At a recent Power Line webinar on “Transforming Power Markets: The Promise of Financially Settled Contracts”, organised in association with the Regulatory Assistance Project, leading experts came together to discuss the opportunities, challenges and practical pathways for implementing financially settled contracts (FSCs) in India’s evolving power market. The event included interactions with Sushanta K. Chatterjee, Chief (Regulatory Affairs), Central Electricity Regulatory Commission; Amit Kapur, Partner at, JSA Advocates & Solicitors; and Dominic Scott, Senior Associate at the Regulatory Assistance Project. The discussion reflected a range of perspectives among the speakers, particularly on the extent to which current market design creates inefficiencies in scheduling and dispatch, and how far FSCs can address these challenges…
A case for financially settled contracts
The webinar opened with an overview of different types of contracts and how FSCs – which do not provide for transfer of ownership of physical energy – differ from other contracting forms like PPAs – which do. A principled case was made for FSCs, in unlocking scheduling efficiencies, supporting availability when it matters, and lowering costs borne by the consumer.
FSCs are increasingly being viewed as a key step in the evolution of India’s electricity market. It has the potential to improve scheduling and despatch efficiency, deepen market participation and create stronger economic signals within the power system. However, the transition towards such mechanisms involves far more than simply introducing market-linked contracts. The challenges associated with legacy PPAs, discom finances, operational reliability and grid constraints remain substantial.
A purely energy-only market structure is unlikely to be sufficient for ensuring long-term reliability and investment adequacy. Therefore, there is broad support for a calibrated and phased transition that combines FSCs with capacity remuneration mechanisms, ancillary services and robust system operation frameworks.
Despatch efficiency and constraints
The Indian power system is built on security constrained economic despatch, which ensures the efficient use of resources that are made available. However, under the present PPA structure, inefficiencies may arise because incentives for over-performance are weak, under-performance penalties are limited and generators often face restrictions on selling power outside their contracted arrangements.
This can lead to inefficiency in scheduling. It can also affect despatch inefficiency – for instance when PPA contracts restrict opportunities to sell to the market this not only affects scheduling but also later despatch.
FSCs can be accommodated in resource adequacy frameworks
Concerns have been expressed that energy-only markets may not provide sufficient incentives for long-term investment in generation capacity. Electricity markets in several Western countries have faced what is often referred to as the “missing money” problem, where generators are unable to recover adequate revenues through energy markets alone.
Such cannibalisation effects are increasingly being recognised as a major risk in energy-only market structures. As renewable generation expands, market prices during high renewable output periods may collapse, reducing revenues for conventional generators that are nevertheless required to maintain system reliability. For this reason, many international markets have gradually moved towards capacity market mechanisms that provide assured capacity remuneration, in addition to energy market revenues. Similar concerns are now being discussed in the Indian context as well.
The proposed capacity remuneration mechanism framework seeks to address some of these concerns by introducing guaranteed capacity payments. Although the proposal does not provide full cost recovery in the manner of traditional PPAs, it includes concepts such as the net cone approach and also considers the use of contract for differences (CFDs – a type of financially settled contract) within the broader market structure. This shows FSCs can function as a component within a broader market architecture that ensures resource adequacy.
Legacy PPAs and transition challenges
One of the critical barriers to FSC implementation is the existence of long-term legacy contracts. A very large share of India’s installed generation capacity remains tied to long-term PPAs, making a rapid transition towards a market-linked structure extremely challenging. These contracts provide generators with both price certainty and payment security. Moving away from such arrangements would, therefore, require strong incentives and carefully designed transition mechanisms.
Legacy migration can prove to be the most complex aspect of the entire transition process. In this context, several experts suggest that pilot projects involving new generating assets or plants with expiring contracts may be more appropriate starting points. A phased approach is, therefore, widely considered necessary. Instead of pursuing a nationwide migration, reforms may initially focus on specific market segments or new resources where transition risks are relatively lower.
Discom finances and payment security
The financial condition of discoms continues to pose another major obstacle to the adoption of FSCs. The Indian power sector already faces extremely high levels of regulatory assets, accumulated dues and outstanding borrowings. The FSC framework assumes timely and automatic settlement of payments between counterparties.
However, such assumptions may not hold in a system where many state-owned discoms already carry large outstanding liabilities. Ensuring payment security is, therefore, viewed as a critical prerequisite for successful implementation. Without credible settlement systems and stronger financial discipline, market-linked frameworks may struggle to gain confidence among generators and investors.
Concerns also remain regarding tariff structures and cost recovery. In several states, tariff revisions have not kept pace with rising power procurement costs, further increasing the financial stress on utilities. Additionally, carrying costs associated with regulatory assets worsen the situation. Given these realities, financial reforms and improved discom viability must accompany any transition towards FSCs.
Grid constraints and operational challenges
Grid readiness represents another major challenge. Recent instances of renewable energy backing down because of transmission constraints have highlighted certain limitations of the current infrastructure. The assumption that electricity can flow freely based only on economic signals is, therefore, viewed as unrealistic under the current system conditions. Physical constraints continue to play a critical role in determining despatch outcomes.
Operational complexities such as start-up costs, no-load costs, ramping constraints and minimum downtime requirements further complicate market design. International experience shows that such complexities often require sophisticated optimisation frameworks beyond simple least-cost despatch mechanisms.
Discoms’ concerns under the FSC framework
Under the current structure, discoms effectively exercise despatch rights over generating stations through long-term PPAs. Under the proposed capacity market-based framework, however, the system operator would undertake real-time despatch optimisation, based on economics and grid conditions.
Under the CfD capacity market proposals the actual power may not necessarily come from the same generating station. However, discoms could benefit from improved efficiency and lower procurement costs. Under market-based despatch, discoms are expected to receive power at the price they bid or even lower. Financial settlement mechanisms such as CfDs are also expected to protect them from adverse price outcomes.
Need for regulatory and institutional reforms
The implementation of FSCs would require targeted regulatory and institutional changes across the power sector. Existing scheduling and despatch regulations would need to be redesigned to accommodate market-linked despatch structures. Further, market reforms must be supported by complementary measures related to ancillary services, storage systems and grid support infrastructure.
Institutional confidence-building measures will also be essential. Energy resources like generators must be assured of fixed cost recovery subject to performance when it matters, while discoms must be protected from excessive volatility and supply risks during the transition period. A phased and state-specific implementation strategy is, therefore, considered crucial.
Additionally, the transition should initially focus on areas with high quality demand growth, such as data centres and global capability centres, where consumers may be willing to pay premium tariffs for reliable power supply. At the same time, socially sensitive consumer categories such as agriculture and small enterprises may require continued protection during the early stages of market reform.
Conclusion
Overall, successful implementation will depend on balancing market efficiency with reliability, affordability and public service obligations. A carefully sequenced road map supported by regulatory clarity, financial reforms and institutional confidence-building measures will be essential for ensuring that FSCs contribute effectively to the future development of India’s power sector.