By Dr Atul Agrawal, Research Officer, CERC
The Electricity Act, 2003 (EA 2003) empowered the Central Electricity Regulatory Commission (CERC) to promote the development of the power market in India. When the EA 2003 was notified, only one trader was there – Power Trading Corporation of India Limited, which was established by the Government of India, with equity support from the state-run NTPC, NHPC, the Power Finance Corporation and the Power Grid Corporation of India. As per the power conferred by EA 2003, the CERC started granting licences for undertaking trading in electricity to eligible applicants. Gradually, electricity trading thrived because of its importance in matching the temporal deficit of one region with the surplus of another region. However, this used to happen in a bilateral mode earlier. Price discovery was not there and most of the time prices used to be decided through mutual agreements.
Sellers and buyers across the country were not visible to one another on a single platform. Thus, sometimes though power was available, it was not getting despatched. The CERC worked towards this end and in 2007, notified the Guidelines for Grant of Permission for setting up and operation of a Power Exchange. Two power exchanges, the Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL) were granted permission to commence operations. This was truly a milestone in the history of the Indian power sector, which led to the development of the wholesale electricity market in the country. In 2008, both the exchanges commenced their operations with the day-ahead market (DAM) for buying and selling electricity on a day-ahead horizon, with double-sided closed bidding auction for price discovery. Subsequently, they filed petitions before the commission for seeking approval on intra-day contracts (trading and delivery on the same day), day-ahead contingency contracts (delivery on the next day of trading) and term-ahead contracts (includes daily and weekly contracts, wherein delivery starts on the next-to-next day of trading).
In 2009, both exchanges sought approval on term-ahead contracts (daily/any-day and weekly) for trading up to three-months-ahead basis. Since the power market was at a very nascent stage at that time, CERC approved these contracts for trading on a one-month-ahead-basis only. However, the matter got sub judice and the High Court of Bombay, in its judgment dated February 7, 2011, held that both the Forward Market Commission (now the Securities and Exchange Board of India [SEBI]) and the CERC, under respective acts, cannot have exclusive jurisdiction to control and regulate forward, future and derivative contracts in electricity exclusively, unless the respective acts and regulations are amended.
On October 26, 2018, the Ministry of Power constituted a committee to examine the technical, operational and legal framework for forward, future and derivative contracts in electricity and to give recommendations in this regard. The committee submitted its report on October 30, 2019, with its recommendations, based on which both SEBI and the CERC have come to an agreement that the CERC will regulate all the physical non-transferable specific delivery-based forward contracts whereas financial derivatives in electricity will be regulated by SEBI. Moreover, the Supreme Court of India, in its order dated October 10, 2021 favourably disposed of the pending matter of future/forward and derivative contracts in electricity in terms of the agreement reached upon by SEBI and CERC.
What happened in between
After the commencement of the DAM and term-ahead market (TAM) at power exchanges, many developments took place. The first one was in 2011, when trading of renewable energy certificates was initiated in the solar and non-solar categories of renewable energy generation. Subsequently, in 2012, change in the market design of day-ahead contracts led to a reduction in the contract size from an hour to 15 minutes. In 2017, trading of energy saving certificates was introduced, which helped in implementing energy efficiency measures across energy-intensive industries.
During 2020-21, two key developments grabbed the attention of the industry. One is the introduction of real-time contracts in the collective transaction segment of power exchanges, for getting power delivered just one hour ahead of trading and another one was that the trading of renewable energy in solar and non-solar categories was permitted on the exchanges, which was later extended to power coming from large hydro projects as well. The trading of renewable energy was initially permitted in TAM with a separate window for renewable buyers and sellers. Subsequently, it was also permitted in DAM, wherein bids for renewable energy are being cleared first, followed by the clearing of bids for conventional sources, making it an integrated DAM place for renewable and conventional energy.
Timeline for the introduction of different instruments on the exchanges
In August 2021, the CERC granted registration to the third power exchange of India, – Hindustan Power Exchange Limited (HPX) and approved all the contracts to be launched at its exchange platform. The HPX has commenced its operations in July 2022, The IEX extended its exchange platform to cross-border electricity trade in DAM, on which trading with Nepal and Bhutan through Indian trading licensees was started in April 2021 and January 2022 respectively.
As mentioned above, for the period during which the matter of forward contracts was sub judice in the court, TAM was restricted for trading up to 11 days ahead. By virtue of the disposal of the matter by the Supreme Court on October 06, 2021, IEX and PXIL filed their petitions before the commission for seeking approval on term-ahead contracts beyond 11 days. It is noteworthy that earlier, power exchanges were governed by the Power Market Regulations, 2010, which were later repealed by the Power Market Regulations, 2021. In accordance with these regulations, the CERC examined proposals of the IEX and PXIL for longer-duration contracts and, accordingly, permitted to introduce monthly contracts and any-day single-sided contracts. The commission also allowed modification in the existing daily contracts and weekly contracts to make them available beyond 11 days. The commission approved these contracts for a maximum duration of three months, considering the month in which the transaction is made as the zero-month. Any day single-sided contracts were approved with reverse auction, while other contracts, such as daily contracts, weekly contracts and monthly contracts were approved with a uniform price step open auction.
Hence, daily contracts, weekly contracts and any-day single-sided contracts for the third month can be traded on a rolling basis in zero-month (M0), first month (M1), second month (M2) and third month (M3), subject to the timelines specified in the accompanying table. With regard to the monthly contract, the first month (M1) contract can be traded up to 10 days prior to the close of the zero-month (M0); the second month (M2) contract can be traded up to five days prior to the close of the zero-month (M0); and the third month (M3) contract can be traded up to the last day of the zero-month (M0). Daily weekly and monthly contracts would be available for pre-specified time blocks, while any-day single-sided contract would be available as per user-defined days and time blocks. Also, the capacity offered under these contracts from a resource in the same time block would be separate and non-overlapping, which effectively means that the source of power with respect to the energy transacted under these contracts will not be able to participate in other available market avenues.
The endeavour of the distribution companies in recent times has been to arrive at a judicious mix of long-term contracts and short-term contracts, which could optimise their power procurement costs. Discoms now tend to prefer short-term contracts to avoid fixed charges. In this line, the approved longer-duration physical delivery-based forward contracts at power exchanges will provide another avenue to discoms to fulfil their short-term demand and to optimise the power purchase cost. Moreover, through these contracts, both beneficiaries and sellers would be able to hedge their risk against price volatility and availability of the transmission corridor. These contracts will provide an avenue for sellers to sell surplus power well in advance with a robust payment security mechanism.
Also, if we refer to statistics of financial year 2020-21, from the total electricity procured in India, the share of the short-term power market was 10.6 per cent, whereas the share of electricity transacted at power exchanges was 5.8 per cent only. This share has been quite constant over the past decade. Although long-term contracts in the Indian context had been prevailing traditionally, the introduction of physical delivery-based forward contracts at power exchanges is expected to break this chain. With this and other products such as the day-ahead ancillary service market and real-time ancillary service market coming up as well as envisaged market-based economic despatch, the Indian power sector may observe a paradigm shift, leading to a growing share of the short-term power market in India.