative current, which changes directions 50 times/second. This frequency, measured in hertz, has to be maintained throughout for the smooth functioning of all the machinery in the country. To maintain this frequency, both the generation and the load need to be balanced every mini second. We have to declare the load that we are going to have every day for every hour and if there is even a slight deviation from the declared quantum then there are heavy penalties to be paid.

The parallel financial market settles with reference to the price in spot market and in that case, we don’t have to physically throw the power in the market. So there is no question of any deviation. However, in physical markets, deviations occur and there are heavy penalties. Therefore, long-term markets are very essential to minimise the cost of the wrong estimations, which are bound to happen sometimes.

How successful have the power exchanges been in facilitating the flow of power from the surplus region to the deficit ones?

The scale and reach of power exchanges, especially for spot market has yielded good results in balancing power between the surplus and the deficient regions. At present, around 45 MUs is being traded on IEX daily in Day-Ahead Market (DAM), which is around two percent of the total electricity generated and which, in turn, is around 40 percent of the short-term power market. This shows the reliance of market participants in exchange based spot market in a short period of their existence.

Another notable fact is that with the advent of power exchanges, the transmission corridor utilisation has improved substantially, which indicates that power exchanges have contributed in reducing the mismatch of demand and supply between surplus and deficient regions.

There are certain periods when the power flows from the northern region to the southern region and likewise during the months of March and April, surplus power flows from the northern region to the southern region. Earlier we were confining ourselves to the state boundaries for power transfer, now with the help of power exchanges, these state boundaries have been converted into a national boundary.

To what extent, is the exchange business getting affected by transmission corridor constraints? How does IEX plan to work out this problem? Is there anything specific you would expect from the government and regulatory bodies for facilitating the development of power market?

Before the power exchanges were established, the question of congestion was discussed in many seminars. At that time, the National Load Dispatch Centre made a statement saying that the incident of congestion is one in thousand. This was before the power exchanges. Then the power exchanges came and we were allowed 1MW/hour to be supplied and since then, congestion has become a daily affair. Now, authorities from the National Load Dispatch Centre are making statements like ever since exchanges have come, all the power in the country is being utilised and because of that congestion has become a daily problem now.

That, I would say, is the contribution of the power exchanges to this country; utilising all the power generated. In economics, one kW of power generates INR 100 worth of GDP and this, in turn, generates INR 15 of tax revenue for the government. We have released this bottled up revenue and thus, the government and the society at large benefits.

As far as the congestion affecting our business is concerned, the loss is almost five percent of our volumes on an average. However, on some days, this figure goes up to almost 80 percent of the volume. This issue has been brought to the notice of the CERC that we are losing volumes because of the congestion.

"Even though IPPs are encouraged by the government, large users are still buying power from utilities as captive power is more expensive. It has been a major disappointment for independent power producers. This disappointment will result in a dearth of capacity. Thus, there is an urgent need to correct that and to take out the large users out of the regulated tariff, as provided in the Act."

One cause for this loss is that the transmission corridor allocation under the present system is based on first come, first serve basis. Exchanges are provided with the left out corridor, after advance allocation to traders. This puts exchanges at a disadvantageous situation. Congestion occurs in two or three specific corridors, i.e., the S1- S2, Rest of India to South, and Rest of India to North corridors. This transmission corridor congestion is a seasonal phenomenon, in Southern corridor in winters (December - January period) and in Northern Corridor in summers (June-July period).

Congestion management for DAM Collective transactions is done by exchanges through "implicit transmission capacity auction", with varying Area Clearing Prices in upstream and downstream of the congestion. This generates 'Congestion Revenue' which is the implicit cost of transmission corridor. Currently, a total of more than INR 650 crore are available in this fund which is held by NLDC. Our proposition is to utilise this fund for measures to relieve congestion, like augmentation of the corridor. We are also in favour of keeping some capacity reserved for the day ahead spot market, as this is the market place where spot prices are being derived and congestion should not skew these prices. We are also in favour of transmission capacity allocation through auctions.

