By Raj Pratap Singh
A market reform in the Indian power sector is overdue as the market has stagnated at less than 10% of total generation. Out of the total market size of around 1,400 BUs, the share of exchange-traded power is a meagre 7% or about 100 BUs, and the remaining is transacted through long-term power purchase agreements (PPAs) or on over-the-counter (OTC) platforms such as DEEP or PUShP. Currently, three power exchanges (PXs)are operating under the framework of PMR 2021.
A CERC staff paper was issued in August 2023 to solicit views on introducing power market coupling. The stated objectives of coupling include the discovery of a uniform market clearing price for the day-ahead market, real-time market, or any other market as notified by the Commission; optimal use of transmission infrastructure; and maximisation of economic surplus. However, the real concern is the limited market share of the two PXs besides IEX. Thus, regulatory intervention to change the market design in order to simply increase the volume of non-performing power exchanges is highly unjustified. The move may increase market share of non-performing exchanges in the near-term, but it will prove to be a value destroyer in the long run.
The concept of market coupling was initially introduced in the EU power market with the primary objectives of integrating different geographical markets and optimising cross-border transmission infrastructure. The volume of power traded on the EU exchanges is high in size as compared to India.
In the European exchanges, regions are divided into bidding areas by the relevant transmission system operator (TSO) to manage congestion in the electricity grid. There is no TSO in India, as Grid India (formerly NLDC/POSOCO) is the authorised independent system operator (ISO). We have a national grid, and for trading purposes, it is divided into 13 bidding areas with interconnected transmission.
The present power market in India operates on a voluntary model where three PXs work at the national level. The proposed coupling of the Indian power market is primarily ‘price coupling’ of different power exchanges. As a result, market coupling in India would only apply to approximately 7%, leaving the remaining 93% of energy with varying prices under PPAs.
Under the proposed coupled power exchanges, existing power exchanges (PXs) would function as intermediaries and merely collect the bids, forwarding them to the MCO for price discovery and conveying the price discovery results. Besides being anti-competitive, this arrangement would provide power exchanges with no incentives to improve their product offerings, innovate, or further develop the market. The proposal will thus end up diminishing the role of the three exchanges, reduce them to mere passive bid collectors, and hurt their growth prospects in the long run. Consequently, it could also negatively impact investment flows and hinder market development.
On the other hand, the MCO, being a monopoly entity without direct customer interaction, would need more incentives to introduce innovative products. This may be the key reason why the financial securities regulator Securities and Exchange Board of India (Sbi) still has not implemented market coupling for security trading exchanges.
The concept of MCO has been taken from the European market, where the entity acts as a price-discovery mechanism for cross-country trading for power that is carried out by different transmission networks. The Indian electricity market is different from its European counterpart. In the Indian context, the objectives of market coupling are already largely fulfilled, as all regions are already geographically integrated, utilising a common transmission infrastructure efficiently. Hence, the proposal to introduce market coupling is not a collaborative initiative of the three PXs, with the objective to integrate different geographies. Therefore, this approach is regressive as it will hamper healthy competition and can promote free-riding behaviour among exchanges.
GRID INDIA or NLDC is prohibited from trading business as per the first proviso of Section 26(2) due to potential conflicts of interest, particularly in price discovery, which is an integral part of trading. An ISO, as an MCO, shall face a conflict of interest, as it could benefit from cost savings in its ancillary services, which occur after the gate closure of bids and balancing. Transferring competences from exchanges to an operator, independent or not, poses anti-competitive challenges, impacting market efficiency and fairness.
Market coupling will also mean developing a new, shared algorithm to underpin the implementation of the framework. This will necessitate a complete reset, effectively nullifying the investments made by exchanges thus far and the knowledge and experience garnered by the trading community.
The current circumstances do not favour the introduction of market coupling in Indian power exchanges solely for price discovery. Even if implemented, market coupling is unlikely to significantly impact electricity transaction prices in India due to the relatively low share of exchange trade and the entire volume being with one exchange. At its current stage and shape, this introduction will disrupt the sequence of power market reforms, increase operational expenses, introduce inflexibilities, and stifle innovation within the market. Implementing coupling before achieving a substantial market share of exchange-traded power is unlikely to add value, enhance market depth or increase social welfare. Moreover, high implementation costs, and risk of market disruption and failure make it counterproductive.
The proposed coupling thus should not be implemented as it fails to achieve any objective and provide any benefit to either exchange participants or end consumers.
The writer is retired IAS officer and former chairman of the Uttar Pradesh Electricity Regulatory Commission