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Soon, even bilateral power purchases will be routed through exchanges

M Ramesh Chennai | Updated on July 24, 2020 Published on July 24, 2020

Soon all power transactions — including bilateral purchase and sale of power through long-term power purchase agreements — will be routed through the power exchanges. This ‘Market-based energy dispatch of Electricity’, or ‘MBED’, is expected to deepen the power markets, bring in better price discovery.

“Something will happen in the next four months — a big policy step — which will make the day-ahead market far, far more liquid,” said Sanjiv Sahai, Secretary, Ministry of Power, while speaking at a conference organised by Delhi-based think-tank, The Energy Resources and Institute (TERI). While the secretary did not mention what the “big step” was, BusinessLine has learned upon enquiry that he was referring to MBED.

According to sources in India’s bigger energy exchange, IEX, both buyers (electricity distribution companies, such as BEST of Mumbai) and sellers (generators, like NTPC) will necessarily have to put in purchase and sell bids in a power exchange, even if they have a bilateral deal with a fixed tariff.

MBED forces all players to route all transactions through the power exchanges. The bids will be in the day-ahead market, where each bidder tells what it wants to purchase and sell in every 15-minute time block of the following day.

At the heart of MBED is the splitting of fixed and variable components of cost of power generation. While the fixed costs would be paid by the buyer in accordance with the Power Purchase Agreement (PPA), generators would have to compete in the market on variable costs.

The idea has been floating around for a couple of years. In December 2018, the Central Electricity Regulatory Commission (CERC) issued a ‘Discussion Paper on Market Based Economic Dispatch of Electricity: Re-designing of Day-ahead Market (DAM) in India’.

The paper noted that currently an electricity distribution company which has a bilateral PPA with a generating company, tells the generating company how much power it needs the following day — discoms requisition power specifically from their contracted generators.

‘Self-scheduling’

This practice, called ‘self-scheduling’ is completely outside the energy markets. In such a system "costlier generation is used despite availability of cheaper generation,” the paper says. In the MBED model, discoms would bid into the power exchange for procuring power. The generators, on their part, will bid on the variable cost of generation — they would be paid their fixed costs separately by the discom with whom they have the PPA.

Notably, MBED is expected to benefit renewable energy companies that will have a bigger market to sell their power.

Calling it a “significant transition”, Vishal Pandya, Director, REConnect Energy, a consultancy which offers artificial intelligence-based analytics to energy companies, noted that because of the “pool-based participation” large systemic efficiencies would be derived. Overall cost of power would come down, Pandya told BusinessLine.

Sahai also said that in a few years, derivatives would be allowed into the energy exchanges — there will be forward trading and futures and options in energy, as for stocks and commodities.

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Published on July 24, 2020
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