Buzz about power trading getting louder

Rajesh K Mediratta: VP, IEX

Online trading in electricity will usher in standardised contracts, greater choice, better price and payment security

India is the third-largest producer of electricity in Asia. Despite the large generating capacity, though, there exist geographical and temporal demand-supply mismatches. This provides substantial opportunities to improve the economic efficiency and security of supply through trading of power — both within and across regions.

There has been a steady growth in the number of short-term power trades with the number of participating utilities in short-term open access (STOA) registering a CAGR of 25% over last three years. Moreover, the unscheduled interface (UI) billed amount stands at Rs 6,856 cr in 2006-07. The volume of electricity traded by the trading licensees in total generation is 2.41%.

The emerging scenario is more competitive where we are moving from the present electricity market of long-term power purchase agreements (PPAs), short-term agreements, bilateral markets and UI to one which encompasses all these along with a common electricity marketplace for standard contracts with a nationwide reach, assuring a better price and payment security.

Need for power trading through an efficient platform
In India, while a huge section of consumers is deprived of power, there are a lot of captive power plants (CPPs), which are underutilised. With a lot of merchant capacity also expected to be added in the near future, there is a need to encourage peaking power plants and bring the surplus captive generation into the grid.

The inherent diversity in demand of various states and regions results in periods of seasonal surplus in one state or region, coinciding with deficit in another part. This demand-supply mismatch can be met by the introduction of a transparent and neutral trading platform that helps in filling the gap by bringing power industry participants together to buy or sell electricity in an auction-based system.

Emulating the established international markets
There are successful power exchanges functioning across the globe like Nordpool, which has a strong physical and financial market with adequate products and services for companies competing in the market. Moreover, the Nordic Free Trade Area has a consumption of 400 Twh with 60% of physical trade taking place on Nordpool and financial trade being 7 times the consumption.

Indian Energy Exchange
The Indian Energy Exchange Ltd (IEX) has been set up with the vision of creating a world class, national level online trading platform for electricity and to provide an efficient and transparent price discovery mechanism to the market participants. Promoted by Financial Technologies (India) Ltd and the Power Trading Corporation of India Ltd, the initiative has attracted many other leading power sector utilities from both private and public sector to seek equity participation in the exchange.

Its prominent features are as follows:
Power exchange operations
In the process of trading, all the participants will submit bids for buying and selling power to the power exchange.

It will be a closed, double-side auction. There will be hourly contracts done on the basis of portfolio bidding. Initially, the minimum contract size would be 10 MW because currently the utilities are not equipped to handle a large number of contracts. But, gradually, 5 MW and 1 MW contracts will also be introduced.

Singe/ portfolio and block bids
All utilities will be able to enter a set of prices and quantities of power they are ready to purchase or sell. The different price-quantity pairs present a wider choice in power purchase and sale. It is possible for a utility to submit a sell bid above a price point and purchase bid below a price point along with different purchase and sale quantities in between.

These bids are called portfolio bids or portfolio. Block bids can also be submitted, specifying a certain quantity of sale quantity for a continuous period. They are All-or-none bids, meaning, if full quantity is not accepted for a complete period, the bid will be rejected.

Timeline of operations
To ensure that the power exchange timeline is consistent with the timeline of the system operators, the exchange will inform the required transmission capacity to regional load despatch centres (RLDCs), which in turn will inform it about the available transmission capacity. Auctions will be carried out, resulting in trade schedules, which will be released to the system operators.

System operators will finally issue the schedule to all the participants. Money will then be exchanged and financial settlement will take place. Both the power cycle and the financial settlement cycle will be closed at the power exchange level in 24 hours for the trade done on a day-ahead basis. The entire process will be internet-based.

Delivery of power
Delivery of power will be ensured through the existing mechanisms by which bilaterally negotiated contracts are delivered today, i.e., through the RLDCs. Once a contract is scheduled, it will be considered deemed delivered, as practised currently. In case the generator defaults, he will be liable to pay UI charges.

Transmission charges from the point of injection of power to the interconnection point of the state grid with the regional grid shall be borne by the seller. Transmission charges from point of interconnection of seller’s state grid with regional grid to the interconnection point of buyer’s connection point at regional grid will be distributed amongst all members on the basis of traded quantity.

Future product offerings
A day-ahead market hourly contract is being currently offered. IEX also proposes to offer other products like week-ahead, month-ahead, quarter-ahead, year-ahead, 3 years-ahead and seasonal contracts, along with over-the-counter clearing. The IEX proposes to cover the entire gamut of power trading domain.

Benefits of power trading through an exchange
A power exchange acts as a neutral, unbiased platform by serving as a one-stop shop, by being a key integrator of power markets, having scheduled coordination with settlement handling and easy physical delivery. Furthermore, it provides payment guarantee, credit risk management, and transparent price discovery mechanism. It will lead to more economic grid operation and provide long-term and short-term price signals in the market, which cannot be seen in the current bilateral markets.

Looking forward
Currently, short-term trading constitutes only 3% of the total energy market. Power markets generally operate with PPAs for long-term trading and bilateral contracts for the short term. For very short-term requirements, there is the UI. In future, these markets will be complemented by the exchange, which will have standard contracts, nationwide choice, better price and payment security.

Views are personal.

rajesh.mediratta@iex.com