Fixing India’s power market to help add more renewables

While India has a power market, it is far from optimal. Only 7% of India’s electricity generation is traded through three power exchanges (Indian Energy Exchange Ltd (IEX), Power Exchange of India Ltd (PXIL), and Hindustan Power Exchange Ltd).

IEX and PXIL also have a disproportionately high share of several market segments. But most importantly, the cost of purchasing electricity from these exchanges differs as each develops its own market clearing prices (MCP).

The situation needs to change, especially as soaring peak power demand and an alarming rise in pollution have spurred the need for renewable energy. India’s peak power demand reached 238 gigawatts (GW) in August 2023, rising to 243GW in September.

According to the CEA’s projections, installed renewable energy capacity is likely to grow from 179GW in October 2023 to 777GW by fiscal year (FY) 2029-30, to cater to peak demand that is likely to reach 335GW by then.

Integrating that much renewable energy into the grid requires a change in electricity procurement by power distribution companies (DISCOMs). They need to shift from long-term Power Purchase Agreements (PPAs) to a more dynamic power market. Despite renewable energy generators offering lower rates, DISCOMs pay more for fossil fuel-generated electricity to honour their PPAs. In contrast, a dynamic power market enables optimum trading and utilisation of renewables to meet the growing power demand, manage intermittency, facilitate price transparency, promote competition and drive innovation and advancement in renewable technologies.

No wonder the Central Electricity Regulatory Commission (CERC) has taken measures to correct the fragmented market and pricing structure by pushing for market coupling. The mechanism aggregates buy and sell bids from all power exchanges to discover a uniform MCP. As a result, it will keep price variations in check, allow optimal allocation of transmission corridors and make transactions efficient.

Such a move will likely introduce fair competition, leading to increased trading volumes. Although, there is a risk that it may diminish the role of individual exchanges, impacting the innovations in product design and associated clearing algorithms.

The CERC’s market coupling proposal extends its reach beyond just linking power exchanges; it intertwines with interstate generators (ISGS) scheduling through Grid-India’s Security Constrained Economic Dispatch (SCED). Essentially, it will ensure that the electricity generated in one place efficiently goes to the demand centre, leading to a stable power grid, optimum utilisation of renewable energy and encouraging more electricity trading through a market mechanism.

Given India’s complex two-tier electricity market structure, comprising ISGS and private generators, CERC will need to tailor market coupling solutions, starting with pilots to suit both.

Structured administration and an institutional framework

Implementing market coupling requires a holistic approach to electricity market design, encompassing long-term capacity markets, short-term markets and ancillary services markets.

Seamless integration will also depend on selecting a proficient Market Coupling Operator (MCO) that adapts rules for fair competition, safeguards existing exchanges and establishes robust monitoring mechanisms. It will collect the bids and discover the price while also being responsible for registrations, deposits, payment securities, settlement of financial dues and so on. The debate on who should be the MCO – Grid-India, a new entity or a roster system that gives each exchange a turn – is ongoing.

Flexible Regulations

Adaptable regulations that accommodate evolving market segments, foster participation from demand-side resources, refine market signals to mirror actual supply-demand dynamics and develop sophisticated algorithms that fortify the efficacy of market coupling.

Currently, the three exchanges have different processes and algorithms for MCP. The design and implementation of sophisticated algorithms for market clearing, congestion management and price determination will be crucial for uniform price discovery. These algorithms should consider factors such as transmission constraints, complex generator and demand-side bids, unit commitment decisions, technical constraints on ramping, minimum up/down time and ancillary services.

Renewable energy integration and grid stability

Market coupling also intersects with the wider canvas of the renewable energy landscape. A sustainable energy ecosystem requires regulatory frameworks that value renewables’ contribution to grid stability and optimise ancillary services.

There is also a need for regulatory interventions that prevent panic buying situations leading to ceiling rate hits while maintaining market competitiveness and transparency. High temperatures and increased power demand led to the power market’s ceiling rate hitting the limit of Rs10 per kilowatt-hour in April 2023.

Lack of planning for resource adequacy by load serving entities (DISCOMs) led to above situation where the buyers place bids for a high quantum (even more than their requirement to overcome partial clearance situation) and at ceiling rate to maximise chances of clearance. As a result, even though the generators are willing to sell at their respective marginal rate (which is lower than ceiling rate), the rate discovered becomes the ceiling rate. Additionally, there is no check for adequate sale bids available on exchanges and it is left to sellers’ choice.

Market coupling holds immense potential in transforming India’s energy landscape. Still, collaborative efforts among policymakers, regulators and market players are key to realising its full benefits, fostering a resilient, efficient and sustainable power market to revolutionise electricity procurement beyond long-term PPAs and meet the nation’s burgeoning energy needs through renewables.

(This article was first published by Financial Express)