Power Exchange mooted- CERC’s consultation paper paves the way

July 2006 - December 2006 Index

Power Exchange mooted- CERC’s consultation paper paves the way

Should we, or shouldn’t we have a power exchange, that is for buying and selling power? That has been the question debated by power trade mandarins for some time now. Whenever sellers have been charging unduly high prices, the question always crops up as to whether there should be an independent, transparent and common platform for power trading based purely on supply and demand.

As a first step towards creating such a power exchange, the Central Electricity regulatory commission (CERC), the central regulator, recently came out with a consultation paper on which it has sought comments and suggestions from all stakeholders. Once this process is over, the CERC proposes to hold open consultations on the suggestion that the exchange should be designed for the purpose of dispensing only short-term power available for trading through competitive bidding. It plans to do this by inviting simultaneous anonymous bids from buyers as well as sellers on a day-ahead hourly basis.

Among its possible advantages is the fact that a power exchange would help streamline power trading, standardize electricity as a tradable product, provide a payment security mechanism to buyers and sellers, and increase business confidence. It would also help to harness captive generation and cogeneration. All these would send out a positive signal for investment in merchant generation and encourage the setting up of peaking power plants.

As regards the pricing of trade power, the CERC recommends marginal pricing of traded power, the CERC recommends marginal pricing principles- essentially, the “market splitting” model – which means dividing the market into two or more sub markets with congested links (transmission congestion) acting as boundary.

The clearing price for each sub-market would be determined separately based on the aggregate demand and supply curves of each sub-market, taking into account the limitations of flow over the congested corridors.

As for suppliers, the CERC paper recommends a uniform pricing philosophy based on the marginal cost of supply. However, in order to ensure that suppliers quote close to their true marginal costs, bid caps could be considered.

Earlier, central power sector units such as NTPC, Power Trading corporation (PTC) and Power Grid Corporation had decided to jointly work towards establishing the country’s first power exchange. Now that the CERC has taken up the idea, it is likely to gain traction.

At present, electricity can be traded bilaterally at mutually agreed rates. But there is a perceived need to further develop short-term trading to bring equity, transparency and efficiency in trading. A power exchange is a step in that direction.

Stakeholders have different views on the subject. Some feel this is not the right time for it. T.N. Thakur, CMD, PTC, says: “Unless industrial consumers and captive power plant owners are connected to the grid and can participate in the market, it would be difficult for the state utilities to discover the ‘spot’ price. Further, the utilities have their own chain of command and there are delays.”

He feels there need to be enough participants in the exchange for it to be successful. Without this, the exchange will not take off. “Before we create an exchange, we need to create a conducive environment so that all potential players are able to participate along with power generators”, says Thakur.

In the interim, some experts suggest that instead of having a separate exchange, power trading could be carried out through specialized software. Another option is to have a financial derivative on power.

Traders disagree on some matters. The first issue is the right of jurisdiction. Whether the CERC should have a right to regulate is hotly debated. Traders argue that in case of any dispute, who has the power to regulate-the forward market commission, the CERC, or both?

But a CERC official clarified that the Electricity Act, 2003 overrides all other previous acts. Consequently, whether there is a day –ahead spot market or a forward market, the right to regulate would rest only with the CERC.

The second area of concern is the proposal to put a cap on the bids quoted by the seller if he quotes more than the true marginal cost. “A trader cannot speculate prices if the bid cap is put because the very idea of having a neutral and transparent power exchange is nullified,” says a Delhi-based trader.

However, the official viewpoint is that, given the power-deficit scenario, the move is necessary. No cap on prices would result in a high price volatility.

All these issues will be scrutinized by the CERC before it comes to a final decision.

COURTESY: POWERLINE, JUNE 2006


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