Electricity Markets: Paradigm Shift in State’s Power Sector

With an increasing share of Renewable Energy (RE) in the electricity mix, the sector is going through a significant transition with various initiatives underway at the central and state levels. Markets help bring greater resource efficiency, optimal utilization of stranded assets and a reduced need for long term power purchase agreements (PPAs). It can help smoothen vagaries of demand and supply across states by providing a larger pool of resources beyond the bilateral contracted resources to the utilities. As a step towards this, the Indian electricity sector saw the advent of two market mechanisms in 2020 – Real Time Markets (RTM) and Green Term Ahead Market (GTAM).

Real-time electricity trading was launched on June 1, 2020. This market, designed as a half-hourly market, comprises 48 auction sessions each of 15-minute duration. The primary objective behind RTM is to use this as a centralized platform to optimize the delivery of existing resources to manage the real-time imbalances efficiently. This platform enables buyers and sellers to meet energy requirements closer to real-time of operation by accommodating any differences between day-ahead forecast and real-time conditions. An average traded volume of about 515 MUs with 237 market participants was seen in the first month. As Figure-1(below) shows, the volume is steadily increasing, to more than 1,200 MUs as of January 31, 2021, achieving 9.2% month-on-month growth. The prices discovered in RTM so far has been between INR 2-3 per kWh in the last eight months.

The second market mechanism, GTAM was launched in September 2020, to create additional avenues to buy and sell RE power for the utilities. This would encourage RE-rich states to not be limited by state’s renewable purchase obligations (RPOs), instead install more RE capacities and become RE-export hubs. For low-RE states and open access consumers, GTAM would enable the procurement of green power by signing up for daily or weekly contracts at competitive rates transparently. This market segment registered a volume of 92.4 MU during January 2021, comprising of 24 MU of solar power and 68.4 MU of other RE.

Currently, distribution utilities meet their power procurements through a combination of short-, medium-and long-term contracts, where long-term procurement constitutes the largest share of the power procurement portfolio, as high as 90%. Utilities plan their procurement on a day-ahead basis and schedule power from generators based on their demand estimates and generators’ availability. Any imbalances between supply and demand are met via intra-day markets including through the power exchanges, bilateral arrangements, deviation settlement mechanism (DSM), ancillary services (AS), and rescheduling of generators. In order to distinguish between energy trading and managing last-minute imbalances, the Central Electricity Regulatory Commission (CERC), is making efforts to discourage the use of AS and DSM as trading platforms. RTM is one such effort which will help to reduce this dependency on AS and DSM.

One of the reasons for the low uptake of markets amongst distribution utilities is that markets are physically and financially binding in terms of paying upfront securities and with limited option for delay in payments to generators. For utilities with poor financial health, this could be a challenge. However, with attractive price signals in the short-term markets and possible increase in market liquidity, utilities could plan the procurement in such a way that it would earn revenues. For instance, RTM has provisions that require participating generators having long-term contracts with the utility to share 50% of the net gains with the utility. In a fully functional ancillary services market, state-owned generators can get paid for providing flexible services like fast ramping or cycling capabilities. Needless to say, this would help in effective management of RE variations.

High RE rich states like Tamil Nadu and Karnataka could utilize market mechanisms for selling any excess capacity from RE plants and un-requisitioned surplus from thermal generators. Markets have the potential to improve reliability of services by managing last-minute imbalances that occur due to unscheduled outages, unpredictable weather, or unplanned events. Based on the experiences in California and New York, markets have been more effective in improving investments and future operational decision-making rather than in correcting poor historical decisions.

The electricity market is still evolving in India. Innovative mechanisms such as exchange-based financial products,spot market pricing and, better revenue protection mechanisms (like contract for differences) could potentially open up more opportunities for the inter-state RE exchange in the near future. However, it is important to have a clear understanding of market rules, incentive structures and contractual arrangements. As a starting point, building capacities of state level officials, utility staff, and other major stakeholders regarding terms and conditions, guidelines, benefits of these mechanisms along with potential risks and mitigation measures becomes vital for gaining the confidence levels. Second, for a well-functioning market, robust IT infrastructure with enhanced data communication and software systems ought to be in place so that schedules, forecasts, actual availabilities and dispatch information is available at a granular level. Third, establishing institutions for market surveillance and market monitoring will play an important role in avoiding any possible market power manipulation. Moving forward, it will be interesting to see how different states will leverage markets to transition towards a more transparent, efficient and cleaner power procurement strategy for better RE grid integration.

(Views expressed are the authors’ own.)

- Sandhya Sundararagavan, Lead, Energy Transitions, World Resources Institute India

- Tirthankar Mandal, Senior Manager, Energy, World Resources Institute India