Finding Favour

Industrial and commercial users turn to short-term power market

A growing number of industrial and commercial consumers, who had long been reeling under high utility tariffs to cross-subsidise other consumers, have in the past few years turned to the open power market. This has enabled them to take advantage of plunging spot prices and thereby save power expenses. Power Line invited power traders and power exchanges to discuss the key drivers of this trend as well as the key challenges that need to be addressed to ensure wider participation. Excerpts…

What are the key drivers for industrial and commercial users opting for short-term power trading?

K.S. Bandyopadhyay

The energy deficit and peak demand have improved over the past few years and were -0.7 per cent and -1.6 per cent respectively in 2016-17. This is mainly due to the surplus power available in the short-term market, which, in turn, has shifted the market orientation towards buyers. This has resulted in the softening of energy charges and motivated industrial and commercial users to purchase electricity from the short-term market as per their daily requirement. The policies and regulations related to the sale of unrequisitioned surplus power in the short term have further increased competitiveness in the market. The power market has also become more transparent and competitive with the introduction of the Discovery of Efficient Electricity Price portal. Due to the above factors, industrial and commercial users are becoming inclined towards short-term power trading.

Kapil Dev

The primary reason that drives industrial and commercial users to procure power from the short-term market is cost optimisation. As the tariffs offered by power utilities are higher compared to the prevailing rates in the open market, consumers want to optimise their costs to remain competitive. Further, in the past two years, government emphasis on environmental sustainability measures, better RPO compliances and energy efficiency programmes have nudged industrial consumers to focus on enhancing operational efficiencies. For example, the Bureau of Energy Efficiency’s Perform, Achieve and Trade scheme for the issuance of energy saving certificates is driving companies to lower their specific energy consumption per unit of production. This requires capital expenditure, which in turn puts pressure on their costs, thereby adding to the need for optimisation.

Rajesh K. Mediratta

First, the prices discovered on the exchange have been very competitive, enabling large consumers to save. The exchanges witness diverse participation from all types of generators and buyers, which ensures liquidity and competitive price discovery. This is the foremost reason for industrial and commercial consumers to opt for this exchange platform. During the 2013-2016 period, the annual average cleared price at the Indian Energy Exchange (IEX) declined from Rs 3.48 per unit to Rs 2.73 per unit, which is lower compared to the annual average price of power transacted through direct bilateral contracts in the short-term market. Second, exchange platforms provide flexibility to participants for buying and selling varying quantities of power as required in different time blocks, thereby helping them manage their requirements more efficiently. Besides, transparency, neutrality, accessibility, speed and efficiency, and state-of-the-art technology are other attributes that drive industrial and commercial users to opt for trading at the exchanges.

Sanjeev Mehra

The key consideration for industrial and commercial customers in sourcing power through short-term trading is the cost of power on a landed basis, as access to competitively priced power results in optimising electricity costs, which is an important production and efficiency measure for this segment. The cost of procured power also depends on the regulatory framework for open access in a particular state and the level of predictability of various open access charges (cross-subsidy charges, transmission costs, wheeling and other charges, etc.), which drives the volume of transactions.

Other than the competitive cost of sourcing alternative power; some of the key drivers for such users are supply reliability with the provision of standby power arrangement; ease of sourcing from various sources of power in the required proportion, including accessing power from the grid to match their load profile (day power, low requirement on holidays and Sundays, etc.); meeting the renewable purchase obligations (RPOs) related to such transactions; shorter and customised contract with no carry-over cost such as duties to be paid later; and smooth transition between various sourcing modes without any disruption in their production. Clearly, the last thing users want is to expose themselves to unnecessary risks, which potentially outweigh the cost reduction objective.

Spokesperson, IPCL Power Trading

Short-term power trading has become an important tool for every industrial and commercial consumer to hedge the erratic cost of energy charged by state distribution companies. It gives them an open-ended opportunity to plan their short-term incentive gathering from the energy cost to sustain the ever-increasing competition. Although one cannot plan long-term goals on the basis of short-term energy market drivers, such opportunities definitely influence market dynamics wherein one can expect certain momentary savings through short-term power trading.

