1. Indian Energy Exchange may be in for a serious jolt; here’s why

Indian Energy Exchange may be in for a serious jolt; here’s why

Baruch Spinoza, a Dutch philosopher, had sagely remarked, “He who seeks to regulate everything by law is more likely to arouse vices than to reform them.”

Published: December 30, 2016 6:34 AM
Central Electricity Regulatory Commission, short-term transaction, STOA, Energy Exchange Baruch Spinoza, a Dutch philosopher, had sagely remarked, “He who seeks to regulate everything by law is more likely to arouse vices than to reform them.” (Source: IE)

Baruch Spinoza, a Dutch philosopher, had sagely remarked, “He who seeks to regulate everything by law is more likely to arouse vices than to reform them.” Recently, the Central Electricity Regulatory Commission (CERC) has proposed to jack up short-term inter-state transmission charges by 1.35 times, in its zest to incentivise long-term access to the national grid. This will give a serious jolt to the growing market for short-term transaction of power.

The argument given in favour of the regulation is that the volume of short-term transaction has grown significantly from 25 billion units (BU) in FY09 to 64 BU in FY15, accompanied with the plummeting prices, from R7.29 per unit to R4.28, respectively. The prices are hovering around R2.5 per unit these days. The trend is likely to shift more customers to short-term transactions. The CERC argues that this shift of generators to the short-term open access is impeding the transmission planning process that is largely driven by the long-term open access to the inter state transmission system (ISTS) grid sought predominantly by generators. This scenario is likely to lead to under-building of transmission capacity and thus to congestion.

The evolving proposal is likely to have an adverse impact on the balance-sheet of the Energy Exchange. In 2008, the Energy Exchange was started, amid much scepticism as there were doubts on their effectiveness in a largely energy-deficit nation. In fact, the Indian Energy Exchange (IEX) became the first across the globe to operate in a supply-deficit scenario. Over the last several years, the evolution of the exchange has outperformed expectations as it provided a platform for optimisation of available generation capacity at the national level, which would not have been possible otherwise.

Open access was the supporting pillar for achieving the phenomenal growth of the Energy Exchange, but still it could not be implemented in true spirit due to the lack of enabling regulations. In fact, the above proposal has been in contravention of the basic ethos of the Electricity Act 2003, which calls for non-discriminatory open access to be provided to all the consumers. Also, short-term open access (STOA) is allowed only on the surplus margin of the transmission system, which is likely to remain unutilised and is additional revenue. STOA is accorded the least priority for allocation and the top for cancellation. Charging abnormally high for something which is used to meet demand variation is certainly unfair to short-term consumers.

Of the total power generated in the country, a very meagre amount—3-5%—is being traded on the Energy Exchange. For perspective, the total volume traded on the Nord Pool Spot in 2015 was 489 TWh, more than 80% of the total Nordic/Baltic consumption. At present, exchanges operate with a limited portfolio focussing on the short-term demand of energy. Forward delivery based contracts must be introduced in the exchanges. This would provide another window to the market players in the not-so-short-term. Exchange may be an effective platform for providing hedging options to the market participants. Needless to say, introduction of such financial products has proved to be very successful in developed markets, one example of this being Nord Pool. Energy exchange can play a big role in development of ancillary services market which will facilitate procurement of real-time active and reactive power to operate the system reliably.

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In fact, in the current scenario, there is an imminent need to promote the Energy Exchange which will play a pivotal role in managing the intermittent renewable energy generation for which the government has an ambitious target of 175 GW by 2022. The market is already facing constraints regarding the volume of electricity transacted, mainly due to transmission congestion, and therefore the large-scale integration of renewable energy would exacerbate the problem. Also, due to large scale variations in the demand pattern across the country, it is prudent for discoms to have the right mix of long-term and short-term procurement of power.

The government is already in the process of identifying the transmission corridor on the basis of General Network Access (GNA) requirement to reduce congestion in the power supply. The CERC, in one of its consultation paper, has already said, “Since a strong all-India mesh grid would emerge by the end of the twelfth Plan period, i.e., FY17, it should be possible to do planning with fair degree of certainty without prior knowledge of pairs of injection and drawal.” This approach is being completely contradicted by the premise that increasing short-term transaction of power is leading to congestion in the grid and also affecting the transmission planning, typically for long-term transactions.

With the government planning the creation of a regional grid in South Asia as per the SAARC Framework Agreement for Energy Cooperation (Electricity) 2014, the Indian Electricity Exchange would aim to spearhead the regional integration of the wholesale market in these countries. All these potentials of the exchange may be realised only when the CERC supports these initiatives with enabling regulations. The power ministry has already issued guidelines to facilitate cross- border trade of electricity and the CERC will be framing the regulations for the participating agencies. But, regulations like these will kill the very essence of competitive power under open access.

In a nutshell, at present, the exchange is at a juncture where participants are looking for the introduction of innovative products on the platform that would provide a choice for transacting in power. It aspires to spread its wings to countries in the SAARC region for cross-border trade. There is a no need for any degenerative regulation which may dampen the spirit of development of a competitive market for electricity in the country.

Purnendu K Chaubey
The author is vice-president, Kalpataru Power Transmission

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