Recently, a group constituted by the Ministry of Power (MoP) for “Development of the Electricity Market in India” proposed comprehensive solutions to address the key issues in the country’s electricity market design, such as the dominance of inflexible long-term contracts, the lack of resource adequacy planning at both the central and state levels, and the heavy reliance on self-scheduling by states. The group has proposed solutions to encourage market participation for renewables, ensure a well-developed ancillary services market and reduce system inefficiencies by reducing dependence on self-scheduling. The solutions are aimed at creating an efficient, optimal and reliable market framework to enable the energy transition and the integration of renewable energy into the grid. Industry experts share their insights on the report and highlight the key constraints or shortcomings in the current electricity market design in the country, along with the necessary reforms to address these issues…
What are your views on the Report of the Group on Development of the Electricity Market in India? Do you believe that the proposed recommendations will effectively address the key limitations in the current electricity market design? What are some of the other reforms required to tackle these issues?
The IEX commends the recommendations put forth by the group for “Development of Electricity Market in India”, constituted by the Ministry of Power (MoP) to address key issues and develop a roadmap for the Indian power market. The country’s electricity market is undergoing a transformation as a result of the government’s focus on sustainable energy transition and energy security. Power markets will play an instrumental role in accelerating India’s energy transition by enabling the smooth integration of renewable energy into the grid.
Some of the key recommendations of the group are expected to expedite the addition of renewable energy capacities and spur investment in the sector, thus helping achieve India’s 2030 renewable energy targets. These recommendations include mandating the participation of renewable energy resources in the market and developing additional renewable energy capacity through the contract for difference (CfD) mechanism.
To mainstream renewable energy participation in the market, a pilot mechanism has been proposed to be implemented within a year. An initial capacity of 1,000 MW can be tendered by the nodal agency under the single price option with a 15-year power purchase agreement (PPA) tenure. The tender will determine the single strike price. A significant benefit of the CfD model is that it deepens the market by providing certainty to both generators and buyers. By guaranteeing a fixed price for a defined period, the mechanism establishes a stable revenue stream for renewable energy generators. This stability is beneficial for both generators and buyers, providing greater certainty and reducing the risk of financial losses. Countries such as the UK, the US and Germany were able to increase their renewable energy penetration to more than 30 per cent by shifting from regulatory incentives/subsidies to market-based reforms such as CfD to facilitate renewable energy integration into the grid. The CfD model helped provide the stability and certainty necessary to attract investment in renewable energy projects. The CfD model has been adopted by the UK, Germany, Australia, France, Italy, Portugal, Sweden, Spain and Switzerland. Further, the proposal to introduce financial products for electricity to hedge against price volatility in spot markets will lead to greater capacity addition, increased private investment and ultimately lower prices for consumers.
The group has recognised the inefficiency and inflexibility of long-term PPAs. Power exchanges having a stronger role will deepen the market and enable efficiency in electricity procurement. Improving the efficiency of the day-ahead market will enable market-based electricity despatch, leading to effective cost optimisation.
With the increased renewable energy integration, utilities will need to undertake detailed resource adequacy planning to ensure an optimal resource mix, and introduce capacity contracting through power exchanges. Further, the adoption of a market-based mechanism for procuring secondary frequency regulation services will provide adequate incentives and compensation to resources that can provide faster responses compared to conventional sources.
We are confident that the implementation of this roadmap will fast-track India’s energy transition through an efficient, optimal and reliable market framework.
The Indian power sector has evolved rapidly over the past few decades. Every village in the country has been electrified and transformed from a power-deficit state to a power-surplus state, driven by remarkable growth in renewable energy deployment. Moreover, sustained rapid economic growth is expected to drive significant electricity demand growth in the coming decade. To meet this demand and achieve its target of sourcing 50 per cent of its power generation capacity from non-fossil fuel-based sources by 2030, a paradigm shift is required in India’s electricity market and transactional structure.
In the next stage of development, stakeholders in the Indian electricity markets have to focus on increasing transactions and decentralising market operations. Transactions are measured by the contract ratio, that is, the extent to which the output (electricity in this case) is circulated before reaching the final consumer. Electricity transactions need to circulate more before being scheduled for final delivery. International markets such as the US and Europe have achieved a transaction ratio of more than four while in India, the ratio remains obscure.
The existing contract structure, whether long-term, medium-term, forwards in power exchanges or spot transactions on exchange platforms, is primarily two-dimensional, based on the time and location of delivery/drawal. Such rigid contract structures do not incentivise counterparties to hedge and manage their risks. The lead time from delivery could be added as the third dimension of electricity markets to give the much-desired depth to the current two-dimensional model of time and location of delivery and develop a three-dimensional aspect in the market. This will also help in the development of a resource adequacy framework and capacity markets in the country. Further, with the Indian grid transitioning towards the large-scale integration of renewable energy sources in the foreseeable future, there is an urgent need to undertake a range of operational and electricity market development initiatives to operate under the new energy order.
