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Finance | March 2015

Ushering in a level playing field

A competitive power market is a better mechanism to supply energy to consumers with transparency, reliability and at low cost.
Going by the terminology of economics, it can be said that restructuring of the electricity market has helped in abolishing the monopoly in the generation and transmission sectors and has brought in competition at various levels of market. Additionally, this restructuring, that is aimed to deregulate the electricity market, also paves way for private investment, efficiency improvement and customer satisfaction as different parties compete with each other to increase their market share and remain in business.

Development of PX
The Indian Electricity Market was opened up in the 1990s and saw a major change with the introduction of the Electricity Act, 2003. Open access is the underlying principle for a free and fair electricity market. The regulations of Open Access were revised by CERC with effect from 1st April 2008 and subsequently, CERC provided a framework for the development of Power Exchange. The objective of this framework was to provide freedom to the exchanges where regulation would be minimal and restricted to essential requirements only. The mandate for developing a Power Exchange is given to CERC in the National Electricity Policy:

´Trading is essential for resource optimization and meeting short term peak demand and for disposing off surpluses which are inevitable as a utility has no direct control over consumer load.´

A power exchange is like an e-commerce marketplace where electricity producers and buyers carry out trading based on demand and willingness-to-pay in the presence of a market operator. In India, the first power exchange was established in 2008. As per the guidelines of CERC, Financial Technologies (India) Ltd and co-promoter PTC India Ltd started the Indian Energy Exchange (IEX) in 2008. IEX was the first power exchange in India followed by Power Exchange India Limited (PXIL) promoted by National Stock Exchange (NSE) and National Commodities & Derivatives Exchange Ltd (NCDEX) in the same year, 2008.

Competition among PXs
The first PX (IEX) started in the year 2008 with the consideration that surplus tradable electricity was limited in India. But soon the second PX (PXIL) was established with the idea that more than one power exchange would encourage competition for their sustained performance, since one PX would be a monopoly and would tend to be complacent in the long run. As far as the tradable volume was concerned, it would be decoded by the operational market forces. As a result of multiple power exchanges operating in the same market, the participants get the benefit of superior quality of service and automated system of checks and balances. Also, the service charges collected by the PXs for are regulated by the market forces.

Operation of PX
Transmission corridor allocation is done with the highest priority to PPA contracts, next to bilateral contracts, then to OTC contracts and lastly to exchange trading. Based upon its capacity the power generating unit places bids for the strategic price and volume between 10 am and 12 noon for any day-ahead transaction. Since the Indian PX market follows double-ended closed bidding, the buyers and the sellers place bids in a similar way. After this the unconstrained price and volume is obtained based on the equilibrium point of aggregate demand and supply mechanism. This is obtained by equating the purchase bids and sale bids placed on the exchange platform initially, which is done with the help of operating software that IEX has developed in collaboration with Nord Pool. By now we have the Unconstrained Price (UN-MCP) and Unconstrained Volume (UN-MCV). Since exchange mode of power trading does not allow for any kind of default, all the bidders are checked for their fund availability, conforming to which the corresponding bids are accepted. Next, requisition for transmission space reservation is sent to the NLDC/RLDCs based on the UN-MCV obtained. In return NLDC informs IEX about the Available Transmission Capacity (ATC) for exchange trading. Now, based on ATC, IEX re-runs the demand supply mechanism on area basis. Prior to this, various possibilities of transporting power to the desired area is calculated based on inter- and intra-State transmission space available.

When the transmission capacity is constrained between the bidding areas, there could not occur bid matching in these areas. As a result of this, different prices are obtained in different bidding areas upon re-equating the demand and supply curves and this is called as Area Clearance Price (ACP) and Area Clearance Volume (ACV). Thus the term ´market splitting´ refers to the fact that the limited transmission capacity leads to a split between two market areas. For a given area´s ACP, the suppliers chosen are those who have bid at lowest price and the consumers chosen are those who have bid the highest price. The difference of the highest buy bid, lowest sell bid and ACP is transferred to the CERC´s Power System Development Fund. The contract is settled with the bank´s clearance and subsequently the final result is sent to RLDC/ NLDC for incorporation into the final schedule. After incorporation, final schedule is received from RLDC/ NLDC by 5 pm.

Volume transaction at PX
The trading at IEX started in the month of June 2008 with a minuscule volume of 0.424 MUs (kWh) and has progressed up to maximum 2,852 MUs (monthly transaction) in the month of September 2013 and 2,790 MUs in the month of October 2014. (Refer Increase in monthly transaction volume at IEX during 2008-2014) During the year 2013-14, the total transaction volume grew by 29 per cent Y-o-Y basis and stood at 28.92 BUs as compared to 22.4 BUs traded during 2012-13 @ Y-o-Y 62 per cent. The CAGR of yearly volume growth at IEX is 67 per cent.

Price discovery at PX
IEX follows the collective bidding mechanism, in which all the sell and buy bids are run through an algorithm to determine the market clearing volume (MCV) and market clearing Price (MCP). In this method of price discovery the aggregate demand is equated to the aggregate supply to arrive at an equilibrium price and equilibrium volume. To simulate the algorithm of market equilibrium mechanism we have taken an example to describe the algorithm, we have considered four buyers as Buyer-1, Buyer-2, Buyer-3 & Buyer-4 and three sellers as Seller-1, Seller-2 and Seller-3 with their respective bid volumes at different prices.

In this process the equilibrium is arrived where the total sum of sell volume is equal to total buy volume. In this example the resultant equilibrium price arrived at Rs 4 /kWh and equilibrium volume as 110 MU.

Upon mapping the data of Purchase bid vs. Sale bid during the year 2013-14 (Refer Increase in monthly prices at IEX during 2008-2013), it is found that the quantum of Sell bids is 21 per cent higher than those of Purchase bids which clearly indicate that sellers have moved toward exchange trading. The highest price (MCP) discovered was Rs 10.80 per kWh on 26th Aug 2014 (block price) and the lowest price was Rs 0.8 per kWh on 20th Aug 2013. The variation of price during the year has been analysed in the following table to find the most traded price of power.

Bidding areas of PX
The entire country is divided into 12 bid areas based upon the area and the grid in which they fall. The first private sector generator to trade through PX is Jindal Power (Chattisgarh) in the western region. As time progressed, generators from captive (CPP), merchant (MPP) and independent (IPP) also started participating in power trading either directly through obtaining license or through registered traders. There were a total of 1,288 market participants in the month of April 2012 which increased to 2,058 at the end of March 2013.

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