The Indian power market has come a long way over the past decade and seems to be preparing for the next leap forward. In February 2021, the Central Electricity Regulatory Commission (CERC) notified the Power Market Regulations, 2021. These regulations replace the previous regulations of 2010. The regulations will come into effect from the date to be separately notified by the CERC.
The regulations are applicable to power exchanges (PXs), market participants and over-the-counter (OTC) market and all types of contracts transacted on PXs, including renewable energy certificates and energy saving certificates as well as delivery-based OTC contracts. The regulations define the features related to price discovery, scheduling and delivery of various contracts on the PXs such as day-ahead, real-time, intra-day, contingency and term-ahead contracts and any other contracts including capacity contracts and ancillary services contracts approved by the CERC. The regulations also propose the introduction of the market coupling mechanism, which has drawn diverse reactions from the industry. The general opinion is that regulations are not yet firm in this aspect and that they should be introduced after the implementation of the market-based economic despatch (MBED) proposed by the CERC in a discussion paper in December 2018.
Power Line presents key highlights of the power market regulations…
For establishing a PX, the applicant must be a limited company incorporated under the Companies Act, 2013, demutualised. Its main objective should be to establish and operate a PX, with a minimum net worth of Rs 500 million and prescribed governance structure and qualified directors. Further, the regulations specify limits on the shareholding pattern for the PX, whereby any shareholder other than a member of a client can hold not more than 25 per cent stake. Members or clients can hold not more than 5 per cent shareholding and the PX can have a maximum of 49 per cent of its shareholding owned by such members or entities. Existing PXs must ensure compliance with the above specified criteria within one year and all PXs must ensure compliance with the shareholding limits at all times. The CERC will grant registration for 25 years. PXs can apply for renewal of registration for another 25 years or less, at least one year prior to the expiry of the registration period. PXs have to pay an annual registration charge as mentioned in the Payment of Fees Regulations and based on the volume of transactions proposed to be undertaken during the financial year as well as adjustments for the difference between the proposed and the actual transaction volume of the previous financial year.
The regulations specify by-laws, rules and business rules of PXs, which cover the principles governing the operation of a PX, including price discovery and matching mechanism (including market splitting to handle congestion in the transmission corridor), reporting of default and penalty mechanism, transaction fee, trading margin, clearing and settlement procedure, dispute resolution and transaction timelines. The existing PXs have to begin the process for compliance with the new rules within six months. The latest regulations require the senior management to comprise three full-time professionals, including one having qualifications and experience in the field of information technology (IT).
Membership of PXs can be categorised into three – trader member (with trading licence under the CERC Regulations), proprietary member (distribution licensee or grid-connected entity) and facilitator member (who provide services such as IT infrastructure for bidding/ skilled personnel and facilitation for clearance for power delivery to its clients to facilitate transactions at the PX). Facilitator members are prohibited from providing any credit or financing or working capital facility to its clients.
The regulations fix a cap on the transaction fee to be charged by PXs at 2 paise per kWh from either party to transactions related to day-ahead and real-time contracts; intra-day and contingency contracts; and term-ahead contracts. This excludes charges for the scheduled energy, open access and transmission losses. Further, PXs are required to obtain approval from the CERC for the transaction fee to be charged by them based on the type of contract or quantum or duration of transactions or any other criteria proposed by the PXs within six months of the regulations coming into effect. (Previously, the boards of PXs were allowed to determine the margins.)
While licensed trader members can charge a trading margin as per the provisions of the Trading Licence Regulations, 2020 for transactions carried out through exchanges, the facilitator member service charges are capped at 2 paise per kWh for transactions on the PXs (0.75 per cent of the transaction value previously).
The PXs may introduce new bid types or modify existing bid types, conforming to the contract types and features specified in the regulations after intimating the CERC. However, PXs can do so only after consulting stakeholders and coordinating with the National Load Despatch Centre for scheduling and delivery.
PXs have to constitute a risk assessment and management committee headed by an independent director to periodically (twice a year) monitor adherence to the risk management framework by the PX.
For clearing and settlement, the regulations require PXs to establish an entity as per the provisions of the Payment and Settlement Systems Act, 2007 within one year. (At present, these are undertaken by PXs as an in-house function.) During the transition period, PXs must comply with the provisions relating to clearing and settlement, settlement guarantee fund (SGF) and default remedy mechanism on PXs specified in the regulations. Particularly, PXs must utilise the proceeds of the SGF in safe investments and ensure that the principal amount is not at risk. At least 50 per cent of the proceeds must be kept in liquid investments. PXs must distribute at least 70 per cent of the return earned on the initial security deposit invested in the financial year to PX members.
PXs have to ensure that the algorithm of the software application for price discovery and market splitting are in compliance with the features of the contracts mentioned in the regulations as well as the by-laws of PXs. The PXs have to get the algorithm audited prior to the commencement of operations and submit the findings of the audit to the CERC once every two years. They have to carry out periodic IT system audit for data security, data integrity and operational efficiency for every financial year and submit its report to the CERC. Further, they must formulate and implement a cybersecurity and cyber resilience framework to manage risks to systems, network and databases from cyberattacks and threats.
The PXs must maintain the congestion amount arising from the difference in market prices for different regions due to market splitting in a separate account and transferred to the Power System Development Fund as per the relevant CERC regulations.
Several provisions have been made for information dissemination and transparency by PXs by publishing on their website the details relating to all PX transactions. Further, PXs must maintain a document that provides a detailed description of the algorithm used by them for price discovery for all types of contracts including the description of the way the algorithm results in the maximisation of economic surplus and information on transmission congestion.
The market surveillance committee of the PX must submit quarterly surveillance reports to the CERC, including information related to the transaction pattern of PX members, daily, weekly and monthly price volatility, dominant position of participants, monitoring of circular trading, analysis of transaction volumes of members, etc.