The MoP’s report on “Development of the Electricity Market in India” identifies the main areas of intervention and recommends a range of measures to be implemented in a phased and time-bound manner to enable efficient, optimal and reliable market operations. The MoP report has identified the following key issues to redesign electricity markets:
- Review of inflexible, longer duration contracts with discoms
- Need for sufficient granularity in resource adequacy planning in the centre and states across seasons
- High reliance on self-scheduling and lower operational efficiency
- Increased share of renewable energy in the overall energy mix and importance of electricity markets to integrate renewable energy
- Firmness in ancillary reserves
International best practices of advanced electricity markets such as the US, the EU, the UK and Australia were analysed to identify options for its implementation in the Indian electricity system.
Several key areas were identified for implementation such as resource adequacy and capacity contracting, transitioning to market-based economic despatch to enhance the efficacy of the day-ahead market (DAM), participation of renewable energy in DAM, market-based mechanisms for secondary reserves, 5-minute-based metering, scheduling, despatch and settlement, regional-level balancing frameworks for deviation management, market monitoring and surveillance, and the introduction of financial products for electricity. The proposed implementation in all these areas is divided into three phases — short-term (less than a year), medium term (between one and two years), and long-term (more than two years).
In our opinion, the MoP-nominated committee, which included representation from prominent stakeholders such as policymakers, regulators, load despatchers and state-owned discoms, should have addressed the implementation aspects of the “market coupling” mechanism as provided in the Central Electricity Regulatory Commission (Power Market) Regulations, 2021, which came into effect on August 15, 2021. The market coupling mechanism, in addition to fostering competition within the exchanges, would optimise transmission allocation at the national level and enhance the efficiency of power markets in the country. The experts could have delved into and recommended the constructs of the market coupling mechanism, which would promote competition between the exchanges, enhance competitive efficiencies, increase economic welfare and provide greater choice to market participants.
The report has also laid emphasis on implementation of security-constrained economic dispatch with unit commitment (UC) on D-1/D-3 basis, and phased implementation of MBED with discoms contracting adequate capacity based on resource adequacy assessment instead of relying solely on energy markets. While adopting this approach, the necessity to have a market coupling mechanism in place along with constructs of Capacity Contracts to be operated by power exchanges are vital for all market participants to seamlessly migrate from legacy contracting structure to market driven mechanism. The experts could have delved into greater detail about this transition that would have guided the discoms to adopt to new exchange driven market structures.
The market coupling mechanism and other key areas identified in the report support the fact that future developments in the power sector depend on the expansion of the scope of market-based electricity transactions in the country. All elements of the MoP report emphasise that the power exchange platform is being expanded to fulfil its role as a “Market Infrastructure Institution” and PXIL is prepared to fulfil its responsibility.
The expert group has analysed the electricity markets globally, their regulatory mechanisms and operational levers, as well as the applicability of these in the Indian market. I find the report to be useful, with a forward-looking approach for the power sector, specifically some of the recommendations regarding MBED implementation, market coupling, introduction of capacity markets, five-minute metering to enable greater accuracy for scheduling and managing intermittency of renewable energy plants, and a push for financial products related to electricity, which could be a game changer, going ahead.
The proposed recommendations will not only address the current constraints in the sector, but pave the way for development of an integrated power market by facilitating the adoption of new and upcoming business models, while addressing the lacunae and filling the voids present in the sector. At present, an area of concern is the high open access charges and other limiting factors at the state level, which have impeded the adoption of open access in its essence. This needs to be addressed, as it will allow market participants to explore and develop new business models such as virtual PPAs and energy storage-enabled RTC renewable energy, while resonating with the overall vision to develop a thriving electricity market. Although the MoP has rolled out the Green Open Access Rules, which have introduced certain waivers on open access charges for renewable power, its adoption by states still lacks pace. I believe it is high time that we normalise the prevailing open access charges and develop a framework for virtual PPAs, while solving issues related to taxations, etc. Virtual PPAs could be a gamechanger in the power sector, something that will bolster renewable energy development and enable companies to meet their sustainability goals.
As mentioned in the report, we need to take steps to address the challenge of meeting the peak demand, as market prices have been frequently touching Rs 8-10 per unit. This price volatility continues to create market speculation. Some regions experience surplus power, while others face deficits. Today, we have 416 GW of installed capacity, of which conventional electricity generation accounts for around 57 per cent, emphasising the significant role played by coal and gas. Further strengthening the installed capacity with a focus on meeting the peak demand will definitely help in reducing prices. The draft guidelines for a resource adequacy planning framework for India is a positive development in this regard.
Other critical challenges include increasing dependence on renewable energy and the lack of new conventional capacities to meet the peaking demand. With respect to renewable energy, intermittency is a major challenge. Going forward, energy storage/pumped storage coupled with renewable energy would be the right step to overcome this challenge.
Overall, I believe that the Report on the Development of the Electricity Market has touched the right notes for developing a flexible, multi-modal, integrated power sector. The recommendations, if adopted, would bring in efficiencies and strategic deployment of resources, which would go a long way in transforming our electricity markets and fuelling growth.