Power Trading

Background:

Power trading inherently means a transaction where the price of power is negotiable and options exist about whom to trade with and for what quantum.In India, power trading is in an evolving stage and the volumes of exchange are not huge. All ultimate consumers of electricity are largely served by their respective State Electricity Boards or their successor entities, Power Departments, private licencees etc. and their relationship is primarily that of captive customers versus monopoly suppliers. In India, the generators of electricity like Central Generating Stations (CGSs), Independent Power Producers (IPPs) and State Electricity Boards (SEBs) have all their capacities tied up. Each SEB has an allocated share in central sector/ jointly owned projects and is expected to draw its share without much say about the price. In other words, the suppliers of electricity have little choice about whom to sell the power and the buyers have no choice about whom to purchase their power from.

The pricing has primarily been fixed/controlled by the Central and State Governments. However, this is now being done by the Regulatory Commissions at the Centre and also in the States wherever they are already functional. Power generation/ transmission is highly capital intensive and the Fixed Charge component makes up a major part of tariff. India being a predominantly agrarian economy, power demand is seasonal, weather sensitive and there exists substantial difference in demand of power during different hours of the day with variations during peak hours and off peak hours. Further, the geographical spread of India is very large and different parts of the country face different types of climate and different types of loads.

Power demand during the rainy seasons is low in the States of Karnataka and Andhra Pradesh and high in Delhi and Punjab. Whereas many of the States face high demand during evening peak hours, cities like Mumbai face high demand during office hours. The Eastern Region has a significant surplus round the clock, and even normally power deficit states with very low agricultural loads like Delhi have surpluses at night. This situation indicates enough opportunities for trading of power. This would improve utilization of existing capacities and reduce the average cost of power to power utilities and consumers.

In view of high fixed charges, average tariff becomes sensitive to PLF. Trading of power from surplus State Utilities to deficit ones, through marginal investment in removing grid constraints, could help in deferring or reducing investment for additional generation capacity, in increasing PLF and reducing average cost of energy. Over and above this, the Scheduled exchange of power will increase and un-scheduled exchange will reduce bringing in grid discipline, a familiar problem.

Open Access and Trading :

The Electricity Act, 2003 which has come into force from 10th June, 2003 repeals the Indian Electricity Act, 1910; Electricity (Supply) Act, 1948; and Electricity Regulatory Commissions Act, 1998. In view of a variety of factors, financial performance of the state Electricity Boards has deteriorated. The cross subsidies have reached unsustainable levels. A few States in the country have gone in for reforms which involve unbundling into separate Generation, Transmission and Distribution Companies. To address the ills of the sector, the new Act provides for, amongst others, newer concepts like Power Trading and Open Access.Open Access on Transmission and Distribution on payment of charges to the Utility will enable number of players utilizing these capacities and transmit power from generation to the load centre. This will mean utilization of existing infrastructure and easing of power shortage. Trading, now a licensed activity and regulated will also help in innovative pricing which will lead to competition resulting in lowering of tariffs.

Definition of �Open Access� in the Electricity Act, 2003:

The non-discriminatory provision for the use of transmission lines or distribution system or a associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission�

A More General Definition of �Open Access� :

Enabling of non-discriminatory sale/purchase of electric power/energy between two parties utilizing the system of an in-between (third party), and not blocking it on unreasonable grounds�.

Issues:

a) Freedom to buy/sell, and access to market
b) Adequacy of intervening transmission
c) Transmission/wheeling charges
d) Treatment of transmission losses
e) Energy accounting, scheduling, metering and UI Settlement.

The present level of inter-regional electricity exchange is still quite limited and the constraints for enhancing the same are the relative lack of commercial awareness with SEBs, lack of proper market mechanism (absence of tariff structure to promote merit-order operation and encourage trading of power), inadequate transmission capacity, lack of statutory provisions for direct sale by IPPs/CPPs/ Licensees outside the State, grid indiscipline and financial viability of State Utilities, among others.

Example:

Suppose a company from Maharashtra wants to sell 100 MW to a Discom-A in Andhra Pradesh.

