Interview with S.N. Goel

“We have successfully positioned IEX as the fulcrum of the power market”

The Indian Energy Exchange (IEX) has come a long way since its incorporation in 2008, trading over 150 BUs of electricity so far. It provides a competitive, transparent, reliable and state-of-the art technology-driven platform to generators, utilities and industries for power trading. In an interview with Power Line, S.N. Goel, chief executive officer and managing director, IEX, shared his views on the organisation’s achievements and outlook for the short-term power market, as well as the issues and challenges facing the sector. Excerpts…

How do you view the country’s short-term power market as compared to two to three years ago?

In my view, the short-term market is the brightest spot in the power sector value chain. The market has seen growth ever since its formation/creation and has increased at a compound annual growth rate of 22 per cent over the past six years. The size of the short-term market in 2015-16 is estimated to be about 118 BUs, marking a growth of 20 per cent over the previous year. Today, the short-term power market has an 11 per cent share in the total power generation while the potential for growth is about 20-25 per cent. The market potential for future growth clearly reflects the need to further strengthen the market mechanism.

What were the key accomplishments of the IEX during the past one year?

Some of the key accomplishments of the IEX over the past one year are:

  • The central government’s mission of one nation, one grid and one price was accomplished by the IEX on six different occasions – November 10, 2015, December 29, 2015, January 14, 2016, January 30, 2016, January 31, 2016 and February 1, 2016.
  • A significant increase in the transmission capacity over the past one year has helped the IEX reduce the impact of transmission congestion on the exchange. For instance, in 2015-16, about 2,144 MUs were curtailed due to congestion as against 3,100 MUs in the previous year.
  • The launch of a round-the-clock trading window in day-ahead contingency and intra-day contracts, which will provide avenues to the state utilities to balance their demand and supply requirements on a real-time basis.
  • The day-ahead market (DAM) traded 34,067 MUs of electricity, about 21 per cent more than the previous fiscal. Almost 29 per cent of the total volume transacted in the short-term market was traded in DAM. The average price discovered in DAM in 2015-16 was Rs 2.73 per unit, 22 per cent lower than the previous year.
  • A total of 3.14 million renewable energy certificates (RECs) were traded in 2015-16 at the IEX, up from the 1.55 million RECs traded in the previous fiscal year, marking a 103 per cent growth in the market.

What is the outlook for trading volumes and prices at the exchanges in the near future?

With an installed generation capacity of 288 GW and peak demand at mere 153 GW, we have ample spare capacity available for sale in the market. Further, a significant increase of about 9 per cent in domestic coal production and reduction in prices of imported coal has considerably improved the availability of coal, thus providing competitive prices for power at the exchange. Against the backdrop of these developments, we expect prices in DAM on the exchange to continue to be on the lower side in the near term, ensuring that the exchanges remain the most competitive avenue for power purchase. Thus, we expect a bright outlook in the near future.

What are your views on the recently released guidelines for short-term power procurement? How would it impact power trading at the exchanges?

The central government’s guidelines for short-term power procurement are a welcome initiative to encourage distribution companies to plan and optimise short-term power procurement in a transparent and competitive way. The introduction of an e-bidding portal in this regard will go a long way in driving distribution companies to strategise and streamline their short-term power procurement. We do not anticipate any impact on the power exchanges since procurement through the exchanges is excluded in the notified guidelines.

What is your outlook for the trading of RECs?

As mentioned earlier, the IEX witnessed a 103 per cent increase in trade in the REC market during 2015-16 as compared to the previous fiscal. By the end of 2015-16, 5 million RECs were traded cumulatively at both the exchanges while the inventory stood at 16.6 million. For the REC market to gain further momentum, the enforcement of renewable purchase obligations (RPOs) on the obligated entities, especially distribution companies, by the state electricity regulatory commissions is the first and foremost requirement. In order to make the market robust, stringent compliance and monitoring are imperatives. We require RPO compliance on a monthly basis instead of the existing annual compliance requirement.

What is your view on the recently released draft regulations for the trading of energy saving certificates (ESCerts)?

The draft regulations for the trading of ESCerts are a welcome step in establishing the ESCerts market. They provide a framework for trading ESCerts on exchanges and clearly identify the roles and responsibilities of the regulator, the nodal agencies, the power exchanges, the designated consumers and other stakeholders. The regulatory provisions are awaited and we expect trading in ESCerts to start in this fiscal year only.

How has the IEX evolved as an organisation over the years?

Today, the IEX is playing an important role in providing a competitive, transparent, reliable and state-of-the art technology-driven platform to generators, utilities and industries for trading of power. We have successfully positioned the exchange as the fulcrum of the power market and the sector at large. In addition, we pioneered the implementation of open access in distribution. Incorporated in 2008, the IEX has strengthened and evolved as an organisation in the past eight years. Today, we have over 3,800 participants from 29 states and five union territories, over 3,300 open access consumers, over 300 generators and daily average trade of about 100 MUs. On a cumulative basis, the exchange has traded a significant volume of over 150 BUs so far.

What is your future roadmap? Are some new products being planned by the IEX for the next two to three years?

