POWER TRADING

BACKGROUND: Power trading basically means a transaction where the price of power is
negotiable and options exist about whom to trade with and for what quantum. In India, power
trading is in an evolving stage and the volumes of exchange are not huge. All ultimate
consumers of electricity are largely served by their respective State Electricity Boards or their
successor entities, Power Departments, private licensees etc. and their relationship is
primarily that of captive customers versus monopoly suppliers. In India, the generators of
electricity like CGSs, IPPs and SEBs have all their capacities tied up. Each SEB has an
allocated share in central sector/ jointly owned projects and is expected to draw its share
without much concern about the price. In other words, the suppliers of electricity have little
choice about whom to sell the power and the buyers have no choice about whom to purchase
their power from.

The pricing has primarily been fixed/controlled by the Central and State Governments.
However, this is now being done by the Regulatory Commissions at the Centre and also in
the States wherever they are already functional. Power generation/ transmission is highly
capital intensive and the Fixed Charge component makes up a major part of tariff. India being
a predominantly agrarian economy, power demand is seasonal, weather sensitive and there
exists substantial difference in demand of power during different hours of the day with
variations during peak hours and off peak hours. Further, the geographical spread of India is
very large and different parts of the country face different types of climate and different types
of loads.

Power demand during the rainy seasons is low in the States of Karnataka and Andhra Pradesh
and high in Delhi and Punjab. Whereas many of the States face high demand during evening
peak hours, cities like Mumbai face high demand during office hours. The Eastern Region
has a significant surplus round the clock, and even normally power deficit states with very
low agricultural loads like Delhi have surpluses at night. This situation indicates enough
opportunities for trading of power. This would improve utilization of existing capacities and
reduce the average cost of power to power utilities and consumers.

In view of high fixed charges, average tariff becomes sensitive to PLF. Trading of power
from surplus State Utilities to deficit ones, through marginal investment in removing grid
constraints, could help in deferring or reducing investment for additional generation capacity,
in increasing PLF and reducing average cost of energy. Over and above this, the Scheduled
exchange of power will increase and un-scheduled exchange will reduce bringing in grid
discipline, a familiar problem.

OPEN ACCESS AND TRADING : The Electricity Act, 2003 which has come into force
from 10th June, 2003 repeals the Indian Electricity Act, 1910; Electricity (Supply) Act, 1948;
and Electricity Regulatory Commissions Act, 1998. In view of a variety of factors, financial
performance of the state Electricity Boards has deteriorated. The cross subsidies have reached
unsustainable levels. A few States in the country have gone in for reforms which involve
unbundling into separate Generation, Transmission and Distribution Companies. To address
the ills of the sector, the new Act provides for, amongst others, newer concepts like Power
Trading and Open Access.
Open Access on Transmission and Distribution on payment of charges to the Utility will
enable number of players utilizing these capacities and transmit power from generation to the
load centre. This will mean utilization of existing infrastructure and easing of power shortage.
Trading, now a licensed activity and regulated will also help in innovative pricing which will
lead to competition resulting in lowering of tariffs.

DEFINITION OF “OPEN ACCESS” IN THE EA’03: The non-discriminatory provision

for the use of transmission lines or distribution system or a associated facilities with such
lines or system by any licensee or consumer or a person engaged in generation in accordance
with the regulations specified by the Appropriate Commission”

A MORE GENERAL DEFINITION OF “OPEN ACCESS”: Enabling of non-

discriminatory sale/purchase of electric power/energy between two parties utilizing the
system of an in-between (third party), and not blocking it on unreasonable grounds”.

ISSUES:
a) Freedom to buy/sell, and access to market
b) Adequacy of intervening transmission
c) Transmission/wheeling charges
d) Treatment of transmission losses
e) Energy accounting, scheduling, metering and UI Settlement.

The present level of inter-regional electricity exchange is still quite limited and the
constraints for enhancing the same are the relative lack of commercial awareness with SEBs,
lack of proper market mechanism (absence of tariff structure to promote merit-order
operation and encourage trading of power), inadequate transmission capacity, lack of
statutory provisions for direct sale by IPPs/CPPs/ Licensees outside the State, grid
indiscipline and financial viability of State Utilities, among others.

EXAMPLE: Suppose a company from Maharashtra wants to sell 100 MW to a Discom-A

in Andhra Pradesh.
Following steps need to be taken:

a) The company and Discom-A to agree on terms and conditions of sale

b) The company to get the consent of MSEB and "no-objection" of MSERC
c) Discom-A to get the consent of APTransco and "no-objection" of APSERC.
d) MSLDC and APSLDC to ascertain transmission adequacy, and agree to arrange necessary
metering, scheduling, energy accounting and UI settlement.
e) WRLDC and SRLDC to ascertain transmission adequacy in their regional transmission
systems.
f) All concerned to have a common understanding about treatment/sharing of transmission
losses, and levy of transmission/ wheeling charges for the use of intra-State and inter-State
systems

IMPACT OF “OPEN ACCESS SYSTEM” ON DISCOM’S:

Electricity Act 2003 has mandated that with immediate effect open access should be
implemented. While everyone accepts that it may serve the consumer interests, there are two
contradicting views regarding the implications of the open access system on the electricity
entities especially the DISCOMs. The first view is that competitive power generation will
bring down the ultimate costs to the consumers. Cost reduction is possible only by reducing
the T&D losses, keeping under control the operating costs and keeping the additional power
purchase costs low. Given the facts that power purchase costs keep increasing and the HT
tariff has been mandated to be brought down closer to the average costs (thereby reducing the
cross-subsidy) according to a fixed time schedule to be set by the regulator, the first group
argues that taking up additional liabilty by way of HT consumers at such high marginal costs
of power purchase would be financially imprudent for the electricity entities.

