By Rishu Garg, Policy Specialist, and Harikrishna K.V., Research Scientist, Center for Study of Science, Technology and Policy
The Central Electricity Regulatory Commission (CERC) issued the Draft Central Electricity Regulatory Commission (Deviation Settlement Mechanism [DSM] and Related Matters) Regulations in April 2024. The commission found that the existing DSM pricing structure was over-incentivising deviations from scheduled transactions, resulting in suboptimal grid operations and impacting grid stability. Generators were using DSM as a market medium rather than a tool to avoid frequency deviations and ensure grid stability. The draft DSM regulations 2024 aim to address these challenges through a commercial mechanism.
Evolution of the DSM regulations
The CERC notified the DSM Regulations in 2014, followed by an amendment in 2016, with the objective of ensuring grid discipline and grid security. It subsequently issued the DSM Regulations in 2022, repealing the 2014 DSM Regulations as amended over time.
First amendment (December 2014): It added limits for over-drawl/under-drawl by a buyer and over-injection/under-injection by a seller at a grid frequency of ≥49.70 Hz and <50.10 Hz.
Second amendment (August 2015): This eased the integration of more renewable energy into the grid and exempted solar and wind generators from deviations on volume limits. Further, wind and solar generators would be paid as per schedule. If actual generation is higher or lower than scheduled generation, the deviation charges would be calculated based on the absolute error with respect to scheduled generation and available capacity.
Third amendment (May 2016): It addressed the issue of deviations for states with higher solar and wind installed capacity as the states faced difficulties in managing deviations because of the variable nature of renewable energy. This amendment relaxed the deviation limits only for renewable-rich states. The deviation limit for states with 1,000–3,000 MW of installed wind/solar capacity was set to 200 MW and for states with >3,000 MW of installed capacity to 250 MW.
Fourth amendment (January 2019): Significant changes in DSM regulations were introduced, including linking the average day-ahead market price with DSM prices and narrowing the frequency band from 49.85 Hz to 50.05 Hz. To prevent any market manipulation, the commission introduced measures such as mandatory sign change after every six time blocks (from the earlier 12 time blocks) and imposed an additional charge of 20 per cent for non-adherence to the sign-change requirement.
Fifth amendment (May 2019): Based on the comments from stakeholders on deviation charges payable in case of sign-change violation, the daily-base DSM (sum of deviation charges for all time blocks in a day, excluding additional charges due or receivable) and time-block DSM (deviation charge for the particular period in a day that is due or payable, excluding additional charges) were introduced. The amendment revised the sign-change duration to 12 time blocks up to 31 March 2020, with additional deviation charges fixed at 10 per cent of the deviation charge of a time block. From April 1, 2020, the duration was to be retained to six time blocks, with corresponding changes to the additional deviation charges based on specific time blocks. In addition, a toleration range of ±10 MW was allowed for such violations.
The 2022 DSM regulations came into effect in December 2022. The main objective was to delink the deviation charges and frequency band as frequency-linked price arbitrage was not found to be a good indicator of surplus/deficit generation without large frequency deviations. The regulations notified all buyers and sellers to adhere to their schedules and the system operator to manage any deviations through ancillary services. However, the system revealed inadequacy in managing deviations when the grid experienced huge frequency fluctuations on December 26, 2022, only two weeks after the introduction of the new regulations. Also, due to the deployment of high-cost ancillary services, deviation charges stood at Rs 40 per kWh, later capped at Rs 12 per kWh. The commission reiterated the need for developing resource adequacy plans, along with planning reserve margins for contingencies.
