By Rohit Bajaj, Head, Business Development, Regulatory Affairs & Strategy, Indian Energy Exchange
India is in the midst of an energy transition, driven by a massive thrust on electrification as well as renewables integration. This presents unique opportunities to all the stakeholders of the country’s power sector, to innovate and contribute to this momentous journey. India is the third largest producer and consumer of electricity in the world, consuming about 1,400 billion units of electricity on an annual basis. The short-term power market covers about 13-14 per cent of India’s power sector, accounting for over 180 BUs.
The Government of India has identified power as a key sector to promote sustained industrial growth. With the Purchasing Manager’s Index rebounding to pre-pandemic levels, power demand growth is expected to remain strong at about 7-8 per cent. Further, the target of becoming net zero by the year 2070 has fast-tracked the pursuit of sustainability and renewable-led energy transition in the long term. India has emerged as the front runner on the road to carbon-neutrality, having achieved the fastest rate of growth of renewable energy capacities in the world. India currently has the fourth-highest installed base for green power worldwide, with almost 168 GW of renewable energy capacity as of December 2022, accounting for about 41 per cent of the total installed power capacity.
Energy security as a key enabler of sustained growth
The geopolitical crises last year caused severe supply-side disruptions, resulting in a spike in coal prices and, in turn, higher electricity prices. Although the Indian government’s timely intervention kept the situation under control, the need to attain energy self-sufficiency regained focus. Recently, India divulged its four-plank energy security strategy, which is based on diversifying supplies, increasing exploration and production, exploring alternative energy sources, and achieving transition towards cleaner sources of energy. Going forth, the government’s actions will be aligned with the goal of helping the country meet its energy security needs, primarily by achieving self-sufficiency throughout the entire renewable energy value chain.
Decarbonising India’s power sector
India’s G20 presidency will complement its strides towards its clean energy targets of reducing the emissions intensity of the GDP by 45 per cent from 2005 levels by 2030, and achieving 50 per cent cumulative installed capacity from cleaner energy resources by 2030. Several policy and regulatory interventions have been put in place to accelerate the decarbonisation of the power sector. The renewable purchase obligation (RPO) has been doubled from 22 per cent in 2022 to 44 per cent for 2030. Green energy open access now allows smaller prosumers with even 100 kW of connected loads to buy or sell renewable energy. Various measures will continue to be taken to minimise the integration cost of renewables – such as auctioning hybrid renewable energy projects, increasing battery storage, shifting the agricultural load from night-time to day-time, solarising the agricultural load and tightening deviation bands.
Realising the crucial role of power markets in achieving the energy transition, the government aims to increase the share of power exchanges from the current 7.5 per cent to 25 per cent by financial year 2024. Spot markets, including the day-ahead market (DAM), the green market, the real-time market (RTM) and market-based ancillary services, will serve as enablers of the large-scale renewable energy capacity addition, while reducing the cost of integration. Globally, power exchanges have helped reduce the cost of renewable integration, and provide efficient price signals for newer capacity addition. Further, power markets are key in managing the intermittencies of renewables, as they enable efficient integration with conventional power as well as the most efficient matching of demand and supply.
Rise of green markets in India
The exchange-led electricity and renewable energy market provides a diverse spectrum of market-based products and contracts, including the RTM, the green term-ahead market, and the green DAM. A pan-Indian exchange-based green market is facilitating obligated entities such as discoms, open access consumers and captive power plants in fulfilling their RPOs at competitive prices.
Last month, the Ministry of Power issued an order for the waiver of interstate transmission system (ISTS) charges on the transmission of electricity generated from new hydropower projects. With this waiver already being available to solar and wind power projects, the implementation of these regulations will provide a boost for renewable energy.
To increase market liquidity in the segment, the government may look at providing dynamic interchangeability between renewable energy certificates and green power.
