The Central Electricity Regulatory Commission (CERC) has floated a paper to discuss high market prices in power exchanges and apprehensions on “super normal profits” earned by units with lower marginal costs of producing electricity.
CERC has pointed out that the recent surge in electricity demand due to revival of economic activity and unprecedented climatic events have put pressure on prices discovered in the power market. It has asked the stakeholders to share their suggestions by November 4.
“In wake of such developments, the Commission finds it expedient to review the regulatory framework, especially pricing methodology used in the power market, and to explore possible options to deal with such situations in a predictable manner,” it added.
The regulator asked stakeholders to share views on using a mechanism like the windfall profit tax imposed by the government to check private refiners making huge profits by exporting diesel to the US and Europe, at the expense of the domestic market this year.
On regulatory intervention, the CERC said: “To partially capture the surplus profits made by the inframarginal generators, would it be advisable to impose a levy on supernormal profits, as was done by the government for petroleum?”
Inframarginal generators are sellers with lower marginal costs such as lignite-based power plants, cheaper coal-based generation and RE generators.
Super normal profits
CERC emphasised that it is imperative to mitigate the concern of super normal profits which may apparently be achieved through pay-as-bid auction.
While participating in the market, Gencos quote prices to receive their marginal costs and, in addition, recover part of their fixed cost. Pay-as-bid auctions may encourage sellers to offer high bid prices (higher than marginal cost) to earn a profit and also recover fixed costs (business rationale), it added.
Suggesting a discussion on pricing methodology, it opined, “Given these facts, would it make sense to switch to pay-as-bid pricing methodology and would it address the concerns regarding super normal profits for inframarginal generators under uniform market clearing price?”
In pay-as-bid model, the prices paid to the cleared sellers are based on the sell bid offered by the respective seller. Thus, each seller is paid a different price tied to the bid offered by them and these prices do not depend on the price of the most expensive seller cleared to meet demand.
Though the overall demand-supply situation generally gets reflected in the prices discovered through exchanges, some spikes in prices were witnessed in October 2021. The situation, however, was short-lived and improved with increased supplies and fall in temperature.
In late March 2022, a similar phenomenon was observed due to unprecedented high demand without commensurate increase in supply and prices in day ahead market and real time market remained significantly high for a consistent period which led to regulatory intervention in terms of imposition of price-ceiling that was later extended to all market segments.
“In the wake of these events, it is imperative to review the regulatory framework, especially pricing methodology in this context and explore possible options to deal with such situations in a predictable manner,” CERC said.