India’s power sector has come a long way in the past few decades. Huge strides have been made to provide access to electricity, bringing power to more than 700 million people since 2000. The commencement of power markets with enablement of the Electricity Act 2003 and later the introduction of the power exchanges in 2008 was a significant development which brought in competitive price discovery, flexibility, efficiency, and transparency in the power sector value chain.
In India, the distribution utilities have been predominantly entering into long-term Power Purchase Agreements (PPAs), for up to 25 years, to secure bulk of their power supply obligations. The residual requirement is met through power markets that presently constitutes about 11 per cent of total electricity consumed in India on an annual basis.
Incidentally, power exchanges have brought forth significant optimisation and efficiency in power procurement for the utilities thus leading to financial savings for the utilities as well as 1 MW and above bulk consumers. At the same time, the markets have been helping power generators optimise generation and sell in the market beyond the sales committed under other medium and long duration agreements. This has greatly helped the generators to gather revenue beyond the PPA stream.
To deepen the power market and harness its potential to the highest, the Ministry of Power and the Ministry of Finance in the recent past have reached an understanding to introduce longer duration delivery contracts (LDCs) in electricity up to 365 days on the power exchanges. Thus far the power exchanges are confined to trade contracts only up to 11 days.
As per the agreed terms, the CERC will have jurisdiction in delivery-based electricity contracts, while SEBI will have jurisdiction in financially settled derivative contracts. The two regulators have been in a jurisdictional conflict on this issue since 2010, which is now awaiting final order by the Supreme Court. Introduction of LDCs will be a complete re-haul of the power market and usher in the era of Power Market 2.0 which will facilitate the growth of power markets and transform the power sector.
Trading in the short-term market allows distribution utilities to maintain the power demand-supply equilibrium in the most efficient way. India’s power sector is currently under transition driven by increasing reliance on short-term power markets and exchange-based electricity spot markets.
Total dues owed by electricity distribution companies to power producers have risen sharply to reach closer to ₹1.40-lakh crore in 2020. This is leading to a deep stress in the entire power sector value chain. Exchanges ensure a cash-and-carry model that eliminates bad repayment and thus ushers in immediate value for all involved.
Currently, the distribution utilities are meeting their short-term power requirement up to 11 days through exchange markets and beyond that up to one year through the Discovery of Efficiency Electricity Price (DEEP) portal functioning under the Short-Term Bidding Guidelines of the Ministry of Power. In fiscal 2020, almost 30 BUs were traded through DEEP platform under bilateral mode with delivery period varying from 15 days to three months for most transactions.
This further corroborates that introduction of contracts beyond 11 days at the exchange platform, where robust liquidity delivers competitive prices besides the flexibility in procurement, will be a game-changing opportunity for the market participants.
Besides the real-time, day-ahead and intra-day electricity market, the market participants, especially the utilities, often require longer duration contracts such as weekly, fortnightly, monthly, quarterly, seasonal and yearly to efficiently plan for their power procurement on a time ahead basis. Exchanges have been providing a robust proposition. Besides offering flexible procurement, efficiency and transparency, the liquidity on exchange platform through participants, especially the utilities, often require multiple buyers and sellers providing most competitive prices.
In terms of flexibility in procurement, one can utilise a flexible quantum of power over a day as the exchange platform provides flexibility of varying buy/sell quantum in all 96 time blocks in a day through the day-ahead, real-time, intra-day and day-ahead contingency markets. Going forward, flexibility in longer duration contract would mean round the clock, peak, day, night or customised hours contracts.
Owing to these core value propositions, the distribution utilities from the southern, western and northern States have increased exchange-based procurement as a significant part of their overall power portfolio. This has also enabled utilities to save immensely and enhance their stressed financial liquidity.
The way ahead
With the energy shift towards renewables being experienced in an accelerated way, India is moving towards an era where power markets are imminent as more small-scale resources with different characteristics will enter the market. The Central Government, as per the National Electricity Plan 2021, seems committed to deepen the spot power markets by enhancing its percentage share to about 25 per cent during 2023-24.
To provide another avenue for reliable supply and competitive power prices to participants, they should have freedom to trade in different markets and timeframes. The recent guidelines by the government allowing central generating stations to put up PPA relinquished power by state DISCOMs on exchanges for efficient price discovery is a good testament to the role of exchanges-led electricity markets in democratising the Indian power sector.
The writer is Head and Senior
Vice President-Business Development, Indian Energy Exchange Ltd