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Will power trading exchanges flourish in the country? Yes, if there are changes in regulatory norms.
At present the industry is confused and not too bullish about expansion of trading exchanges. There are hiccups in the regulatory regime that are major roadblocks for the market to expand.
On the one hand, the Power Ministry proposes to make it mandatory for power developers to sign long-term agreements with distribution utilities (Discoms) for the entire electricity produced, thus, leaving no electricity available to be traded in exchanges. And on the other, the Centre recently allowed 49 per cent foreign investment in power exchanges. This includes FDI up to 26 per cent and foreign institutional investors can bring in up to 23 per cent of the paid-up capital.
The Cabinet has also approved a debt restructuring scheme for Discoms, which may help regain buying power of the utilities.
The power trading market, especially through online platforms in the two exchanges, is at a nascent stage with just one per cent of total electricity market. Even in the developed countries, base requirement of electricity is tied up through longer term bilateral contracts between the distribution utilities and producers. The volumes in the spot market are roughly around 10 per cent in countries such as Netherlands and Spain.
In India, the spot electricity trading (short-term plus exchanges) volumes vary at around 5-6 per cent of total electricity demand.
“The best case situation in India will be to have 10 per cent of volume handled through short term market — both bilateral and exchange based,” said Debasish Mishra, Senior Director at Deloitte Touche Tohmatsu India Pvt. Ltd.
EXCHANGES
Currently, the two exchanges -- Indian Energy Exchange Ltd (IEX) and Power Exchange India Ltd (PXIL) – trade about 35-40 million units a day, which has come down from 70-80 million units compared year-on-year.
IEX, which caters to about 93 per cent of electricity traded in the exchanges, is promoted by Financial Technologies. NSE and NCDEX own the second exchange PXIL.
Two more exchanges are being proposed. They are the National Power Exchange to be jointly promoted by NTPC, NHPC, PFC and TCS. And the other is by Ahmedabad-based Marquis Energy Exchange. The National Power Exchange is expected to start operating from 2013-14.
According to guidelines notified by Central Electricity Regulatory Commission (CERC) the promoters require net worth of Rs 25 crore to float a power trading exchange.
REGULATORY FACTOR
Regulators, participants and all the other stakeholders are still trying to find right kind of market design and products suitable for India, said Rupa Devi Singh, Managing Director and CEO of PXIL.
“The restriction of trading up to 11 days on exchanges had stalled the evolution process. This regulatory imbroglio did not let the exchanges mature, provide depth and help establish them as a transparent market,” Singh explained.
If CERC lifts the cap of 11 days from exchanges, many of the short-term buyers (varying from a month to three months or more) would opt to buy electricity from exchanges, said a senior PFC official.
“The exchanges offer transparency and real-time pricing which is not there in short-term bilateral agreements,” the PFC official pointed out.
The stakeholders involved in the business expect that power exchanges would be allowed to launch products for trading of electricity for up to three months soon. “It is going to shake things up in terms of products available in the market and definitely participants will re-calibrate their portfolios in this light. Volumes in these products will be totally different from the spot markets due to sheer time horizon,” said Singh.
Power exchange business is a natural monopoly. Regulators were aware of the dangers posed by monopolistic markets; hence they proposed multiple power exchanges.
VIABILITY OF NEW EXCHANGES
There are also options for restructuring or consolidation of exchanges. As the market grows, more exchanges may be needed. Currently, the power sector is in turmoil. There is liquidity crunch with both buyers and sellers. But things would improve, feels the PFC official.
However, industry watchers differ. “We already have two exchanges and I do not see the immediate business case for more exchanges at this point of time,” said Mishra of Deloitte.
“Despite this, I see spot trading volumes growing in India in the near future,” said Singh.
This is because with the tightening of frequency band, stricter implementation of unscheduled interchange (UI) regulations and other initiatives taken by the CERC, the spot trading market is expected to grow in the future.
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