Trading Trends: Short-term market registers healthy growth in volumes

Short-term market registers healthy growth in volumes

Power trading has come a long way since it was recognised as a distinct activity in the Electricity Act, 2003. Conventionally, discoms sign power purchase agreements (PPAs) with developers to meet their baseload requirements. However, it is not always economical to sign PPAs to meet short-term or peak load requirements which keep varying on a seasonal basis. Further, while the country has “surplus capacity” so to say, there are demand-supply gaps within and across different regions. The power trading market has therefore emerged in response to these requirements and plays an important role in the power sector.

In 2017-18 (till February 2018), the short-term market accounted for a 10.54 per cent share of total power generation with 115.96 billion units (BUs) traded. The short-term power market comprises bilateral transactions through interstate trading licensees, and direct transactions by distribution licensees, power exchanges and the deviation settlement mechanism (DSM). These volumes grew by 3.5 per cent to 119.23 BUs in 2016-17 as compared to 115.23 BUs in 2015-16.

Excluding the DSM and direct bilateral

sales between discoms, the total volume of electricity transacted through traders and power exchanges was 78.73 BUs 2017-18 (till February 2018), as compared to 74.63 BUs in 2016-17. Of this, the power exchanges constituted the majority share at 53 per cent while traders accounted the balance share of 47 per cent.

A look at the key trends in the trading segment during the past year…

Trading through licensees

During April 2017-February 2018, about 37.14 BUs of electricity was transacted bilaterally through traders. The maximum trading was seen in August 2017 with around 4.1 BUs traded. The average monthly volume traded during the period was around 3.3 BUs. In comparison, in 2016-17, the volume traded through licensees was 33.5 BUs, a decline of over 5 per cent from over the 35 BUs traded in 2015-16.

In 2017-18 (till February 2018), the weighted average price of electricity transacted through traders varied between Rs 3.30 per unit and Rs 4.13 per unit. The average price was Rs 4.11 per kWh in 2015-16 and Rs 3.53 per kWh in 2016-17.

As per the data available for February 2018, PTC India with a 37 per cent share is the market leader. One of the key highlights for PTC during the year was the winning of a tender from state discom Punjab State Power Corporation Limited for managing its power portfolio for 2017-18. PTC has also recently been selected as a trader for carrying out the procurement of 2,500 MW of power on a medium-term basis for a period of three years under the Ministry of Power’s recently launched pilot scheme for power procurement.

Other top traders during the month were NTPC Vidyut Vyapar Nigam Limited (with a 13 per cent share), Manikaran Power Limited (11 per cent) and Mittal Processors Private Limited (11 per cent). In all, the market comprised 22 traders during February 2018.

Power exchanges

During the April 2017-February 2018 period, an aggregate volume of 41.59 BUs was transacted through the power exchanges, with the lion’s share (around 40.88 BUs) traded on the Indian Energy Exchange (IEX) and the remaining on Power Exchange India Limited (PXIL). In fact, in the past five years, more than 95 per cent of the total transactions on the power exchanges have been executed through the IEX. The total volumes traded through the power exchanges were 41.12 BUs in 2016-17, recording a compound annual growth rate of 85.56 per cent between 2008-09 and 2016-17.

Further, trading at the power exchanges during the past year continued to be dominated by day-ahead contracts. The volume traded in the day-ahead market (DAM) at both exchanges was 41.5 BUs in 2017-18 (till February 2018), while only 1.9 BUs was traded through the term-ahead market during the same period.

Meanwhile, the weighted average price at the IEX ranged from Rs 2.65 to Rs 4.26 per kWh, while that at PXIL fluctuated between Rs 2.12 and Rs 4.04 per kWh. These prices had averaged Rs 2.72 per kWh in 2015-16 and Rs 2.50 per kWh in 2016-17.

REC trading

In 2017-18, the renewable energy certificate (REC) market saw slow growth, as a result of industry associations’ appeal against the Central Electricity Regulatory Commission’s (CERC) order reviewing the floor and forbearance prices in the Supreme Court. (Earlier, in March 2017, the CERC had introduced a new pricing regime for RECs, under which the forbearance prices were reduced from Rs 3,500 to Rs 2,500 per REC, and floor prices from

Rs 1,500 to Rs 1,000 per REC.) The matter was being contested at the Appellate Tribunal for Electricity when the Supreme Court intervened and imposed a stay on REC trading in April 2017, with the stay being lifted in April 2018. In July 2017, however, the stay on the trading of non-solar RECs was lifted, while trading of solar RECs remains suspended. During April 2017-February 2018, the total market clearing volumes of non-solar RECs in the IEX and PXIL were 7.16 million and 6.04 million respectively. Comparatively, in 2016-17, in all about 6.5 million RECs were traded, an increase of 31 per cent from the 5 million RECs traded the previous year. For now, the new pricing regime has also been suspended, although the court has ordered that the difference in amount between the forbearance and floor prices is to be placed in an escrow account with the regulator while the matter is pending resolution.

Key challenges and the way forward

Even as the volume traded on the short-term power market has increased over the years, the share of short-term transactions as a percentage of total electricity generation has remained restricted primarily on account of infrastructure constraints and congestion in transmission networks. Therefore there is a need to augment the inter- and intra-regional transmission networks to meet the requirements of the existing and upcoming generation capacity.

Besides, challenges in open access implementation have also hampered short-term transactions. Distribution utilities have been wary of losing their large customer base and have imposed high transmission charges on purchases from power exchanges, making such transactions uneconomical. Moreover, the lack of demand due to the poor financial condition of several discoms has also been a key concern.

Going ahead, improvement in the financial health of discoms through the Ujwal Discom Assurance Yojana, regulatory intervention for minimisation of cross-subsidy/additional surcharge (for open access users), and introduction of new products on exchanges is expected to drive growth in the short-term market.