Energy trading on power exchanges is an emerging domain in the field of renewable energy. In countries across the world, green power exchanges are in their nascent stages and are yet to find their place in mainstream renewable energy agendas. However, across these countries, including India, sources of renewable energy, primarily wind and solar, are increasingly occupying a larger share in the overall energy mix. Electricity supply is now moving away from coal- and fossil fuel-based sources. Consequently, a large number of companies, both renewables based and otherwise, are actively becoming more reliant on renewable energy sources as a part of their environmental, social and governance norms, as well as their asset management and trading strategies. This is likely to have an impact on the pricing dynamics of power markets.
A market-based green power exchange platform can allow flexible, transparent and competitive procurement of renewable energy to meet the increasing government and industry targets. Green power exchanges function similarly to commodity exchanges. They provide a platform for buyers and sellers of renewable energy to enter into spot contracts for the same day, the next day, and on a weekly basis up to a specified number of days. India has two power exchanges, the Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL). They use instruments such as renewable energy certificates (RECs), and day-ahead and term-ahead contracts for the sale and purchase of power.
In May 2021, Pranurja Solution Limited was also approved by the Central Electricity Regulatory Commission (CERC) to start the country’s third power exchange. PTC India and Bombay Stock Exchange Investments Limited each own 22.06 per cent stake in Pranurja, followed by ICICI Limited with 9.04 per cent. Additionally, 14 other investors, including Greenko Energy, Jindal Power, Manikaran Power and Mercados Energy Markets, and state-run SJVN Limited, the Uttar Haryana Bijli Vitran Nigam and the West Bengal State Electricity Distribution Company, are also shareholders in the company.
While coal-based power generation continues to be dominant in India, a greater share of renewable energy in power generation is likely to overhaul the sector in the coming years. This can be seen in estimates by Bloomberg for 2021, which suggest that more than 80 per cent of new capacity addition in power generation in India is attributed to renewable energy sources. A greater focus on intermittent sources such as wind and solar power, which create variable generation of electricity, would lead to increased short-term trading at power exchanges. Short-term green trading options are expected to enable increased flexibility in choosing and gaining access to more efficient and cleaner sources of energy. These platforms provide a nationwide automated trading mechanism for renewable energy procurement, RECs and energy saving certificates. This enables efficient price discovery while enhancing transparency and accessibility in the power market.
A look at the present scenario, recent developments, challenges and the future outlook for green energy trading in India…
Green energy exchange platforms in India witnessed several key developments in 2021. In early 2020, the IEX halted the trading of RECs as per an order of the Appellate Tribunal for Electricity (APTEL). Trade was recently resumed, in November 2021, in line with the recent orders of APTEL and the CERC. In December 2021, the IEX traded 365 MUs of renewable energy, which is a 20.13 per cent month-over-month decline compared to 457 MUs in the previous month. However, 1,194 MUs of renewable energy was traded in the fourth quarter of 2021, depicting a 158 per cent year-on-year growth.
The IEX also launched trade in energy saving certificates under Perform, Achieve and Trade (PAT) Cycle II in October 2021. PAT II is aimed at achieving overall energy savings of 8.87 mtoe. This would include 621 designated consumers spread across 11 energy-intensive sectors of the industry. Industries such as petroleum refineries, railways and power distribution utilities are new additions under PAT II.
In October 2021, the Ministry of Power and New and Renewable Energy launched the green day-ahead market (GDAM), making India the only large electricity market in the world to implement GDAM exclusively for green energy. The introduction of this new and alternative instrument is expected to create a gradual shift from long-term contracts to market-based models. This mechanism also ensures instant payment to renewable energy producers, making it an attractive tool to boost green energy trading.
PXIL also launched the green term-ahead market (GTAM) in March 2021 after the IEX introduced the same in September 2020. The market incorporates both solar and non-solar electricity segments. The GTAM is an alternative model for trading in renewable energy and allows renewable energy producers to sell power in the open market without entering into long-term power purchase agreements. This provides greater flexibility to producers and consumers in the exchange market.
REC market: Progress and challenges
REC is a key market instrument in green energy trading. It allows distribution companies, open access consumers and other entities to procure renewable energy without the requirement of capital investment. The REC mechanism was introduced in India by the CERC in 2010 in order to improve the access of state utilities and other industrial units to renewable energy. The REC framework creates a market for electricity generated by renewable sources at the national level, enabling producers in different parts of the country to connect to discoms, corporate entities and state utilities. This allows electricity producers to minimise and cover their costs more effectively. Simultaneously, it allows private and state utilities to meet their renewable purchase obligations (RPOs) using RECs purchased from producers in any part of the country. Such an exchange market provides an effective platform for accelerating the adoption of renewable energy and ensuring that RPO targets are met.
However, trends over the past decade depict several challenges that continue to hamper the growth of the REC market instrument. As of December 2021, a total of 4.5 GW of installed renewable energy capacity has come under the REC mechanism. This represents roughly 4 per cent of the total installed renewable capacity in the country. Further, a report by BRIDGE TO INDIA suggests that reluctance among project developers looms large due to high prices and regulatory uncertainties. As per the report, by March 2018, roughly 401 projects with a total capacity of 2.07 GW were deregistered by developers due to the perceived better economic viability of selling renewable power directly. Lenders are also hesitant to provide long-term funds under the REC mechanism due to barriers created by regulatory instability, which accentuates volatility in the pricing of power. Further, non-compliance by discoms and other entities in meeting their RPOs is a pertinent challenge. Poor enforcement by regulators, recurrent regulatory changes and ad hoc waivers by state regulators are key barriers in this regard. Trading volume is also affected if the purchase obligations are low to begin with.
Climate change and its associated risks present an inevitable challenge for the major economies of the world. The adoption of renewable energy is an integral and necessary step towards mitigating and minimising the damage. The increasing impetus on renewable energy by the government and corporate entities is likely to encourage a greater shift towards spot power trading, while moving away from traditional long-term contracts.
Consequently, streamlining the energy trading market would play a critical role. This would entail a stable regulatory and policy environment, augmented by strong infrastructure for data transmission and analysis. India’s energy exchange platforms are also taking steps to enhance green energy trading. The IEX has laid down its plans to introduce contracts lasting for as long as one year to cater to buyers looking to secure future supplies. PXIL is also expected to bring in new products and services into the green energy market to further advance India’s energy transition. Thus, with innovation in instruments, improved back-end services, robust regulatory backing and cost efficiency mechanisms, renewable energy trading has the potential to become a significant tool in achieving the country’s clean energy targets.