FE Editorial: Getting power trading right

Written by The Financial Express | Updated: Apr 30 2010, 05:14am hrs
The reported move of the Central Electricity Regulatory Commission (CERC) to discourage power trading through unscheduled interchange (UI) and encourage greater use of power exchanges by imposing an additional charge of 40% on UI trading is a welcome step. The UI mechanism, an indigenously developed innovative model that had successfully enforced greater grid discipline, is now creating distortions in the market as many potential buyers preferred to use the UI mechanism for trading instead of the exchanges. In fact, numbers for 2009 show that although the volume of the short-term power trade through UI transactions was comparable to transactions using trading licences and much higher than that through even the two power exchanges. The UI mechanism originally evolved in response to the chaotic conditions in an earlier era, where grid operators were faced with the challenge of relentlessly enforcing some semblance of order, as power producers and distribution utilities pumped in or withdrew power from the grid with impunity, thereby threatening the very reliability of the network. The UI mechanism replaced this command and control system with a contractual approach under which a schedule of supply and demand for power was worked out and priced as per the agreement between buyers and sellers. Any deviations from meeting this previously agreed demand-supply schedule are termed unscheduled interchanges or UIs and the suppliers or purchasers have to pay for their errant behaviour at a real-time market determined rate. This not only encouraged greater grid discipline but also ensured some flexibility in operations. The UI prices also served as an indicative ceiling for traders in bulk electricity as the utility had the option to overdraw from the grid instead of buying from other sources in the short-term markets if the real-time prices were lower than those of the traders or in the power exchanges.

But over time, the UI mechanism has slowly evolved to become an alternative mechanism to formal trading as the potential buyers preferred to use this mechanism wherein the cost of transactions was lower as were power prices. In 2009, the average price of electricity transacted through traders was Rs 6.41/kWh, while it was Rs 5.73/kWh in the power exchanges and just Rs 4.99 for UI transactions. This has also created new problems for the transmission networks as the UI electricity transactions are very uncertain, forcing them to keep, as reserves, a relatively larger proportion of transmission capacity. The result is a distortion of the markets, which suggests that the UI system has outlived its utility. It is time to move ahead and work out new models for enforcing grid discipline.