What kind of response do you get from captive power generators? Can you provide a figure as to its share in the monthly transactions?

Right from the inception, IEX is actively involved in pursuing the issues with the Open Access policy with regulators and State Load Despatch Centers. The exchange has also taken up the task by capacity building at different levels. Currently, over 80 CPPs actively trade on IEX, with a monthly volume of around 200 MUs. However, there are some states, which have not implemented the Electricity Act 2003 in its real spirit, particularly with reference to the Open Access provisions. Once this is done, we hope that the participation of Captive Power Plants would substantially increase. It will unlock the hitherto un-utilised power generation capacity which, in turn, will benefit the consumers.

An instance of the captive power generators making a beeline for the power exchanges was witnessed during the global slowdown. The iron and steel industry, during that period, started selling their captive power on power exchanges, which provided them a steady revenue stream. In the absence of power exchanges, this power would have remained idle but now the industries are making money out of it. This power is being provided to people who need it. Thus, it is a win-win situation for the entire country.

Therefore, in accordance with what the Act provides, captive power plants are coming to the exchange and finding regular customers for their power. The exchange provides them a multi-buyer and a multi-seller market with a guaranteed trade.

What would be the role of IEX with regard to PAT for trading in energy saving certificates?
Energy Saving Certificates (ESCerts) are proposed for trading exclusively through power exchanges, so as to promote transparency and enable liquidity. Trading on power exchanges is not alien to designated consumers, as majority of them are already associated with IEX for meeting their power demand. IEX, enjoying over 88 percent market share, will play a major role in facilitating trade of ESCerts. We are also actively involved with the Bureau of Energy Efficiency in the development of market mechanism for trading of ESCerts. Our proposition is that a liquid market for the ESCerts would support in achieving the objectives of PAT mechanism. Market awareness about PAT mechanism is another area, which should be given greater attention in the initial phases. IEX will play a major role in this area as well.
What are the key issues that the regulator should keep in mind while framing the regulatory framework for the power exchanges?

First and foremost, there is an urgent need to revamp the tariff policy, which presently is based on the principle of average cost of supply model for fixing the tariff. In this case, if the consumption by the high-end consumers increases while at the same time, the consumption by the weaker section of the society or the priority sector only marginally increases, the average cost of electricity still goes up. This, in turn, means that the weaker section of the society is also required to pay more for the electricity even though their consumption remains the same. The Act provides for making a differentiation based on the purpose. But what is the rationale behind the purpose?

Also, the principle of average cost of supply is also creating problems for Open Access and cross subsidy. The regulators have to ensure that Open Access is allowed in principle. Though it can have different interpretations, yet the Act says that those categories which have been granted Open Access, which means one MW and above, their tariff will not be fixed by the Regulatory Commission. Only wheeling charges and cross subsidies is chargeable. However, in reality that is not what is being followed.

Their interpretation of the Act is that the tariff is not applicable to only those who wish to go out of the net. This would result in the underdevelopment of the market. People have accepted the increased prices of petrol and diesel, but there has not been much change in the electricity market.

The regulated tariff will continue and since it is based on the average cost of supply, it will always be lower as the average cost of supply is always lower compared to the marginal cost. Even though IPPs are encouraged by the government, large users are still buying power from utilities as captive power is more expensive. It has been a major disappointment for the independent power producers. This disappointment will result in a dearth of capacity. Thus, there is an urgent need to correct that and to take out the large users out of the regulated tariff, as provided in the Act.

In case the Act needs to be amended, then it should be done but market development should occur and it will not happen unless large consumers are pushed to the market. This is how it has happened in other countries, where the electricity market has developed. In case the regulator needs to fix the tariff, it can be said that the top five percent of power procurement will be the decided tariff. In many developed countries, utilities supply power but they change the rate every hour. The rate is based on the rate of buying the power at that hour and that is why it keeps on changing. In India, there is a need to do something similar.

(InfralineEnergy thanks Jayant Deo for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)