Power-exchange-led markets are playing a key role in India’s growth amid Covid-pain. But, the question is: Do we need the multi-exchange model when the best is being delivered already?
By S L Rao, Shruti Bhatia & Anshul Joshi
The nation has been going through an unprecedented wrath of COVID-19 pandemic since almost a year now and it has unfolded as one of the toughest challenges that mankind has known or confronted in the recent past. The pandemic has also caused an unparallel economic disruption. There is hardly any industry segment that has remained unaffected.
India’s Index of Industrial Production (IIP) is still not back at the pre-pandemic level. In FY21, the industrial sector saw an 11.3% contraction, compared to a 1% growth in the corresponding period a year ago. India’s GDP grew 0.4% in Q3 of FY21, after two consecutive quarters of recession and de-growth. In Q1 and Q2 of FY21, India’s economy witnessed a GDP contraction of 24% and 7.5%, respectively. The energy sector is no exception. As per the Central Electricity Authority (CEA) data, India’s overall electricity consumption at 1,271 billion units in FY21 is down 1% YoY. The distribution utilities have been staring at the worst financial liquidity crisis and payable to the generators have mounted to new highs.
Hence, this crisis has brought to the fore the urgent need for reforms in several areas baring which the economic growth engine may sputter. The leisurely approach towards reforms may have adverse impact and might pull down the growth and the economy further. Here again the energy and power sector reforms, structural, financial, and regulatory are no exception and needed on urgent basis.
Leading from the front
India has a vibrant but not a deep power market. The short-term power market, as it is known, since it allows procurement of power upto 365 days represents about 12% of the overall market of 1300 billion-unit that India consumes annually. The Power Exchanges represent about 50% of the short-term market. The Exchanges were established way back in the year 2008 and have come a long way since. Especially, the Indian Energy Exchange is today positioned as an institution providing the most competitive price reference and numerous important signals for the power value chain. The Exchange power market seems to have led the sector from the front during the CoVID crisis and played a significant role in supporting the distribution utilities, industries in procurement of power at competitive prices, and in a flexible manner thus helping to build the much precious financial liquidity. The implementation of the nationwide lockdown during the first two quarters of the year adversely impacted the power demand and energy consumption mainly driven by inactivity in the commercial and industrial activities. In the first two quarters of the FY21, India’s power demand was down by appx 20%. Several generators as well as the utilities who had surplus power offered their power on the Exchange platform. The adequate availability of power helped to softening of the power prices during those tough times.
In the first two quarters of the FY21, power was available at as low as Rs 2.5 per unit at the Exchange platform with average FY21 price remaining at Rs 2.86 per unit. The competitive prices coupled with flexibility, transparency and zero-risk procurement, provided an opportunity to the distribution utilities to leverage the Exchange market to optimise their power procurement costs by replacing the costlier electricity bought under the rigid long-term agreements with the competitively priced electricity on the Exchange and save as well as repair their precarious financial health. For instance, the media reports say that the Andhra Pradesh alone saved about Rs 1,000 crore during April -December’20 by way of efficient power procurement through the Exchange market. Maharashtra and Gujarat also reported huge savings by stepping up Exchange procurement and optimising their power portfolios.
Now imagine a situation if we did not have nationwide Exchange-based power markets. During the lockdown, the states and utilities would have spent even greater amount of money to procure expensive power during the crisis and would have had no place to sell their surplus power or to optimize their portfolios. Similarly, the utilities would have operated their generation power plants at sub-optimal level incurring huge costs on coal, transportation, logistics, fixed charges etc to meet the power demand of their consumers. The financial liquidity crisis at the end of distribution utilities would been seen a multiplier effect if there was no Exchange based market.
New market segments
Beside assuring uninterrupted 24*7 availability and a robust value proposition to the to the market participants, driven by the digital transformation, the Exchanges successfully turned the crisis into an opportunity by diversifying their product offering with the commencement of the Real Time Markets (RTM), Cross Border Electricity Trade (CBET) and Green Markets launching new market segments on their platform.
With the launch of real-time market, the exchange has provided the market participants an option to manage their power demand-supply variation in the most flexible, efficient, and dynamic manner, close to real-time. The RTM features 48 half-hourly auctions with a new auction window opening every 30 minutes during the day and delivery of power within 1 hour of bid session closure. The new market segment has cumulatively traded over 10,000 MU since its commencement on June 1, 2020.
Similarly, the recent commencement of the Cross Border Electricity Trade (CBET) is a first-of-its kind initiative for the Exchanges to expand their power markets beyond Indian geographies, is aimed towards building an integrated South Asian regional power market. Nepal came forward as the first country and commenced cross-border trade in Indian Exchange platform’s day-ahead market, recently on April 17. Currently, we trade about 18 billion-units in a year with Nepal, Bangladesh and Bhutan through the medium- to long-term bilateral contracts. However, according to a study by IRADe the power trade with neighboring countries has promising potential of upto 70 BU by fiscal year 2027.
The recent commencement of the green term-ahead contracts on Electricity Exchange market is a significant milestone and will act as a key enabler in efficient and effective integration of renewable energy, in line with India’s ambitious green aspiration of 175 GW by 2022 and 450 GW by 2030. With the increasing penetration of renewable power, a robust green market is the need of the hour to address the intermittency issues linked with green power adoption. The real-time, day-ahead and term-ahead electricity market, coupled with the green market offers comprehensive spectrum of choices to the market participants for electricity or renewable procurement in the most efficient and competitive manner. Going forward, further introduction of new market segments such as Integrated Green Day-ahead Market, Long-duration Green Contracts and Contract for Difference (CfD) etc., will play a critical role in deepening power market and furthering national sustainability aspirations.
So, the Exchange-led markets seem to have been playing a key role in shaping India’s energy and power future. The government also seems to not only be cognizant of all the market developments but has been playing an enabling role to deepen the power markets. As per the draft National Electricity Plan 2021, the Government has demonstrated commitment to introduce suitable market mechanisms to deepen the markets by enhancing its percentage share to about 25% by the year 2023-24. These mechanisms may include capacity markets, new green markets besides other market products to foster greater competition, flexibility, and efficiency in power sector. The increasing consumption, phasing out of old and inefficient plants, ample merchant capacity, favourable policy and regulatory drivers, declining input costs of coal and natural gas, new products and diversification initiatives by power exchanges, will truly unleash new, efficient, competitive and sustainable energy order in the country. Having said this, a question that remains to be answered is about the value and worth of multi-exchange model that we have adopted basis the 2006 paper of CERC. Do we really need many power exchanges when we have the best being delivered already?
Rao is former chairperson, CERC, & member, Advisory Board, Competition Commission of India. Bhatia and Joshi are, respectively, head, corporate communications, and senior executive, IEX Limited