Following steps need to be taken:

a) The company and Discom-A to agree on terms and conditions of sale
b) The company to get the consent of MSEB and "no-objection" of MSERC
c) Discom-A to get the consent of APTransco and "no-objection" of APSERC.
d) MSLDC and APSLDC to ascertain transmission adequacy, and agree to arrange necessary metering, scheduling, energy accounting and UI settlement.
e) WRLDC and SRLDC to ascertain transmission adequacy in their regional transmission systems.
f) All concerned to have a common understanding about treatment/sharing of transmission losses, and levy of transmission/ wheeling charges for the use of intra-State and inter-State systems

Impact of �Open Access System� on Discom�s:

Electricity Act 2003 has mandated that with immediate effect open access should be implemented. While everyone accepts that it may serve the consumer interests, there are two contradicting views regarding the implications of the open access system on the electricity entities especially the DISCOMs. The first view is that competitive power generation will bring down the ultimate costs to the consumers. Cost reduction is possible only by reducing the T&D losses, keeping under control the operating costs and keeping the additional power purchase costs low. Given the facts that power purchase costs keep increasing and the HT tariff has been mandated to be brought down closer to the average costs (thereby reducing the cross-subsidy) according to a fixed time schedule to be set by the regulator, the first group argues that taking up additional liabilty by way of HT consumers at such high marginal costs of power purchase would be financially imprudent for the electricity entities.

The other view is that electricity entities have heavy responsibility to meet the needs of agricultural consumers and small domestic consumers at a lower rate than the average cost. Consumers who are currently the HT consumers and commercial consumers paying a higher tariff are providing the means to do this. If such consumers walk away from Grid supply subsidy from Government will have to increase. The correct position would depend on the statewise situation regarding relative tariff of the different consumers, the possible rates of growth of category wise consumption and the potential for purchasing additional power at low rates in the future.

Market Development:

In the legal framework before enactment of the new Act, the development of market in power was highly constrained as the industry structure was horizontally and vertically integrated. The electricity supply to a customer is through a chain of monopolies earlier regulated by the Government and now by the Regulatory commission.

With the new Act, a liberalized market structure is sought to be provided. A customer has a number of choices to get his power. The generators can also compete among themselves for distribution companies/individual customers. There is a provision for surcharge to meet current level of cross subsidy, if a consumer opts to get electricity directly from generator or any source other than his own distribution licensee and has been allowed open access by the Regulator. However, there is no surcharge when distribution company buys power from a generator directly. There is also a provision for bilateral contract for supply of power through a competitive process between a generator and distributor. With the provision of non-discriminatory open access to transmission, the competition for bulk supply to distribution companies could become a reality in the near future. The market structure will, perhaps, require to be transformed.

The commission is committed to the development of a fully competitive power sector.

However, given the current realities of the sector (shortages, cross subsidies, long term PPAs, capacity allocation from CGS to state etc), the market development has to go through a number of intermediate phases. It may be noted that the retail competition has yielded perceptible benefits to consumers in the countries having surplus generation. There are a number of complex issues such as transition risks, settlement of imbalances in power injected and drawals, effective metering, efficient pricing of transmission, management of congestion etc. on which the Commission would float a separate discussion paper in due course.

As per an estimate, Captive Power capacity in the country is about 20,000 MW of which about 14,000 MW is grid connected. Surplus is available with many Captive Power plants and also with IPPs and Licensees of some of the States. They need permission from the State Govt. as well as consent for usage of SEB's transmission network, which besides being difficult to come by, is also usually irrationally priced. Many Captive plants are keen to trade their power at a remunerative tariff, but there is no statutory provision presently for direct sale of surplus power by them to outside States. A provision for this however, exists in the Electricity Bill.

Power Market:

The Wholesale transactions for electric power globally are through spot contracts, forward and future contracts and long term bilateral contracts. The primary driver for change in the power market in India today, at least from the consumers' point of view, is the desire to see lower prices in the wholesale electricity market. For this objective to bear fruit, attention has to be paid to the ideal power exchange for India backed with adequate regulations, as poor exchange design may lead to market failures. The envisaged power market will rely on competition, instead of regulation, to minimize generation costs and additionally will obtain long-term financing for power systems / generating companies.

