India‟s electricity sector is currently

Akshay kumar
Sap- 500060968
Roll-17
Batch!- I

Explain the Concept of Electricity Trading in India and how it has evolved post 2003.

India’s electricity sector is currently undergoing reform to introduce competition to the

market. The reform process began in 1990 but the progress in the subsequent years has
been slow. However, the Electricity Act, 2003 intends to accelerate the process of reform.
Although there are many agendas for the intended reform, one of the priorities is to
facilitate nationwide electricity trading at the wholesale level. Such trading activity is
expected to develop an efficient wholesale electricity market in India, which is key to the
success of the sector’s reform. An open, transparent market place would reveal the
inefficiencies of the current system and encourage competition among generators to
improve sector’s economic efficiency.

Electricity sector restructuring is expected to draw private investment, increase efficiency,

promote technical growth and improve customer satisfaction as different parties compete
with each other to win their market share and remain in business. Open access is the key to a
free and fair electricity market. Power producers (sellers) and dealers/customers (buyers)
have to share a common transmission network for wheeling the power from the point of
generation to the point of consumption.

CHANGING ELECTRICITY SUPPLY STRUCTURE IN INDIA

In India power development program implementation was opened to private sector
participation in the 1990s. Existing power supply utilities had to be restructured. By now
most of monolithic public sector utilities (State Electricity Boards/Corporations) have been
unbundled. Non-Government electricity supply utilities are now in the field contributing to
power generation programs and DisComs have
- Higher responsibilities- service parameters include customer satisfaction and ensure cash
flows
- Evolving competitive environment in distribution leading to service beyond tariff collection
- Legal foundation for emergence of competitive or multi-buyer structure in the Indian
Power Sector was laid by the Indian Electricity Act 2003 mandating certain restructuring
needed for the purpose.

The Act also brought in certain legislation empowering the consumers to have a choice to
decide a supplier. The unbundled single buyer model is essentially a chain of connected
monopolies. All generating stations who supply electricity in the state sell to the
Transco. The Transco in turn procures all electricity that needs to be supplied to end
consumers. The discoms can purchase their requirements only from the Transco and
consumers in each of the discoms have no choice but to buy their electricity supply from
the local distribution company, which has the monopoly to serve in that area.

INDIAN ELECTRICITY MARKET & POWER TRADING IN INDIA

Power Trading Corporation of India Ltd. (PTCIL), is the leading provider of power
trading services in India, providing best value to both the buyers and sellers and ensuring
that the resources are utilized optimally. It is a ‘pure-play’ trading entity, and does not own
any generating units or transmission facilities. On the one hand timely payments are
ensured to the sellers of power and on the other hand a definite quantum of power is
delivered to the buyers of power in a reliable manner. It charges a predetermined amount of
transaction charges, worked on a per unit (KWh) basis and catalyses the development of
power projects by entering into multi-year contracts for future trading of power.

Though the power-trading scenario in India is at a nascent stage, it is growing at a

rapid pace. The power market in India has evolved over the last four years and it is expected
that it is likely to grow at a faster pace – with the reforms of SEBs and building up of
transmission highways across the regions to increase Inter-regional power transfer
capacity from currently available 8000 MW to 30,000 MW.

The Electricity Act, 2003, mandated development of power markets by appropriate

commissions through enabling regulations. This paved the way for the new trends to emerge
like Open Access. The open access provided non discriminatory use of the interstate and
intrastate transmission system, facilitating the trading of power from one utility to other. It
also facilitates setting up of Independent Power Producers (IPPs), Captive Power
Producers (CPPs), and merchant power plants. Long-term open access transactions (those
more than25 years) have priority over the short-term open access transactions during
congestion.
The National Electricity Policy, stipulated that enabling regulations for inter-and-intra-state
trading, and also regulations on power exchange, shall be notified by the appropriate
Commissions within six months.

