INDIAN POWER MARKET

Overview

Indian Power Market starts from the policy making at government level both Central & State and
Central Electricity Authority (now onwards CEA) is the statutory authority in this market. Statutory
authorities at both central and state level namely Central Electricity Regulatory Commission (CERC)
and State Electricity Regulatory Commission (SERC) respectively monitor and regulate the policies.
Then there is a statutory authority in the form of National Load Dispatch Centre (NLDC) which
coordinates the smooth functioning of Regional Load Dispatch Centres (RLDC) and State Load
Dispatch Centres (SLDC). Load dispatch centre ensures safe and secure grid operation by
coordinating between generation and transmission.

Power generation in India is a competitive market in which all central, state and private players
compete. Transmission and distribution sector have all the players including private players but it is
a regulated sector.

Lastly comes, the power trading market with a little share in power market where competition is in
trading licensee, power exchanges and bilateral markets.

To understand further the power market in India it is required how power is get traded on actual
basis. As power market is dominated by long term PPAs so it is better to distribute the trading in
three parts namely long term PPAs (10-25 years), medium term PPAs (3-5 years) and short term
PPAs (on the spot to one month). It was always traded between two parties from the start but in a
completely regulated way. From investors to generators to consumers along with regulators
everyone knew about their assured returns. It’s a different chapter that in this process consumer
(SEBs) didn’t grow because of political reasons and their inefficiency.

Generally, generators in India install their power stations on the basis of Power Purchase Agreement
(PPA) with consumers and large consumers are State Electricity Boards (SEBs). This long term PPA
between generator and consumer ensures return on investment and attract investors to invest in
this sector.

There is some flaw in long term PPAs because electricity cannot be stored and hourly forecasting for
peak load cannot be done without errors which makes long term PPAs for peak load requirement
costly for consumers. In addition to this consumers are getting power at cheap rates in exchanges
and trading. Further, most of the states declared as power surplus. It is a known fact now that SEBs
started refusing to adhere with long term PPAs.

Short term PPAs, trading a day ahead to real time and bilateral trades started to complement the
long term PPAs to meet the demand and supply curve. Short term trade is done through exchanges
and two major buyers in short term trading are DISCOMS and industrial buyers. In India,
transmission companies central, state or private cannot generate electricity and participate in power
trading. Their function is just to provide open access to use of their transmission system.

Trader in power market is who facilitates the transactions between buyer and seller and is not
authorized to own any physical asset related to power. However, DISCOMS are allowed to trade in
electricity without having a separate trading licence.
Literature available

As per the Business Standard’s article on 15 th July 2019, PPAs loosened their dominant grip from
93.86 % in FY09 to 88.30 % in FY19 and power exchanges and bilateral trades moved up from 6.10 %
in FY09 to 11.70 % in FY19. It is also to be considered that power generation is also increased about
6 % from FY09 to FY19. Further, 65 % to 70 % of short term transactions are done through power
exchanges.

As per Economic Times article dated 05.02.2019, CERC pushes for 100 % power sale in spot market
to lower the tariffs and promote efficient plants. The same report says that short term market in
India is stagnant at 10 % and European & US markets at 40-60 % from last five years.

As per CERC notification No.L-7/143/158/2008-CERC, dated- 16.02.2009, power trading opened for
all. However, this step was taken in 2009 but not much literature is available in public domain.
Recently only major stakeholders in power sector started talking about it. Now, stakeholders started
feeling that power market scenario can change in near future. However, uncertainties over
implementation are always here but power generators started preparing for the same.

As not much literature is available on Indian power trading, it is better to understand from other
economies of world and nothing will be better than taking example of USA and China as they are
world’s two biggest economies with 180 degree opposite government structure.

In USA, electricity is regulated. Energy policy Act of 1992 removed the obstacles and promoted
competitive market. However, in practice regulation is still dominating with a trace of competitive
market in certain areas. And this regulated market is in place when 80 % of electricity generation &
75 % of electricity distribution in US is done by private players. US power sector is supported by tax
incentives, subsidies, feed-in tariffs for renewable energy and support to low income households to
pay their electric bills.

China, the largest electricity producer implemented an Electric Power Law in April 1996 to develop
the electric power industry and to regulate generation, distribution and consumption along with to
protect legal rights of investors. Earlier it was completely managed by electric power bureaus of
provincial governments. In 2002 China set up 11 companies (2 power grid operators, 5 power
generation and 4 relevant business companies). China tried to make the market competitive but
power sector is still regulated.

With the Paris Agreement on climate, India started focussing on renewable energy especially in solar
power. In this series India included the hydro projects in renewable energy sector and made the
obligations for consumers to buy a certain percentage of power from renewable energy sources. It
will start from 10.50 % in 2020 to 17.50% by 2022. With subsidies in solar power, it was started
picking up and tariffs which were once around Rs 17 per unit reduced to below Rs 3 per unit. This
concept of power purchase obligation and subsidies to promote renewable energy and to support
the power sector not exists only in developing countries like India and China but in USA also.

