Trading has been the part and parcel of the life ever since the human being evolved on the planet. But there has been a continuous development in the techniques of trading because of the improvement of technology. Even though some of the discoveries have taken place by accident, most of the discoveries are a result of decades of research and involvement. A major break-through in trading in India came after the formation of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). Both these exchanges are globally well regarded and are amongst the largest in the world. Now, the power is considered as a resource which can be traded. Hence, the concept of power trading has come into existence.
Power Trading in India:
Historically the main suppliers and consumers of electricity in India have been the various govt. controlled generation and distribution companies who contracted power on a long term basis by the way of Power Purchase Agreements (PPAs) with regulated tariffs. However in order to encourage the entry of Merchant Power Plants (MPPs) and private sector investment in power sector, the Electricity Act, 2003 recognized power trading as a distinct activity. This has facilitated the development of power trading market in India by providing the transmission networks for open access at normative charges. The power trading is conducted through the power exchanges.
Power Exchanges in India:
It is an electricity market where electricity is traded. The market forces like demand and supply determine the prices. The business of power exchange is carried out to promote, facilitate, assist, regulate and manage dealings in power.
The features of the power exchange are as follows:
Automated online electronic platform which is nationwide.
Allows voluntary participation of buyers and sellers.
Transparent, Neutral and unbiased System.
Offers day ahead and term ahead markets.
Its time line consistent with the time line of Load dispatch centres.
According to the Electricity Act, 2003, the energy investors are allowed to set up the power exchanges. So, on a power exchange, the traders are from a large geographical spread and they converge without their identities being revealed. The anonymity of the traders is maintained so that market manipulation is thwarted and a true market driven power economy is enabled.
As of today there are two power exchanges functioning in India. They are:
Indian Energy Exchange (IEX).
Power Exchange India Ltd. (PXIL).
A third power exchange, the National Power Exchange (NPEX), is also currently in offing.
India Energy Exchange (IEX):
IEX is India's first nationwide, automated and online power trading platform. It attempts to catalyze the development of electricity trade in India by ushering in a neutral and transparent market through a technology enabled platform. IEX received approval from CERC on 9th June 2008 to commence its operations. It is a demutualised exchange that facilitates efficient price discovery and price risk management in the electricity market. It is promoted by Financial Technologies (India) Ltd. and PTC India Financial Services Ltd. (PFS). The other stake holders of the company are Adani Enterprises, Infrastructure Development Finance Company (IDFC), Jindal Power Limited, Lanco Infratech, Reliance Energy, Rural Electrification Corporation and Tata Power Company. The clearing banks of IEX are HDFC bank, Indus Ind Bank Ltd. and State Bank of India.
Power Exchange India Ltd. (PXIL):
PXIL is India's first institutionally promoted power exchange. It is promoted by National Stock Exchange of India Limited (NSE), and the National Commodity & Derivatives Exchange Limited (NCDEX). The other stakeholders of the exchange are Power Finance Corporation Limited, Gujarat Urja Vikas Nigam Limited, West Bengal State Electricity Distribution Company Limited, Madhya Pradesh Power Trading Company Limited, JSW Energy limited, GMR Energy Limited and Tata Power Trading Company Limited. It received its approval from CERC on 30th September 2008 to commence its operations. It started its operations on 22nd October 2008 after receiving the final approval from NLDC. The initial products offered for trading are voluntarily participated electricity contracts offered on daily basis. It received further approval to introduce long tenure physical products of weekly and day ahead contingency products.
National Power Exchange Ltd. (NPEX):
NPEX will establish, operate and manage specialized automated electronic platform with modern facilities. It plans to facilitate nation-wide trading in all types of contracts for buying and selling of all forms of electrical energy, ancillary services and products, transmission rights etc., including derivatives. It also promises to have the clearing and settlement process which is transparent, fair and open with non discriminatory access to all players in the power market. NPEX is planned to be set up with a proposed authorised capital of Rs. 500 million. The NPEX is expected to begin operations by end of 2010 or early 2011. NPEX is promoted jointly by the three public sector units NHPC Ltd., NTPC Ltd., Power Finance Corporation Ltd. and the IT major Tata Consultancy Services Ltd.
