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Spotlight | April 2011

Need for awareness

Queried about the issues that power exchanges face, Rupa Devi Singh, MD and CEO, PXIL, informs R Srinivasan that one of the key challenges is the need for market knowledge.

To what extent have the objectives of setting up power exchanges been realised?
The concept of power exchanges was instituted in India with a view to demonstrate the effectiveness of nationwide competitive platforms for trade of electricity. The power exchanges have successfully attained this objective of having a nationwide market for power over the last two and a half years. They have provided a transparent platform for participants across the country, irrespective of their location, to come and participate in a highly efficient manner without worrying about counter-party risk.

This platform has witnessed continued participation from almost all state utilities as also from a large section of captive power plants and a large number of industrial consumers from across the country, who till date had otherwise not been able to enjoy the benefits of competition. The exchanges are, and will be looked upon, to provide innovation in product offerings and to provide a fair and transparent marketplace, which enables fair price discovery and helps in the growth of the Indian power markets.

What challenges do power exchanges face?
For the exchanges, one of the key challenges, apart from the obvious issues related to power sector infrastructural bottlenecks and overall systemic issues, is the need for widespread awareness and market knowledge.

The barrier of going beyond the state markets towards a completely seamless nationwide market is also a key challenge. This is coupled with infrastructure issues like transmission unavailability and regular congestion in the transmission corridors. We believe that efforts are being made to resolve all these issues, one step at a time, and would be sorted out for the overall benefit of the country as we go forward. As for awareness and market knowledge, creating such capacity in the sector is a gradual and time-consuming process. However, we are glad that PXIL, as a knowledge leader, has realised this and channelised efforts towards extensive capacity building efforts for the Indian power sector. This has been in the form of several training programmes being organised in association with premier educational institutes like IIMs and IITs, etc.

How will the company handle arbitraging between exchanges?
Currently, the instruments traded through the exchange necessitate physical delivery. The instrument specifications ensure that the parties placing orders on the exchange are liable for injection and drawal of power that has been traded and scheduled for delivery. This structure does not allow as such for any arbitrage opportunities. Moreover, any deviation from the scheduled injection and drawal of power is managed by the regulators and system operators in the form of commercial penalties.

However, any arbitrage opportunity, if available only points out towards the liquidity and opportunities in the market which get balanced out very fast. Arbitrage, if handled properly, can act as a healthy tool towards better and more efficient price discovery.

What lesson/s can our exchanges learn from experiences of those that function abroad?
International power markets have their structures and system designed around an environment with surplus power, whereas the Indian sector continues to face power deficits on an ongoing basis even in the absence of connectivity to a large number of consumers across the country.

So the Indian power market structure would have to be indigenously designed and implemented. However, as some of the international markets have reached a more stable structure of operations with their regulatory structures as well as overall systems reaching a degree of maturity, we as a nation need to apprise ourselves of such experiences and learn from them. Such experiences need to be seen in the context of the Indian situation and modified appropriately before being implemented.

To the extent of creating a platform for exchange of experiences from the international markets, our company took the first step in organising an international conference in New Delhi, which was organised on the backdrop of the Asia-Pacific Meet of the Association of Power Exchanges. This conference, inaugurated by the Minister of Power and the CERC Chairman, was attended by several key stakeholders from the power market in India as also a number of key power market operators from Asia-Pacific, Australia, New Zealand and Korea, etc.

To what extent has the infrastructure model of the power market evolved in the last few years? Kindly mention the noticeable changes.
The process of restructuring the Indian power sector into a completely competitive power market started in right earnest with the enactment of the Electricity Act 2003. The Act provided for converting the electricity market into a multi-buyer, multi-seller framework, which could interact through several competitive markets. It also provided for non-discriminatory open access to transmission lines in the country and allowed market participants to reach competitive marketplaces directly.

The Act was followed by the National Electricity Policy (NEP), which among others, confirmed the path of competitive markets that the nation had chosen to tread by setting objectives like assured electricity to consumers at reasonable and competitive rates, financial viability of the sector, promoting transparency, predictability and consistency in regulatory approaches and encouraging competition. The NEP also talked about setting up of power exchanges to provide a common platform for trade of electricity.