Major changes in the 2024 draft
To capture the impact of ancillary services deployment, recover its cost and provide equal weightage to all market segments, the normal rate has been revised as the sum of:
- One-third of the weighted average area clearing price (ACP), in paise per kWh, of the integrated day-ahead market segments of all power exchanges
- One-third of the weighted average ACP (in paise per kWh) of the real-time market segments of all power exchanges
- One-third of the ancillary service charge (in paise per kWh) computed based on the total quantum of ancillary services deployed and the net charges payable to the ancillary service providers for all regions
Deviation charges for buyers and sellers (generators)
To discourage deviation beyond the operative frequency band owing to the presence of incentives and disincentives without any volume limits for both buyers and sellers, the commission graded the deviation charges within the operative frequency band of 49.90–50.05 Hz. For frequencies beyond the operative band, the deviation charges are kept flat irrespective of the frequency. The deviation charges in case of over-injection by a seller and under-drawal by a buyer are explained below for reference.
Deviation charges in case of over-injection by general sellers: When the frequency is at the lower band of 49.90 Hz, over-injection by the seller should be incentivised. Therefore, charges for the deviation are kept at 115 per cent of the reference rate and are constant as long as the deviation is within its volume limit (10 per cent of the schedule or 100 MW, whichever is less). However, any over-incentives should be avoided to encourage the seller to participate in the ancillary services market rather than relying on the grid. Thus, beyond the volume limit, a general seller would be paid zero charges for any deviations by way of over-injection.
If the seller is a generating station based on wind or solar or a hybrid of wind–solar resources, deviation charges are delinked from the grid frequency, and symmetrical deviation charges are imposed within the recommended volume limits.
Deviation charges in case of under-drawal by a buyer: To appropriately incentivise the buyer for under-drawal during low frequency and avoid any over-incentives, the rate of deviation is set at 95 per cent of the normal rate at 49.90 Hz frequency and kept constant until the deviation is within Volume Limit-1 (VLB-1). For any deviations beyond VLB-1, the charges will be flat across different frequency ranges but relatively less than those in VLB-1 to encourage the buyer to participate in the ancillary service mechanism rather than relying on the DSM.
The volume limit deviations are increased beyond 300 MW for buyers from renewable-rich states (earlier 200 MW) and beyond 350 MW for buyers from super renewable-rich states (newly introduced).
Addition of super renewable energy-rich states
To accommodate the increased penetration of renewable energy and its grid impact, states are segregated as renewable rich and super renewable rich, with a combined installed solar and wind capacity of 1,000–5,000 MW and >5000 MW respectively.
DSM framework for standalone ESS
The regulation introduces deviation charges for energy storage systems (ESS). For standalone ESS, the deviation charges are equivalent to those for a general seller. If the ESS is co-located with other generation sources such as wind or solar, a tolerance band of ±5 per cent or 50 MW is allowed without linking to the system frequency. Beyond this tolerance band, it is treated as a general seller.
Grid security charge (accounting of charges for deviation and ancillary service pool account)
To manage grid security during high demand and reserve shortfalls, costly gas-based generation is procured, the cost recovery of which is done from the DSM pool account. Due to the continuous procurement of costly generation, the DSM pool account faces consequent deficits. In case of such a deficit, the balance amount shall be recovered as grid security charges from the states. The balance amount shall be recovered from the drawee from the date of effect of these regulations till March 2025, in the ratio of 50 per cent of their drawal at the regional periphery and 50 per cent in proportion to their general network access. From April 2025, the amount will be recovered based on the shortfall of reserves by respective states; a detailed procedure will be issued in this regard.
Conclusion
The increased injection of intermittent renewable energy to achieve the 500 GW target and initiatives such as electrification of the transport sector, implementation of rooftop photovoltaics, promotion of green hydrogen and solarisation of agricultural feeders may lead to grid imbalances in the future. While the revised regulations may help alleviate grid issues to some extent, with increasing emphasis on the clean energy transition, it is important to focus on developing state-wise resource adequacy plans along with accurate renewable energy and demand forecasting. This will help in building self-sufficient generation capacity at the state level to meet peak demand and ensure the availability of an adequate reserve margin in the system at all times while maintaining grid frequency.