Assessment of CERC draft Power Market Regulations

CERC has released a draft Power Market Regulations on 18 July, 2020. The first power market regulations were issued in January 2010, after which two amendments have been made through gazette notifications. These regulations have come in the backdrop of Real Time Market (RTM) for electricity which is introduced a month ago by Power minister Mr. R.K.Singh.

In India, short term power market is dominated by two power exchanges, IEX and PXIL. Exchanges in India have twelve years of experience and are continuously evolving. These exchanges have come a long way since their inception, almost 44.36%  of short term transactions of electricity is done via power exchanges, but it still remains significantly low (4.56%) compared to volumes of various other kinds electricity transactions in total electricity generation.

The idea of trading through an exchange enables the traders to discover the best price in the market and to find the optimum buyer or seller for trade. Power exchange introduces transparency in the market clearing and reduces counter-party credit risk. Exchange manages trades, clears market and settles financial transactions.

The draft regulations introduce a new concept called ‘Market Coupling’, wherein the bids from all power exchanges will be collected and matched to discover a uniform market clearing price. The task will be assigned to ‘Market Coupling Operator’ (MCO), an entity which the regulator will notify later.

Mechanism of Market Coupling

power market regulations

Source: CERC, JMK Research

The concept of Market coupling is prevalent in Europe where different countries are unified through a single market. The cross border electricity trade across countries with multiple exchanges makes market coupling relevant in Europe. However, in India, with only two power exchanges and no cross-border electricity trade, placing another regulatory body can lead to system inefficiencies.

The role of Power exchanges is also likely to be reduced to mere bid collection centers. As IEX holds more than 90% of the total volume of electricity traded, the price discovery is also likely to be similar even with new regulatory body, which is also primary objective of introducing MCO.

Another objective of introducing market coupling is reduction in transmission congestion. During 2018-19, the actual transacted volume was about 0.92% less than the unconstrained volume due to transmission congestion according to report published by CERC.

The draft has also increased the net worth requirement of an applicant for establishing a power exchange to Rs. 50 crores will further debar players from entering the market. Clearly, there is still lot of ambiguity in the draft regulations released. The objectives of the regulation aren’t clearly defined and there is ambiguity in certain provisions. More transparency is needed on the regulation which aims to build a robust market design. The commission has invited comments on the draft by August 7 and has scheduled a virtual public hearing on that day.