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POWERTRADING
BACKGROUND:Powertradinginherentlymeansatransactionwherethepriceofpowerisnegotiableandoptionsexistaboutwhomto
tradewithandforwhatquantum.InIndia,powertradingisinanevolvingstageandthevolumesofexchangearenothuge.All ultimate
consumers of electricity are largely served by their respective State Electricity Boards or their successor entities, Power Departments,
private licenses etc. and their relationship is primarily that of captive customers versus monopoly suppliers. In India, the generators of
electricitylikeCentralGeneratingStations(CGSs),IndependentPowerProducers(IPPs)andStateElectricityBoards(SEBs)havealltheir
capacitiestiedup.EachSEBhasanallocatedshareincentralsector/jointlyownedprojectsandisexpectedtodrawitssharewithout
muchsayabouttheprice.Inotherwords,thesuppliersofelectricityhavelittlechoiceaboutwhomtosellthepowerandthebuyershave
nochoiceaboutwhomtopurchasetheirpowerfrom.
Thepricinghasprimarilybeenfixed/controlledbytheCentralandStateGovernments.However,thisisnowbeingdonebytheRegulatory
CommissionsattheCentreandalsointheStateswherevertheyarealreadyfunctional.Powergeneration/transmissionishighlycapital
intensiveandtheFixedChargecomponentmakesupamajorpartoftariff.Indiabeingapredominantlyagrarianeconomy,powerdemand
isseasonal,weathersensitiveandthereexistssubstantialdifferenceindemandofpowerduringdifferenthoursofthedaywithvariations
duringpeakhoursandoffpeakhours.Further,thegeographicalspreadofIndiaisverylargeanddifferentpartsofthecountryfacedifferent
typesofclimateanddifferenttypesofloads.
PowerdemandduringtherainyseasonsislowintheStatesofKarnatakaandAndhraPradeshandhighinDelhiandPunjab.Whereas
manyoftheStatesfacehighdemandduringeveningpeakhours,citieslikeMumbaifacehighdemandduringofficehours.TheEastern
Regionhasasignificantsurplusroundtheclock,andevennormallypowerdeficitstateswithverylowagriculturalloadslikeDelhihave
surplusesatnight.Thissituationindicatesenoughopportunitiesfortradingofpower.Thiswouldimproveutilizationofexistingcapacities
andreducetheaveragecostofpowertopowerutilitiesandconsumers.
Inviewofhighfixedcharges,averagetariffbecomessensitivetoPLF.TradingofpowerfromsurplusStateUtilitiestodeficitones,through
marginal investment in removing grid constraints, could help in deferring or reducing investment for additional generationcapacity,in
increasing PLF and reducing average cost of energy. Over and above this, the Scheduled exchange of power will increase and un
scheduledexchangewillreducebringingingriddiscipline,afamiliarproblem.
OPENACCESSANDTRADING:TheElectricityAct,2003whichhascomeintoforcefrom10thJune,2003repealstheIndianElectricity
Act, 1910 Electricity (Supply) Act, 1948 and Electricity Regulatory Commissions Act, 1998. In view of a variety of factors, financial
performanceofthestateElectricityBoardshasdeteriorated.Thecrosssubsidieshavereachedunsustainablelevels.AfewStatesinthe
country have gone in for reforms which involve unbundling into separate Generation, Transmission and Distribution Companies. To
addresstheillsofthesector,thenewActprovidesfor,amongstothers,newerconceptslikePowerTradingandOpenAccess.
OpenAccessonTransmissionandDistributiononpaymentofchargestotheUtilitywillenablenumberofplayersutilizingthesecapacities
andtransmitpowerfromgenerationtotheloadcentre.Thiswillmeanutilizationofexistinginfrastructureandeasingofpowershortage.
Trading,nowalicensedactivityandregulatedwillalsohelpininnovativepricingwhichwillleadtocompetitionresultinginloweringof
tariffs.
