The Central Electricity Regulatory Commission (CERC) has been consistently monitoring the performance of various market segments and contracts within power exchanges to ensure efficiency and transparency. Recently, the apex regulator issued a draft order giving directions to power exchanges to address concerns in the power market regarding price discovery in day-ahead contingency (DAC) contracts. Further, the commission has observed some anomalies in the operation of the term-ahead market (TAM), including any-day single-sided
(ADSS) contracts.
Considering the historical performance of contingency contracts, coupled with the emergence of other competitive market segments such as real-time markets (RTMs), the commission has put forth specific directions aimed at improving their functionality and aligning them with the current market needs. Additionally, the commission has proposed modifications to the operational framework of TAM contracts to further enhance market accessibility, increase liquidity and ensure better alignment with short-term energy procurement requirements.
A closer look at the draft order and the modifications proposed…
Issues with intra-day, DAC and term-ahead contracts
The intra-day market in power exchanges was launched to meet energy requirements close to real time, while the DAC market was established to manage unexpected changes arising after the closure of the day-ahead market (DAM). In April 2015, the commission mandated that power exchanges can operate a 24×7 intra-day/contingency market.
However, the intra-day market has struggled to attract liquidity since its inception. The possible reasons include decision-making inertia among discoms and a lack of delegation at the operator level, a continuous pay-as-you-bid trading model rather than a uniform auction-based model and the absence of gate closure. However, with the RTM launched in June 2020, these issues have been addressed to some extent, as RTM offers a uniform clearing and gate closure mechanism in real time. RTM has since seen significant growth in trade volume compared to the intra-day market.
The DAC market similarly saw limited activity until 2020, with occasional volume spikes. However, DAC volumes have increased noticeably since 2020-21. DAC prices typically trend close to DAM prices, with a slight premium owing to its contingency role. However, since October 2023, DAC prices have consistently remained higher than DAM prices, raising regulatory and policy concerns. Stakeholders have also suggested potential manipulation within DAC contracts during recent consultations.
Initially, continuous matching was allowed in contingency contracts due to anticipated low liquidity. However, as the DAC market has grown significantly, there is now a case for shifting to single-price discovery instead of continuous matching. Without a uniform price for the same time block/hour, the market can fragment, creating price disparities among participants and adding to price uncertainty.
Meanwhile, for TAM, the commission notes that after approving daily, weekly and monthly contracts of up to three months with clearly defined time blocks, power exchanges provided a wide range of slots through circulars, including options such as base/round-the-clock, peak, off-peak, evening, night peak and hourly. These numerous time slots, which often overlap and provide high granularity, allow market participants to customise delivery times, which deviates from the commission’s intent for “pre-specified” contracts.
The commission recognises that exchanges are responding to specific participant needs by offering a variety of time block options. However, this approach is viewed as excessive, creating market fragmentation and diluting the overall liquidity. Such fragmentation could lead to reduced price efficiency and higher transaction complexities, ultimately impacting the robustness of the exchange platform.
The commission, therefore, underscored the need to streamline available options, limiting them to a standardised set of pre-specified slots. This adjustment aims to simplify market participation, improve liquidity and strengthen market stability by ensuring a more predictable and cohesive trading environment.
Another segment, which is a concern according to the commission, is the ADSS, which was approved for allowing buyers to define their preferred days and time blocks. These contracts are initiated by buyers based on their specific requests. However, it has been observed that exchanges are offering flexibility in timelines, such as bid validity and acceptance windows, which may encourage non-serious participation and hinder the effectiveness of these contracts.
CERC’s proposals
To address these issues, the CERC emphasises the need for clearly defined durations for all stages of ADSS contracts, including the bid receiving window, bid validity and bid acceptance, to
ensure consistency and serious participation from all buyers across the exchange platforms.
Further, the commission has proposed that all exchanges offer only the established pre-specified slots for TAM contracts, including HP-TAM. These slots should include base/round-the-clock (RTC), peak, off-peak (excluding peak) and night periods, with the peak period defined by the National Load Despatch Centre. For GTAM contracts, exchanges may define slots based on the generation profiles of different technologies provided by sellers. Additionally, exchanges are required to submit these pre-specified contract details to the CERC for approval.
Further, all power exchanges should follow the timelines for different stages of ADSS contracts, including the bid receiving window/submission of interest quantity by sellers, IPO auction, reverse auction and the bid acceptance window as given below.
Due to the consistently low liquidity in intra-day contracts since their introduction and the availability of the alternative RTM, the commission has also proposed to withdraw intra-day contracts from all power exchanges on a specified date, as per Regulation 25(3) of PMR 2021, to prevent market fragmentation.
Additionally, the commission has proposed modifying the price discovery mechanism for contingency contracts, shifting from the existing continuous matching to a uniform price step auction. Amendments to PMR 2021 will be issued to reflect these changes.
Further, until amendments to PMR 2021 are implemented, the commission has directed power exchanges to make changes to their software and market watch systems to allow all parties to view buy and sell offers for 10 minutes before these orders are transferred to the order book. After this period, the best buy and sell bids will be cleared. Moreover, power exchanges are required to display information on the number and volume of received bids (both buy and sell) on their websites, alongside data on the traded volume.
Additional recommendations by CEA
The Central Electricity Authority (CEA) has made additional recommendations to optimise TAM operations. A key suggestion is to incorporate a time extension mechanism, similar to that used in reverse auctions, to account for last-minute bids. Specifically, if a bid is received after 16:45 hrs, the market should be extended by 15 minutes. If another bid is placed within the last five minutes of the extended period, a further 15-minute extension would apply, with this process repeating until 24:00 hrs on the auction day. However, if no bids are received after 16:45 hrs for a particular category (for example, RTC or evening peak), the time extension rule would not apply to that category.
The CEA has also suggested to limit trading days to enhance liquidity in TAM’s fixed-duration contracts. Monthly contracts should be traded only on two days per month, weekly contracts on one day (such as Tuesday) in the previous week, and daily contracts should have a restricted delivery period of up to six days per trading session, with trading allowed for delivery between T+2 to T+8 days.
Further, the draft CERC order proposes a temporary measure allowing buy and sell offers to be visible for 10 minutes before they are transferred to the order book, after which they are cleared, based on the best available bids. However, the specifics of this approach require further clarification according to the CEA. It is unclear when exactly this 10-minute window would begin and how an offer that outperforms others but does not meet the 10-minute threshold would be handled. To ensure effectiveness, this solution requires a structured framework and thorough testing.
To increase competition and efficiency in the DAC market, the CEA has recommended to shift the price matching method from continuous matching to an open auction model, as is used for daily, weekly and monthly contracts – a change also supported in the draft CERC order. To implement this approach, the existing DAC trading window (13:00 to 23:30 hrs) could be divided into two or three sessions, enabling a uniform price auction process. Additionally, it is advised to discontinue the DAC dynamic product, which only permits matching for customised delivery blocks, as this results in non-standardised bids. Furthermore, the existing algorithm could be optimised to prioritise bid matching at the national level, taking into account congestion improvements; a similar optimisation could be extended to TAM to improve the overall efficiency.
Further, to enhance transparency and competition, the CEA has recommended specifying minimum durations for the bid receiving window and IPO auction. Moreover, reverse auctions should be conducted only during regular working hours.
Conclusion
In conclusion, the proposed reforms by CERC represent a critical step towards enhancing transparency, efficiency and competitiveness within India’s power markets. By refining contract structures, optimising auction mechanisms and standardising timelines, these measures aim to strengthen market integrity and ensure more responsive, accessible and robust energy trading platforms.
Aastha Sharma