What has been the trend in participation by such users at the power exchanges during the past year or so?

K.S. Bandyopadhyay

New industrial and commercial users prefer to be registerd as client members on the power exchanges through bilateral contracts. The day-ahead market (DAM) volume has increased considerably over the years, but the volume in the term-ahead market (TAM) has stagnated and is not more than 1 BUs.

Kapil Dev

The participation of open-access consumers is very sensitive to prices and remains cyclical. On a macro basis, it has come down. A couple of years back, almost 60 per cent of the overall volume traded at the exchanges was constituted by industrial and small consumers. Today, it is less than 50 per cent. One of the reasons for this reduced participation is the changes in cross-subsidies and tariffs charged by various states. This has reduced the cost advantage that open-access consumers had if they opted for open market purchases. Second, owing to administrative reasons, buyers do not have the option of procuring partly from current suppliers and partly from the open market. Therefore, even though the number of open-access consumers has increased, the overall contribution to the total volumes purchased has come down.

Rajesh K. Mediratta

There is increasing participation from large consumers, that is, industrial and commercial consumers and about 20 per cent growth in participation was recorded in the past year.

Open-access power trade in DAM and TAM accounted for around 60 per cent of the total procurement on the IEX in financial year 2016.

  • In 2015-16, against the total 34 BUs of volume traded at the IEX, around 20.3 BUs was procured by open-access industrial consumers and the average price of electricity discovered on the exchange was Rs 2.73 per unit.
  • In 2016-17, against the total traded volume of 39.8 BUs, industrial consumers procured nearly 23.9 BUs and the average price of electricity discovered on the exchange was Rs 2.41 per unit.

Further, over the past one year, there has been considerable increase in the transmission capacity in and around the Southern region, leading to a reduction in market-splitting and congestion. Consequently, participation from open-access consumers in this region witnessed a quantum jump.

Sanjeev Mehra

Overall, in recent years, the trend has been positive as far as availing of open access is concerned, and most of the participation has taken place through the power exchanges. The volume of open access transactions through the bilateral contracts by open access users in the respective states does get influenced by the enabling open access provisions and charges applicable in that state.

Spokesperson, IPCL Power Trading

Participation in the short-term power purchase market has seen substantial growth over the past few years. Although bilateral contracts have their own consumer segments, almost the entire consumer (power) market is intending to optimise the short-term power procurement tool because of the availability of very low-cost power on the exchange platform. Once our intra-regional transmission corridor has been strengthened enough to cater to the load, short-term power trading will definitely be on the rise. For example, during 2016-17, the spot market energy rates were Rs 2,414.40 per MWh for round-the-clock power, Rs 2,696.21 per MWh for evening peak power and Rs 2,100.87 per MWh for night power. Despite such low rates in the spot market, we could see that, across India, there was about a 2 per cent deficit in peak power availability. This clearly indicates the scope of improvement in infrastructure building requirements.

Which are the products and solutions in the short-term power market that are of high interest to industrial and commercial consumers?

K.S. Bandyopadhyay

Both DAM and TAM are of high interest to industrial consumers. The trading licensee provides consultancy to customers for choosing the type of product, bidding price, and bidding volume and period based on historical data and experience so that the bidding volume and price of consumers gets cleared at once.

Kapil Dev

Currently, the flagship product of the exchanges for all consumers, including industrial, is the day-ahead spot market wherein buyers have the option of procuring electricity 24 hours in advance.

Rajesh K. Mediratta

Such large consumers mainly use DAM as against the other segments such as intra-day market and TAM. We have single and block orders in DAM to meet the needs of participants. In DAM, they can purchase as low a quantum as 100 kW, which allows flexibility. However, generally states allow purchases above 1 MW. Consumers can make purchases in continuous or any of the 15-minute time blocks.