DEFINITIONOFOPENACCESSINTHEELECTRICITYACT,2003:Thenondiscriminatoryprovisionfortheuseoftransmissionlinesor
distributionsystemoraassociatedfacilitieswithsuchlinesorsystembyanylicenseeorconsumerorapersonengagedingenerationin
accordancewiththeregulationsspecifiedbytheAppropriateCommission
AMOREGENERALDEFINITIONOFOPENACCESS:Enablingofnondiscriminatorysale/purchaseofelectricpower/energybetween
twopartiesutilizingthesystemofaninbetween(thirdparty),andnotblockingitonunreasonablegrounds.
ISSUES:
a)Freedomtobuy/sell,andaccesstomarket
b)Adequacyofinterveningtransmission
c)Transmission/wheelingcharges
d)Treatmentoftransmissionlosses
e)Energyaccounting,scheduling,meteringandUISettlement.
Thepresentlevelofinterregionalelectricityexchangeisstillquitelimitedandtheconstraintsforenhancingthesamearetherelativelack
ofcommercialawarenesswithSEBs,lackofpropermarketmechanism(absenceoftariffstructuretopromotemeritorderoperationand
encouragetradingofpower),inadequatetransmissioncapacity,lackofstatutoryprovisionsfordirectsalebyIPPs/CPPs/Licensesoutside
theState,gridindisciplineandfinancialviabilityofStateUtilities,amongothers.
EXAMPLE:SupposeacompanyfromMaharashtrawantstosell100MWtoaDiscomAinAndhraPradesh.
Followingstepsneedtobetaken:
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a)ThecompanyandDiscomAhastoagreeontermsandconditionsofsale
b)ThecompanyhastogettheconsentofMSEBand"noobjection"ofMSERC
c)DiscomAhastogettheconsentofAPTranscoand"noobjection"ofAPSERC.
d) MSLDC and APSLDC has to ascertain transmission adequacy, and agree to arrange necessary metering, scheduling, energy
accountingandUIsettlement.
e)WRLDCandSRLDChastoascertaintransmissionadequacyintheirregionaltransmissionsystems.
f) All concerned to have a common understanding about treatment/sharing of transmission losses, and levy of transmission/ wheeling
chargesfortheuseofintraStateandinterStatesystems.
IMPACTOFOPENACCESSSYSTEMONDISCOMS:
ElectricityAct2003hasmandatedthatwithimmediateeffectopenaccessshouldbeimplemented.Whileeveryoneacceptsthatit may
servetheconsumerinterests,therearetwocontradictingviewsregardingtheimplicationsoftheopenaccesssystemonthe electricity
entitiesespeciallytheDISCOMs.Thefirstviewisthatcompetitivepowergenerationwillbringdowntheultimatecoststotheconsumers.
CostreductionispossibleonlybyreducingtheT&Dlosses,keepingundercontroltheoperatingcostsandkeepingtheadditionalpower
purchasecostslow.GiventhefactsthatpowerpurchasecostskeepincreasingandtheHTtariffhasbeenmandatedtobebroughtdown
closertotheaveragecosts(therebyreducingthecrosssubsidy)accordingtoafixedtimescheduletobesetbytheregulator,thefirst
grouparguesthattakingupadditionalliabiltybywayofHTconsumersatsuchhighmarginalcostsofpowerpurchasewouldbefinancially
imprudentfortheelectricityentities.
The other view is that electricity entities have heavy responsibility to meet the needs of agricultural consumers and small domestic
consumersatalowerratethantheaveragecost.ConsumerswhoarecurrentlytheHTconsumersandcommercialconsumerspayinga
higher tariff are providing the means to do this. If such consumers walk away from Grid supply subsidy from Government will have to
increase.Thecorrectpositionwoulddependonthe statewise situation regarding relative tariff of the different consumers,thepossible
ratesofgrowthofcategorywiseconsumptionandthepotentialforpurchasingadditionalpoweratlowratesinthefuture.
