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India's power market design needs to evolve

August 25, 2022
Kashish Shah
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Key Findings

The Central Electricity Regulatory Commission’s (CERC) proposed market-based economic dispatch (MBED) model can significantly improve cost and resource efficiency.

Regulators should allow new renewable generators to sell more power on open market platforms to increase competition.

System operators should start planning to procure grid ancillary services from battery energy storage and pumped hydro storage technologies, which have faster response times and ramping rates than coal-fired power plants. 

Executive Summary

The rise in India’s renewable energy generation capacity through variable sources like solar and wind is throwing up new challenges for the country’s electricity grid. India’s power market design needs to mature to address the challenges and optimum utilisation of existing resources. Policymakers may consider accelerating several pilot programmes aiming to reform power scheduling and dispatch, potentially saving billions of dollars for electricity distribution companies (DISCOMs). We also believe that a larger shift to open markets will allow competition and add dynamicity to electricity trading. Concerning grid stability, Frequency Control and Ancillary Services (FCAS) should move from un-requisitioned coal-generation capacities to battery storage and pumped hydro storage (PHS) systems. The new regulations for Ancillary Services aim to procure grid management services through the open market mechanism and allow for batteries and PHS to take part in it. This is because battery storage and PHS with faster ramp-up and ramp-down rates are much better for FCAS.

A larger shift to open markets will allow competition and add dynamicity to electricity trading.

India’s power market is transitioning with great momentum, especially in adding renewable energy capacity. India installed a record 15 gigawatts (GW) of renewable energy capacity in the fiscal year (FY) 2021/22. As a result, renewables form roughly a quarter of India’s total installed capacity, with 115GW on the grid.

Further growth in variable renewables will pose challenges to grid integration. Managing the variability of supply on a grid with higher penetration of variable renewables, controlling the fluctuations in frequency and voltage, and maintaining system strength and inertia will require new technical and financial solutions. Therefore, India’s power market design needs to evolve to optimise the utilisation of existing resources and incentivise new technological solutions.

This report reviews the current market design and structure for scheduling, dispatching and financial settlements for India’s power trade and grid management services. Additionally, we refer to structural aspects of other foreign electricity markets to provide learnings for the Indian market.

Currently, 90% of the electricity traded is through long-term power purchase agreements (PPAs). However, the two-part tariff structure of thermal power PPAs has locked electricity distribution companies (DISCOMs) into long-term capacity payments. Combining this with self-scheduling of power dispatch at a regional-level results in a sub-optimal outcome for the DISCOMs.

Policymakers have identified this issue and are actively exploring its solutions.

A Security Constrained Economic Dispatch (SCED) pilot pooled 58.1GW of inter-regional thermal power stations. It recorded a saving of Rs20.7 billion (US$260 million) between April 2019 and February 2022. Policymakers have also proposed a Market-based Economic Dispatch (MBED) mechanism to pool all the generation resources, potentially reducing power procurement costs by Rs120 billion (US$1.6 billion) annually. Further, they proposed a year-long pilot to explore this mechanism in FY2021/22, but there is no publicly available update regarding the same.

In our view, a larger shift to open markets will allow competition and add dynamicity to electricity trading.

India’s Ministry of Power also aims to increase the share of open market platforms in the country’s electricity market to 25% by FY2023/24 from the current 10%. The introduction of competitive day-ahead and term-ahead markets to trade clean power on open market platforms has been quite successful. In our view, a larger shift to open markets will allow competition and add dynamicity to electricity trading. More importantly, they provide a time-of-day price signal for energy storage technology solutions, such as utility-scale batteries, pumped hydro storage (PHS), as well as demand-side management.

These solutions are also crucial for future rise in grid management requirements to deal with frequency and voltage fluctuations.

Since solar generation only happens during the day and wind patterns are highly seasonal and intermittent, the power system needs to evolve and modernise to respond to grid stability challenges, particularly as the share of variable renewable energy rises in India’s energy system.

Increased frequency and voltage variability on the grid requires supporting services, broadly defined as Frequency Control and Ancillary Services (FCAS). These services mainly support the grid operation in maintaining the grid's power quality, reliability and security.

Under the current mechanism, FCAS use the un-requisitioned capacities of coal-fired power plants.

The new regulations for Ancillary Services aim to procure ancillary services through the open market mechanism to make it more cost competitive. Also, it makes way for storage assets more suitable for fast frequency response than coal-fired power plants.

Batteries and PHS can dispatch power during grid events. They can also absorb electricity from the grid to manage its frequency. On the other hand, traditional thermal generation assets and gas peakers can provide these services by dispatching or backing down the power but cannot absorb the power from the grid. Therefore, grids with higher renewable energy penetration will require storage assets to absorb the excess power to avoid curtailments of cheaper clean energy sources.

India’s grid ancillary service market needs modernising and deepening to incentivise these solutions.

Kashish Shah

Kashish Shah is a Senior Research Analyst with Wood Mackenzie. Previously,
he worked as an Energy Finance Analyst with the Institute for Energy
Economics & Financial Analysis (IEEFA). He specialises in financing, policy

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