A vibrant green market will encourage renewable-rich states to increase their capacities beyond RPOs, and sell the surplus power in the market. Further, renewable energy generators may be permitted to buy from the RTM segment to manage the variations in green energy production.
Implementation of general network access
As part of its continued efforts to improve energy access, GNA is being implemented, which allows eligible discoms and gencos to draw or inject power from specific points along the ISTS. This can enrich collective markets, alongside removing arbitrage and providing a foundation for merchant plants. The GNA Regulations will go a long way in streamlining network access and network usage charges.
Introduction of ancillary markets
The introduction of ancillary markets is much anticipated by the energy sector. The operation of these markets will go a long way in helping system operators maintain grid stability and will inculcate discipline across the value chain. India’s national grid operator, the NLDC, is expected to introduce the guidelines for participation, thus initiating trading in the ancillary markets.
Proliferation of carbon markets
Carbon markets have a crucial role to play in efficiently channelising climate finance towards sustainable projects by sending market signals to investors and corporates. The International Emission Trading Association estimates that the potential cost reductions through market mechanisms will exceed $300 billion per year vis-à-vis the independent implementation of NDCs by countries.
A national carbon market in India will be hugely beneficial in providing a transparent price signal to the industries. Market-based carbon pricing instruments can enable industries to proactively plan their future capex and factor in the cost of carbon emissions in their business decisions. Thus, global carbon markets, both mandatory and voluntary, will see increased traction this year towards the 1.5 degree pathway.
Increasing demand for battery storage
A NITI Aayog report predicts that India’s battery storage potential will reach 600 GWh by 2030. The growing focus on electric vehicles, stationary storage and consumer electronics will be the key drivers of demand for battery storage. The Union Budget 2022-23 conferred infrastructure status to energy storage systems, including grid-scale battery systems. New measures that will encourage the setting up of grid-scale battery energy storage systems in the country are likely to continue.
Innovative market models
With the growing thrust on renewable energy, new market models are emerging to facilitate smooth integration of renewables. Contract for difference (CfD) is one such innovative mechanism, which alleviates the issues of forced restriction of renewable energy generation and payment delays, and avoids the issues associated with rigid long-term power purchase agreements (PPAs). CfDs introduce greater flexibility in PPAs and facilitate payment security for generators and discoms alike. Additionally, CfDs create a market for the trade of surplus renewable energy generation to areas that are deficit in green power.
Similarly, a virtual power purchase agreement (VPPA) allows financial transactions between renewable power generators and consumers, while the physical transaction is handled by discoms. VPPAs ensure certainty of cash flow for the renewable energy generator as per the PPA, thereby helping deepen the market and encouraging renewable capacity addition in India.
Power markets will serve as a stepping stone for these new models, which have the potential to advance the development of renewable forecasting algorithms. This will help address the main concerns of buyers and grid operators regarding the integration and assimilation of green generation in the grid.
Introduction of capacity markets
Stringent targets for renewable penetration necessitate having a certain capacity in place to ensure grid security and provide round-the-clock power to all. As greater capacities of intermittent renewable generation are added to the grid, the capacity market will act as a backup for generators and demand-side responders to balance the network during times of stress. Capacity markets are predicated on the generation resource adequacy requirement, which is the ability of the system to meet any level of power demand, including peak demand, at all times.
Capacity markets will help ensure capacity creation by maintaining the long-term demand profile at the country level. Going ahead, green markets can be expeditiously boosted for larger capacity additions and transactions through market-based models, thus creating a sustainable model for renewable energy, similar to what is seen in other developed countries. New generation capacity addition through capacity market auctions will improve liquidity in the market and encourage the integration of new technology into the grid.
Looking ahead
A resilient and sustainable power sector will be key to achieving India’s vision of becoming a $10 trillion economy by 2030. Continued support by the government and a conducive policy ecosystem will accelerate India’s energy transition towards a green and inclusive economy. Power markets will soon have a much larger role to play in catalysing this transition though efficient and competitive mechanisms.