Interview with S.N. Goel: “Power exchanges will play a larger role in energy transition”

“Power exchanges will play a larger role in energy transition”

S.N. Goel, chairman and managing director, Indian Energy Exchange Limited (IEX), spoke to Power Line about the current state of power trading and the power exchanges in the country, as well as  the outlook for the power trading market in the near to medium term. He also discussed the key highlights for the IEX in the past one year or so, and the company’s future plans and priorities. Excerpts…

How do you rate the performance of the power sector in the past year or so?

The power sector in India is in the midst of a transformation, led by the accelerated pace of renewables development and rapidly evolving technology. The past year saw notable changes across the electricity value chain, keeping pace with the country’s strides towards becoming a sustainable energy economy.

On the installed capacity front, India continued its fast-paced addition in the past year. As of August 31, 2022, the total capacity stood at 406 GW. In the past five years, the total capacity has increased at a 4 per cent compound annual growth rate.

With an interregional transmission capacity of 112 GW, India has an integrated single largest grid in the world. Power flows seamlessly across the country, resulting in one nation, one grid, one price round the year. Significant investments by the government towards its mission to bring power to all was instrumental in achieving this milestone.

The share of renewables has increased rapidly. It is now at 163 GW, representing 40 per cent of the installed power capacity. This renewables’ growth has put India on track to achieve the prime minister’s target of meeting 50 per cent installed capacity from clean energy resources by 2030.

On the consumption side, the demand for electricity resumed after two years, increasing 8.1 per cent year on year to reach 1,374 BUs in financial year 2022, buoyed by the revival of economic activities. The demand in the first five months of this fiscal touched 659 BUs, a year-on-year rise of 11 per cent.

The past one year saw several promising policy initiatives. These included.

Revamped Distribution Sector Scheme: It is a reforms-based and results-linked scheme with an outlay of Rs 3,037.58 billion. A significant part of this outlay is earmarked for smart prepaid meters. Smart metering systems will ensure proper energy accounting, billing and collection. Upgradation of distribution infrastructure will reduce the aggregate technical and commercial (AT&C) losses. These will ensure the financial viability of distribution companies in future.

Electricity (Amendment) Bill, 2022: The bill proposes to introduce multiple discoms in a supply area to promote private participation, provide better services, and improve the financial health of the distribution sector.

Late Payment Surcharge and Related Matters Rules, 2022: These rules have provisions for rationalisation of late payment surcharge. Further, generating companies are allowed to sell unrequisitioned power through the power exchanges without obtaining consent of the beneficiary, which will improve sell liquidity, whereas enforcement of provisions regarding timely payments will ensure financial discipline in the sector.

Regulatory initiatives such as the GNA Regulations will streamline network access and network usage charges; the deviation settlement mechanism will ensure grid security and stability; REC Regulations will boost renewable energy certificate trading, and the grid code will deepen the power markets.

The overall outlook for the power sector is quite encouraging. An expanding economy, rising industrialisation and the focus on electrification – be it cooking, railway traction, or electric vehicles – will continue to boost power consumption in the country. There is huge scope for the power sector to grow as the nation strides towards becoming a $5 trillion economy and a global economic powerhouse in this decade.

What is your perspective on the power trading scenario/exchanges in the country?

The share of the short-term power market was about 14 per cent in the overall power consumption in financial year 2022, which is only a marginal increase from 12 per cent in 2012-13. In the short-term market, the share of exchange transactions has increased significantly, from 24 per cent in 2012-13 to 54 per cent in 2021-22.

With the high targets set by the government for renewable capacity addition, the spot market is expected to grow significantly in the near future. It is seen that countries such as Germany and the UK, which have a high renewable share in the total energy mix, trade more than 50 per cent of the generation through the exchanges. At present, India’s exchange market size is around 7.7 per cent of its annual electricity consumption, which is expected to increase significantly in the coming years.

Power trading through exchanges provides flexibility, competitive prices, transparency, payment security, risk management and greater choices to market participants. Globally, power exchanges have played a key role in reducing the cost of renewable energy integration and providing efficient price signals for newer capacity addition. Further, power markets are key in managing the intermittencies of renewables by efficiently integrating them with conventional power and matching demand and supply. As India marches towards installing 500 GW of renewable energy and achieving its net-zero targets, the power exchanges will play a much larger role.

What are your views on the MoP’s proposal to introduce the high price market segment for DAM?

This proposal, if implemented, will enable generators with high variable costs to participate in the exchange market. We welcome this move by the ministry, which will ensure the availability of power during high demand periods even at a slightly higher cost.

What is your outlook for the power trading market, volumes, prices, etc. in the near to medium term?

The power market will play an instrumental role in facilitating the government’s vision of Power for All on a 24×7 basis at affordable prices. The target to increase the share of spot markets to 25 per cent in the next three to four years, as per the draft National Electricity Policy, will accelerate the growth of the markets. The markets will serve as a catalyst for accelerating renewable generation capacity addition in the country.

As per a joint study by the Solar Energy Corporation of India and the IEX, market-based renewable energy projects can command a better internal rate of return vis-à-vis the renewable energy projects being set up through the existing bidding route. Market-based renewable energy capacity will also resolve issues such as delays in signing of PPAs, curtailment and payment delays. A gradual transition to market-based models will facilitate faster addition of renewable energy capacities to meet India’s 2030 climate goals.

