In July 2020, the Central Electricity Regulatory Commission (CERC) introduced draft Power Market Regulations 2020 for comments from stakeholders.
A number of changes have been proposed in terms of ownership, governance structure, management of the power exchanges, clearing and settlement mechanism apart from mentioning as to which contracts would be governed by the CERC and which would be governed by SEBI.
This dispute between the CERC and SEBI has been going on for years and hopefully, matters will come to a rest now, albeit after the Supreme Court (SC) gives its judgement in the matter.
The draft regulations also introduce the concept of a 'market coupler' who would determine a uniform clearing price, subject to market splitting, in the day ahead and real time markets based on the information provided by the various power exchanges.
Who will function as the market coupler will be decided by the CERC and ironically, the concept of the coupler is being introduced in the same breath while tightening the functioning of the power exchanges.
One is calling this ironic since the coupler, as and when it starts functioning, will reduce the power exchanges to a mere secretariat. All that the power exchanges would do is to forward the bids received to the coupler and thereafter convey the market-clearing price to the stakeholders after due diligence has been done (ie. by the coupler).
In its explanatory memorandum, the CERC has given three reasons why a coupler is required in a multi-power exchange model. First, there is a difference in the prices discovered on different power exchanges for a particular market segment, second, the allocation of transmission corridors amongst power exchanges is not optimal due to skewed market share of various power exchanges, and third, the overall economic surplus is not maximised since buyers and sellers may be spread out on various power exchanges.
Unfortunately, these arguments don't seem valid and prima-facie, don't justify the introduction of a power market coupler.
Taking the first argument, the CERC seems to be backtracking from its own argument as cited in the Power Market Regulations 2010 that there would be more than one power exchange and that competition amongst them would result in competitive price discovery, product innovation, efficiency in service, minimum transaction fee etc.
It is obvious that prices are likely to be different in each exchange and CERC can't use that as the reason now for introducing the coupler.
As far as the second argument is concerned regarding transmission corridors, in case there is no congestion, it does not really help having a coupler since no extra efficiency is gained.
In India, most of the times there is no congestion and the spot market prices are the same throughout the country. However, some seasonal congestion is possible but is expected to iron out over time.
Coming to the third argument, there is no way to estimate, a priori, the total economic surplus if the buyers and sellers are spread out in various power exchanges vis-a-vis if the coupler integrates the bids.
The measure of economic surplus is a function of the elasticities of the demand and supply curves and we have no idea as to what are the elasticities in an integrated market or separate markets. The CERC would have done well to reference such statements so that one could study the literature that they are relying on.
The first Power Market Regulations were enacted in 2010 and what really happened between 2010 and 2020 is that such a volte-face is being done by the CERC.
The answer, perhaps, lies in the concept note of the CERC entitled "Market Based Economic Despatch" (MBED). Under the proposal, while the beneficiaries will continue to pay a fixed charge for generators, for the variable charge, it will be a daily bidding in the power exchange.
It is feared that with a severely fractured power exchange, where 95% of the day-ahead market lies with the one particular exchange, the MBED will not be viable.
With a market coupler in place, a bidder, be it a seller or buyer, will not be constrained by the fact that he is bidding in the exchange which has only 5% of the market. The market coupler will integrate the bids and determine the market clearing price.
Now that the CERC has given permission to another entity to operate as the third power exchange, it would be proper to give it time to develop so that it can compete with the dominant power exchange of today.
The chances of this power exchange succeeding are very good since it has one of the major trading organisations as a promoter who has the requisite experience and skill.
Moreover, since the problem with SEBI is being eased out, the power exchanges are now in a position to leverage technology and introduce greater product innovation to commence longer duration forward and derivative products for the benefit of power market consumers.
If the market coupler becomes a reality, there will be no incentive left for the power exchanges to innovate since the coupler would centralise the platform.
With increasing renewable energy penetration and involvement of other players like batteries and electric vehicles, there is more of a need for innovation in the market place today which is not possible in a centralised set-up.
In any case, there is no guarantee that the MBED would be a workable solution since one would still have to deal with the legacy of PPAs.
States that have relatively low per unit power purchase cost, for example, Uttarakhand, Chattisgarh and Odisha, are likely to offer resistance to its implementation. There would be the added problem of availability of transmission corridors since the relatively cheaper power will be completely allocated.
To kill power exchanges just to get MBED implemented is certainly not a good idea and would be a classic case of regulatory uncertainty.
The best course of action is to allow the third exchange to mature and use this time to debate on the utility of a market coupler. For this purpose, the CERC should bring out a concept note having more depth than the draft regulations they have recently published.
While preparing the concept note, it would be useful to see what has been the experience of having market couplers in other countries.
One is aware of the existence of market couplers in Europe but there it's coupling across countries, involving several exchanges and moreover, coupling was voluntarily started by the power exchanges themselves. There is no case of compulsory coupling across exchanges.
Finally, it may be mentioned that there are a few issues which have not been addressed in the draft regulations. The first is how to increase the market share of power traded in the power exchanges which is stagnating at 4% for the last five years and the second is how to enable renewable energy participation in the power exchange which is negligible today. These issues could also be included in the concept note to make it holistic.(The author is former Member (Economic and Commercial), Central Electricity Authority, Ministry of Power.)