Infrastructure model of Power Exchanges:
A modern power exchange is completely electronic and wire-driven and consists of the following players and systems:
Buyer
Seller
Regulator
Trading / Bidding Platform
Risk Management System
Surveillance System
Clear and Settlement System
Website / Media Interface
i) Buyer:
One who places a request to exchange to procure electricity is called as a Buyer. The necessary legal and compliance requirements are to be completed to consider buyer as a member of exchange. In a power market the buyer would be a power trading or power distribution company. The company first buys the electricity and again sells it through the exchange. A data link is used by buyer to connect to the power exchange. The exchange allows the buyer to have the data link through an internet leased line platform secured for trading or a private leased line.
ii) Seller:
One who places a request to exchange to sell electricity is called a Seller. As in the case of buyer, the seller also is required to complete the necessary legal and compliance requirements to be considered as the member of exchange. The seller would be a power generating company such as a state utility selling surplus power or a merchant power plant. The connectivity and IT security norms are to be satisfied, as stipulated by the exchange to connect to the power exchange.
iii) Regulator:
The role of regulator is to understand the country's markets and amend the regulations in the interests of the users. The regulator regulate the tariffs, sets the standards for grid control and continually look for the improvements in the power market operations by monitoring every entity in the power market. It also involves the grid operator which sets practices for the stable and healthy operation of the national grid.
iv) Trading / bidding Platform:
This platform provides a neutral platform to receive the orders or bids from each buyer and seller and then match the bids to determine the best price and the corresponding volume or quantity at the best prices. The bids received would be matched based on the volume, price and time priority of the bid. The matching engine uses an algorithm devised to derive the schedules to be cleared based on the country's power market. The schedule clearing is done by the grid operator and it is communicated to the respective buyers and sellers during the time slots defined. The trades which are matched are then stored in the data base for the long term storage.
v) Risk Management System:
This system manages the day to day financial risks of the trading system. In the power exchange, the risk management has to be done between the buyers and the sellers. This system ensures that buying and selling are conducted smoothly on the exchange with no payment defaults. This system entails pay in from buyers and pay out to sellers through online system of the clearing banks which are authorised to operate with the exchange. This system would not allow a transaction unless necessary and sufficient margins are available from the bidders.
vi) Surveillance System:
This system keeps a close watch on the transactions like bids, changes in the bids before being cleared, the volumes cleared, and the correlation between the cleared schedules, bids and volumes.
vii) Clearing and Settlement System:
This system manages the receipt of the funds from the buyers, payment schedules for the sellers and margin deposits. For the receipts and payments to be properly carried after cleared sale, the sellers and buyers are required to open the settlement accounts with the clearing banks associated with the exchange. The system also provides the necessary regulatory payments such as transmission charges, grid operator charges and any other receivables from the sellers and buyers on the power exchange.
viii) Website / Media Interface:
A website provides all the information to all the parties interested to observe the market's movements. It also provides the reports and transaction details such as cleared price and volumes throughout the contract for participants. The historical data saved would be available anytime and is used or scheduling and load prediction.
Role of IT in Power Exchange and Trading:
An end user who is a member of the exchange or power trader can connect to the exchange's trading / bidding system using IT. The bidder can plan his bids by determining the schedule required for injection or withdrawal of the power. The bidding pattern available can be used as a useful tool to plan the schedules effectively.
The data transferred between the end-user and the trading system will remain intact and anonymous for any other user because of the secure sessions and multiple authentication levels for users. A system driven approach is used to retain the anonymity of the bids.
At power exchange, the core of the trading system is the electronic matching engine of bids, which determines the final despatch quantities for the buyers and sellers by working out the provisional schedules.
Power Exchange Life Cycle:
Power Markets with power as underlying commodity includes two types of trades:
Trade of power as commodity
Trade of derivative instruments
The related and ancillary products such as renewable energy certificates, energy efficiency certificates and transmission rights can also be traded when in the power market when the market matures. The renewable energy certificates program is launched in India recently i.e., on November 18th, 2010.
The power market life cycle depends on the maturity of the market with various products being introduced in the market at various points of time. In various markets abroad the time for such introductions has varied between three and eight years.
The maturity of the market depends on the following factors:
No. of active trading entities in the market.
No. of new entrants.
Volume of trading in the market.
Representative spot market prices.
Demand and Supply transparency.
Influence of dominant market incumbents.
Market Matching Mechanism in India:
The market matching mechanism currently in use is the Uniform Price Auction Mechanism which has closed double sided bidding. In this mechanism, during a window of time both the buyers and sellers put in their buy and sell trades. After the closing of the window, all the buy bids and sell offers are stacked such that there is an intersection of the demand and supply curves. The intersection of the curves gives a price which is uniformly applied to all buy bids at or more than the price at intersection, and to all sell offers at or lower than such price.
Different types of Markets in India:
Day-ahead Market:
The exchange offers a double side closed auction for delivery on the following day, on a daily basis. Price discovery is through double side bidding. The buyers and suppliers will pay and receive a uniform price.
