CERC norms: ‘Market coupling’ mechanism for spot power market gets a leg-up

By: |
February 19, 2021 5:15 AM

Analysts said the new regulations will help increase the share of spot power in electricity purchased by discoms and large industrial consumers.

The move is seen to dent the market dominance of the Indian Energy Exchange (IEX), where currently around 94% of the spot market transactions take place and catalyse formation of new exchanges.The move is seen to dent the market dominance of the Indian Energy Exchange (IEX), where currently around 94% of the spot market transactions take place and catalyse formation of new exchanges.

The Central Electricity Regulatory Commission (CERC) has introduced the ‘market coupling’ mechanism for spot power trading, a move which could align spot prices within same geographical areas and time slots, and encourage exchanges to attract consumers via improved quality of supply, payment flexibility, etc.

The move is seen to dent the market dominance of the Indian Energy Exchange (IEX), where currently around 94% of the spot market transactions take place and catalyse formation of new exchanges.

A competitive market might also increase the options of discoms and other consumers when it comes to purchasing spot power according to their requirements. Effectively, they might be able to cut costs.

Analysts said the new regulations will help increase the share of spot power in electricity purchased by discoms and large industrial consumers.

Currently, short-term power market comprise barely 10% of total electricity procured in the country while the balance of generation is consumed by discoms and other large consumers through long-term contracts with generators and short-term intra-state transactions. Between FY10 and FY20, the volume of short-term transactions of electricity increased annually at 8% while gross electricity generation increased 6% every year.

In its latest power market regulation, the CERC also capped the transaction fee charged by the exchanges to two paise per unit. Though the rate is similar to the current margin levels earned by exchanges, the role of the regulator was restricted to oversight under the old regulations while the board of exchanges would determine the margins.

“These regulations shall come into force from the date to be separately notified by the Commission,” the CERC said. The new norms would likely be implemented only once the Supreme Court gives the final judgment on the Sebi-CERC case, analysts pointed out. The two regulators have moved the apex court to ascertain who will regulate electricity derivatives trading.

Through the market coupling approach, orders received from multiple power exchanges will be combined and cleared by a common algorithm, resulting in a single price for the same delivery periods and geographies. “Once market coupling is applied, exchanges would be reduced to bid aggregators, which in turn would diminish the competitive advantages enjoyed by the IEX,” analysts at DAM Capital pointed.

The new regulations are also seen to be significantly reducing the entry barriers for new entrants in the exchange space, challenging IEX’s domination. Apart from IEX, the only other power exchange existing in the country is PXIL. Pranurja Solutions, promoted by BSE, PTC and ICICI Bank, is also currently procuring the necessary approvals for setting up another power exchange.

“The price differences between the two exchanges are used by participants to compute the notional gains and losses on a daily basis, which in turn determines whether to continue participation on both the exchanges or not,” Prabhajit Kumar Sarkar, CEO, PXIL, told FE. “The fear of different prices has led market participants flock to only one exchange, giving it the advantage of higher liquidity,” Sarkar added.

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