Look before you leap | The Financial Express

Look before you leap

The Security Constrained Economic Dispatch pilot shows it works well. There are perhaps greater risks involved in starting something new like the Market Based Economic Dispatch

Look before you leap
About Rs 2,070 crore (about Rs 2 crore per day) has been saved in two years by burning less coal. (IE)

By SK Soonee and Somit Dasgupta

In the recent past, there has been some debate regarding the economic dispatch in India. The Market Based Economic Dispatch (MBED) is a new system of scheduling for the power sector which was to be implemented, at least on a pilot basis, from April 2022. It is understood that the central regulator isn’t fully convinced as yet about the efficacy of this scheme, and is holding more consultations. Each generator has its identified beneficiaries (distribution companies, or discoms) or conversely, each discom has its identified set of power purchase agreements (PPAs), mostly with a two-part tariff with fixed and variable costs. Any discom can schedule power from its own set of PPAs and cannot schedule power in real time from some other discom’s PPA unless through advance bilateral trade. This leads to inefficiencies in the system since many times, a more expensive generator may be generating and feeding into the grid whereas a relatively cheaper generator may be sitting idle since it was not scheduled by its beneficiary who anticipated a drop in demand and so on.

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MBED asks each generator discom to quote a bid in the day-ahead market of the electricity exchanges. This quote will indicate how much is demanded/supplied at a given price. On the basis of these quotes, a national demand and supply curve will be drawn up, the intersection of which will give the market clearing price (MCP). All generators who quote below the MCP will be asked to dispatch and will be given the MCP, irrespective of how much they quote. In essence, only the relatively economical generators will generate, starting from the cheapest and moving up thereafter till one reaches the MCP. The MBED system, therefore, endeavours that a costly generator does not generate while a cheaper generator sits idle.

While this system is being pushed, another system, called the Security Constrained Economic Dispatch (SCED), has been in operation since April 2019 and still continuing as a pilot trial. This trial was initiated at the instance of the Central Electricity Regulatory Commission (CERC). Under the SCED, scheduling was done as is being done now and only after this process was completed, the national load dispatcher (POSOCO) moved in to ascertain every 15 minutes in real time whether any relatively cheaper generator is sitting idle on a pan-India basis. If so, the efficient generator was asked to ramp up its generation and the costly generator was asked to back down.

By now, about 60 GW of inter-state generating capacity is under the SCED scheme and the variable per unit cost of generation varies from Rs 1-4. About Rs 2,070 crore (about Rs 2 crore per day) has been saved in two years by burning less coal. There was a reduction in the average cost of generation of about 2 paise per unit. Besides this, SCED ensures that PLF of cheaper plants improve. There was also a decrease in the carbon footprints of the power sector. Moreover, using less coal also had the salutary effect of easing the congestion on railway tracks.

While both the MBED and SCED would endeavour that one meets the demand for power efficiently, their approach is different. MBED relies on the creation of a market which by itself is a complex exercise. Apart from rewriting regulations, there are legal complications since one would be overriding the current system of scheduling based on PPAs, which are legally binding contracts. One would also need to have a market coupler whose job would be to determine a single day-ahead price pan-India, based on the three different day-ahead prices which would be determined in the three exchanges in operation today. There are nuances of single-part versus multi-part tariffs (since some plants, though miniscule, operate on a single-part tariff as they don’t have PPAs) and need reforms in PPAs. In the case of SCEDs, the system is working well during the pilot phase and it can be concluded that there are greater risks involved in starting something new like the MBED.

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Though some simulation studies (based on data from five states) have showed that monetary benefit of about Rs 5 crore per day (more than that under the SCED with only interstate generators) is achievable under the MBED, when all the state generators are included, one should bear in mind the issues that may surface during settlement when all the state generation are brought in MBED. Freedom and choice are the hallmarks of any market design, particularly in a federal structure. It is recommended to expand the scope and ambit of the SCED in a layered structure and introduce the same at the state level by implementing the Forum of Regulators (FOR)-approved recommendation in the SAMAST (scheduling accounting and metering of transactions) report before taking a quantum jump towards the MBED. As the proverb goes, look before you leap.

Writers are respectively, former and founder CEO, POSOCO, & senior visiting fellow, ICRIER and former member, CEA

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First published on: 29-10-2022 at 04:00 IST