Power Trading & Power Exchange

Rahul Anand & Akshit Jain

Indian Power Sector : Key Statistics

Indian power sector is the sixth largest in terms of power generation.
Installed Capacity: 1,99,600 MW (as on March 2012)
Peak Demand: 108,866 MW Demand Met : 90,793 MW Peak Deficit: 16.6% Energy Requirement : ~ 740 BU Energy Availability: ~ 666 BU Energy Deficit: 9.9%

The per capita electricity consumption for 2005-06 at 733^ kWh (CEA General Review 2009), remains far below the world average of 2,429 kWh.
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An Overview of Indian Power Sector

Coal-dominated fuel mix:
COAL GAS DIESEL NUCLEAR HYDRO RES TOTAL

STATE SECTOR CENTRAL SECTOR PRIVATE SECTOR TOTAL

47257
34045 13351 94653

4327.17
6702.23 6677.00 17706.35

602.61
0.00 597.14 1199.75

00
4780.00 0.00 4780.00

27257
8885.40 1425.00 37567.40 21.55

3008.85
0.00 15445.67 18454.52 10.58

82452.58
54412.63 37496.19 174361.40

47.29
31.21 21.50

54.29 10.15 0.69 2.74 % Share of hydro declining in the generation mix

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Unmet planned targets in generation capacity addition In last 3 Plan periods, target versus achievement ~ 50% 11th Plan (2007-2012) Target: 78577 MW
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Scene prior to introduction of power market concept

Prior to power trading as a business concept: power exchanges between the States/vertically integrated utilities were characterized by:
Small , Intermittent volumes Mostly in the nature of emergency support Without any commercial arrangements Non-payment or payment delays with resultant disputes

The exchanges were further limited due to lack of transmission inter-connections Sustained shortages, both in energy and peak demand, discouraged initiatives Skepticism about success of trading was widespread
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WHAT IS POWER TRADING?

Power trading inherently means a transaction where the price of power is negotiable and options exits about whom to trade with and for what quantum.

In India power trading is in involving state and volumes of exchange are not huge.
Pricing have been primarily fixed slash/control by Central and State government. It is now being done by the Regulatory Commission at the Centre and also in the states.

Power generation /transmission is highly capital intensive and the Fixed Charge c\ component makes up major part of the tariff.

Power demand is seasonal whether sensitive and there exists substantial difference in demand of power during different hours of the day with variations during on peak and off peak hours.
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Genesis of power trading in India

PTC was formed in 1999 as a Government of India initiative for development of power market and incentivising market based investments to the Power Sector, specially from the private sector:

Facilitate development of Power Projects particularly through private investment Promote Power Trading to optimally utilize the existing resources Develop power market for market based investments into the Indian Power Sector Promote exchange of power with neighbouring countries

Pioneer Role : Initiated development of short term power market and introduced innovative products for customers Efforts lead to beginning of sustained trading during 2000-01 (1.6 Billion units ) and also optimum utilization of existing resources Exponential growth established the viability of trading as a business concept
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PTC India Key achievements

Established the viability of concept Power market can play key role in growth of sector Credible intermediary Payment Security Mechanism Weekly billing to reduce credit risks Right to divert in case of default Relationship of trust, transparency Comfort to developer of power projects by addressing market risks Comfort to lender by addressing credit risks

A catalyst for private investment in the sector

Introduction of New Products

Short & Medium Term transactions for peak/off-peak load balancing: different products brought in the market Duration of Transactions (Few hours to 3 years) Hours of Supply Round the Clock Evening Peak / Morning Peak Night Off Peak / After Noon Off Peak As and When Available Power for balancing Scheduled Interchanges Weekend / Holiday Power Banking of Power
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Continuous development of new products as per market requirements

Emerging Industry Structure

Generation GENCO GENCO GENCO

Transmission

TRADER

OPEN ACCESS : Transmission

DISCOM DISCOM

DISCOM

Distribution

OPEN ACCESS : Distribution

TRADER
Customer

Customer

Customer

EA 2003 and enabling provisions on Power Market

Electricity Act 2003 The intent and object of the EA 2003 is to develop power market through increased competition, more players and protect consumer interests

Development of Power Market EA 2003, Section 66, The Appropriate Commission shall endeavor to promote the development of power market, guided by the National Electricity Policy
Suitable safeguards to prevent adverse effect on competition Recognized Trading as a distinct activity Definition under section(2) (47): Purchase of electricity for resale thereof Adequate and progressive provisions governing open access both : to transmission networks (inter-state and intra-state) and to distribution networks

