Rajesh Kumar Mediratta, Director Business Development, Indian Energy Exchange (IEX) expects an over two-fold increase in the electricity trades in India. The revival in the industrial demand, expansion in renewable energy generation, shift to short-term PPAs, cross-border deals with, especially the SAARC member countries and the evolution of electric mobility are among the key factors that will spur the demand.
As compared to the several developed western economies, India only trades 4 per cent of the electricity generated on energy exchanges. Does this denote a humongous opportunity for further expansion?
We see this as a big growth potential. In Scandinavia, 80-90 per cent of the electricity is traded through exchanges, while in Western Europe the figure is between 40-50 per cent for countries like Germany, France and the UK. Therefore, we need to align a few things better to expand the short-term markets. We have to move away from the long-term Power Purchase Agreements (PPA). Today, natural circumstances are forcing people to move away from them. India has set a target of 175 GW of renewable capacity by 2022. An increase in the share of renewables means no long-term tie-ups on coal-based power plants because you don't know how the situation might evolve in the future. All this is going to create a better market environment for electricity trading in the short-term. With the granularity provided by exchanges, the distribution companies can buy to meet ramp ups and downs as also surges in the demand. Therefore, the distribution companies buy 3,000 MW during certain blocks and ramp down to a few hundred MW at other times. We expect the 4 per cent likely to grow to 10 per cent over the next five years.
Is that a conservative estimate?
Yes, because in India the transition from the long-term PPAs is happening at a slow pace. The other countries have moved much faster in that area. Where earlier there used to be 25-year PPAs, the maximum duration should now be set to five to seven years. However, because of the legacy of the MoUs inked by the NTPC for power plants in the past, the country continues to come up with PPA-based power plants. Similarly, a few states still have plans for their generation companies to set-up mega-power plants. Such actions are delaying the expansion of the short-term markets. We find that most states today are well-aware of the dangers of falling into the PPA trap, since they have experienced low-demand periods during a major part of the year. Moreover, the fixed cost of PPAs becomes a fiscal burden over time. Therefore, we expect them to act consciously when it will come to the renewal of the old PPAs on their expiry.
IEX has been looking at trading in electricity futures. How can that help in enhancing liquidity as well as strengthening the spot market?
Wherever you have futures trading in the energy markets, you have more volumes on spot trading. The mechanism entails that you buy futures to hedge your prices through a purchase of the electricity contracts. This enhances liquidity on the spot markets. Now, when you want to take the delivery of that power, those futures contracts are settled in the day-ahead market. That enhances liquidity and spot volumes. It is easy to enter the futures market and then hedge your prices because the entry barrier is minimum as compared to signing rigid PPAs. Further, a lot of non-physical participants also trade in a future which provides liquidity. This liquidity is used by the hedgers like generation and distribution companies to give them a pricing and volume advantage.
What is IEX's view on cross-border engagements, especially with reference to the South Asian Association for Regional Cooperation (SAARC) region?
Things are not moving as fast in the SAARC region as they are in the Bangladesh, Bhutan, India and Nepal (BBIN) region. The BBIN countries are fairly well-connected with government-to-government and the bilateral transactions on commercial basis are already happening. As the next step, these transactions should be facilitated through energy exchanges. We are, therefore, keen to explore as to how these transactions can be facilitated through our day-ahead market.
Liquidity in the day-ahead market is helped by cross-border transactions and that helps the market participants to get a more competitive and liquid platform. The bilateral contracts entered into by the distribution companies or generators tend to be fixed quantum rigid contracts for particular blocks of the day and seasons. Typically, this does not allow changes on an hourly basis. Now, such changes can be well managed through the exchange. Exchanges provide granular management of energy profiles. In Europe, 19 countries that consume almost 85 per cent of the total energy in the continent have their day-ahead markets coupled with each other. We can have a similar model for the BBIN region to start with.
You propose to create a Green Power Exchange platform to integrate a large number of generators of renewable energy. Will this act as a useful instrument to facilitate transactions between the renewable energy-rich states to the deficient ones?
