S.K. Soonee, Former and Founder CEO, POSOCO Limited (now Grid Controller of India Limited); Dr Deb Chattopadhyay, Senior Energy Specialist, The World Bank; and Dr Puneet Chitkara, Chief Analytics Officer, Energy Markets, India, The Lantau Group
Post the notification of the Electricity Act, 2003, the establishment of twin power exchanges in 2008 was a major step towards the development of the day-ahead electricity market (DAM) in India. The milestone was achieved after a two year long stakeholder consultation process that began in 2006. In June 2020, the real-time energy market was introduced, including the ancillary market (day ahead as well as real time). The third power exchange also commenced operations in July 2022.
India has adopted the coordinated multilateral model for power trade. System operators at the national and state levels are responsible for the security of the system. They assess the network transfer capability and declare the available transfer capability (ATC) margins in advance for market utilisation. Participation in the power exchanges is voluntary. Market participants can enter into bilateral contracts directly, or through traders, or opt for an over-the-counter platform, or select any one of the exchange platforms to fulfil their power trading requirements.
The allocation of ATC margins among competing avenues for trade has an important bearing on their functioning, and the subject has been under discussion since 2008. On the allocation of the ATC margin between bilateral trading and trading through electronic platforms, it was observed that the electronic exchange platform offers better congestion management. Therefore, it was decided that in the case of a binding transmission constraint, bilateral trades would be curtailed first followed by collective transactions. Regarding the allocation of ATC margins between power exchanges, as an interim step, it was decided to apportion the ATC margins in proportion to the bid volume. The feasibility and suitability of adopting market coupling models was also considered.
In 2014, one of the power exchanges that was affected by the skewed market share approached the regulator for reviewing the principles regarding the allocation of ATC margins between exchanges. The expert committee deemed the practice of pro-rata allocation as suboptimal and recommended the merging of bids from all the power exchanges to obtain an optimal solution. It also suggested a more in-depth study to capture the full complexity of loop flows and counter flows, etc. The expert committee also observed that the merging of bids would require changes in the market design, amendment to the Power Market Regulations, and the resolution of other practical considerations such as confidentiality, the operation of the merging solution, logistics and settlement among multiple exchanges.
The Power Market Regulations, 2021 recognised that the multi-power exchange model, as seen in India, may lead to the following senarios:
- Variations in the prices discovered on different power exchanges for a specific market of collective transactions;
- Suboptimal allocation of transmission corridors among the power exchanges owing to skewed market shares of various exchanges; and
- Suboptimal utilisation of the overall economic surplus since buyers and sellers may be spread out across various power exchanges.
Prior to this, in 2019, a national level pilot project on security constrained economic despatch (SCED) was taken up. SCED aimed at minimising the total power generation costs by optimising the despatch of interstate generating stations (ISGS) while honouring the technical constraints of generating stations and interregional transfer capabilities. These constraints included the technical minimum requirements of plants, transmission constraints, and ramp-up and ramp-down rates of the stations.
The SCED pilot successfully demonstrated the value of optimising the despatch while accounting for security constraints. By February 2022, 49 plants participated in the SCED pilot, representing a total capacity of 58,180 MW, and the number continues to increase. The pilot successfully demonstrated a total variable cost reduction of Rs 25 billion or Rs 20 million a day, amounting to nearly 1 per cent cost savings on variable charges. The SCED engine was developed indigenously and the entire development cost was a fraction of the savings it generated on the first day!
The SCED pilot provides insights into the SMP (system marginal price) as well as the technical and regulatory capacity readiness necessary for a successful transition to a more centrally coordinated despatch mechanism. This includes understanding the software needs for pan-India scale scheduling and communication infrastructure. The pilot also highlights the regulatory frameworks that must be developed for sharing benefits, meeting spinning reserve requirements and enabling co-optimisation.
