Trading Options

Growing role of short-term market in meeting power needs

Facilitated by traders and exchanges, the short-term power market is playing an increasingly important role in meeting the short-term seasonal demand of the sector.

This is reflected in the growing share of the short-term power market in total power generation. Its share increased from 6.1 per cent in 2008-09 to 10.6 per cent in 2015-16 (as of February 2016). In volume terms, the market grew at a compound annual growth rate (CAGR) of 4.96 per cent from 2010-11 to 2014-15. The options available for power procurement in the short-term power market include buying power directly from generators through one-to-one contracts, from power trading licensees wherein traders have contracts with the generator, from power exchanges, and lastly through unscheduled interchanges (which is essentially a grid management tool but is used by suppliers and distribution companies to feed or draw power over and above what is scheduled).

Of the various options under the short-term arrangement, the one that has seen considerable growth is power exchanges. In 2014-15, 30 per cent of the total power in the short-term market was traded through exchanges.

Market structure

Interstate trading licensees have been undertaking electricity trading since 2004. The number of traders (trading bilaterally or through power exchanges) increased from four in 2004-05 to 28 in 2014-15. The increase in competition has resulted in an increase in volumes and a decrease in prices in the short-term bilateral market.

The top 10 traders constituted 88.4 per cent of the total volume of electricity traded through trading licensees in 2014-15, reflecting a decrease of 0.68 per cent from 2013-14.

PTC India Limited is the leading trading licensee, with a 33.12 per cent share, followed by the JSW Power Trading Company with a 8.47 per cent share and the Tata Power Trading Company with a 9.56 per cent share. Reliance Energy Trading, which was the fourth largest trading licensee in 2013-14, witnessed a declined in its share by 5.31 percentage points in 2014-15.

Licensed power traders have a broad-based product portfolio ranging from same-day delivery contracts to long-term power purchase agreements. These include products like round-the-clock (RTC) power, evening or morning peak, other than RTC and peak (including afternoon or night off-peak power), etc. Within these categories, they also provide specific products like day-ahead, first come, first served, specific time blocks for 6 to 18 hours, weekend or holiday power, and energy banking.

Currently, there are two energy exchanges in India, the Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL), which provide an automated online platform for physical day-ahead contracts. The IEX started operations in June 2008, while PXIL began operations in October 2008. The IEX is the bigger of the two exchanges, with a share of nearly 98.8 per cent in terms of volumes transacted in 2014-15.

In recent years, the power exchanges have seen a rise in participation by industrial consumers and captive power producers (CPPs), both for sourcing competitive power and selling surplus captive power. The major sellers of electricity through the power exchanges are state utilities, independent private producers, private distribution licensees and CPPs. Meanwhile, industrial consumers are the major buyers of electricity through the exchanges.

Size and growth

cover (Page 1)

During 2015-16 (as of February 2016), the volume of electricity transacted in the short-term power market was around 106.61 billion units (BUs), representing 10 per cent of the total electricity generated during the period. With a 47.98 per cent share (as of February 2016), bilateral trading (including electricity traded directly between distribution companies) continues to constitute the largest share in the short-term power market. Over the years, the volume traded through bilateral trading has shown healthy growth. The volume of electricity traded increased at a CAGR of 7.88 per cent between 2008-09 and 2014-15.

The share of the two power exchanges in the short-term power market stood at 33 per cent in 2015-16 (as of February 2016). The total volumes traded on the exchanges were around 28,293 MUs in 2015-16 (as of February 2016) as compared to 28,465 MUs in 2014-15. In 2015-16, the total volumes traded on the IEX stood at 28,170 MUs and on PXIL at 123 MUs. From April 2010 till February 2016, 147,725 MUs of electricity had been traded at both the exchanges through all available products.

Between January 2015 and February 2016, the prices of short-term power at both the exchanges have displayed little variation across months, with the exception of September 2015, where the price at the IEX rose from Rs 2.80 per kWh to Rs 3.65 per kWh and at PXIL, it rose from Rs 2.59 per kWh to Rs 3.56 per kWh.

The weighted average price of electricity transacted through the IEX during the same period ranged from Rs 2.32 per unit to Rs 3.65 per unit, with Rs 2.75 per unit being the average price. The weighted average price of electricity transacted through PXIL ranged from

Rs 2.30 per unit to Rs 3.56 per unit, with Rs 2.71 per unit being the average price during the period January 2015 and February 2016.

cover (Page 1)

Trading process on the exchanges

Day-ahead market contracts are the most popular on the exchanges. A day-ahead market is a one-day-ahead delivery-based market for carrying out transactions for any 15-minute time block or for the duration of one hour, or for all 24 hours. Prices on the exchange are discovered for every 15 minutes, after aggregating the buy and sell requests posted at the exchange using an advanced algorithm based on the economic principle of demand and supply. The exchange also covers the risks associated with trading, as buyers are required to pay in advance whereas sellers get paid after delivery.

Bids are collected by the exchanges between 10 a.m. and 12 noon. The market clearing price and market clearing volumes are calculated from 12 noon to 1 p.m., and corridor availability and funds are verified between 1 p.m. and 2 p.m., where the exchange calculates the amount of power that would be flowing in different corridors across the country. By 3 p.m., the final average clearing price and volumes are calculated, and by 5.30 p.m., a collective transaction confirmation is received from the National Load Desptach Centre (NLDC). At 6 p.m., the results are passed on to the regional load despatch centres, the NLDC as well as the state load despatch centres, taking into consideration the transmission corridor availability. These are the key agencies that publish the results on their websites.

Issues and the way forward

Among the major challenges that the power trading market is facing, the key ones are the prohibitive open access charges and the unwillingness of states to allow open access for fear of losing high-paying industrial consumers. States like Punjab, Madhya Pradesh, Andhra Pradesh, Tamil Nadu, West Bengal and Odisha have increased applicable charges. Maharashtra does not allow buying power through the day-ahead market (DAM) whereas Rajasthan issued draft regulations to block open access through DAM. Another challenge for the power trading market is that of network constraints and inadequate interregional transmission capacity. Another issue is that of the poor financial health of the distribution companies because of which they are unable to buy power and instead resort to load shedding.

There is a need to introduce new market products such as capacity trading, ancillary services, forwards, futures and transmission rights. Introduction of forwards and futures in the exchanges will enable higher liquidity in the short-term power market. Forward delivery-based contracts will provide an additional window to players to tie up electricity supply.

Net, net, India’s short-term power market has still not unlocked its true potential. Several regulatory, institutional, infrastructure and operational challenges need to be addressed before this can be achieved.


Enter your email address