Commodity Analysis

Derivatives can be a game-changer in power sector

Vivek Ananth | Updated on November 30, 2019 Published on November 30, 2019

They will probably change the business of power generation in the country forever

Many State power distribution companies for the past few years have been using power exchanges to meet their peak demand. Earlier, many short-term power trades were carried out through traders. Now, a large part of this volume has moved to power exchanges, mainly to the Indian Energy Exchange.

As of 2018-19, electricity traded on exchanges accounted for nearly 37 per cent of all short-term electricity traded at 53.52 billion units, according to the Central Electricity Regulatory Commission (CERC). This is a sharp rise from 3.4 per cent of the total volume of short-term electricity traded 10 years ago.

The development has brought down prices of electricity available in the short-term market, and it is the reason for State distribution companies now heavily relying on exchanges.

Scuttling thermal demand

The lower prices available in exchanges, compared with what State utilities have to pay to generators under long-term power purchase agreements (PPAs), can lead to their wanting to distance themselves from PPAs. Recently, the Assam government had asked the Centre to pay ₹1,000 crore to NTPC to help it get out of a deal to buy power from the 750 MW thermal power plant in Bongaigaon. This is because power exchanges, with their one-day and up to 11-day contracts, have allowed utilities to lower the cost of power procurement.

But what has led to this shift in preference of State power utilities? After large outages across the country in the early part of this decade, India sought to generate surplus power and connect its grids in different regions. This has now been given the moniker of ‘One Nation, One Grid’.

The price at which electricity can be bought at exchanges has gone down to ₹3 KWh, which is lower than the rates under many long-term PPAs signed with power producers. This move to link all the regional power grids with a single national grid has allowed surplus power from one region to flow to other regions where demand is higher. It also gives reliable data on the electricity rates at which a State power utility can buy from exchanges.

Now that there is surplus power being generated in the country, and with the rise of cheaper renewable energy over the years, State utilities have realised that they are now stuck with expensive PPAs. They are using every chance they get to buy power from exchanges.

This has upended thermal power producers’ plans in India, who are struggling with low plant load factor — the ratio of power produced to the installed capacity. The shortage of coal for thermal power has also played a role in pushing up volumes traded in exchanges. As and when coal shortage comes down, the volumes normalise at Indian Energy Exchange, India’s largest power exchange.

Upending the game?

As of now, due to a dispute between the Securities Exchange Board of India (SEBI) and the CERC, power exchanges have not been able to offer derivative contracts . This has meant that State utilities, which want to source power from exchanges for a period of more than 11 days (T+11), can’t do so. The two contracts that are currently available are one-day ahead or day ahead market (T+1), or up to 11 days ahead, or term ahead market(T+11).

The spectacular rise in volumes of both these contracts show that there is an appetite for trading in power by producers and consumers (State discoms). If the dispute between SEBI and the CERC is settled, and derivative contracts are allowed on power exchanges, there is every chance that trading in power can grow by leaps and bounds.

What this would do for the existing business model of power generators can be gleaned from what short-term power trading has done to the business of power traders. Many generators also have power trading subsidiaries. Derivative contracts, as and when they are allowed, , will probably upend the business of power generation in the country forever.

Published on November 30, 2019
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