Price Cap

The Good ,Bad and Ugly of

Price Cap
Need , Impact and implementation
issues

Vijay Menghani, Joint

Chief( Engg.) ,CERC
Disclaimer: These are personal views and does not represent the Organization view.
 Players
• Generator
• Trader
• Investors
• Discoms
• Consumers
• How to balance stakeholder ‘s benefit
in a group play.
 Bad of Price Cap

Supply decline and due to price cap and demand may increase
due to no DSM, shortage increases.
Dead Weight Loss is the loss to society that transaction which
can benefit both buyer and seller not undertaken.
Good of Price Cap
Supplier have
market power as
firm drive up the
prices to Pmon, in
order to maximise
profit.

Pre condition of
Price cap: Abuse of
Market power is
established.

Recent study of
Exchanges show
no market power
abuse.
Good of Price Cap

Firm can no longer

push prices and no
incentive to reduce
production.
 Timing /Horizon of decision
• How much period data need to be analyze
to establish spurt in price rise is due to :

• Abuse of Market Power.

• Regulatory Decisions
• or Simply a reflection of Demand Supply
Mismatch.
• Hence data for 1st to 15 Aug ,2009 was
analyzed as draft paper discuss rise in price
in two snap shot 3rd and 13th August,2009.
Movement of Prices
Demand and Supply
Max MCP and Peak Shortage
Avg MCP and Peak Shorage
Average MCP and Energy
Shortage
 Impact/ effectiveness
Regulator interfere in market when its steps
would affect whole market not only a very small
portion of market ,which is 4.5% in June,2009
and
prices in that small portion does not affect
whole market .( For exchange it is only 0.86%)
Compare it with Oil market and sugar market
where whole market have single price.
Price movement -
August,2009
 Congestion issue
• During the period under
consideration there was huge Area
price difference in Exchange

On 13th August,2009
Congestion –Price increased
due to market splitting
 Congestion Today

On 7th Sep,2009 out of 24 hours there was congestion in 15

hrs
 June Market report
Average Price of Power in June,2009
Mode Trade/Bilater PE UI Balanc
al e
Quantity 2417.51 529.4 2118.6 57580
( MU) 9 3
% Share 3.86 0.85 3.38 91.91
Average 5.05 7.5 5 3
Price
Wt 3.18     
Average
Cost

In August,2009 the average cost of exchange power was Rs

7.39 /kWh only.
As % volume in exchange is small , Hence Exchange Price
 International experience
• The price cap was introduced in some
markets where the wholesale market
price was governed by Exchange prices.
• Price cap were generally introduced to
combat volatility or price spikes in short
term market, but these price spikes are
investment signals to PEAKER Power
Station.
• Can Price cap is sufficient to cover AFC of
Peaker and bring it profit.
 IEA report
• Volatile electricity prices encourage
investment in the different types of plants
needed. Investment strategies for different
type of
plant:
• Baseload (continuous operation, average
• price)
• Midload (operate when prices favourable)
• Peakload (like midload but over small
number of Hours)
 IEA report

Almost Similar Price duration curve exist in IEX where only less
than 10 % of time power is traded at Above Rs 10.5 /kWh.
IEA Study
 IEA Study
• Important Conclusions:
• Price Caps are not effective in long term.
• Government is caught in a trap
• Government “temporarily” intervenes to subsidise retail
• prices well below entry price for new generation
• ⇓
• higher demand and discouraged investment (political risk)
• ⇓
even higher wholesale prices
• ⇓
• higher government subsidies and blackout risks
• ⇓
• Direct investment by government in new capacity
• Government trapped itself into paying for higher prices
and new supply
 Possible Solutions
• Manage the situation
– Provide transitional arrangements
for small consumers
– Monitor for manipulation
– Act as “last resort” builder
– Capacity/resource adequacy
mechanisms
– Demand response
 Demand Response
• Electricity prices are high and volatile because high spot
prices do not deter consumption
• While everyone wants some electricity at all times,
• certain uses are not critical and can be deferred.
Electric water heaters, cycling air conditioning
• Consumers with on-site power generation can turn it on
• during peak periods.
• A strong demand response would:
– Limit price rises
– Limit market power under tight conditions
– Lower costs a lot in the short term, more moderately in the
medium term
Increasing Demand Response
make market better.
 Implementation Issues
• Whether bids would be limited / restricted at Rs 11
or
• when supply is less than demand, there are a lot of
demand customers who bid Rs 1000 / kWh (a very high price bid), knowing fully well that
the price cap is Rs. 11 / kWh?
• Will all these demand customers get the limited electricity available in a pro-rata
manner?
• How market split case would be handled?

Time priority ,volume priority need to be used.

Now as price have gone down whether there exist need of Price Cap?

Once we enter into price cap all type of issues would crop up:
– Is it too low or too high
– It should be cost plus or VOLL based.
– In case of surplus , lower floor price would make generators bankrupt.
– What volatility level , regulator would enter as during 3-13 Aug,09 IEX Volatility was
44% , in Brazil March,2007 volatility levels was 260% .
– How many days of sustained high prices would trigger regulator intervention.
– One year scenario indicate demand for lowering Price cap and fuel cost
based capping request .
 Conclusion
• Unless abuse of Market Power is established , it would be better to refrain
from Intervention. Consumer need power and only sufficient availability
would drive down prices.
• Better regulatory mechanism at SREC level is available to manage ultimate cost to
consumer like % of short term power in portfolio of DISCOMs and let consumer speak
for themselves whether they are comfortable with slightly higher cost of power ( due to
low % short term volume of higher cost) or load shedding.
• Wartsila study : Cost of back up power : Rs 100,000 Crs with 1.98 m tonne of Co2
emission.PowerGrid Study VOLL +Rs 34 to Rs 112 per kWh.
• Value of lost opportunity Rs 289,000 Cr at lowest VoLL.
• So decide before leaping , whom we want to protect and at cost of whom, both
consumer and Generator would be at loss in long term , only inefficient Discom are
protected who fail to forecast and arrange his supplies in Long Term and medium term
and bidding aggressively in shot term either in desperation or under pressure .
• There is no danger of California Crisis where Wholesale prices were market based and
retail prices were regulated. Here long term PPA constitute more than 85% share in
portfolio of DISCOMs./State Utilities.
• Short term short duration price spikes are there to stay due to weather beating nature of
load and hydrological risks.