Market Coupling: CERC proposal may impede innovation and competition in the sector

CERC proposal may impede innovation and competition in the sector

Professor S.L. Rao, Former Chairperson, CERC & Associates

The Central Electricity Regulatory Commission (CERC) in its Power Market Regulations Draft 2020 has proposed market coupling of power exchanges. As per the proposal, a uniform market clearing price would be discovered considering all types of bids from all the power exchanges. The draft also proposes that the commission will designate a market coupling operator to aggregate bids collected by the power exchanges and undertake price discovery.

This indicates a major shift from the earlier approach taken by the commission. Under the prevailing Power Market Regulations issued in 2010, power exchanges are tasked with ensuring an efficient and robust price discovery and matching mechanism. They perform price discovery. Over the years, the price of electricity transacted through the exchange has provided the most competitive benchmark across the power value chain and has consistently been lower than average electricity prices in the bilateral market. Hence, the proposal to introduce a market coupling operator is not in the spirit of competitiveness, which is one of the key cornerstones of the Electricity Act, 2003. The exchanges have played a key role in building a competitive electricity market in the country. They have brought in several robust benefits such as transparency, ease of transaction, flexibility in procurement across different products, robust savings through competitive prices, elimination of counterparty risk, and maximisation of social welfare. During 2019-20, the IEX alone created Rs 150 billion worth of social welfare, benefiting the market participants and the sector at large. Therefore, one pertinent question to deliberate upon before embarking on this change is:  What dose the larger system stand to gain after market coupling is implemented? The proposal to couple power exchanges is a major shift in the power market design. This, in turn, is bound to diminish competitiveness, innovation as well as the role of power exchanges, which have been instrumental in developing the market. Thorough consultation with industry stakeholders, perhaps through a discussion paper on the concept of market coupling, would have been the best approach.

India is a diverse country with uniform resource distribution, needs and weather patterns across regions. Further, the increasing share of renewable energy in the energy mix, the emergence of electric vehicles and energy storage batteries, the implementation of demand response, etc., call for greater innovation in the marketplace, which is only possible in a decentralised market set-up. The coupling of power exchanges would centralise the platform, providing hardly any incentives and little room for the value chain as well as the exchanges to innovate. Furthermore, the rationale provided to introduce market coupling are vague and unclear. There are three specific objectives enumerated in the draft regulations, – maximisation of economic surplus, optimal utilisation of transmission corridor, and uniform clearing price. However, these do not hold water in the current market scenario. With only 4 per cent of the overall transactions happening through power exchanges, these objectives are being delivered to the fullest. With the draft regulations, the role of exchanges will be limited to bid collection and aggregation. This will impede power market development, restrict competitiveness and remove incentives for power exchanges to compete and innovate.

Regulatory uncertainty and investment decisions

Any decision to couple the power exchanges without a strong rationale or consultations will increase regulatory uncertainty. This is bound to affect both existing and prospective investments in the power exchanges and the market. The coupling of the exchanges is neither likely to increase the efficiency further nor bring additional liquidity into the market. Instead, it would fragment the existing market and increase administrative complexities. Given there are no visible gains, it is not prudent to disrupt a market.

Setbacks of market coupling

Ever since the CERC introduced the real-time electricity market, many distribution utilities are coming forward to the exchange to buy power at attractive rates and address demand-supply mismatches at one-hour notice. With the initiatives taken by the CERC and the Ministry of Power, power exchanges are working towards the launch of the green market, forward contracts and ancillary markets. All these initiatives would further deepen the market and show that the power exchange market is set to see much innovation, competition and growth. Today, exchanges are investing significantly in technology, product innovation, process automation and human resources. If price discovery is done by the market coupling operator and not the exchanges, there would be a huge compromise with respect to technology, product innovation, competitiveness as well as social welfare. The power exchanges, which have played a crucial role in delivering cost and portfolio optimisation opportunities for distribution utilities and industrial consumers, would become incapacitated to play a constructive role in the market.