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.