The National Tariff Policy focused on creating a standardised approach towards defining tariffs in the sector. It also focused on competitive bidding for procurement of electricity, first from private entities and with a five-year holiday from government entities as well. This five-year holiday in fact came to an end recently and a competitive framework exists for all now. There have been a series of regulations thereafter, including the Power Market Regulations in 2010, which have created an appropriate structural framework for development of the power markets in the country. The structural model in the country is inclined towards a multi-buyer multi-seller framework, with non-discriminatory open access to the transmission network in the country along with competitive marketplaces in the form of exchanges as also a competitive bidding framework in the long term.

Kindly give details of the Renewable Energy Certificate (REC) product, which successfully completed mock trading?
RECs are certificates that are issued by the Central Agency against generation of renewable energy and denote the green attribute of energy. These certificates are expected to provide a further boost to renewable energy generators and will also provide an additional avenue for utilities and other obligated entities to meet their renewable purchase obligations (RPOs). RECs will be mandatorily traded through the power exchanges. The Central Electricity Regulatory Commission has designated the National Load Despatch Centre (NLDC) as the Central Agency for this scheme and made it responsible for issuance and depository of these certificates.

PXIL has successfully completed mock trading of its Renewable Energy Certificates (REC) trading platform. We have familiarised our members about the PXIL platform and its capabilities as the RECs will be traded for the first time on 30 March 2011. As in the case of the physical power trading platform, we have developed the REC trading platform in-house, leveraging on our superior product development skills and understanding of markets.

Also why was the last Wednesday of March 2011 chosen for the first trade to take place?
The REC segment is the first such market-based policy mechanism being implemented in India. This made it difficult to ascertain the expected initial liquidity of trade in the market. Moreover, the response of the market participants was also difficult to gauge in the initial phases of development. Therefore, in order to consolidate the liquidity in the market as well as to provide a fair opportunity for all participants to trade, it was necessary, in the initial phase to provide trading in batch auctions once a month. Consolidation of liquidity and adequate levels of participation are expected to help in appropriate price discovery.

Now, as the issuance of certificates is to take place across the month, the last week was chosen for trading the certificates to ensure that all certificates issued in a month are also available for trading. Wednesday was chosen, as operationally mid of the last week was found to be most suitable. It was with this view that NLDC, as the Central Agency, has declared the last Wednesday of each month for trading of RECs in the initial phases, which may be changed later. Therefore the trading of RECs has been scheduled on the last Wednesday of every month.

To what extent will these certificates provide a boost to renewable energy generators and provide an additional avenue for utilities and other entities to meet their renewable purchase obligations?
Renewable energy (RE) provides a number of primary and secondary benefits which are economic, social, environmental or technical in nature.

Over the last two decades, the scaling up of installations and capacity of renewable energy sources has meant that the prices of several RE technologies have been on the decline. This has also helped enhance the extent of investments in this sector.

Many small and medium hydro, wind and biomass projects are in the process of nearing grid parity and hence it can be confidently expected that in the future most of these renewable energy based sources would compete on economic and financial terms with conventional thermal power generation. The REC mechanism offers a level-playing field for RE generators and the utilities. It offers utilities easy access to electricity at a reasonable price and on the other hand allows REC generators to sell RECs to meet their cost of generation or even earn more.

The mechanism also provides a means to meet their RPOs through purchase of RECs. RECs are agnostic to location and thus allows the development of the most efficient renewable energy resources regardless of its location. This is especially more important for India because of the high concentration of pockets of cost-efficient RE resources (the coastal belt for wind, Thar desert for solar and the Himalayan belt for small hydro).

REC trading would also lead to a transparent mode of price discovery which would act as price signals towards the cost of the environmental attribute of generation of renewable energy sources. Moreover, it would be the most efficient and competitive way of fulfilling the RPO for any entity.

