Gross Bidding: An efficient way to optimise power procurement costs

An efficient way to optimise power procurement costs

India has moved from a power-deficit scenario to a surplus scenario, achieving an installed capacity of 382 GW against the peak demand of 187 GW during 2020-21. In this scenario, it is important that generators are despatched based on merit order, that is, from lower cost to higher cost, for the efficient utilisation of resources. However, this has been difficult to achieve in the current scenario, where distribution utilities (discoms) are mostly procuring their power through long-term contracts on a self-scheduling basis. Under this mechanism, the discoms are providing the schedule to their contracted capacity on a day-ahead basis without having visibility of any other cheaper generating station available in the system. As a result, there are situations where capacities in efficient and cheaper generating stations have remained unutilised, whereas the costlier ones have been despatched.

The Central Electricity Regulatory Commission (CERC), in its discussion paper dated August 31, 2018, analysed the above issue in detail and suggested a market-based economic despatch (MBED) mechanism for despatch of all generators for achieving efficiency. The Ministry of Power also issued a consultation paper on MBED on June 1, 2021, echoing the CERC’s views. However, as deliberated in these consultation papers, the introduction of MBED would require structural changes in the power market and substantial changes in the existing regulatory framework. An alternative mechanism, the “gross bidding” mechanism, which is already in vogue in NordPool and the Japan Electric Power Exchange (JEPX), can be introduced in the Indian power exchanges for achieving the efficient despatch of generating stations. As we understand, gross bidding will not require much change in the existing regulatory framework and could be effectively used by discoms for optimising their power procurement cost. This mechanism has been elaborated in the sections below.

Gross bidding mechanism

Currently, discoms are participating in the power exchanges on a net pool basis, which essentially means that after fulfilling their demand mostly from bilateral sources, they are participating in the spot market to meet their residual requirement. Some of the limitations associated with discom participation on a net pool basis are:

  • Poor liquidity in the market: The liquidity in the spot market continues to be in the range of 4-5 per cent of the overall electricity transactions in the country (almost 1,400 BUs) and is not helping the cause of efficient pricing signals and despatch of low-cost generators.
  • Limited cost optimisation by distribution utilities: The discoms are unable to avail the benefit of low prices in the spot market, particularly while scheduling their requirements from marginal stations (energy charge of the generator is close to the market clearing price), due to uncertainties associated with transactions in the power exchanges. For instance, in case a generator’s energy charge is Rs 3.50 per unit and the prevailing rate at the exchange is Rs 3 per unit, the discoms may still not prefer to replace such power, looking at the uncertainties involved in the clearing of the exchange.
  • Underutilisation of cheaper generating assets: A generating station that is efficient and has low cost/cheaper power in an overall scenario, but is a relatively costlier one within a discom’s portfolio will not get despatched, resulting in system inefficiency.

The above limitations, to a large extent, can be addressed through the gross bidding mechanism. Under this mechanism, both the generator and the discom that have a long-term power purchase agreement (PPA) will participate in the market and schedule their transactions through the day-ahead market (DAM). The discom will place both buy and sell bids simultaneously for the contracted capacity in the market under a gross bidding portfolio to be provided by the power exchange. It will place the sell bids at the agreed upon energy charges in the PPA and buy bids as price-inelastic bids in the DAM. Based on the demand and supply situation in the spot market, three different scenarios may emerge as discussed below:

  • Market clearing price (MCP) < energy charge: In this scenario, sell bids will be rejected as power will be available at a cheaper price at the exchange. Discoms will buy from the market at a price lower than the contracted energy charges. As the sell bid will not get cleared and the generator will not get despatched, the discom will not be paying any energy charges to the generator. Discoms will gain in this scenario by procuring power at a cheaper price.
  • MCP = energy charge: In this scenario, both buy and sell bids will get cleared. The discom will buy from the market at the same price as energy charges and pass it on to the generator under the PPA. In comparison to the PPA, the discom will not have any loss or gain.
  • MCP > energy charge: In this scenario, both buy and sell bids will get cleared. However, the pay-in and pay-out of the discom will get exactly netted out with no additional obligation for the discom. In case the discom has a lower requirement, that is, the buy quantum is less than the sell quantum, then the discom will be able to gain on account of a positive difference between the MCP and energy charges.

Assume that a discom has a demand of 500 MW, it has entered into a PPA with a generator and contracted a capacity of 400 MW at energy charges of Rs 2.50 per unit. As per the existing practice, the discom will self-schedule 400 MW of capacity under the PPA and buy the remaining quantum of 100 MW from the market. In the proposed gross bidding mechanism, the discom will place sell bids of 400 MW at Rs 2.50 per unit in the market and buy bids of 500 MW, comprising 400 MW of price-inelastic bids and 100 MW of price-sensitive bids. Depending on the demand and supply scenario, the sell bids of 400 MW will get cleared and accordingly the generator will get despatched. The bidding as per the existing system – on a net pool basis – has been compared with the gross bidding in the accompanying figure. The different scenarios that can emerge in the market along with the net impact on discoms’ power procurement cost in these scenarios are presented in the table.

It is quite clear from the illustration that when MCP < PPA price, the generator that is not in the merit order will not get despatched, resulting in net savings in the power procurement cost of the discom. In the other two scenarios, as MCP>=PPA price, the generator will get despatched through the market. However, the discom’s financial position will remain neutral without any net gain or loss in its power procurement cost. Overall, the discom will have an opportunity to save its power procurement cost while being hedged against any increase in market prices.

Benefits of gross bidding

Gross bidding will be beneficial to the discom, the generator and the power market at large. It will be a win-win proposition for all the market participants as briefly discussed below:

  • Benefit to discoms: Discoms will be able to optimise their power procurement cost by replacing costlier power with the cheaper power available in the market. In none of the scenarios will the discom be incurring any loss. Besides, the discom would not be required to pay upfront for the procurement of power as envisaged under the CERC MBED consultation paper.
  • Benefit to generator: The generator will continue to be paid fixed charges and energy charges as agreed upon in the PPA based on its despatch through the market. In case the discom does not require the capacity on any particular day, the generator may still get the despatch through the market where other buyers are participating to meet their demand.
  • Benefit to market: Gross bidding will bring additional capacity to the DAM, thereby increasing liquidity in the market. Enhanced liquidity in the market will lead to further improvement in efficiency and robustness in price discovery. Gross bidding was introduced by Nord Pool in 2011, followed by the JEPX in 2017, primarily to enhance liquidity in their spot market. Apart from the increase in liquidity, the low-cost generators will get despatched before the costlier ones, leading to the most efficient resource utilisation. Discoms find it difficult to schedule the generators that are on the margins bilaterally. They can be scheduled through the gross bidding mechanism benefiting the generator, the discom and the overall market.

Implementation challenges

There are a few implementation challenges associated with gross bidding. For example, how to participate in the gross bidding portfolio when a generator has PPAs with multiple distribution utilities, how to ensure technical minimum through gross bidding, applicability of additional transmission charges and losses due to participation through the gross bidding mechanism particularly for intra-state generators. However, these issues are all operational in nature and decision regarding them can be taken by the parties involved, taking into consideration their own commercial interests. Going forward, some of these challenges can be addressed by suitably designing the market and bringing the necessary regulatory changes.

Rajesh K. Mediratta, Director, Strategy and Regulatory Affairs

Jogendra Behera, Vice-President, Market Design and Economics, Indian Energy Exchange Limited