Transmission and Wheeling:

With the introduction of mandatory open access, there will be demand by third parties for wheeling of power through the existing transmission networks in addition to wheeling being undertaken at present for various beneficiaries importing power from outside the region. In this context, CERC has jurisdiction for regulation of transmission and wheeling charges for all inter-state and inter-regional power flows. As per the existing notification, the wheeling charges are payable at the same rate as the transmission charges for a particular region.

Methodology for Sharing of Transmission Charges:

Although the principles for sharing of transmission charges/wheeling charges have been enumerated in detail in the present notification, there appears to be need to bring further clarity in the matter. The following methodology for sharing of transmission and wheeling/congestion charges is proposed for discussion:

a) Transmission charges for the inter-regional lines may be shared by the two contiguous regions on 50:50 basis and further shared among the beneficiaries within the respective region.

b) Transmission charges for the inter-regional lines may not be pooled with those for the other transmission assets in the respective regions.

c) Transmission charges (after deducting the wheeling/congestion charges realized from others) for the regional assets (other than the inter-regional assets) may be shared by the "regional beneficiaries" (Regional beneficiaries means beneficiaries located in the region concerned)

d) If an inter-regional asset is used for wheeling by a third party, the balance transmission charges after accounting for the payable wheeling/congestion charges, may be shared by the beneficiaries of the contiguous region on 50:50 basis.

Recommendations:

The best system would be one in which the consumer has a choice that comes out of competition. Establishment of markets with rules for their operation and a regulator to see that they are followed will give acceptable results for consumers and investors both. Competition and markets do not have to wait for shortages in supplies to be overcome. Trading is a bridge even in shortage situations and regulators can rightly be expected to look after the interests of the less powerful.

However, the lessons from around the world indicate that adequate availability of power, its unrestricted flow across geographical boundaries, strong commercial mechanisms that determine market operations and the paying ability of consumers are vital necessities that would need to be in place for competition at all levels to be truly sustainable. Rules and regulations are to be formulated for interstate, inter-regional and international transactions which have built-in relaxation that encourages trading and makes transfer of power easier. Streamlining levy of reasonable transmission charges, wheeling charges and losses on power to be traded are important, otherwise trading will not remain competitive with incidental use of transmission system to be priced on incremental cost basis. Transmission losses should also be charged on actuals, rather than on a normative basis.

There is an immediate need for strengthening the upstream and down stream transmission networks to better utilise the existing Inter-regional transmission capacity. Also better reactive power management would lead to significant additions to existing transmission capacity utilisation. Bottled-up capacities of the IPPs and Captive Generators as well as underutilized capacities of Utilities needs to be tapped urgently through a more commercial approach. Trading of such capacities would mean availability of extra energy at only the variable cost, thus bringing down the average cost of power not only to bulk consumers but also reducing the burden of rate increases on ordinary consumers too.

India is already on its way to establishing a power market. This requires considerable and continuous effort starting from continued strengthening of inter-regional power transmission links, open access to transmission and later to distribution links, releasing the underutilized captive capacities, to the designing of an effective market mechanism suited to India's needs. The institutional set-up of the Market could make a significant difference to the final market price. In the short term, market rules should promote economic efficiency, so that customer loads are served and reliability is maintained at the lowest possible cost. In the long term, the market should produce prices that stimulate appropriate levels of investments in new generation and transmission capacity.

In addition, the market rules should be such as to encourage broad participation and ensure fairness. Such a process will reduce the need for government oversight because it will be to a large extent self-policing and it will be difficult for individual participants to manipulate results in their favor.Of the two market mechanisms evaluated, Pool day-ahead market, with Pay SMP settlement, may produce lower prices than the bilateral model. However, in the case of a power exchange with a small number of buyers and sellers, often there may be not enough bids to provide an assurance that the price is competitive, thus creating the need for more market participants.

To ensure that sufficient generating capacity is available to prevent capacity shortages and wholesale price spikes an installed-capacity requirement may be made mandatory as proposed in California. This standard would require all retail providers to acquire, either through contracts or physical assets, sufficient capacity to meet peak demand plus a certain reserve margin. Combining the above mentioned reforms with a more transparent bidding and price setting mechanism, could also lead to more demand-side participation, and hence greater price elasticity.

Keywords:

investment, insurance, sip, tax planning