Despite the significant value unlocked by SCED, the pilot faced a key limitation: it only applied to voluntary ISGS generator participants and did not account for power exchange trades. An analysis of marginal costs from SCED and power exchange prices revealed significant opportunities for further optimization. However, it was not possible to achieve this as per the SCED mandates. Additional cost savings, among other benefits, could be captured through the coupling of power exchanges and SCED. The Indian Electricity Grid Code, 2023 now mandates SCED.
An essential next step in reforming electricity market operations and moving towards the “One Nation, One Grid, One Frequency, One Spot Price” framework is to implement market coupling along with SCED, as initiated by the Power Market Regulations, 2021.
The rapidly evolving and transitioning energy scenario demands continuous innovation and flexibility from the regulators, operators, market institutions and all the stakeholders. Further, meeting the future demand requirements primarily through intermittent sources of energy calls for innovative strategies.
Key Findings – Preliminary Analysis of Coupling SCED with Power Exchanges
A preliminary analysis using the publicly available SCED and IEX data for August 1, 2022 to July 31, 2023 shows that the total annual benefits of coupling are close to Rs 10 billion on the RTM alone, with daily benefits of around Rs 30 million. There are several ancillary benefits in terms of reduction in price volatility and decrease in the frequency of hitting the price cap. The results of the coupling exercise are very interesting but not at all surprising. The optimisation of the whole always gives better results than the optimisation of parts.
Apart from potential benefits, there are other positive attributes. The process would retain the current power exchange structure and the SCED structure while simplifying transmission corridor allocation. It could pave the way for further integration with state-level SCED and full scale co-optimisation of ancillary services to render the system more reliable. It will facilitate the development of a regional market to integrate cross-border trade.
As this is largely an extension of optimisation to add an additional layer of coupling, the process should be relatively inexpensive to pilot and implement. Various contextual constraints that facilitate transition can all be configured albeit at the cost of reducing overall social welfare. It should also be easy to temporarily or even permanently suspend the coupling layer in extraneous circumstances should it interfere with efficient market operation or another policy.
In sum, the analysis makes a very strong case in favour of coupling SCED with power exchanges and also expands the current scope of SCED to include day-ahead unit commitments.
A way forward would be to couple the power exchanges with SCED, with current SCED volumes (50-60 GW) being ten times that of the dominant power exchange (5–6 GW). This will:
- Reduce system cost through utilisation of cheaper capacity across the domains of SCED and the power exchanges, further increasing the savings already generated by SCED;
- Improve market liquidity;
- Streamline congestion management, and enhance reserves and system security,
- Prove beneficial under stressed conditions to reduce the hitting of price caps frequently on high demand days.
The power exchanges should continue innovations, including the introduction of aggregators and unbundling settlement, etc. In the future, coupling will pave the way for the integration of cross-border transactions in electricity through the market coupling operator. Ultimately, the energy market, power exchanges and SCED will be co-optimised with ancillary reserves, leading to seamless integration of large-scale renewable energy capacity and minimising curtailment as the systems are centrally optimised.
To conclude, market coupling will deliver the following benefits:
- System wide maximisation of social welfare
- Optimal utilisation of transmission infrastructure
- Enhanced choice for market participants in power exchanges
- Improve security as SCED coupled with power exchanges will factor in security constraints
Market coupling will enhance competition, aligning with Power Market Regulations’ long-standing objective of a multiple power exchange model, which involves product innovation, improved efficiency in service delivery, removal of entry barriers for new market infrastructure institutions, etc. If the SCED implementation experience is anything to go by, market coupling implementation should not be an expensive proposition as it can be viewed largely as an extension of the SCED philosophy. It would preserve the autonomy of the power exchanges. Besides, the process can be designed flexibly so that the market coupling function can be suspended temporarily under unusual conditions.
Future development in the power sector will depend on the expansion the scope of market-based electricity transactions in the country. In this regard, market coupling can help create a more integrated and efficient Indian electricity market, which supports the growth of multiple power exchanges by increasing market liquidity, enhancing competition, allowing optimal utilisation of transmission capacity, and enabling power exchange platforms to enlarge their role as market infrastructure institutions in the electricity space.