MARKET DEVELOPMENT: In the legal framework before enactment of the new Act, the development of market in power was highly
constrainedastheindustrystructurewashorizontallyandverticallyintegrated.Theelectricitysupplytoacustomeristhroughachainof
monopoliesearlierregulatedbytheGovernmentandnowbytheRegulatorycommission.
With the new Act, a liberalized market structure is sought to be provided. A customer has a number of choices to get his power. The
generatorscanalsocompeteamongthemselvesfordistributioncompanies/individual customers. There is a provision for surcharge to
meetcurrentlevelofcrosssubsidy,ifaconsumeroptstogetelectricitydirectlyfromgeneratororanysourceotherthanhisowndistribution
licenseandhasbeenallowedopenaccessbytheRegulator.However,thereisnosurchargewhendistributioncompanybuyspowerfrom
ageneratordirectly.Thereisalsoaprovisionforbilateralcontractforsupplyofpowerthroughacompetitiveprocessbetweenagenerator
and distributor. With the provision of nondiscriminatory open access to transmission, the competition for bulk supply to distribution
companiescouldbecomearealityinthenearfuture.Themarketstructurewill,perhaps,requiretobetransformed.
Thecommissioniscommittedtothedevelopmentofafullycompetitivepowersector.
However,giventhecurrentrealitiesofthesector(shortages,crosssubsidies,longtermPPAs,capacityallocationfromCGStostateetc),
the market development has to go through a number of intermediate phases. It may be noted that the retail competition has yielded
perceptiblebenefitstoconsumersinthecountrieshavingsurplusgeneration.Thereareanumberofcomplexissuessuchastransition
risks, settlement of imbalances in power injected and drawals, effective metering, efficient pricing of transmission, management of
congestionetc.onwhichtheCommissionwouldfloataseparatediscussionpaperinduecourse.
Asperanestimate,CaptivePowercapacityinthecountryisabout20,000MWofwhichabout14,000MWisgridconnected.Surplusis
availablewithmanyCaptivePowerplantsandalsowithIPPsandLicensesofsomeoftheStates.TheyneedpermissionfromtheState
Govt. as well as consent for usage of SEB's transmission network, which besides being difficult to come by, is also usually irrationally
priced.ManyCaptiveplantsarekeentotradetheirpowerataremunerativetariff,butthereisnostatutoryprovisionpresentlyfordirectsale
ofsurpluspowerbythemtooutsideStates.Aprovisionforthishowever,existsintheElectricityBill.
POWERMARKET:TheWholesaletransactionsforelectricpowergloballyarethroughspotcontracts,forwardandfuturecontractsand
longtermbilateralcontracts.TheprimarydriverforchangeinthepowermarketinIndiatoday,atleastfromtheconsumers'pointofview,is
thedesiretoseelowerpricesinthewholesaleelectricitymarket.Forthisobjectivetobearfruit,attentionhastobepaidtotheidealpower
exchangeforIndiabackedwithadequateregulations,aspoorexchangedesignmayleadtomarketfailures.Theenvisagedpowermarket
will rely on competition, instead of regulation, to minimize generation costs and additionally will obtain longterm financing for power
systems/generatingcompanies.
TRANSMISSIONANDWHEELING:
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 interstate and interregional
power flows. As per the existing notification, the wheeling charges are payable at the same rate as the transmission charges for a
particularregion.
METHODOLOGYFORSHARINGOFTRANSMISSIONCHARGES:Althoughtheprinciplesforsharingoftransmissioncharges/wheeling
chargeshavebeenenumeratedindetailinthepresentnotification,thereappearstobeneedto bring further clarity in the matter. The
followingmethodologyforsharingoftransmissionandwheeling/congestionchargesisproposedfordiscussion:
a) Transmission charges for the interregional lines may be shared by the two contiguous regions on 50:50 basis and further shared
amongthebeneficiarieswithintherespectiveregion.
b) Transmission charges for the interregional lines may not be pooled with those for the other transmission assets in the respective
regions.
c)Transmissioncharges(afterdeductingthewheeling/congestionchargesrealizedfromothers)fortheregionalassets(otherthanthe
interregional assets) may be shared by the "regional beneficiaries" (Regional beneficiaries means beneficiaries located in the region
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concerned)
d) If an interregional asset is used for wheeling by a third party, the balance transmission charges after accounting for the payable
wheeling/congestioncharges,maybesharedbythebeneficiariesofthecontiguousregionon50:50basis.