Term-ahead Market:
The exchange offers an opportunity to the power market participants to trade in contracts for weeks, Months, Quarters, Contingency and Intraday etc.
Short -term Power Market:
On Demand Side:
The manufacturing sector has been recording a continuous growth rate. It has recorded a growth rate of 10.8 % in 2009-10. Hence to sustain and propel such growth, meeting the power requirements of the industry in a cost-effective and reliable manner becomes important. Hence securing power supply at competitive rates and at a short notice through the power trading route is fast emerging as the preferred option for several industrial consumers.
On Supply Side:
Trading volumes are increasing year by year because of the increased participation of the Captive Power Plants (CPPs) along with other private players. In the context of CPPs, the power trading option is profitable. Firstly, CPPs have the opportunity to trade the surplus power generated in the power market, thereby allowing them to enjoy guaranteed off take for any extra power produced. Secondly, power trading allows CPPs to sell their power supplies at competitive rates, thus allowing them to focus on their core activities.
Many industries invest in CPPs to have continuous power supply and also to lower their costs of production. For the production of power these industries use the internal resources like the waste gases and heat from the kiln, agricultural residue etc. This makes the CPPs to produce power at a cost lower than that purchased from the grid. This means that such industries have an advantage in the short-term power market because they can sell the power at relatively higher prices.
Facts and Figures of Short - Term Power Market:
1) Of the short term transactions, bilateral contracts executed through trading licensees and direct transfers comprise the majority at 54.21 %. Trade through power exchanges constitutes 12.21 % while Unscheduled Interchange (UI) transactions constitute the remaining short-term transactions at 33.58 %. Thus, barring UI transactions, power trading accounted for more than 66 % of the short term trade in 2009.
2) The short term power market is characterized by the low participation on the licensee side. Despite of 37 registered trading licensees as of June 2010, trading is restricted to only 16 players. The major companies among these are Power Trading Corporation India (PTC), Adani Enterprises, JSW Power Trading Company, NTPC Vidyut Vyapar Nigam Limited, Lanco Electric Utility, Tata Power Trading Company, Reliance Energy Trading.
3) In 2009, more than 30 billion units (BUs) were traded in the short term market, taking a total size of the market to Rs. 190.2 billion.
4) As of June 2010, around 7.3 BUs or 11.2 % of the electricity generated was transacted through this market.
Power Trading Volumes and Prices of 2009 and 2010:
Trading volumes in 2009-10 registered an increase of 37.3 % over the previous fiscal year. Compared to the power exchanges, transaction through trading licensees were predominant in the short term market. Against the 26.81 BUs transacted through licensees in 2009-10, the IEX and PXIL transacted 6.17 BUs and 0.91 BUs respectively.
Even though there is an increase in the trading volume, the prices came down below the 2008 levels in 2009. The weighted average prices of power traded through licensees were 9.5 % lower at Rs. 6.41 per unit and were about 24.3 % lower through power exchanges, at Rs. 5.73 per unit. Prices continued to spiral downwards till March 2010. The weighted average sale price fell by almost 46 % from Rs, 7.21 per unit from the beginning of fiscal year 2009-10 to Rs. 4.94 per unit by the end.
The trend was similar at the two power exchanges. IEX prices fell 81 % from Rs. 10.10 per unit in April 2009 to Rs. 5.58 per unit in March 2010. For PXIL, the decline was about 57 %, from Rs. 10.18 per unit to Rs. 6.47 per unit.
The reasons for the decrease in the prices are
Addition of the gas based generation capacity to meet the peak power supply.
The experience of the below average monsoons that curtailed agricultural and
industrial demand.
Power Trading Margin:
Under the Section 178 of the Electricity Act, 2003 vide notification dated January 23, 2006 the CERC was delegated with the power to cap the trading margin. But there has been a dispute on this capping because of the profiteering activities carried out by power traders and a case has been filed in Supreme Court.
The Supreme Court's final judgement stated that:
CERC has the power to cap trading margins in the power sector.
Appellate Tribunals have no jurisdiction to decide on the validity of CERC regulations capping trading margins.
All existing and future contracts are to be overridden according to the CERC regulations on trading margin.
CERC regulations can be challenged by power traders in high courts.
As per the regulations, for power sold at Rs. 3 per or less, the trading margin was fixed at 4 paise per unit and for power sold at over Rs. 3, the allowed trading margin was 7 paise per unit.
Electricity Act, 2003 - Rules of Trading:
As per the Electricity Act, 2003, trading is defined as purchasing of electricity for resale thereof. It also recognizes trading as an independent activity. The different rules of trading specified in Electricity Act are as follows:
1) No person can undertake electricity trading unless he is authorised to do so by a license issued under section 14, or is exempted under section 13.
