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Indian Electricity Market Trends

Sanjeev K. Bhasker

B.Tech, MBA UP Power Corporation Limited, Lucknow

Indian electricity market is undergoing a churn which it has never witnessed before. After the enforcement of Electricity Act 2003, the power sector in India started sensing the market forces. Under section 42 of the Act, Power trading was made possible after getting a trading license from the Central Electricity Regulatory Authority. Initially, the market was unpredictable and a very high price of electricity was discovered in the market, which was on expected lines as our market was a power deficit market and, like any other market, it was following the economic theory of demand and supply. Distribution utilities, working in a highly regulated retail electricity market, were put under an additional burden of procuring high price power. These utilities had to purchase high cost power - one way or another - due to social or political compulsions. Regulatory Commissions and Load Despatch Centres endeavour to make states and utilities follow their drawl schedules strictly, which is also obligatory under Indian Electricity Grid Code and ABT commercial mechanism. ABT mechanism is a commercial mechanism to resolve the imbalances in the Grid by linking the price of Unscheduled Interchange (UI) with the Grid frequency. The new Indian Electricity market, therefore, developed under various regulations, and in the beginning was quite immature. The policies and commercial mechanisms were new, and the conventional power utilities operating in the states were unaccustomed to them. Utilities were yet to realise and understand the repercussions of the newly developed market and the commercial mechanisms. In June 2008, the first power exchange was introduced in the country. Back then, only about 2% of power was traded through bilateral agreements and in spite of restrictions on over drawl from the grid, constituents were mainly dependent on UI to meet their unmet demand. Even today states and utilities often have to face petitions under section 142 and

other sections for violation of grid code. Utilities find themselves trapped between their obligation to provide electricity for meeting the basic needs of common people, and their obligation to follow the regulations and grid norms. In the mean time, a shift in the pace of Open Access mechanism was observed. Captive Power Plants (CPP) throughout the country got a major thrust after the introduction of power exchange(s) and the increasing bilateral trade in the country. CPPs found the market lucrative, and got a good price for their surplus power. On the other hand, the power starved utilities got the much needed

Exhibit 1

Source: CERC

starved utilities got the much needed Exhibit 1 Source: CERC power. Further, the Central Government and

power. Further, the Central Government and many State Governments developed energy policies with special considerations for captive power plants. The volume of power traded through Short Term Open Access (STOA) under bilateral and collective transactions, started rising and touched 30.60 BU in 2009 (Exhibit-1) which was 4.08% of total transacted volume (Exhibit-2). Along with the rise in business volume for

Exhibit 2 Source : CERC
Exhibit 2
Source : CERC

bilateral and collective transactions, average


power prices also reduced



Exhibit 3


year power prices also reduced in the Exhibit 3 Source-CERC 2009(Exhibit-3), even though the price of

2009(Exhibit-3), even though the price of power in the exchanges for the month of August were as high as Rs. 17.00/- p.u. Reacting to this price volatility, CERC issued a cap of Rs. 8/- p.u. for 45 days. Today, there is no cap on short term transaction of power in India. The current year trends are showing a further downfall in the weighted average power prices. There are certain reasons attributing to these changing trends. The UI Regulations have tightened the frequency bands, resulting in the frequency profile remaining high with fewer deviations. Under the ABT Commercial mechanism the price of power is directly proportional to the frequency deviations through UI mechanism. Low frequency deviations mean low volatility for UI prices. The price of bilateral and collective transactions benchmark UI price as a reference point, and low volatility in UI prices resulted in low volatility in open market power prices. Now, the State conventional utilities have also become well accustomed with the new concepts and electricity market trends. Accordingly, they have brought about changes in their strategies, and are becoming more vigilant about day to day power schedules and deliveries. Overall the installed capacity in the country has also risen up to 165 GW, and as more electrical energy is pumped in to the grid, better grid stability is achieved by the independent grid operators. Establishment, and the subsequent ring fencing, of the State Load Despatch Centres have mitigated the socio-political pressure on the grid operators to some extent. Favourable and market supportive regulations have created a

framework for better market development, and a mandate for IT applications has further improved the whole process. Best practices adopted in the electricity sector worldwide are now being practiced in the country, and Regulators are preparing to introduce ancillary services in the market. Independent system operators will be strengthened further to enhance Grid security and stability. Electricity prices for Short Term Open Access have fallen up to 9.5% in bilateral category and 24% in power exchanges category. Price downfall trends are likely to continue; collective and bilateral transactions business volumes are likely to continue to increase. Transmission network congestions, however, are still causing blockages in the short term transactions. In the year 2009, 17% of the volume was blocked due to congestion. If there would have been no transmission congestion, more power could have been pumped into the grid. Present regional transfer capacity of 21000 MW needs to be increased by the CTU. It is also the Responsibility of the STU to frame grid expansion plans accordingly, to mitigate the congestion in the grid. New provisions like evening bidding and allocating un-cleared power exchanges bids for ancillary services will help in harnessing more power by the Grid users. Rapid market changes and market maturity will help in introducing derivatives into the power market. Financial institutions, then, will be in a position to deliver more services to the electricity sector. Power Market Regulations, 2010 have provided provisions for mitigating financial and operational market risk. Clearing Corporation will further provide security to the investors investing in short term power market, and this confidence will bring more investment in the sector. Further reduction in the minimum volume of electricity from 1 MW through open access will increase the market accessibility, and small industries can have multiple electricity suppliers. This will reduce the dependence on any one distribution utility, making the distribution market more competitive, resulting in better services to the consumers. In the open market, the regulators

role becomes very important and they must be very strong. Best practices adopted by a few strong regulators like IRDA or the Central Bank may be studied, and adopted. Ethical business practices must be adopted and should be given due cognizance by the companies operating in the market. Still a long distance has to be travelled before we are able to change the electricity service provider, like we replace the SIM of our cell phone.