Indian Electricity Market Trends

Sanjeev K. Bhasker
B.Tech, MBA
UP Power Corporation Limited, Lucknow

Indian electricity market is undergoing a churn other sections for violation of grid code. Utilities
which it has never witnessed before. After the find themselves trapped between their obligation
enforcement of Electricity Act 2003, the power to provide electricity for meeting the basic needs
sector in India started sensing the market forces. of common people, and their obligation to follow
Under section 42 of the Act, Power trading was the regulations and grid norms. In the mean time,
made possible after getting a trading license from a shift in the pace of Open Access mechanism
the Central Electricity Regulatory Authority. was observed. Captive Power Plants (CPP)
Initially, the market was unpredictable and a very throughout the country got a major thrust after
high price of electricity was discovered in the the introduction of power exchange(s) and the
market, which was on expected lines as our increasing bilateral trade in the country. CPPs
market was a power deficit market and, like any found the market lucrative, and got a good price
other market, it was following the economic for their surplus power. On the other hand, the
theory of demand and supply. Distribution power starved utilities got the much needed
Exhibit 1 Source: CERC
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 power. Further, the Central Government and
resolve the imbalances in the Grid by linking the many State Governments developed energy
price of Unscheduled Interchange (UI) with the policies with special considerations for captive
Grid frequency. The new Indian Electricity power plants. The volume of power traded
market, therefore, developed under various through Short Term Open Access (STOA) under
regulations, and in the beginning was quite bilateral and collective transactions, started rising
immature. The policies and commercial and touched 30.60 BU in 2009 (Exhibit-1) which
mechanisms were new, and the conventional was 4.08% of total transacted volume (Exhibit-2).
power utilities operating in the states were Along with the rise in business volume for
unaccustomed to them. Utilities were yet to
Exhibit 2 Source : CERC
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
bilateral and collective transactions, average
power prices also reduced in the year
Exhibit 3 Source-CERC
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.