Enabling regulations will lead to the introduction of new markets such as capacity markets, derivatives and market-based ancillary services, which will further deepen the markets. The implementation of the National Open Access Registry has enabled automation and increased efficiency and transparency in transmission allocation, thereby bringing in greater efficiency in the power market. Similarly, the CERC Connectivity and General Network Access Regulations, 2022, will simplify and rationalise transmission allocation and transmission pricing, and support strengthening of the transmission network.

Going forward, in the near term, given the initiatives undertaken by the government and regulators, and the increase in coal production by Coal India Limited, we expect a softening in input prices, thereby reducing the recent surge in prices on the exchange. This will improve open access volumes and increase the discom optimisation potential as well.

On its part, the IEX is working proactively in collaboration with all stakeholders towards deepening the markets. The growth of the exchanges is dependent on the overall power consumed in the country. With the launch of new products, investment in technology and innovation, customer-centric initiatives, and increase in country’s power consumption, we expect to maintain our growth rate of 20 per cent achieved in the past five years.

What are the biggest issues and challenges facing the power sector?

The distribution sector continues to demand greater attention and reforms despite the various initiatives that have been taken. Despite a considerable decline in AT&C losses, the financial health of discoms continues to be a challenge. The current average AT&C losses of the discoms are at 20-21 per cent, which the government aims to reduce to 12-15 per cent by 2024-25.

Tariff continues to be uneven with a gap between retail tariffs and the cost of generation. Tariffs are still not determined on the cost of supply. Discoms are incurring losses on every unit of power sold. Thus, they have no incentive to supply more power to consumers. Power tariffs to industries are very high. Although there is a provision for open access in the Electricity Act, high cross-subsidy charges and non-supportive state regulations inhibit its broader implementation. High power costs deter competition among Indian industries as compared to their global counterparts.

Even though renewable generation contributes around 25 per cent of the overall generation in India, challenges exist in meeting the morning and evening peak demand for electricity. Therefore, we should rethink about adding coal-based generation to manage the morning and evening peak till we have commercially viable storage capacity in place.

Further, the availability of fuel for the generating companies continues to be a challenge. Due to the limited availability of domestic coal and high prices of imported coal, many generating stations are not operating. Due to high LNG prices and lack of availability of domestic gas, many gas-based plants have also become stranded. In the short run, it is necessary to ramp up coal production so that some generating companies can be put back in operation. Recently, initiatives taken by the Government of India have led to an increase in coal production by more than 20 per cent in the first five months of this fiscal. Going forth, the coal position is further expected to improve, with a target of reaching 1.23 billion tonne fuel production by financial year 2025, which will further ease supply constraints.

What have been the major highlights for the IEX in the past 12 months?

The IEX continued to make significant contributions towards helping India build a sustainable and energy efficient economy. We facilitated uninterrupted 24×7 power in the most competitive, flexible, transparent and efficient manner.

We launched automated bidding through the application programming interface for the real-time market product that requires auction to be conducted 48 times in a day. Our best-in-class technology platform resulted in zero errors with an almost 100 per cent availability.

During the year, we launched multiple products and market segments to meet the diverse needs of our customers. These include the green day-ahead market and weekly contracts with delivery of up to 12 weeks and daily contract delivery of up to 90 days.

With customer centricity at the heart of our operations, we enhanced the experience of our customers across all touchpoints – registration, bidding, physical delivery and financial settlement. We launched a web-based platform that provides digital on-boarding experience to our customers, intelligent data insights to enable effective bidding on multiple data points around volume trend, price trend, uncleared volume, how it is distributed from the clearing price, demand trend, under-drawal trends and comparison around prices across product segments. We have migrated from a desktop-based system to a web-based platform for most of our products, enabling an easy, anytime-anywhere access to trade reports, and a secure bidding experience. IEX was at the forefront of the emergence of the South Asian power market, which makes power available at competitive prices in the South Asian sub-region. Cross-border electricity trade has already begun with Nepal and Bhutan, and Bangladesh is expected to join in the near future. As a result of these initiatives, IEX achieved a record all-time high volume of 102 BUs in financial year 2022, with a 37 per cent year-on-year growth across our market segments.

What are IEX’s future plans and top priority areas? What are some of the new opportunities that the company is pursuing?

The massive transformation in the global and Indian energy sector has created several opportunities for IEX, which it is well positioned to leverage. IEX will continue to pursue opportunities in the power markets and evaluate a foray into adjacencies. We will continue to fortify our position in current products such as GDAM and GTAM, increase volumes in existing products, and launch new products such as an ancillary market and capacity markets.

The Indian Gas Exchange (IGX), our first diversification initiative, is growing from strength to strength. In line with the Government of India’s ambition to increase the share of gas in the overall energy basket from 6 per cent to 15 per cent by 2030, we see a huge potential for IGX in the years to come.

We will continue to explore other opportunities in the energy marketplace. We are encouraged with the government’s idea of establishing a coal exchange. The enactment of the Energy Conservation Act 2022, which talks about setting up a carbon market in the country, provides us an opportunity to set up a carbon exchange in the country.

As India moves towards carbon neutrality and harnesses vast amounts of renewable power to meet its growing appetite for energy, IEX will continue to leverage technology and innovation to facilitate the nation’s energy transition.