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National Electricity Policy on Power Market

National Electricity Policy 2005 Para 5.7 To promote market development, 15% of the new generating capacities, be sold outside long term PPAs. -As the power markets develop, it would be feasible to finance projects with competitive generation costs outside the long term PPAs.this will increase the depth of power markets.and in long run would lead to reduction in tariff Ministry of Power A progressive Merchant Power Policy with a view to add 15,000 MW capacity by 2011-12

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Power Trading Scenario In India

Inter-state trading licenses (25 Years validity) in the purview of CERC Twenty Six (26) Trading licenses issued by CERC Volume of bilateral exchanges is still low (about 2.5% to 3% of energy generation) Total short term market approximately 21 billion units* in 2007-08 * Includes cross- border

Trading Volumes (in MUs)

25000 21301 20000

15000 11029 11846

14188

15023

10000

5000

0 FY 04 FY 05 FY 06 FY 07 FY 08

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Key Players and Market Share (2007-08)

Market Share 2007-08

PTC 4% 7% 12% 1% 46% NVVN Adani Tata Power 8% 6% 16% JSW Reliance Energy Lanco Others

Trading Volumes (MU) Licensees PTC # 9889 NVVN 3324 Adani 1322 Tata Power 1682 JSW 1479 Reliance Energy 776 Lanco 2600 Others 229 Total 21301

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Benefits of Trading (1)

Increasing realization among utilities of power as a source for revenue earning

Improved PLF, particularly of State Power Utilities

An example: DVC - a rise of 5% in PLF No backing down
85 82 80 75 72 73 70 69 65 70 74

Reduction in load shedding

75

60 2001 2002 2003 2004 2005 2006 2007

Trading results in optimization of resource utilization

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Benefits of Trading (2)

The short term market has created value for power. There is a distinct shift towards higher revenue realization

98

Price volume break up (%)

59 48 36 26 2 FY 05 Rs 1-3 5 FY 06 Rs 3-4 Rs 4-5 9 12 FY 07 Rs 5-6

Power as a resource for earning revenue did not exist

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Benefits of Trading (3)

Encouraged IPPs to invest in generating assets- spurt in investment based on competitive tariff due to widening demand supply gap
Market-based returns No sovereign/government guarantee

Large merchant capacity is being funded States Governments of Chhattisgarh, Jharkhand, Orissa, Himachal Pradesh, J&K,

Uttaranchal, etc. have recognized Power as Resource

Planned rapid capacity additions have devised policies to become Power Hubs MoU with developers for Capacity addition Jharkhand
Chhattisgarh Orissa Tamil Nadu 9,110 MW 30,000 MW 17,000 MW 10,000 MW
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A paradigm shift from Cost plus return regime to market determined returns

WHAT IS POWER EXCHANGE?

Common platform where buyers and sellers of Electricity come together for trade. This concept is introduced in INDIA by CERC.

AIMS OF POWER EXCHANGE:

Retrieving the excess generation from surplus region and transmitting it to a deficit regional a market clearing price. The MCP is discovered based on the principles of demand and supply prior to exchange operation, this was introduced by Electricity traders on negotiation basis.

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NEED FOR POWER EXCHANGE

In market driven economy market forces are contradictory. Buyer wants low price, seller wants other wise. These conflicting forces determine the

correct price of a commodity at a given time. It is thus important that

market forces must be faceless and anonymous.

In todays scenario electricity is no more a service, it is a commodity. On an electronic power exchange buyers and sellers of electricity from the length and breadth of the country can converge without revealing their identity. For this we need nation wide electronic power exchange to allow the Electricity to be driven by genuine market forces of demand and supply.
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Benefits of Power Exchange

Empowering the market to discover a uniform market clearing price and market clearing volume

Evenly distributing transmission losses at both ends.

Enabling participants to hedge against UI risks

Guaranteeing secure and timely payments to sellers

Generously improving the market environment to encourage

investment in new generation capacity, thus helping make India a

power-surplus country.

