The Hindu Business Line : `Power trading will take 5-6 years to develop'

Power Trading Corporation, the first company in India to start trading in power, has a number of hurdles ahead. Still in its nascent stage, the power trading business has miles to go before it develops into a mature one.

Faster implementation of reforms, unbundling or corporatisation of state utilities and availability of sufficient transmission capacities are a necessity to facilitate growth. The country's power scenario is still far from providing structural facilities that could aid development of the power market.

In addition, there are issues such as a good IT backbone, access to real time information and a proper state regulatory framework, which are still not in place. The PTC has been functioning for the last three years in a very nascent market and its volumes have grown multifold. But will the growth continue, given the limitations and the fairly long time required to settle these issues?

Competition too is hotting up with several established power sector players integrating themselves into the trading business. Will a standalone trading company such as the PTC have enough scope for growth? Business Line discussed some of these issues with Mr S .K. Dube, Director (Operations), PTC.

Excerpts from the interview:

The power trading business is still at a nascent stage. How do you think this market is going to evolve?

Power trading is very much in its place in developed countries. As far as our stage of development is concerned, we are far behind developed countries.

The market has opened and has accepted trading as a commercial proposition. The Electricity Act has given an impetus to trading as a commercial activity. But the reforms are still at its nascent stage and the market will take five-six years to develop. In January 2004, open access to transmission was provided. But State Regulatory Commissions are yet to lay down a framework for the open access. Unbundling of utilities is another major requirement for facilitating this market. A start has been made but it is going to take time to develop into a competitive market.

Are there enough transmission capacities to facilitate growth in trading business?

Open access will be successful only when there is sufficient transmission capacity. I can say that we have nearly reached the maximum trading volumes that can take place through available capacity. We just have a little more margin. The silver lining is more projects are under construction. The new transmission network when completed will provide capacity for growth.

Trading will also require an extensive database. Is such a database available?

We get details such as short-term deficit and surplus situation of each and every state over various seasons, various months of the year and even various time blocks in a particular week.

The Regional Electricity Boards, Central Electricity Authority and Ministry of Power generate such details. The data might not be online or be available real-time. We collect such data and store in our own system for analysis.

We also get certain daily data such as availability and load. But honestly, the type of data that we are looking for as a trader is yet to be generated in this country.

We will need a different kind of platform such as power exchange and online trading facility to get real time data. That might be possible only a couple of years down the line. There may be a situation when power trading takes place just like in equity markets.

You were planning to open a power exchange. Is the market ready for an exchange?

Yes, we are planning to go for stage one. Today, a structure for trading like in the US cannot be created in the country. The market is not ready for that kind of a scenario. Given the status of unbundling in this country today it is not possible now.

May be later on when the process of unbundling is complete and the distribution companies start functioning as it is intended to by the Act, through the process of privatisation or through corporatisation and when the infrastructure such as online connectivity is in place, we will be able to do it.

You can develop power exchanges in two to three stages. At the first stage, we would bring together the three main players — generator, trader and the buyer. It will act as a communication point for all the stakeholders and help price discovery.

Now there are three main players. All the three parties involved should have their IT infrastructure in place. They must have their delegations of power in place so that the person sitting in the opposite desk is authorised to take a decision to purchase or sell power. We are just trying to provide a structure to the deals through an exchange. Today information flow is only through fax or telephone conversation. There is no record.

Real time database is the second stage of development. If you want to capture the real time generation, load and the deficiency between the load and generation, is it possible only in the second stage. It has to be allowed by the law of the land and such infrastructure should exist with all the concerned players. The third stage could be derivatives or a function similar to that of equity trading.

When an exchange is in place, where you get information and the concerned parties can communicate directly, will not PTC's role decline?

PTC will still be a major participant in deal making as we provide payment security and take on credit risk.

We pay them either on a weekly, fortnightly or monthly basis. We usually get credit at least for three to four days in advance. At times, we make the payment and then collect from the buyer.

Which means, you would need a lot of cash for day-to-day operations. How do you manage your cash requirement?

We need to have networth equal to at least a month's trading requirement. We have raised equity for the purpose.

With an equity base of Rs 150 crore, you can go in for another Rs 150 crore as debt considering a one-to-one debt equity ratio. Your volumes now are like Rs 2,250 crore. Does it mean that you would need lot more cash to grow?

Yes, you are right. We might approach the market with a fresh issue if need be.

Established players are now entering the power trading business. Will it not be difficult for a standalone trading company to grow when integrated players start functioning?

In a selective manner we may go for equity participation in select projects. To sustain ourselves as a trader, we cannot just depend on these small arbitrages and state surpluses. We are working on entering into long-term 25-year to 30-year contracts.

We want to have atleast 5,000-7,000 MW in long-term contracts. We have initiated talks and they are at various stages. We have entered into MoU's for about 1500 MW. We have still have not finalized on any equity participation contracts.

We will be concentrating on captive power projects, industrial consumers and high-tension power consumers to beat the competition.

There is enough space available in the market. We will also ensure that we give the best pricing efficiency to beat competition.

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