07 Sep 2020

Central Electricity Regulatory Commission (CERC) recently issued a draft regulation for power markets. The regulation is aimed at improving transparency in market trading and lay groundwork for derivative trading in near future.  

Figure: Power traded through short-term markets

Source: CERC annual market monitoring reports

One of the most important proposals is to set up a market coupling operator for discovery of a common clearing price across all power exchanges for day-ahead (DAM) and real-time (RTM) instruments. However, the justification provided for introduction of this operator is not entirely convincing. CERC claims that harmonisation of prices across power exchanges would lead to optimal utilisation of the cheapest sources of power and transmission corridors. The commission also claims that a common market price is necessary to benchmark financial derivatives and contracts expected to be launched soon.

Surprisingly, the commission has made no mention of market-based economic dispatch (MBED, mooted in 2018) in the draft regulations. MBED aims to maximise utilisation of power plants with low variable charge, potentially requiring all power plants, even those with existing long-term PPAs, and DISCOMs to trade electricity through power exchanges. If achievement of optimal utilisation of cheapest power plants is indeed the objective, MBED should have been central to these regulations. CERC has claimed annual savings of INR 62 billion (USD 831 million) in a simulation conducted for Andhra Pradesh, Karnataka, Telangana, Maharashtra and Chhattisgarh.

With respect to benchmarking to a common price, there is no such precedent in other markets. The two national stock exchanges trade independently with separate derivative contracts. Further, any difference in prices at two or more platforms is bound to diminish overtime.

Another proposal in the draft regulation envisages setting up an OTC trading platform with information of all buyers and sellers. We believe that this measure would increase transparency in the bilateral market and potentially increase trading volume and competition.

The draft regulation also includes a brief mention of ancillary services and capacity contracts but falls short of providing any details, operational guidance or implementation timeline for either of the two contracts. Lack of operational guidance for these contracts or clarity on introduction of MBED makes this draft regulation a missed opportunity in our view.

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