A Complex Task: Evolving power market design in India

Evolving power market design in India

By S.K. Soonee, Former and Founder CEO, POSOCO

With the evolving dynamics of the power sector in India, the transformation of power market desi­gn from the contemporary model of long-term power purchase agreements (PPAs) to an efficient and liquid energy mar­ket is imperative. Resource adequacy, energy security a robust transmission and distribution system in tandem with an efficient electricity market remain fun­damental requirements to enable utilities to meet the system load 24×7 with reliability.

Needs and requirements

Currently, the Indian electricity market has several instruments for transactions in electricity, such as bilateral, the day-ahead market (DAM), the real-time market (RTM) and ancillary services. The ma­jority of the electricity is procured and sold through medium- or long-term PPAs. It is vital for the electricity market as a whole to advance to the next stage by improving market design, structuring new instruments and devising additional methods of settlement. There is a ne­ed to look at the entire spectrum of the market rather than to have overcrowding of market products close to delivery, though the right design of the spot market is extremely important. The market has to evolve by introducing novel instr­uments that facilitate procurement from over months to years in over-the-coun­ter (OTC) contracts. The historical me­cha­nism of full fixed cost compensation to generators needs a revisit and an in­no­vative interim capacity market for “tem­porary reallocation of existing capa­city” needs to be developed to facilitate trading of states’ seasonal surplus/deficit.

The spot market in India, the way it has been designed, probably has a missing money problem wherein the energy pri­ces discovered by the spot market fall short to adequately reflect the inves­tme­nt required for reliable electric service. Broadly speaking, electricity prices in the markets are not enough to attract su­fficient investments that will help In­dia achieve resource adequacy. Many co­un­tries have solved the missing mon­ey pro­blem in many ways and, therefore, it will be beneficial for India to stu­dy the variants of capacity markets im­plemented elsewhere to evolve a model suitable for India.

Markets could be highly competitive. How­ever, markets can’t address issues as far as equity and affordability are concer­ned. Hence, Indian regulators could in­corporate safety measures to avoid vol­atility and extreme price movements

An ideal market should also respect the choice and freedom of market players. Security constrained economic despa­tch (SCED) is an example of a thin layer of centralisation, a proxy market that fa­cilitates merit order amongst interstate generating stations while honou­ring the underlying contracts.  SCED has led to a 43 per cent reduction in the num­ber of schedule changes and a 34 per cent reduction in MW changes, whi­le additionally contributing to higher pla­nt load factors in cheaper stations. Hence, it is advisable to introdu­ce the SCED mechanism at the intra-state level too, so as to cause further eco­nomy yet reflect all the physical constraints like ramping limits, technical minimum, etc.

The power exchanges should have limited products to avoid the liquidity issues that arise from fragmentation. The­re is a need for a vibrant OTC

e-platform for in­novative instruments so as to offer sufficient space for market ex­perimentation. Post success with certain instruments in the OTC market, the­se products can later be converted to standardised contracts.

Besides this, the transformation of the electricity market will have to be accompanied by the development of other su­pport systems and ecosystems, such as clearing single/multilayered settleme­nt, net/gross pooling, accounting and com­pliance systems, data regulation, tra­­de reporting, monitoring, etc.

The draft IEGC Grid code by the CERC and the draft resource adequacy (RA) guidelines by the CEA are extremely im­portant for the Indian power system, be it for renewable energy integration, de­car­bonisation or development of the power market in India. Cross-border tra­nsmission infrastructure augmentation and wide-scale harmonisation and co­o­peration at the regional level are top priorities as transition without transmission is tough.

While it may be challenging to migrate from zonal to nodal pricing, it is worth a regulatory sandbox by the operator. Lo­cational marginal prices (LMPs) could be derived from a routine optimal power flow simulation while arriving at total transfer capability and av­ai­lable transfer capability. It wo­uld be a proxy signal regarding congestion due to economic despatch and intervention required to mitigate the same.

The way forward

The transformation of the Indian power market needs a battery of certified pow­er market specialists at the centre as well as in the states, who comprehend the co­m­plexities of market design and de­velop strategies accordingly. These certified power market specialists should ne­ed to apply for a renewal periodically in order to be in touch with the cutting-edge developments in the electricity market design

In my humble opinion, markets are not a substitute for planning and capacity development. In the long term, plann­ing, taking into consideration resource adequacy, can aid in determining the qu­antum of investment required and accordingly direct the development of adequate capacity.

In the next stage of evolution, stakeholders in the Indian electricity markets have to specifically focus on increasing liquidity and decentralising market operation. Liquidity and volumes are measured by churn ratio, that is, the extent to which the output (electricity in this case) is circulated before reaching the final buyer. The electricity trade needs to circulate more before being scheduled for its final delivery. In Europe, the churn ratio of the electricity markets stands at 3-9 while in India, the churn ratio data remains obscure.

Liquidity of the market can be achieved by transitioning to a financial derivati­ves market besides a physical delivery me­chanism. The shift to a financial de­rivatives market will empower the market to introduce numerous instruments such as price spreads, swaps, options, etc. A liquid electricity market ecosyst­em will help entities in hedging and ma­naging their risk. It will simultaneously improve the signalling capacity and fo­re­sight of the market given the presen­ce of more money and entities.

From the current two-dimensional mo­del of time and location of delivery, lead time from delivery could be added as the third dimension of electricity markets to give the much-desired depth to develop a three-dimensional aspect in the market. This will also cater to the resource adequacy framework and develop ca­pa­city markets in the country.

The decentralisation of market operation along with an ecosystem at the state level is essential. 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. A lot of work is already going on at the Forum of Reg­u­­lators level, along with the involvement of FOLD for the implementation of CABIL (capacity building of Indian LDCs), SAMAST (scheduling, accounting, metering and settlement of transactions in electricity) and SANTULAN (in­tra-state reserves and ancillary services for balancing). The distribution system operator (DSO) concept also needs a push from the policymakers and regulators. These are the prerequisites for a vib­r­ant power market in the future.