RECOMMENDATIONS:Thebestsystemwouldbeoneinwhichtheconsumerhasachoicethatcomesoutofcompetition.Establishment
of markets with rules for their operation and a regulator to see that they are followed will give acceptable results for consumers and
investorsboth.Competitionandmarketsdonothavetowaitforshortagesinsuppliestobeovercome.Tradingisabridgeeveninshortage
situationsandregulatorscanrightlybeexpectedtolookaftertheinterestsofthelesspowerful.
However, the lessons from around the world indicate that adequate availability of power, its unrestricted flow across geographical
boundaries,strongcommercialmechanismsthatdeterminemarketoperationsandthepayingabilityofconsumersarevitalnecessities
thatwouldneedtobeinplaceforcompetitionatalllevelstobetrulysustainable.Rulesandregulationsaretobeformulatedforinterstate,
interregionalandinternationaltransactionswhichhavebuiltinrelaxationthatencouragestradingandmakestransferofpowereasier.
Streamlining levy of reasonable transmission charges, wheeling charges and losses on power to be traded are important, otherwise
tradingwillnotremaincompetitivewithincidentaluseoftransmissionsystemtobepricedonincrementalcostbasis.Transmissionlosses
shouldalsobechargedonactuals,ratherthanonanormativebasis.
Thereisanimmediateneedforstrengtheningtheupstreamanddown 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
capacityutilisation.BottledupcapacitiesoftheIPPsandCaptiveGeneratorsaswellasunderutilizedcapacitiesofUtilitiesneedstobe
tapped urgently through a more commercial approach. Trading of such capacities would mean availability of extra energy at only the
variablecost,thusbringingdowntheaveragecostofpowernotonlytobulkconsumersbutalsoreducingtheburdenofrateincreaseson
ordinaryconsumerstoo.
India is already on its way to establishing a power market. This requires considerable and continuous effort starting from continued
strengthening of interregional power transmission links, open access to transmission and later to distribution links, releasing the
underutilizedcaptivecapacities,tothedesigningofaneffectivemarketmechanismsuitedtoIndia'sneeds.Theinstitutionalsetupofthe
Marketcouldmakeasignificantdifferencetothefinalmarketprice.Intheshortterm,marketrulesshouldpromoteeconomicefficiency,so
thatcustomerloadsareservedandreliabilityismaintainedatthelowestpossiblecost.Inthelongterm,themarketshouldproduceprices
thatstimulateappropriatelevelsofinvestmentsinnewgenerationandtransmissioncapacity.
Inaddition,themarketrulesshouldbesuchastoencouragebroadparticipationandensurefairness.Suchaprocesswillreducetheneed
forgovernmentoversightbecauseitwillbetoalargeextentselfpolicinganditwillbedifficultforindividual participants to manipulate
results in their favor.Of the two market mechanisms evaluated, Pool dayahead market, with Pay SMP settlement, may produce lower
pricesthanthebilateralmodel.However,inthecaseofapowerexchangewithasmallnumberofbuyersandsellers,oftentheremaybe
notenoughbidstoprovideanassurancethatthepriceiscompetitive,thuscreatingtheneedformoremarketparticipants.
Toensurethatsufficientgeneratingcapacityisavailabletopreventcapacityshortagesandwholesalepricespikesaninstalledcapacity
requirementmaybemademandatoryasproposedinCalifornia.Thisstandardwouldrequireallretailproviderstoacquire,eitherthrough
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 demandside participation, and hence
greaterpriceelasticity.

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