Towards Efficient Electricity Market… (Part 2)

Among the major stages in the evolution of power sector is establishment of Power Exchanges in 2008. The absence of a trading platform, or a market place, for electricity was a basic drawback which hindered the development of electricity market.

Before the formation of exchanges, power was sold/purchased through bilateral agreements, mostly long term PPAs (Power purchase agreement) which were on cost plus and ‘take or pay’ basis. The system meant that the buyer would have to pay for the inefficiencies of the seller who gets paid for everything penny he spends. Further, the buyer has to pay for the fixed cost even if there is a dip in its requirement and he doesn’t buy all the power agreed upon. The system also meant that distribution utility had limited options for procurement of power in case of sudden spike in demand during a season or even at any point during the day. (Read the first part- http://indiaeconomyandbusiness.com/2016/05/24/efficient-electricity-market/)

The Power exchange brings together the buyers and sellers who bid for quantity and price like in any other exchange. The quote is sale of power for a 15 minute time period meaning a buyer/seller will have to make a total of 96 quotes if he wants to buy/sell power the whole day. Similarly, the deal can be for just a period of 15 minutes also if the availability/need is only for that short period. The only difference is that here the quotes are not on real time basis but on day ahead basis or for a fixed term ranging up to seven days. So, a seller or a buyer has to project the surplus/deficit for the next day/ next seven days and accordingly make his quote.

India currently has two such exchanges, India energy Exchange (IEX) and Power Exchange India (PXIL) with IEX accounting for more than 90% share. The total volume of power traded on the two exchange together has gone up from barely 6.2 bn units in FY09, first full year of operations to 34 bn units in FY16, a CAGR of 28%. More importantly, with the development of the market, market clearing price, the price at which the power is delivered, and the fluctuation in prices have come down substantially over the years  As per IEX data, average price has come down from a high of Rs 7.3 in FY08 to Rs 5.2 in FY09 and to Rs 2.73 in FY16.  However, the market is still trading less than 5% of total power produced in the country with most of the rest being sold through long term PPAs.

With the evolution of exchanges, the profile of buyers and sellers has also changed. Earlier, most of the purchase was done by state distribution companies which now includes many industrial consumers also who have entered the market to meet their incremental demand or demand in cases of shutdown etc. Similarly, sellers profile has also changed significantly over last few years with many Independent Power Producers (IPPs) entering the market. Power trading companies are also an important partner acting on behalf of both buyers and sellers.

(Image courtesy of domdeen at freedigitalphotos.net)

 

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