For starters, the Electricity Act, 2003 recognised trading of power as a distinct activity with a view to promote competition and optimise the use of generation resources. What makes power trading critical is the requirement of immediate consumption; power, unlike most other commodities, must be consumed when generated, since it cannot be stored.

Power trading allows power to flow from power-surplus regions to power-deficit regions so that the existing generation capacities are used effectively and power is supplied optimally to all consumers, Ms Desai explains. “Various factors such as fuel availability, location, seasonal power requirements, etc., contribute to the demand-supply gap existing across the various regions in the country.” The power trading market has grown at an average rate of about 20 per cent over the last five years, she informs, during the course of a recent email interaction with Business Line. “The weighted average sale price has increased from approximately Rs 2.30 per unit in 2003 to over Rs 4.50 in 2008 and is expected to be more than Rs 7.20 in Q1 FY 09.”

While the objective of developing the electricity trading is to unleash market forces to improve efficiencies, stimulate technical innovations and promote investments in the power sector, it is important, says Ms Desai, that the system runs in a free and fair manner ensuring the desired quality of power to the consumer at the most economical price through safe, secure and reliable operation of the trading system.

The end-consumers require power that is uninterrupted and economical, and the investors in the power sector look for a free and fair trading market, she adds. “With additional investments, as capacities are added and the demand-supply gap reduces, power tariffs may be expected to ease in the long-term, nearer to the cost of generation plus a reasonable return as evidenced in the telecom sector.”

Excerpts from the interview:

First, a brief history of power trading.

PTC India Ltd (erstwhile Power Trading Corporation Ltd) was established in 1999 to promote power trading and power exchange with neighbouring countries. Till 2003-04, PTC was the only power trading company in India and traded approximately 11000 MUs (million units) of power that year.

However, as on July 2008, around 31 entities hold power trading licences across various categories, of which, around 10 are currently active, such as the trading arms set up by power generation companies; these include NTPC, the Adani Group, Tata Power, Reliance Energy, JSW, and Lanco. The total trading volume in 2007-08 was nearly 21,000 MUs, an increase of more than 40 per cent over the past year.

What are the growth drivers?

One of the key factors driving the growth of the power trading market was the introduction of the ‘open access’ concept in the Electricity Act, 2003. Open access allows companies to utilise the existing State/Central transmission and distribution network, enable generation companies to utilise their unused capacities to transmit power from their generation stations to the load centre on payment of certain open access charges.

Another factor driving the rapid growth of the power trading market is the supernormal profits that power generation companies expect to realise from selling the power generated in the short-term trading market.

How has been the price behaviour?

The average annual sale price in the last few years has been more than Rs 4.50 per unit (more than 53 per cent of the traded volume in 2007-08 was in the range of Rs 4 to Rs 6 per unit) compared to long-term tariffs of around Rs 1.50 for captive coal-based power and Rs 2.30-3 for linkage-based or imported coal-based power. This is evident from the fact that most of the power trading companies have been set up by power generation companies such as NTPC, Tata Power, JSW, Lanco, Reliance Energy, the Adani Group etc.

And the volumes?

The trading volume was still around only 3.2 per cent of the total generated units in FY 08. The key factor limiting the growth of the power trading market has been the existing power deficit scenario in the country which limits the power available for trading. The planned capacity addition of nearly 80,000 MW (megawatts) in the Eleventh Five Year Plan, out of which nearly 10,000 MW is planned in the private sector, is expected to add significantly to the power available for trading.

Hasn’t the sector seen a few progressive measures?

True. A major milestone for the power trading market was the opening of the country’s first power exchange, the Indian Electricity Exchange (IEX) on July 27, 2008. The exchange has seen a healthy growth in volumes since its inception and has traded more than 1.5 MUs in its first three months of operations. The average price per unit has been around Rs 7.50 per unit. The IEX offers benefits of payment security, hedging and various trading options. The exchange enables appropriate price discovery and justice to the time value of electricity.

A prime benefit of the development of the power trading market has been the recent spurt in announcement of capacity addition plans by the private sector, in particular the announcement of several merchant power plants.

In a traditional power plant, the power sale is tied up on a long-term basis, thereby eliminating any market risk, whereas in a merchant power plant the developer competes for customers post commissioning of the plant, thereby absorbing the full market risk. The opportunity to make supernormal profits through short-term sales at high tariffs in the trading market is driving developers to take the additional risk.

Distribution companies were also expected to take advantage of the power trading market to fulfil their peaking requirements while signing long-term contracts to meet their base load requirements. This would have allowed the distribution companies to efficiently plan their power purchase requirements resulting in economic operations and reduction of tariffs to the eventual consumer.

D. MURALI

(Portrait by R. Rajesh)

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