Today, you have the option of buying conventional energy through energy exchanges. The same requirement is emerging from the renewable energy sector as there are several generators who don't have any PPA with the state-owned distribution companies. The distribution companies of eight renewable energy-rich states have enough capacity tied-up, since they have either already fulfilled or are close to fulfilling their Renewable Purchase Obligation (RPO). Therefore, the new generators based in those states will be looking for other alternatives to sell. They can do that either by entering into a contract with other states or once the option is available, through the energy exchange.
At a time when all the segments of the economy are witnessing a significant amount of disruption, what are some of the primary concerns of your members?
Our members' primary concern is how they can manage the electricity generated through renewable sources in the best possible manner. States like Gujarat, Tamil Nadu, Maharashtra, Andhra Pradesh, Telangana and Rajasthan are facing this challenge. Therefore, we have observed an over 100 per cent growth in our intra-day market, year-on-year, as the distribution companies are looking for ways to handle the intermittencies. The transaction and delivery time on our intra-day market is presently about three hours. We have requested the Central Electricity Regulatory Commission (CERC) for reducing this to less than one hour as the distribution companies wants to do quick transactions whenever there is a change in the wind-solar generation. The CERC has floated a paper on the open access registry to allow a speedy transmission clearance and bookings for intra-day transactions. The regulator has also floated a discussion paper on the real-time market, proposing hourly markets for the generation and distribution companies to transact 90 minutes before the actual delivery time. This is planned to be an auction platform to facilitate, both price discovery and transactions.
The CERC has also issued a draft paper on the market-based ancillary services. The distribution companies are expected to balance their systems in such a way that the total production equals the total demand. But, with renewable energy also entering the system that might not be always possible. As of now, very limited options are available with the system operators. The available ancillary market has only a limited number of central generators like NTPC, NHPC, NLC India, etc. and only un-requisitioned surplus power of those generators is available for such services. The CERC has proposed a market-based mechanism in which all the generators across India will be able to place their bids.
Any system operator would be able to purchase those ancillary services whenever required.
India is facing a situation where the supply is likely to increase but the demand might not keep pace with the supply. In such a situation, what are some of the sectors that are likely to drive the demand going forward? The industrial demand is not growing as fast as we had anticipated. The sectors that are likely to witness a growth are urban demand, which includes housing and commercial. The government, through schemes like Saubhagya, intends to provide access to the network and electricity to all rural households by 2019. This will mean a higher growth in demand from the rural sector. Besides services, manufacturing may also lead to an expansion in demand on account of the government’s Make in India programme. The likely growth in electric mobility is expected to be another major contributor to the growth as electric charging will be a big demand driver in another three to four years’ time.
With India having achieved its one nation, one grid, one price objective,, how do you see the country’s power sector evolving over the next decade?
We have come to a stage where there is a uniform pricing across India, since a lot of new transmission network has been created. When IEX was launched in 2008, there was less congestion. By 2011-12, we saw more electricity flowing from cheaper to costlier areas. But as the network was not planned accordingly, congestion in the transmission system resulted in differential pricing across the country. By 2014, we were witnessing a lot of price divergence across regions due to a constrained infrastructure. Ever since then, the government focused on putting more infrastructure in place. As a result, by 2016 we have had an efficient transmission network in place. As we move forward, with more demand coming in, we might again see the network getting congested in another five years. To avoid that situation, we will have to keep on adding to the transmission network. It’s a cycle and we need to keep strengthening our transmission network. The other bottleneck that might arise is that at a time when renewables energy is becoming a part of the grid, there will be areas that will generate a lot of electricity. In such a scenario, more corridors will have to be put in place for the evacuation of green power.
Eventually, the overall growth in demand for electricity, the evolution of electric mobility on a pan-India basis and development of green energy in different parts of the country will set the tone for the growth in networks. This is an ongoing process and demands a regular review, planning and construction of the new networks.
- Manish Pant
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