FDI in power exchange business soon

Written by Rajat Guha | Rajat Guha | Subhash Narayan | New Delhi | Updated: Feb 29 2012, 07:08am hrs
The government will soon allow foreign investment in the countrys fledgling power exchange business. The Foreign Investment Promotion Board (FIPB) and the department of industrial policy and promotion (DIPP) have come around the view that the overall foreign investment in the sector may be capped at 49%, on a par with the level for the commodity exchanges. Of the 49%, 26% will be foreign direct investment (FDI) and the balance, foreign institutional investment (FII).

The DIPP is likely to issue a press note to this effect in the next few days, official sources said.

The policy is expected to give comfort and clarity to foreign investors and help existing bourses get funds to scale up their operations. Currently, there is no clarity on whether foreign investment is allowed in power

exchanges as this activity

is not defined in the note on foreign investment in commodity exchanges. The proposed press note will remove this ambiguity.

The commodities exchanges also have sub caps for FDI (26%) under the

overall foreign investment cap of 49%.

However, the DIPP is likely to stipulate that private power trading companies wanting to accept FDI must comply with the Central Electricity Commission's (CERC) power market regulations of 2010. Also, the FDI proposals will be routed through the FIPB.

The proposal of ex-ICICI Ventures head Renuka Ramnath to pick up minority stake in Jignesh Shah-promoted Financial Technologies' Indian Energy Exchange (IEE) is likely to be the first FDI proposal in the sector to come up before the FIPB.

At present, India has two functional power exchanges, the other being National Stock Exchange-promoted Power Exchange India.

The central electricity regulatory commission (CERC) is thinking of introducing some innovative, power exchange-based electricity trading instruments that would deepen the short-term electricity market and encourage investment in merchant power generation capacity. The regulator is also mulling a move towards capacity trading to reduce the incidents of low grid frequency and improve the quality of power supply.

For example, the CERC is planning to introduce instruments like shorter bidding time block for day-ahead trading at power exchanges that would overcome the problem of transmission network congestion and make it easier for buyers to forecast their electricity demand. Currently, only generated power is traded. But now the CERC wants to usher in trading of power capacity.

The volume of power sold through inter-state trading licensees has increased from 12 billion units (2.16% of total generation) in 2004-05 to 59 billion units (11.54% of total generation) up to October 2011, representing more than four-fold growth in seven years. During the current year, the transactions comprise about 88.5% through long-term, 8.2% through trading (6.4% bilateral and 1.8% power exchange) and 3.3% through balancing market.