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Interaction | July 2011

Open access is key to introducing competition

The Electricity Act 2003 opened the power sector to multiple players by providing for a power market replete with competition, Mrs Rupa Devi Singh, MD&CEO, PXIL, informs R Srinivasan.

Kindly give us an overview of the importance of power trading and exchanges in a power-deficit economy and what are the key trends in this segment?
India has committed itself to creating a competitive power market by undertaking a series of reform initiatives, starting with an umbrella legislation, enabling policy framework as well as progressive regulatory guidance and support. The development of competitive markets is largely dependent not only upon de-regulation but also upon the creation of efficient marketplaces. Establishment of a power exchange in India is one such initiative that completes the value chain in India's move towards deregulated, efficient and vibrant power markets.

Our country faces an overall power-deficit, which is also reflected in the numbers published by the Central Electricity Authority (CEA). However, on any day of trading, there is a combination of surplus and deficit entities that vary at different points of time throughout the day. Since the smallest level of control is at the state level, various entities need a platform to plan portfolios and remove disparities. Following the Electricity Act (EA) 2003, traders played a key role by acting as intermediaries, allowing buyers and suppliers to interact. However, the actual effect of a common marketplace began to emerge with the start of the exchanges in 2008, wherein the exchanges provided an electronic platform.

The exchanges, over the last three years have also shown that it is possible for small entities like industrial consumers and power producers to participate directly in a national-level marketplace to meet their demand-supply requirements. Therefore, the presence of trading and exchanges in the Indian market has allowed for optimisation of available generation capacity at a national level, which otherwise would not have been possible. In addition to providing an efficient, transparent and equitable platform, the exchanges provide price signals for bilateral trades. They facilitate participants with access to the physical market free of cost and eliminate credit risks by becoming counterparty to all the trade.

Some key trends are:
  • Newer types of contracts like any day and intra-day contracts are being made available to participants.
  • The time is ripe for longer period contracts like month ahead and quarter ahead trading on the exchange.
  • The trading of Renewable Energy Certificates (RECs) being allowed only on the exchange platform reinforces the importance and trust by regulators about the functioning of the exchange. It also provides a roadmap for other instruments like energy-saving credits issued by the Bureau of Energy Efficiency (BEE).
  • Large participation from small industrial consumers across the country
  • Movement towards ancillary services to be handled through exchanges
  • Central Electricity Regulatory Commission (CERC) proposes to spread the renewable power purchase obligation of states staggered over one year and at specified intervals to make renewable power trading on exchanges more vibrant and to gain volumes.
  • CERC has also directed power exchanges to cut bidding block time from the present one hour to 15 minutes. The company has developed its software on the 15-minute time block and had proposed this three years ago. We are glad that it has been agreed upon, which will take the market towards real-time availability and also better price discoveries. It will also give a boost to renewable resource-based power as well, since the time between making the commitment and actual delivery can be bridge.
What regulatory issues and challenges does the company face and what would you suggest to overcome them?
Power market regulations like power trading are evolving and as the market expands, these regulations need to be re-visited from time to time. Jurisdiction issues too need to be checked if CERC or the forward markets commission (FMC) should be the judiciary regulatory body to decide on issues related to electricity derivatives. Parties have moved the Supreme Court. Clarity on the regulatory issue will give a boost to the power market and exchanges. For congestion management, we have been requesting the CERC to change the formula in line with the market realities in India. Here, the regulator needs to chip in and set rules.

What do you feel about the key regulatory issue of open access?  
A key objective of EA 2003 was to provide 'open access' in electricity transmission and distribution. Open access to transmission and distribution is the key to introducing competition in this sector. The Electricity Act 2003 opened the power sector to multiple players by providing for a power market replete with competition. Regulatory issues of open access emerge from a catch-22 situation which state utilities in the country today face. Almost none of the state utilities have revised their tariffs to keep in line with rising costs of electricity. This has resulted in their overdependence towards highest-paying consumers in the state i.e., the industrial consumers.

In view of the over-dependence, it is difficult for state utilities to give open access to industrial consumers as that may lead to financial problems for utilities. So it has led to various technical issues to deny open access or high charges being levied as open access. Hence, purchasing electricity from open access becomes unviable for any consumer. Also, there has been slow progress on the open access policy. Several State Electricity Regulatory Commissions (SERCs) have notified open access regulations apart from fixing surcharge, transmission and wheeling charges ('regulated fee'). But this has hardly helped consumers come forward to use the open access facility. Further, the state load despatch centres (SLDCs) have failed to act as independent system operators and open access is being denied by SLDCs to protect state electricity boards from competition. It is difficult to persuade a monopolist/incumbent to give up its monopoly privileges. An oft-repeated concern by discoms has been that if large consumers shift, the discom (or utility) may suffer losses. Though housing societies in urban centres, due to their bulk consumption above one megawatt, also qualify for open access, discoms are reluctant to give them open access. Discoms claim that such housing societies 'distribute' electricity without being 'licensees' within the meaning of EA 2003. There are however states which have allowed open access to industrial consumers and we hope that some more states will follow suit to ensure that key constituents enshrined in the Electricity Act 2003, including competitiveness, are included.

Power exchanges are a vital element in power sector reforms but the amount of power traded is only around five per cent of the total generation. What can be done to improve upon this?  
Almost all legacy generation assets are tied to long-term PPAs. So there is less possibility of excess capacity being available beyond 4-5 per cent for trade in short-term markets. With a larger degree of private partnership in power generation, there is an expectation that some portion of such capacity will be available for direct market transactions.

However, such capacity coming into the market place depends upon state utilities being able to procure power and allowing industrial consumers to come to the market place and purchase as per their needs. In the first instance, it will require state utilities to improve upon their financial condition to be able to purchase a part of the portfolio from the open market. The current state of finances of the utilities paints a dismal picture. For second instance, key issues related to open access need to be resolved where state utilities have a role to play. Apart from these, CERC is considering several measures to improve power trading on exchanges, including starting evening trading which could bring the market much closer to real-time demand. Also, exchanges have been urged to form separate clearing houses for transactions.

There is a feeling among some industry persons that as more participants enter the market, there will be higher volumes, greater competition and lower prices while others feel it will be easier for national and regional load despatch centres to deal with a single exchange. Your views on the same.

The Indian power market has the potential to sustain multiple power exchanges. However, this potential can be realised if issues related to state finances, transmission corridors and undelivered transmission capacity is improved. Since power exchanges undertake highly structured transmission, even multiple exchanges should not create issues for load despatch (LD) centres as long as LDs invest in building appropriate technical and institutional capabilities.

Which product (weekly or day ahead) is best suited to Indian generation needs?  
Each of these products has a role to play in meeting the requirements for various types of consumers for varying needs. It would be difficult to categorise or prioritise according to the benefits. However, we believe that as long as utilities plan to manage both quantity and price risk, they will need a judicious mix of short-term transactions coupled with long-term transactions.

In a sense, therefore, day ahead and a longer tenure market, say a monthly, would be ideally suited for the Indian market. In the long run we would like to see standard contracts for say, up to a year trading on exchanges which will be a great source of comfort to investors in merchant untied capacities. The day ahead market provides an excellent market to sell surplus or the allocated quantity in the very short duration. Power sold in the day ahead spot through the exchange also generates immediate cash flows which are very attractive to surplus utilities as well as captives.
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