Revisiting DSM

Taking cognisance of the changing dynamics of power system operatio­ns and the emerging electricity market realities, the Central Electricity Re­­gu­­latory Commission (CERC) proposes to revise the existing framework of the deviation settlement mechanism (DSM). To that end, the central regulator has re­cently notified the draft DSM and Rela­ted Matters Regulations, 2021. The pur­po­se of the regulations is to ensure, th­ro­u­gh a commercial mechanism, that us­e­rs of the grid adhere to and do not deviate from their schedule of drawal and injection of electricity in order to maintain grid security and stability. These regulations will be applicable to all grid-connected regio­nal and other entities en­ga­g­ed in interstate purchase and sale ­of electricity. A key change proposed in the draft regulations is the delinking of de­viation char­ges to frequency. To recall, the DSM regulations, first notified by the CERC in 2014, provided that the linkage of deviation ch­ar­ges to frequency may be review­ed by the commission, keeping in view the changing power market conditions.

Over the years, there has been a clear improvement in power system operations, both in terms of stable operation and frequency, remaining within a close band mainly due to measures such as changes in the grid code and unscheduled interchange mechanism/DSM, the­re­by ensuring grid constituents to adhe­re to their schedule. However, the commission believes that in the absence of large frequency excursions, as at present, there is little scope for frequency-linked price arbitrage. Therefore, the system frequency is no longer a correct indicator of generation being short or surplus and also the link between the system marginal price and frequency hardly exists. In addition, linkage of frequency to the DSM rate often leads discoms to deviate from the schedule, especially during high frequency conditions as DSM prices are low or even zero at those times.

Further, the introduction of ancillary services in 2016 has made the linkage of DSM price to frequency largely redundant. The CERC has also proposed a new framework for ancillary services, including, inter alia, secondary reserves ancillary services and tertiary reserves ancillary services, under the recently released draft ancillary services regulations. The new framework aims to ensure that the frequency deviations are managed by the system operator through deployme­nt of ancillary services of various types. Therefore, the draft DSM regulations now propose to price deviation from the schedule according to what it costs to compensate the deviation through the despatch of ancillary services.

Proposed changes

Load generation balance is the prime objective of system operation, which re­quires generators and the drawee entities to adhere to their schedule (finalised on a day-ahead basis). However, in the face of uncertainty in demand and possible unanticipated changes in the generating plant, day-ahead schedules may not be adequate for the drawee entities to meet their demand or for the generating stations to meet their supply obligation. To overcome these issues, market-based platforms such as a real-time mar­ket have been enabled by the CERC. Buyers and sellers of power avail of these to buy and sell energy to correct their day-ahead position. Usually, such optio­ns for power trading remain open up to gate closure, that is, about an hour befo­re the actual delivery, following which the system operator takes over and manages the system imbalances or deviations through deployment of ancillary services. The proposed DSM regulations provide that all grid-connected entities will adhere to their schedules and deviation, if any, shall be managed by the system operator through ancillary services and charges for such deviation shall be governed by these regulations.

The formulae for computation of deviation will remain the same as in the 2014 DSM Regulations. The deviation percentage for general sellers (other than wind and solar generators) shall be computed with reference to their scheduled generation and deviation percentage for wind and solar generators shall be computed with reference to their available capacity (cumulative capacity rating of wind turbines or solar inverters that are capable of generating power in a given time block) to take care of the variability. The normal rate of charges for deviation for a time block has been proposed to be equal to the weighted average ancillary service charge in paise per kWh. It will be computed based on the total quantum of ancillary services deployed and the total charges that are payable to the ancillary service providers for all the regions for that time block.

Since the ancillary services framework is still in the development phase, it has been proposed that for a period of at least one year from the date of effect of the proposed regulations (or such further period as notified by the CERC), the normal rate of charges for deviation for a time block shall be equal to the highest of the weighted average area clearing price (ACP) of the day-ahead market seg­ments of all the power exchanges; the weighted average ACP of the real-time market segments of all the power exch­an­ges; or the weighted average ancillary service charge of all the regions, for that time block. In the event of non-availability of ACP for any time block on a day, the ACP for the corresponding time block of the last available day shall be considered for computation of the normal rate of charges for deviation for that time block.

At present, generators are paid for over-injection on the assumption that by doing so they assist in restoring grid frequency within the permissible operating band. With this regulation, the responsibility of managing frequency will be vested in the system operator. Genera­tors may continue to help restore frequency within the operating band but at the instruction of the system operator, by participating in the ancillary services mechanism, rather than acting on their own, driven by the price signals linked to frequency. Therefore, for up to 2 per cent overinjection, the charges for deviation shall be zero for generators. Overin­jec­tion beyond the limit of 2 per cent during a time block shall attract charges for deviation at the rate of 10 per cent of the normal rate of charges for deviation ap­plicable during that time block. In the event of underinjection by generators, there could be a need for procurement of ancillary services by the system operator. Some exceptions are solar, wind, run-of-the-river and municipal solid waste-based generating plants, where DSM charges shall be computed in a different manner.

From the buyers’ side, the proposed regulations provide that they will neither pay nor have to be paid for any under-drawal. At present, under the 2014 DSM Regulations, the buyers are paid for un­derdrawal (which is also a deviation) on the belief that such an action (under-drawal) helps restore grid frequency with­in the operating band. Now, to discourage overdrawal as it could pose a serious threat to grid security, buyers will have to pay for overdrawal. In the case of an overdrawal by buyers, the system operator will deploy the services of ancillary service providers and impo­se a cost on the system and the causer needs to pay for this. However, recognising the fact that unlike generators, discoms have less control over the consumption of consumers, the volume limit for deviation charges in the proposed regulations has been retained as it existed in the 2014 DSM Regulations. When overdrawal is within the volume limit, buyers shall be liable to pay for deviation at the normal rate of charges for deviation. Any deviation beyond the above-indicated volume limit shall attract the charges for deviation at the rate of 110 per cent of the normal rate of charges for deviation.

The regulations have stated that the payment of charges for deviation shall have a high priority and the concerned regional entity shall pay due amounts within seven days of the issue of statement of charges for deviation by the re­gional power committee. Failing to make timely payment, a late payment surcharge at the rate of 0.04 per cent shall be payable for each day of delay.


Once the new DSM regulations are fina­lised, the 2014 DSM Regulations will be repealed. The commission closed comments on the draft on October 22, 2021. The Power System Operation Cor­po­ra­ti­on has raised some concerns on the draft, in its comments submitted to the commission. It states that delinking frequency from DSM without putting in place the full suite of resource adequacy, optimal portfolio management, generation reserves and ancillary services may lead to insecure operating conditions in the grid. Further, there is an inherent “inadvertent deviation” by conventional generators because of design and control characteristics and delinkage of frequency from DSM would remove the in­centive for conventional generators to pro­vide any primary res­ponse (as the po­wer generated through governor respon­se might get treated as deviation).

Going forward, the power market stakeholders will keenly await the final moda­lities of the DSM regulations.


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