Trading Trends: Exchanges register healthy growth in volumes

Exchanges register healthy growth in volumes

Power trading has emerged as a viable option for both generators and consumers (industrial/commercial and discoms) to sell and buy power at competitive rates. Power trading is a part of the short-term power market which grew significantly between 2009-10 and 2015-16, registering a compound annual growth rate (CAGR) of 9.8 per cent. Short-term contracts can be executed via bilateral transactions through interstate trading licensees, directly by distribution licensees (discoms), power exchanges and the deviation settlement mechanism. Of the total electricity generated in the country in 2016-17 (April 2016-February 2017), the short-term power market accounted for a share of 10.4 per cent (110 BUs), while the rest was accounted for by long-term power purchase agreements.

Bilateral trading

The size of the bilateral trading market stood at Rs 145.57 billion in 2015-16, a decline of 1.6 per cent over the previous year. The decline in the market size can be attributed to a decrease in the price of electricity transacted through trading licensees to Rs 4.11 per kWh in 2015-16 vis-à-vis Rs 4.28 in 2014-15. Between 2009-10 and 2015-16, the size of the bilateral trading market grew at a CAGR of only about 0.59 per cent.

The number of traders undertaking trading bilaterally or through power exchanges increased significantly from four in 2004-05 to 27 in 2015-16. The top 10 traders constituted 92.33 per cent of the total volume of electricity traded through trading licensees in 2015-16, as compared to 89.94 per cent during 2014-15. During 2015-16, PTC India emerged as a leader in trading captive power with a market share of nearly 30 per cent.

During April 2016-February 2017, about 32.4 BUs of electricity was transacted bilaterally through traders and 19.8 BUs directly between discoms, totalling 52.2 BUs. The weighted average price of electricity transacted through traders varied between Rs 3.30 per unit and Rs 3.80 per unit during this period.

The major sellers of power in the short-term bilateral markets are a mixed group comprising independent power producers (IPPs), distribution companies, state government agencies and captive power plants (CPPs). The major buyers are state discoms.

Power exchanges

There are two main power exchanges in the country – Indian Energy Exchange Limited (IEX) and Power Exchange India Limited (PXIL) – which started operations in June 2008 and October 2008 respectively. The former has a majority share of over 99 per cent (in terms of volumes traded) in the power exchange market.

The total size of the power exchange market during 2015-16 stood at Rs 95.39 billion, a decline of 7.2 per cent compared to the previous year. This decline can be attributed to a reduction in the price of electricity transacted from Rs 3.50 per unit to Rs 2.72 per unit during this period, a reduction of over 22 per cent. Between 2009-10 and 2015-16, the size of the power exchange market grew at a healthy CAGR of about 17.8 per cent.

The volumes traded at the two exchanges have shown an impressive growth. The quantities traded have registered a gradual increase over the years, from 2.77 MUs in 2008-09 to 35.01 MUs in 2015-16. This corresponds to a CAGR of 43.7 per cent. During 2016-17, about 36.61 BUs was traded on the exchanges during the April 2016-February 2017 period. Of this, 99.5 per cent of the volume was traded on the IEX and the rest on PXIL.

Further, trading at the power exchanges is dominated by day-ahead contracts. The volumes traded in the day-ahead market (DAM) increased at a CAGR of 43.1 per cent between 2008-09 and 2015-16 to reach 34.1 BUs. The volumes traded in the term-ahead market (TAM) have also increased over the years. During 2016-17 (April 2016-February 2017), about 36.6 BUs was traded on DAM and about 1.01 BUs on TAM.

The price of power at the exchanges has been continuously decreasing. In 2015-16, the weighted average price of power transacted through the exchanges was Rs 2.72 per kWh, lower than the Rs 3.50 per kWh in 2014-15. During April 2016-February 2017, the weighted average price at exchanges varied between Rs 2.30 per kWh and Rs 3.01 per kWh.

Participation at the exchanges has been consistently increasing since their inception. For instance, at the IEX, the number of participants (including both members and clients) increased from 58 in June 2008 to 3,796 in March 2016 and further to 4,096 in August 2016. The total number of participants at PXIL is lower at 2,924.

IEX classifies participants into seven categories – IPPs, state utilities, CPPs, industrial consumers, industrial consumers owning CPPs, interstate/central generating stations and private discoms. Industrial consumers are the largest buyers of power, followed by state utilities and private discoms. IPPs are the largest sellers, followed by state utilities and CPPs.

Participants at PXIL are classified into four categories – CPPs, industrial consumers owning CPPs, industrial consumers and state utilities. In 2015-16, industrial consumers owning CPPs and state utilities were the largest sellers of electricity through PXIL, while industrial consumers and state utilities were the largest buyers.

Open access consumers account for a significant share of IEX participants. As of March 2016, the number of open access consumers at the IEX accounted for almost 96 per cent of the participant base. Their share is much lower at 18 per cent in the case of PXIL.

Key issues and the way forward

Congestion in the transmission network constrains the volume of electricity transacted through the power exchanges. The volume of electricity that is not cleared has shown an increasing trend and stood at 1,258 MUs during April-December 2016. This is a key concern for the power exchanges.

Besides, challenges in open access implementation hampers short-term transactions. The reluctance of discoms in providing open access to industrial and commercial consumers is a major hindrance to power trading.

The lack of demand due to the poor financial condition of several distribution utilities is also a key concern. As discoms are unable to buy power, they resort to load shedding instead. An improvement in the financial health of discoms is crucial for the development of the power trading market. The Ujwal Discom Assurance Yojana is expected to make a difference in the financial health of discoms, albeit gradually.

Going forward, with the launch of new products and ancillary services, the share of unscheduled exchange is expected to come down and that of bilateral trade and exchanges is likely to increase. Meanwhile, the price of bilaterally traded power is expected to reach Rs 4 per kWh in the next three-four years and then stabilise, according to industry experts. The evolution of the price discovery mechanism to the more efficient and transparent Discovery of Efficient Electricity Price (DEEP) platform is further likely to drive the growth of the short-term power market.