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Cover Story | February 2013

Energy Trading Poised to Touch New Peak

Even though short term trading of energy is not very old practice in India, it has grown many folds in less than five years. Going ahead, the energy trade market can achieve a very healthy growth if country is able to short out transmission constraints.  The country has plans to set up regional exchanges and it plans to set up trading platforms that can also facilitate trade with neighbouring countries. India has already initiated action to explore options of energy trade with  Bangladesh, Bhutan, Nepal, and Sri Lanka. Pradeep Pandey delineates future expections.
Energy trading in India is relatively a new concept but the energy trading through exchanges has gained momentum and the growing interest for participation by public and private players insinuates the possibility of tremendous growth potential in the near future.  
With a growing need for rapid infrastructure growth to support the economic growth of the country, demand for power is continually growing and the demand "supply mismatch has become poignant. Despite a huge capacity addition by power generators in the past five years, the country still faces a peak hour deficit of 10-11 per cent. 

Under such circumstances, industry people and experts are expecting this situation to be very positive for the energy trading sector. The country targets a capacity addition of about 80,000 MW in the XII Five Year Plan, which may require an investment of about 1.4 lakh crore. The government has also recommended state governments to release provision of open access, under Electricity Act 2003, to promote healthy competition. In addition to this, the government has also increased the limit of foreign direct investment in the sector. 

Short-term trading of energy is broadly being executed through the two leading power exchanges namely the Indian Energy Exchange and Power Exchange India Ltd. Both expect trade and both see enormous growth in the years to come. However, both remain worried on infrastructure constraints that are hitting power trading in the country.

"CAGR has been about 60-65 per cent in past years for IEX and going ahead we expect to see about 20-30 per cent, depending on open access, transmission constraint and all these issues," says Rajesh K Mediratta, director business development, IEX, country's largest power exchange with market share of over 95 per cent. 

In FY 12-13, IEX traded over 16 Billion Units (BU) . It pulled in more than 1,700 participants, which included Discoms, IPPs, CPPs, open access consumers and electricity traders. Ironically, the exchanges are missing targets due to poor connectivity in the states.  
"The transmission infrastructure was a significant bottleneck, leading to a loss in volume of 2.9 milestones achieved by IEX in the recent past. BUs in 2012, has remained as an area of grave concern, says Venkat Chary, chairman IEX. 

Moreover, in 2013, people at exchanges expect some key policy changes, including 20-30 per cent of capacity for the short term market in the transmission planning criteria in order to deal with the acute congestion and a dedicated capacity for exchange transactions in line with  overseas markets.  
Better future for REC Trade
With the recent order by the Central Electricity Regulatory Commission (CERC) on proposal for extension of Renewable Energy Certificate (REC) validity up to 365 days and move to make provision compulsory on RPO compliances, the transactions on REC counters are also likely to pick up. REC, a mechanism to trade renewable energy including solar, other non conventional sources on platforms similar to stock exchanges, is gaining ground in India, in line with other countries such as Australia and Japan , where it has already gained popularity in countries. REC trade through the Indian Energy Exchange and Power Exchange India Ltd (PXIL) has generated around Rs 430 crore for the country's renewable energy producers. One REC equals to 1 MW of electricity produced from renewable resources.

According to Rupa Devi Singh, managing director, Power Exchange India, the REC current market size is pegged at around Rs 30 crore per month and has an enormous growth potential to reach up to more than Rs 10,000 crore in a few years.

State electricity distribution companies and public sector utilities, which are mandated to buy a certain portion of power from renewable sources under the renewable purchase obligation (RPO), are the primary drivers of the REC market. "Though a proper compliance mechanism holds the key to success in the REC mechanism, it is expected that obligated entities would come forward to meet their RPO targets. Also, more participation on the voluntary front would ensure a prosperous "Green" India, said Chary. December REC trading session concluded with the trade of 1,73,644 non-solar RECs and 931 solar RECs on IEX. With more than 19.43 lakh RECs available in the market, only 14.55 lakh RECs (75%) were put for sale and 2.75 lakh (14%) were redeemed. Though the statistics are not very encouraging, this was the highest redeemed figure in this FY since April'12. Earlier, 2.74 lakh RECs were redeemed in August'12 session. With a strict compliance mechanism being the need of the hour, it is expected that the last quarter of FY 12-13 would see an increase in participation from obligated entities to fulfill their RPO obligation. On the contrary, voluntary participation has seen some development with some voluntary entities coming forward to purchase RECs in the last two trading sessions.  
New Paradigm  
India is also looking towards a bright future for energy trade with the expectation of a cross border transmission line connectivity in the future. Idea of regional exchange in line with overseas countries, Indian exchanges can facilitate trading with neighbouring countries such as Bangladesh, Myanmar, Sri Lanka and few others. 

It is also good because this model of exchange is very scalable. It is just that generators or buyers can come bid on-line. With cross border connectivity, transaction would be possible through bidding. Whichever country gets connected electrically could become a part of  
the exchange.
The process is on but at a slower pace. Now connectivity with Bangladesh is going on and as per plans it will be connected by end of this year. It will be HVDC back-to-back with a capacity of 500MW. With Nepal, we are getting 400kV double circuit AC line which will be in place by 2015. There are cooperation forums like SAARC, BIMSTEC and SASEC who are in the process of finding right framework to take care of issues of harmonising grid code and other commercial and technical aspects," said Mediratta. However, Nepal and Bhutan can start with minimal preparations for small amount of electricity transactions. Nepal has shortages and the need can be met in very small way through 33kV and 132 kV radial interconnections. Bhutan presently has no merchant capacity but as soon as they will have merchant capacity, they will be able to transact through IEX, he added.

Despite, India's vast energy requirement and import dependence, India's regional energy trade is not robust enough to exploit its potential fully and comparative advantage. Currently, India-Bhutan bilateral electricity trade had been going on for several decades and is the largest in the region in terms of volume. Bhutan exports more than 75 per cent of its generated electricity to India. 

The eastern part of Bhutan is linked to India by 66 kV and 33kV lines, and the western part is linked to and on western side it is linked by a 220 kV line. As of now electricity trade between India and other neighbouring countries such as Nepal and Myanmar remain minimal but have enormous potential to grow since Nepal espouses a feasible hydroelectric potential of 43,000 MW, of which only 627 MW have been developed. Similarly, Myanmar has an estimated hydropower potential of 39,720 MW and about 2 per cent has been developed. However, it can only be increased once proper connectivity between the two countries is established.
Way Forward
There is a need to encourage both the national and international private sector to play a major role. Public Private Partnership arrangements in cross-border energy export projects combined the best of political commitment and commercial delivery. India and its regional energy trade partners should subscribe to and become members of the Energy Charter Treaty, to place the cross-border energy trade on a firmer multilateral footing. India has already initiated its action to explore options of energy trade with Bangladesh, Bhutan, Nepal, and Sri Lanka. 
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