2) The Appropriate Commission may, on application made to it under section 15, grant license to any person to undertake electricity trading in the area specified in the license.
3) A distribution licensee shall not require a license to undertake trading in electricity.
4) The Appropriate commission can revoke the license of licensee with at least three months of notice, in writing, stating the reasons on which it is proposed to revoke the license and has considered any cause shown by the licensee with in the period of that notice, against the proposed revocation.
5) The National and State Load Dispatch Centres should not engage in the business of trading electricity.
6) The Regional Load Dispatch Centre should not engage in the business of generation of electricity or trading in electricity.
7) The Central and State Transmission Utilities should not engage in the business of trading in electricity.
8) No Transmission licensee is allowed to engage in the business of trading of electricity.
9) No member of authority shall have any share or interest, whether on his name or otherwise in a firm engaged in the business of trading of electricity.
10) It shall be duty of every licensee to furnish information relating to trading such as statistics, returns or other information, as and when required and in the form and manner specified by the author.
11) The CERC can fix the margin of trading in the inter-state trading of electricity.
12) The SERC can fix the margin of trading in the intra-state trading of electricity.
Benefits of Power Trading:
The power utilities can use the power trading as a source for earning their revenue.
The state power utilities can improve their Plant Load Factor (PLF).
As it is an open market the power utilities need not back down because of the power requirement in different areas.
As the power will be available continuously there is a reduction in load shedding.
Because of the high industrial tariffs, the industrial consumers prefer to go for the short term market which created the 'Value' for power. Because of this short term market has a distinguishable shift towards realising high revenues.
Power is now recognised as a 'resource' by the state governments of Chhattisgarh, Jharkhand, Orissa, Himachal Pradesh, Jammu & Kashmir, and Uttaranchal etc.
The policies are devised for the rapid capacity additions of power.
The Independent Power Producers are encouraged to invest in generating assets through competitive tariffs.
Simply Power Trading can be considered as a paradigm shift to 'Market determined returns' from 'Cost plus return regime'.
Issues of Power Trading:
Profiteering:
Power Trading is done on the basis of energy flow from power-surplus states to power-deficit ones. This is how the states like Himachal Pradesh, which put up the power plants, earn the money. But some states are taking an undue advantage by buying power at a low-cost power from central power plants and exporting this at a huge profit to power deficit states. The pan-Indian market is also being destroyed because the power is being sold at one price locally and at a huge premium outside the state. This problem has been solved by capping the trade margins.
2. Open Access:
A key policy measure facilitated by the Electricity Act 2003, Open Access, is not yet fully operational at the distribution level. This is because of the continued reluctance of the state distribution utilities because of their fear of losing high value industrial consumers. With the state utilities taking the monopolistic position, lack of proper open access is a major hurdle for power producers in capitalising on the power trading opportunities.
3. Inadequate Power Transmission Capacity:
The growth of the power markets is shortened because of the inadequate power transmission capacity. In the past decade there has been only 6-7 % growth in the transmission network (at 220 kV and above voltages). Due to the transmission constraints, power cannot be fully transported from power surplus to power deficit areas and also open access transactions cannot be facilitated effectively. As per the CERC estimates there would have been 17 % higher transaction volumes if there had been no congestion in the transmission system.
4. Non-availability of Surplus Power:
The growth of the power markets i.e., power trading will ultimately depend on the surplus power availability. The power deficit in India continues to stay at very high evels because of the gross under achievement of capacity addition plans in the past. The power trading transactions can be increased with the increase in the availability of surplus power because in the deficit market the participants face both price and quantity risks.
5. Unreliable and insufficient grid supply:
The limited participation of the industrial consumers in trade because of the unreliable and insufficient grid supply because of the problems like frequency variations, voltage fluctuations, generation spikes, surges and sags. These problems not only lead to downtime and production losses but also lead to damage of the capital equipment. Because of these reasons industrial consumers prefer to buy power from the short-term power market.
Conclusion:
Despite of its rapid growth in the past few years the power trading market is still in the infant stage because, the volumes of electricity traded are very less when compared to the total power generated. The reason for the small share is the limited participation of the industrial consumers. As more industrial consumers begin participation, the no. of players on the buyers' and sellers' side will also increase. Along with this, when the issues like profiteering, open access, lack of transmission capacity, non availability of surplus power and unreliable and insufficient grid supply are solved the Power Trading in India will take at a very high pace making it the road ahead for the power sector.