Although the volumes traded in TAM and same-day contracts are low compared to that traded in DAM, the former segments provide flexibility. The intra-day contracts allow participants to trade up to three hours before the intended delivery of electricity for managing contingencies. In addition, participants can trade electricity for the next day through day-ahead contingency contracts.

Sanjeev Mehra

The following are some of the products that are being offered in this segment:

  • Sale/Purchase of power through power exchanges (DAM and TAM)
  • Sale/Purchase of power through bilateral contracts
  • Sale/Purchase of renewable energy certificates
  • Sale/Purchase of renewable energy to meet the RPOs.

Spokesperson, IPCL Power Trading

For private consumers, it is of foremost importance to maximise the optimisation of power costs. It depends entirely on the traders involved to do the best they can to customise their clients’ requirements and bring down the energy rate through maximum utilisation of the available sourcing choices. Simultaneously, state distribution companies are faced with a revenue crunch. Hence, they try to curb their net spending on procurement costs. Power traders are now coordinating/managing products like “banking of power” between distribution companies. This is a mutually agreed power sourcing arrangement between two or more discoms without any monetary commitment by either party.

If energy is not resourced, it is returned within the agreed terms. For instance, Himachal Pradesh has abundant availability of unallocated energy during the monsoon when all hydropower plants run at optimum capacity. During the same period, due to scorching heat, the northern states (Punjab, Haryana, Rajasthan, etc.) face high demand. In such a scenario, Himachal Pradesh can supply power to any of these states to meet their demand for a certain quantum under mutual terms and conditions, including the predetermined capacity to be returned to Himachal Pradesh when it faces a deficit. During the winter, when hydropower plants normally slow down, Himachal Pradesh faces a shortage in its power procurement schedule. At such times, it requests those states to supply power to it at a premium of 3-5 per cent of the quantity that they had supplied. Such a supply arrangement does not have any revenue settlement other than default by the first procurer, which normally pays a mutually agreed rate in the event of its inability to supply power back to the initial supplier state.

What are the key challenges faced by industrial and commercial consumers in short-term power trading? How can these be addressed?

K.S. Bandyopadhyay

Long- and medium-term contracts are accorded greater priority as compared to short-term contracts. There is also a high level of uncertainty in terms of scheduling short-term power due to the limited availability of the transmission network. The distribution licensee resists the implementation of open access due to the fear of losing high-paying industrial consumers who cross-subsidise other consumers; therefore, states are not permitting open access. Moreover, industrial consumers have to obtain no-objection certificates regarding open access from the concerned state load despatch centres.  The cross-subsidy surcharges to be paid to the states are too high. The absence of independent feeders for open access consumers is also a key challenge. In case of load-shedding by distribution licensees for a feeder to which both open access and non-open access consumers are connected, the open access consumers do not get electricity for which they are paying high cross-subsidy. This can be addressed by planning transmission lines for short-term market/power exchange. The cross-subsidy should be reduced gradually. Open access on independent feeders can be provided; however, any deviation in schedule has to be compensated as per the regulation through some penalty charges.

Kapil Dev

When the exchanges came into being in 2008, power utilities were the main participants. Open-access or industrial consumers started participating at the exchanges 2010 onwards and the next few years saw a quantum jump in the number of participants. Primarily, the market was facing huge deficits and industrial/ commercial users did not have access to 24×7 power supply due to other priorities. Similarly, in the southern region, congestion was resulting in high prices. Thus, during that period, a lot of industrial consumers started participating at exchanges to procure power from the market. However, with power deficits reducing 2012-13 onwards and the augmentation of transmission capacities, today, on an overall basis, we are power surplus, and this has brought down the prices.

Therefore, one of the key challenges today for open-access consumers is on the commercial side. There are a number of risks that participants are exposed to. For example, with utility tariffs, they have a predefined billing cycle, which results in a credit period and they are assured of supply. Whereas in the case of DAM, they have to bid, clear and settle on a daily basis, which has certain risks (such as uncertainty about bids getting cleared, congestion, prices going up, or buyers exceeding their drawal limit). Consumers try to mitigate these risks by being conservative while bidding. While they want to avail of the cheaper power available, they are not very sure about its availability on a sustained basis. Also, they don’t want to be in a situation wherein they are certain about power availability, but the tariff is very high.