INTER STATE TRADING OF ELECTRICITY

The Central Electricity Regulatory Commission (CERC) has issued final Regulations for
Inter-State Trading of Electricity. The Electricity Act, 2003, recognizes trading as an
independent activity and accordingly prescribes issue of trading licenses by the CERC for
inter-state trading. The Regional Load Despatch Centre (RLDC) is proposed to be the
apex body to ensure integrated operation of the power system in the concerned region.
RLDC shall comply with such principles, guidelines and methodologies in respect of
wheeling and optimum scheduling and despatch of electricity as the Central Commission
may specify in the Grid Code.

POWER EXCHANGE BENEFITS

The trading system is based on an auction mechanism and is divided into multiple sessions
meant for sell, buy, trade matching and price revision. A new trend that is emerging is
that the existing generation companies have reduced their long term power sale
commitments from 90-100% to 75-80% and sell the remaining 20-25% through the open
market which provides them better returns thus improving their financial position. Power
exchanges act as a catalyst for efficient transfer of power at fair and transparent prices using
open access.

CHALLENGES AND ISSUES CONFRONTING THE DEVELOPMENT OF POWER

MARKETS
A number of issues are affecting the development of power markets in India & are :

1. Lack of Participation in Electricity Trading on Power Exchanges

2. Definition of Appropriate Market place and its Forces: In order to ensure the
success of Power Markets, it is imperative to ensure the working of a
free, fair and transparent market place and its various participants. Power
Markets are typically defined on the basis of tenure and geographical
limits.. In addition to this, real time/ balancing contracts also need to
be developed. These contracts are typically based on random events
and contingencies and give rise to intra-day demand and supply need of
power.

3. Introduction of Innovative Market Products: The Indian Power Markets are

characterized by lack of innovative financial products and liquidity. One of the best
ways to attract greater participation and liquidity to power markets is to introduce
various kinds of products to suit different consumer needs.
Long tenure products: week-ahead, 1st month ahead, 2nd month ahead and 3rd month
ahead contracts.

Intra-state products: The intra-state products involve 2-day-ahead transactions wherein a

market participant can buy/sell power from/to other market participant within the same
state.

Day-Ahead-Contingency (DAC) product: It has been designed by PXIL to provide buyers

and sellers with additional opportunity to clear their volume at the end of the day after
trading is over for the day-ahead market. According to PXIL authorities, given the
perishable nature of electricity, surplus electricity which could not be traded during the earlier
session can still be cleared if the sellers reduce their price bids and buyers requiring
electricity match such prices

4. Deficit Market: India is perhaps the only country to have a growing power market in
an overall deficit condition.

5. Pricing Mechanism: While introducing exchange- traded collective transactions, a form

of point-of-connection tariff on MW usage basis was conceptualized. This mechanism
though suitable to the day-ahead market, isn’t amenable to long term contracts. The
pricing mechanism varies across the various categories of trading contracts which makes the
entire process of pricing complex. So, it is essential to define the extent of regulatory
jurisdiction over pricing and demand & supply forces governing it.

6. Regulation: Appropriate regulatory framework to guide the concept of power trading’s

success is critical. Regulators should work in collaboration with the power exchange
authorities to keep in mind participants’ and consumer’s interests and at the same time
ensure a vibrant and smooth functioning of the exchanges.

7. Information Asymmetry: There are a varied group of entities involved in trading

through the Power Exchanges, each having its own set of valid information. There is an
urgent need to streamline all relevant data and develop a comprehensive data to cater to
the needs of power trading and help in making the entire process more efficient.

CONCLUSION
Although the fundamental goal of electricity sector reform is to increase efficiency, it is not
yet clear how best to achieve this goal. As a matter of fact, there exists diversity in the
operation of the wholesale electricity market. The policy makers and the market
participants are ‘experimenting’ with various procedures to promote
electricity trading. Hence, the selection of appropriate strategies for India to follow in
developing an efficient wholesale market remains controversial.

„experimenting‟ with various procedures to promote