The other view is that electricity entities have heavy responsibility to meet the needs of
agricultural consumers and small domestic consumers at a lower rate than the average cost.
Consumers who are currently the HT consumers and commercial consumers paying a higher
tariff are providing the means to do this. If such consumers walk away from Grid supply
subsidy from Government will have to increase. The correct position would depend on the
statewise situation regarding relative tariff of the different consumers, the possible rates of
growth of category wise consumption and the potential for purchasing additional power at
low rates in the future.

MARKET STRUCTURE :

Mkt. Structure created by EA , 2003

CGS STATE GENCO IPP

TRADER PX DISCOM

CONSUMER

TRANSMISSION AND WHEELING :

With the introduction of mandatory open access, there will be demand by third parties for
wheeling of power through the existing transmission networks in addition to wheeling being
undertaken at present for various beneficiaries importing power from outside the region. In
this context, CERC has jurisdiction for regulation of transmission and wheeling charges for
all inter-state and inter-regional power flows. As per the existing notification, the wheeling
charges are payable at the same rate as the transmission charges for a particular region.

METHODOLOGY FOR SHARING OF TRANSMISSION CHARGES: Although the

principles for sharing of transmission charges/wheeling charges have been enumerated in
detail in the present notification, there appears to be need to bring further clarity in the matter.
The following methodology for sharing of transmission and wheeling/congestion charges is
proposed for discussion:

a) Transmission charges for the inter-regional lines may be shared by the two contiguous
regions on 50:50 basis and further shared among the beneficiaries within the respective
region.
b) Transmission charges for the inter-regional lines may not be pooled with those for the
other transmission assets in the respective regions.
c) Transmission charges (after deducting the wheeling/congestion charges realized from
others) for the regional assets (other than the inter-regional assets) may be shared by the
"regional beneficiaries" (Regional beneficiaries means beneficiaries located in the region
concerned)
d) If an inter-regional asset is used for wheeling by a third party, the balance transmission
charges after accounting for the payable wheeling/congestion charges, may be shared by the
beneficiaries of the contiguous region on 50:50 basis.

RECOMMENDATIONS: The best system would be one in which the consumer has a
choice that comes out of competition. Establishment of markets with rules for their operation
and a regulator to see that they are followed will give acceptable results for consumers and
investors both. Competition and markets do not have to wait for shortages in supplies to be
overcome. Trading is a bridge even in shortage situations and regulators can rightly be
expected to look after the interests of the less powerful.

However, the lessons from around the world indicate that adequate availability of power, its
unrestricted flow across geographical boundaries, strong commercial mechanisms that
determine market operations and the paying ability of consumers are vital necessities that
would need to be in place for competition at all levels to be truly sustainable. Rules and
regulations are to be formulated for interstate, inter-regional and international transactions
which have built-in relaxation that encourages trading and makes transfer of power easier.
Streamlining levy of reasonable transmission charges, wheeling charges and losses on power
to be traded are important, otherwise trading will not remain competitive with incidental use
of transmission system to be priced on incremental cost basis. Transmission losses should
also be charged on actuals, rather than on a normative basis.

There is an immediate need for strengthening the upstream and down stream transmission
networks to better utilise the existing Inter-regional transmission capacity. Also better
reactive power management would lead to significant additions to existing transmission
capacity utilisation. Bottled-up capacities of the IPPs and Captive Generators as well as
underutilized capacities of Utilities needs to be tapped urgently through a more commercial
approach. Trading of such capacities would mean availability of extra energy at only the
variable cost, thus bringing down the average cost of power not only to bulk consumers but
also reducing the burden of rate increases on ordinary consumers too.

India is already on its way to establishing a power market. This requires considerable and
continuous effort starting from continued strengthening of inter-regional power transmission
links, open access to transmission and later to distribution links, releasing the underutilized
captive capacities, to the designing of an effective market mechanism suited to India's needs.
The institutional set-up of the Market could make a significant difference to the final market
price. In the short term, market rules should promote economic efficiency, so that customer
loads are served and reliability is maintained at the lowest possible cost. In the long term, the
market should produce prices that stimulate appropriate levels of investments in new
generation and transmission capacity.

In addition, the market rules should be such as to encourage broad participation and ensure
fairness. Such a process will reduce the need for government oversight because it will be to a
large extent self-policing and it will be difficult for individual participants to manipulate
results in their favor. Of the two market mechanisms evaluated, Pool day-ahead market, with
Pay SMP settlement, may produce lower prices than the bilateral model. However, in the case
of a power exchange with a small number of buyers and sellers, often there may be not
enough bids to provide an assurance that the price is competitive, thus creating the need for
more market participants.

To ensure that sufficient generating capacity is available to prevent capacity shortages and
wholesale price spikes an installed-capacity requirement may be made mandatory as
proposed in California. This standard would require all retail providers to acquire, either
through contracts or physical assets, sufficient capacity to meet peak demand plus a certain
reserve margin. Combining the above mentioned reforms with a more transparent bidding
and price setting mechanism, could also lead to more demand-side participation, and hence
greater price elasticity.

ABHISHEK KUMAR
R100107002, MBA(PM)
UPES,GURGAON.