Further, there is no segmentation in the market today and all participants, including industrial, are bundled into one group. The exchange-driven market in India turned into a retail-driven one very soon and seems to have come a full circle in a short span. While most of the international energy exchanges are still contemplating allowing retail participants in the market, even the ones which allowed took calibrated and gradual steps towards the same. A way to address these challenges would be through the introduction of different products to cater to the specific segments. For example, the intra-day market, the ancillary services market and the balancing market need to have a convergence in prices, with a mix of voluntary and mandatory participation. As we move towards a complex, complicated, networked grid, the corridor allocation has to be revisited to develop a layered structure with market overlaid on the physical infrastructure for delivery. Also, more depth in the open market will result in better price discovery. Last, we also need to make available institutional finance for participants for supplementing and complimenting the traders by way of funding the trade cycle. The organised market needs to grow from price discovery, information dissemination to a risk-sharing, neutral and transparent platform.

Rajesh K. Mediratta

One of the key challenges for the short-term power market has been the barriers/restrictions placed on open access in many states.

Even after 14 years of enactment of the Electricity Act, 2003, open access is yet to see the light of the day in states like Uttar Pradesh and West Bengal. In a few states like Punjab, Himachal Pradesh and Tamil Nadu, tariff barriers such as high cross-subsidy surcharge (CSS), additional surcharge and wheeling charges are used to discourage open access. While in West Bengal and Uttar Pradesh, non-tariff related barriers such as delay or refusal in the grant of standing clearance/NoC prevent large consumers from buying power through open access. The National Tariff Policy clearly states that CSS should not exceed 20 per cent of the tariff of the relevant user category; however, many states continue to have high CSS despite such mandate.

Analysis shows that states allowing open access have a higher GDP. The denial of open access and high tariffs in several states has forced industries to shut down and move to states with a friendly open-access regime. Therefore, we feel that open access should be one of the parameters while ranking states in terms of “ease of doing business”.

In order to address such challenges, we intend to continue our efforts to work in different states, and assist in developing a more conducive policy and regulatory framework to enable trade on the exchange platform. We also wish to continue working with regulators to encourage the development of relevant infrastructure, and a regulatory and policy framework for the development of the power market in India.

Sanjeev Mehra

Higher levels of cross-subsidy and other open access charges applicable for short-term transactions in states, issues regarding availability and cost of standby power, transmission corridor constraints, and the need for a more favourable open access regime in various states are the key impediments in this segment. Open access is very policy dependent and is significantly influenced by changes in tariff orders open access-related grid charges, change in open access norms by states and by various orders on the subject. Hence, a proper regulatory environment, supported by an appropriate open access policy framework at the state level, is critical. As part of the above objective, efforts should be directed towards making the entire process more enabling for open access users in terms of market design, transmission pricing, management of grid constraints, demand response, a more integrated regulatory framework perhaps at the regional/ national level for enabling such transactions, and developing a competitive and efficient electricity market for providing effective options to users to meet their electricity needs.

It is also important to underline the fact that open access is not an end in itself but a building block for a more efficient electricity market, which leads to larger productivity gains for market participants. Steps like the creation of the National Open Access Registry and open access consumers, providing standby power as per the National Tariff Policy, and pursuing the objective of segregation of carriage and content at the last mile are certainly some good steps in that direction.

Spokesperson, IPCL Power Trading

The basic challenge for consumers across sectors opting for short-term power trading is hedging the volatility of availability of the unscheduled quantum of power in the market. Since most state regulators are prejudiced in their formulations of procurement policies, their enforcements are not very consumer friendly. The need of the hour is to try and make optimum use of underutilised capacities across the generation sector for catering to the requirements of end-consumers and developing a sustainable model for open access practices.

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