A crucial discussion paper by CERC, the electricity regulator, has, verily, made economics stand on its head! Incentives and economic signals seem to be downright lacking in the proposed design for a wholesale, pan-India market for electric power. Given that such a market would cut down on costs and boost efficiency across the board in the fault-prone power sector, the lacuna seems glaring indeed. The issue at hand is a market for transmission capacity. The key really is "open access", the assurance of carrying capacity to transmit power cross-country. With open access, efficient power producers can compete for custom. It’s essential for reform. The Electricity Act, 2003 does provide the necessary enabling environment for open access. But the problem is that for long years we have thoroughly underinvested in transmission. Line capacity is woefully inadequate and is likely to remain so for years on end. Hence the compelling need for a system of pricing and tariffs for transmission assets.

The idea, of course, is that proper price signals would induce better utilisation of scare assets, and boost investment as well. Open access (at the right price!) would lead to a "seamless" wholesale power market. It would imply that sellers are able to transact smoothly countrywide, and that buyers are able to access lower-cost, reliable supply. But the open access paper by CERC calls for flat-rate "postage stamp" approach to pricing. Pointedly, what is proposed is that the short-term rate for line usage be 25% of those for long-term contracts. Given the umpteen load and demand scenarios both across and within regions, surely a more nodal approach to tariffs specific to transmission nodes, makes sense.

Second, the paper wants the current system of Rs/MW/day rates to continue never mind that a changeover to billing on Rs/MW/hour basis would better allocate resources. As, at the consumers’ end, it would hasten time-of-day tariffs, and so imply efficient pricing of power. And yet, hourly rates are crossed out outright with a laboured argument that it would lead to "avoidable increase in workload"! Also curious is the suggestion to double the short-term open access rates for uncongested transmission corridors. For such routes, the proposal is that the short-term tariff would be 50% of those for long-term rates. Instead, a long uncongested corridors cut-price rates for open access ought to lead to a more complete market for power.

The whole point about open access is to align the more short-term, spot market price for power with those for long term, bilateral contracts. In a capital-intensive sector like power, it makes better sense to source surplus power form elsewhere in the grid. And it needs to be done in real time, as the alternative is to "store" electricity with high cost unutilised capacity. Given our weak inter-regional transmission linkages, what we really need is a screen-based bid system to decide on short-term line usage. We need to design the market keeping in mind the unique commodity called power.

We need to put in place a two-stage bidding route to open access: a short-term market for a day ahead of actual usage, and another for real time despatch. This would mean better contested, more efficient price discovery. The fact is that energy loss in transmission can be minimal. So, by appropriately pricing short-term open access, the spot market and the long-term market for power can be effectively connected, literally! It ought to bring down long-term, bilateral prices to short-term, spot price levels and so economise on costs and improve productivity. We can have such a system of open access at both the regional level and intra-regionally as well. A real time market for open access would require dedicated software and reliable IT backup, true.

What is needed is support for such business critical functions like billing and settlement across multiple tariff schedules. Concurrently the system needs to keep a tab on routine despatch, congestion management, penalties et al. But we shouldn’t balk at IT solutions. Our IT majors like Wipro have been doing so abroad for years!