The CERC may revoke the registration granted to the PX if it violates the terms of the registration, non-maintenance of stipulated net worth, indulges in market manipulation or insider trading, or if its shareholding is in violation of the stipulated terms and conditions or non-compliant with the CERC directions.
The PXs must constitute a grievance redressal forum headed by an independent director and disclose details of complaints lodged, status of resolution and provide details regarding any specific grievance as per the CERC’s requirement.
The key objectives of market coupling are discovery of a uniform market clearing price for the day-ahead market (DAM) or real-time market (RTM); optimal use of transmission infrastructure and maximisation of economic surplus, after taking into account all bid types and creating simultaneous buyer-seller surplus. Market coupling refers to the process where collected bids from all PXs are matched after taking into account all bid types to discover the uniform market clearing price, such as the DAM or RTM or another CERC-notified market subject to market splitting. A market coupling operator (MCO), who will perform the related function, will be separately designated by the CERC, after which the regulations related to market coupling and the MCO in the regulations would come into effect. In addition to the specified objectives, the CERC expects that financial products in the electricity market (which are in the process of being approved) require a uniform price discovery in the DAM and RTM.
The OTC market currently comprises transactions that take place outside PXs between generators and consumers directly or through market intermediaries. The regulations allow the establishment of the OTC platform to provide an electronic platform with the information of potential buyers and sellers of electricity, maintain a data repository and provide advanced data analysis services to market participants. Participants on the platform could be grid connected entities and trading licensees. While any registered company with a net worth of at least Rs 10 million is eligible for the registration of an OTC platform, a PX or trading licensee or any of their associated or grid connected entities are not permitted to set up, or have any shareholding in an OTC platform. To eligible applicants, the CERC will grant registration for five years, which can be renewed for another five years.
The CERC will exercise market oversight through various measures such as data collection, analytics and surveillance; investigation; and inspection to prevent market manipulation, or cartelisation by any market participant, ensure participants have confidence in the integrity and fairness of power markets and that prices are discovered in a transparent and competitive manner. This gains significance as it is expected that there would be an increase in the number of participants in the market in the future.
Industry response and the way forward
There have been mixed reactions from various stakeholders to the latest regulations, particularly to the proposal of market coupling. A few have welcomed the move as the next step in the power market progression. Its role in facilitating better utilisation of transmission in case of congestion is also recognised.
The Indian power market is a single delivery physical market with multiple PXs. S.K. Soonee, adviser, Power System Operation Corporation of India, points out that the market is currently coupled by default and split by exception. This is unlike the case of Europe where different geographies (countries) having different power exchanges engage in market coupling to calculate power prices across Europe, while implicitly allocating auction-based cross-border capacity. “PXs in Europe have their footprint in many countries and transmission corridor utilisation is the main objective for market coupling rather than an efficient price discovery”, says Soonee. So, the CERC proposal is not market coupling in the strictest sense but a merger of bids received through various PX platforms to produce a uniform market clearing price. Given that it is a complex mechanism involving harmonisation of bid structures, market clearing engine, information exchange requirements, resource-level constraints, system-wide constraints and settlement systems, it requires a clear road map for implementation.
Meanwhile, some industry experts have questioned the need for a separate MCO and argue that it may impede innovation and competition in the sector and diminish the role of PXs, which have been instrumental in developing the market so far. The exchanges have made significant investments in technology, process automation and related human resources, which would be sunk if the MCO takes over the price discovery function. Some also iterated that there is a weak case for market coupling among the PXs which currently have only a minuscule share in consumption (< 5 per cent) and operate in the same geography. In this context, the implementation of the CERC’s previous proposal on MBED first will help increase the overall volumes traded on the exchange. According to Rajesh Kumar Mediratta, director, strategy and regulatory affairs, Indian Energy Exchange, “The implementation of MBED provisions for executing all electricity transactions (including long-term transactions) through the market must precede the introduction of market coupling.”
Several challenging issues have to be addressed for MBED implementation itself. To begin with, the state and central generators (including NTPC, which has a sizeable market share) must be prepared and enabled to participate in the market for the power market to become robust and sizeable. For generators tied in long-term power purchase agreements, there would be hedging arrangements (in the form of bilateral contract settlement BCS) of refunding the difference between the market clearing price and contracted price (or variable cost as fixed cost would be paid separately, based on the availability as per the current practice). This will help reduce the exposure to the variability of prices.
Parallely, the creation of a strong institutional structure and well-equipped load despatch centres (LDCs) at the state level will be critical for smooth market and system operations. Soonee asserts, “The base should be prepared well and the ecosystem must be created. The trigger must come from the bottom. A lot of work is already going on at the regulator and Forum of Regulators level, along with the involvement of LDCs for the implementation of CABIL (capacity building of Indian LDCs), SAMAST (scheduling, accounting, metering and settlement of transactions in electricity), SANTULAN (intra-state reserves and ancillary services for balancing). These are the pillars on which the market will stand, and hence are a prerequisite for a stable power market.” He has also welcomed the move to separate the clearing and settlement function from the PXs.
These measures will increase liquidity in the power market. Subsequently, financial contracts (or derivatives) may be introduced after a due consultation process to make the market more vibrant. For this to work, an underlying uniform market price (in the DAM and RTM) would be a requisite, which, in turn, necessitates market coupling.
Net, net, the intent of the central regulator towards the creation of a vibrant power market operating on principles of competition and consumer protection is welcome. Given the complexity and number of stakeholders involved, particularly at the state level, who are still in catching-up mode, it may be prudent to go through the process step by step, with appropriate preparation on the ground to achieve larger objectives.