What are the advantages and disadvantages of longer tenure products?
A longer tenure product essentially means trading for delivery beyond the next day. Power exchanges currently offer power trading in the spot and week ahead markets. The current product offerings include day ahead spot, day ahead contingency and week-ahead trading in the physical segment and PXIL is the market leader in the week-ahead segment. Longer tenure products provide for better information symmetry in the markets. Since the trades are spread over longer time durations, including seasons, they help in better management of portfolio of the users as well as the cash flows of the participants.

The introduction of products with tenures longer than the current one-week would require appropriate regulatory structure. At the same time, since the portfolios of this market would be spread across time horizons, provisions for appropriate risk management and settlement of these trades would be essential.

The current offerings of the power exchanges have started creating an awareness about the benefits of trade through the exchanges. Participants now know that a trade through the exchange will ensure payments for all transactions, with transparency in price discovery and efficient trade management and will hopefully lead markets towards the introduction of longer tenure products in the near future.

APEX APAC meet and international conference

For the first time, the Asia Pacific Meet for members of the Association of Power Exchanges (the APEx APAC meet) was organised in India by Power Exchange India (PXIL) for members of the Association of Power Exchanges. It was earlier hosted only in countries like Australia, Singapore, etc. The international conference was inaugurated by the chief guest, Sushilkumar Shinde, Union Minister of Power, and Dr Pramod Deo, Chairman, Central Electricity Regulatory Commission (CERC) was the guest of honour.

Union Minister of Power Sushilkumar Shinde, said, “The growth of the power sector, especially in the last five years has been substantial. We have added over 47,000 MW, taking the installed capacity of the country to over 170,000 MW. In the 11th Plan, we have added nearly 33,000 MW of new capacity, which is 150 per cent more than the total capacity added during the 10th Plan. During the current year so far, we have added 10,640 MW which is the highest capacity addition in a single year since Independence. We will be adding more than 15,000 MW this year.”

He further declared that in view of the fact that:

• Only 66 per cent of our population has access to electricity as compared to 98 per cent in America, 95 per cent in Australia, 99 per cent in Brazil, 75 per cent in South Africa, and
• India’s per capita power consumption of approximately 800 KWh per year is significantly lower as compared to 12,924 KWh in USA, 10,720 KWh in Australia, 5,486 KWh in South Africa and 2,116 KWh in Brazil. We need to go full steam to bridge this gap.

On the last day of the two-day conference, on the sidelines of the Asia Pacific Meet of Association of Power Exchanges, a world-wide body of power exchanges, where eminent speakers from international markets such as Australia, New Zealand, Singapore, Korea, Philippines had assembled to discuss developments and learn from experiences in operating in various competitive international power markets.

Reflecting on the progress made by power exchanges, Rupa Devi Singh said, “Power exchanges are already in the third year of their operations and are today well accepted and trusted platforms for procurement of power. Almost all government-owned utilities as well as independent power producers (IPPs) and captives are already actively bidding on the power exchanges and the prices discovered therein are accepted as reference prices for most other transactions in the market.”

Dr Pramod Deo, Chairman, Central Electricity Regulatory Commission, disclosed his three-fold agenda in the next five years:

• Electricity consumers should have a choice in choosing the supplier
• Private sector participation is a must for growth of the power sector
• To mainstream environmental products with all kinds of renewable energy projects along with the conventional energy sources with the launch of RECs, in both the solar and non-solar category. He said, “Power exchanges will have to play a crucial role in maintaining the confidence of investors as they are the institutions that would present the true price signal of electricity in India”.

About PXIL

Power Exchange India (PXIL), India’s first institutionally promoted power exchange, provides solutions to transform the Indian power markets. It is promoted by the National Stock Exchange of India and the National Commodity and Derivatives Exchange. Other stakeholders are Power Finance Corporation, Gujarat Urja Vikas Nigam, West Bengal State Electricity Distribution Company, Madhya Pradesh Power Trading Company, JSW Energy, GMR Energy and Tata Power Trading Company. In line with regulatory guidelines, the company provides the compulsory delivery-based products such as weekly, day-ahead spot and day ahead contingency products for market participants to trade. It has received approval for launch of its REC product, the trading for which will commence from 30 March 2011. Efforts are being put towards developing longer tenure products that will, subject to regulatory approval, enable the market participants to trade up to three months in advance.

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