With the central government aiming to supply power on a 24×7 basis, we expect the short-term market to grow further and reach new heights. The development of the power market is our key focus to spur growth and progress. Cross-border trade, green contracts and the ESCerts market are new segments that we plan to introduce this year. With the commissioning of new transmission lines, congestion in the interstate transmission network is expected to reduce significantly, which would infuse liquidity and at the same time increase market depth. Today, due to transmission congestion, many buyers are procuring power under bilateral arrangements so as to book corridors in advance and have to pay a premium for that. Once the issue of congestion is addressed, buyers will have the comfort of buying power at the exchanges, which will further increase market penetration for the IEX.

What is your view on the implementation of open access in the country? How are high open access charges in various states impacting the short-term power market?

Open access is the key cornerstone of the Electricity Act, 2003. Even after 13 years of its enactment, the Act remains partially implemented. Meant to spur competition and bring viability in the sector, open access is unfortunately being perceived as a threat by many state governments. Due to this, a few distribution companies have fixed high open access charges making it unviable, while others rely on infrastructure or other regulatory impediments to dissuade open access. For the government to accomplish Make in India, the success of open access is pivotal as also rightly recognised in the National Economic Survey 2016.

What are some of the challenges facing the IEX and how do you plan to address these? What are your key priorities for the IEX?

For the IEX, the key priority in the near term will be to address the existing challenges. Some of the challenges faced by the exchanges are:

  • Suboptimal utilisation of existing transmission infrastructure – Transmission congestion in the past has led to splitting of the market on the exchanges with power-deficit regions seeing higher prices and surplus regions seeing low prices. Both generators and consumers have been adversely affected due to congestion and the exchanges have also lost significant volumes of electricity trade. Although adequate efforts are being made to augment transmission capacity, congestion is expected to continue for a few more years. Therefore, it is important to promote the optimum utilisation of the existing transmission infrastructure. In this context, declaring the available transmission capacity and total transfer capability on a dynamic basis keeping in view the season, the time of day, weekends, the weekday, and the changing load profile, temperature and weather conditions will go a long way in optimising the usage of the existing transmission infrastructure, and will be in the best interest of all stakeholders.
  • Building new transmission and distribution (T&D) infrastructure – Inadequate T&D infrastructure is one of the key challenges facing the exchanges and the power sector at large. The network should be built considering new generating capacities and upcoming demand and not on the basis of long-term transactions. T&D infrastructure should be built on the concept of highways with due approvals from the appropriate regulatory commissions. The utilities will have to accordingly pay for the infrastructure. In my view, adopting general network access will be a step in the right direction to meet the desired objective.
  • Open access: Distribution companies have been adopting restrictive practices such as increasing the cross-subsidy surcharge, wheeling charges, as well as additional surcharge thus making open access unviable. Several distribution companies have not built the infrastructure such as metering and energy accounting systems. The key objective of open access is to increase competition and improve distribution efficiency. Thus, open access should be perceived as an opportunity and not as a threat. To facilitate open access in a streamlined manner, introduction of the National Open Access Registry will go a long way. This will also be in line with the government’s Make in India and Digital India initiatives.
  • Long-term contracts – Such contracts are for 25 years. These are required by lenders as comfort for debt servicing. However, since debt services are usually provided for the first 10 years, the duration of long-term contracts needs reconsideration. World over, these contracts are for five to seven years. In India also, we should limit their duration to 10 years so that generation capacities can participate in the competitive market once they have serviced the debt. This is also important given the renewable energy thrust of the government. For the integration of large solar and wind capacities into the grid, we need liquidity in the market in order to address intermittency in the renewable energy supply.
  • Financial health of distribution companies: In the current scenario, distribution companies prefer load shedding over buying power. Moreover, they have not been investing enough in the distribution infrastructure. On the one hand, we have low per capita electricity consumption of about 975 kWh versus the world average of about 3,000 kWh. On the other hand, 30,000-40,000 MW of generation capacity is not being scheduled because of the poor financial health of the distribution utilities. We sincerely hope that the Ujwal Discom Assurance Yojana (UDAY) succeeds in addressing these challenges. In my view, the real challenge for us lies in reforming the distribution segment by bringing in privatisation and greater participation from franchisees.

What is the likely impact of UDAY on the power sector?

Distribution is the weakest link in the power sector value chain. UDAY is a promising step, which provides a holistic solution to arrest high commercial losses and improve the deteriorating financial health of the distribution utilities. It will not only bail out distribution companies from the mounting debt but will also direct them towards operational efficiency and optimal utilisation of available resources. The benefits accrued will enable distribution companies to provide affordable, regular and quality supply of power.

What is your overall outlook for the power sector?

The power sector has witnessed a paradigm shift over the past decade, and we remain quite optimistic about the future prospects of the sector. As a country, we are now quite comfortable on the generation front and every year a significant capacity, from both conventional and non-conventional sources, is being added to the grid. In the past eight years, the installed capacity has increased from 143 GW to 288 GW, up by over 100 per cent. Generation has increased with the increased availability of domestic coal and several gas-based units, which were earlier stranded and are now generating power. Consequently, power shortages that were earlier a norm are now a thing of the past. The commissioning of several interregional transmission links between west and north, and west and south has reduced congestion although much more remains to be accomplished in order to connect the pockets of power-deficit areas with power-surplus areas. Huge hopes are pinned on UDAY to bring the much-needed fiscal vibrancy in the sector, which is currently under heavy commercial losses and debts. The renewable energy goal of 175 GW by 2022, if realised, will make India a global leader in renewable energy and change our lives radically.

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