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Electricity Exchange with Bhutan

Salient Features: Nodal agency for exchange of power with Bhutan PTC entered into long term power purchase agreement with Department of Energy, Bhutan PTC purchasing surplus power on long term basis from following three projects in Bhutan:
Chhukha HEP (336 MW) Kurichhu HEP (60 MW) Tala HEP (1020 MW)

Run-of the River Projects 4 Hours peaking

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Indo-Bhutan Power Exchange

Year Energy export to India (MUs) Revenue to RGoB (Nu. Million)

2003-04 2004-05

1751 1735

2691 2708

2005-06 2006-07
2007-08

1762 2963
5234

3452 5695
9778

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Indo- Nepal Power Exchange

PTC - an active member of Indo-Nepal Power Exchange Committee Pursuing opportunities for short term and long term trade in electricity for mutual benefits Acting as facilitator for transmission inter-connection between the two countries- Investment in transmission capacity Arranged 25 MW RTC power to NEA Initialed PPA with SMEC West Seti for purchase of 750 MW power and MoU with Braspower for purchase of 309 MW power from Arun III HEP Proposing to facilitate formation and partner in a company in Nepal for accelerating hydro power development.

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Power Exchange : Some Interesting Trends

IEX commenced operation with effect from 28th June, 2008 The data up to 20th August, 2008 reflects that the average purchase bids received (in MUs) are about four times the average sale bids received (in MUs) Even more interesting is that whatever is on offer by the sellers at perceived high prices are not being accepted by the buyers and less than 50% sales bid has actually been cleared by the market at market clearing price. This data, interalia, establishes without doubt that the buyers are exercising their choice to procure prudently, keeping in mind affordability and prudence-checks to voluntarily not off-take power from sellers what they perceive as high cost. Integrated Energy Policy:

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Power Market Facilitating Private Investments

The market determined prices in the short term market has encouraged IPPS and merchant generators to look at the sector with renewed vigour and as an investment destination An evidence of this is that PTC has entered into PPAs to procure long term power with IPPS for more than 10,000 MW and / MoUs for around 30,000 MW

Power market has in fact become a catalyst for private investment in power sector
75,000 MW under development by IPPs without any Government support

Rs. 40,000 to Rs. 45,000 Crores investment already committed

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Power Market: Salient Features

The wholesale market for electricity in India is completely voluntary by design - that none of the market participants are obliged to operate through a restricted and compulsory market. This is because the buyer is free to choose from any of the following options: Long term PPA based mechanisms Medium Term Short term bilateral trades Day ahead market (through the power exchange) Real time mechanisms (UI) Even the real time arrangements are completely voluntary, since the UI mechanism permits frequency to float within a range, providing tremendous flexibility to market participants. Further, the rules regarding standards of supply are more liberal, permitting greater flexibility to utilities on demand side response.
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Current Status of Power Market

A fledgling, nascent market Limited growth of volumes of short term traded market due to
Overall deficit scenario Limited number of active players and resultant liquidity crunch Transmission constraints/congestion
2.50% 2.40%

Volume of Electricity Traded by the Trading Licensees in Total Generation (%)

Rising cost of traded power: (The average cost Rs. 4.50/kWh in 2007-08)
Due to overall shortage situation (widening demand-supply gap) Lack of capacity additions Linkage with UI rates and Rising fuel prices

2.30% (%) 2.20% 2.10% 2.00% 1.90% 2003-04 2004-05 2005-06 (Period) 2006-07 2007-08

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Power Market Development Next Steps

Main thrust of the Electricity Act 2003 is competition, and power market development- it has many enabling provisions. Strict Implementation of EA 2003 enabling provisions is essential Efforts are on to further deepen the market by introducing new trading products, easing open access and trade through Power Exchange 1st National Level Power Exchange in India i.e., Indian Energy Exchange (IEX) has become operational since June 2008 Power Exchange has started giving transparent signals on:
Price

Demand
Liquidity

New Products on anvil week ahead, fortnight- ahead, month-ahead, year ahead etc Regional Energy Cooperation

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Integrated Energy Policy Projections

India - Installed Capacity
1200 960 1000 800
GW

685 425 488 575

778

600 400 200 153 155 220 233 306 337

Generation Mix 2031-32 (8% GDP growth)

24 BU 1% 401 BU 11% 375 BU 10%

0 2006-07 2011-12 2016-17 2021-22 2026-27 2031-32

8% GDP Growth
2828 BU 78% Hydro Nuclear Thermal RE

9% GDP growth

India Installed Capacity

Total 3628 BU

Source: Integrated Energy Policy

Generation Mix 2031-32 (8% GDP )

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Window of Opportunities

Nepal is rich in hydro potential > 43000 MW techno-economic Indian Power Market is a voluntary market tariff competitiveness is key Nepal Power Projects, due to moderate transmission distance involved up to load centers could be competitive Integrated Energy Policy of India encourages hydro power from Nepal A huge market next door, waiting to be tapped!
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Power Market Ripple Effect

Power trading share is 2.5% of Indias total energy generated but

its indirect impact on the power sector is several times bigger

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