In US, these types of renewable power generating stations have special rates due to regulations and
called as qualifying facilities. Distribution power utilities have obligations to buy power from these
qualifying facilities at a regulated rate or negotiated rate.
Long term PPAs are to ensure to meet the demand in longer terms. These PPAs generally take care
of minimum power required and to avoid extra payment during peak load. In countries like US also
to make the power projects feasible generators are paid for how much they can produce i.e PAF
rather than how much they generate i.e. PLF. Generators get their fixed price just to keep their
plants ready for generation.

As it is difficult to predict the forecast of power required at different times without error. Longer the
time more difficult it is. Medium term PPAs came in picture to take care of this difficulty. In US short
term PPA generally means to agree to provide electricity at certain times upon an agreed price as on
today or through exchange on the day required. But in India it generally means to shorten the length
of long term PPAs from 15-20 years to 3-5 years which sometimes goes as low as 1 year.

Short term PPA take care of meeting the demand and supply on real basis. Participants buy and sell
power a day ahead instead of years. It is like bidding in share market, buyers bid to buy power just a
day ahead of their actual requirement and generators offer price according to the demand and their
availability. In addition to this there is intraday/ on spot power trading also.

US faced the problem of stressed assets in power sector and demand of high tariff and long term
PPAs by generators in somewhere 1980s which India is facing today. Private players bid the low
tariffs to install capacities and then demanded for high tariffs, SEBs are not adhering already signed
long term PPAs, investors are not ready to invest because of uncertainties in this sector.

Regulators in US took some steps like energy conservation and resource adequacy to come out of
this problem. Then regulators authorized non utility generators to sell their electricity to utilities and
utilities could buy capacity rather than building their own plants. This is already allowed in India.
Then US regulators reorganised transmission entities in regional transmission operators, it means
making the sector more regulated. India is already having this regulation in transmission.

In 1998, US tried to make power sector as a competitive sector by liberalization in the form of
avoiding long term PPAs. It brought disaster to the sector with high fluctuations in wholesale prices
and no change in retail prices for first four years. Utilities failed to recover their cost and were on the
verge of bankruptcy. This California market failure in 2001 is an alarm for power markets around the
globe that how policy changes can finish a sector in this short period of time.

Problem

DISCOMS generally buy power in exchange to meet the peak load requirement only. At the same
time India is declared as power surplus which means supply is more than demand. And because of
this reason only rates are less in exchange.

Now the problem is, if long term PPAs are vanished, investors will not invest in power sector and if
adhere with long term PPAs then electricity tariffs are getting high and becoming financial burden for
consumers. However, for the growth of power sector in India healthiness of both generator and
consumer is required. Investment should come in sector without burdening consumer.

Let’s take an example of 1200 MW Hydro Power Project of Teesta Urja Limited (TUL) under PPP
model costing Rs 17000 crores. As per its audit report of FY 2017-18 it made a loss of Rs 700 crores.
TUL signed PPA with Punjab, UP and Rajasthan government at the cost of Rs 1.00 per unit but after
commissioning CERC finalised the tariff of Rs 6.48 per unit. States are not able to bear the burden of
this cost so states refused to buy the power at tariff decided by CERC. TUL is forced to sell its power
in exchange where rates are ranging from Rs 2 to Rs 5 hence making the project a stressed asset.

Another problem in India is the health of DISCOMS and political will. DISCOMS are not able to
realizing their payments from retail consumers mostly because of political interference and the best
example is waiving of electricity bills of retail consumers. This cannot be done in energy exchange
and DISCOMS needs liquidity which they don’t have because of poor realization of payments. Power
is required for development of poor people and poor needs support and in process this support
extends to DISCOMS and further to generators. In long term PPAs, generators and investors are
somehow get assurance that they will get compensated with payment or by some other means. But
to buy power in exchange, DISCOMS needs to be healthy.

With certain reforms in electricity act, market is becoming competitive but no one knows how
sustainable this competition for power market as a whole in India is.

Analysis

USA a capitalist country where 80 % of power is generated by private players and 75 % of

distribution is done by private players has a regulated power market with a good support of
subsidies and tax incentives.

China a communist country where government controls everything took out the power sector from
provincial governments and made 11 companies and sold out many states owned assets also to
make the sector competitive. However, by large power sector is still a regulated sector in China.

World’s two biggest economies with a 180 degree opposite set of governing system have regulated
power market with some sort of competitiveness under complete regulation.

It is understood that when a capitalist and a communist economy is trying to balance between
competition and sustainability, India as a mixed economy and as a developing country have no
choice but to make a balance between competition and sustainability.

Success of European exchange is also stopped at 60 % share. CERC’s claim of 100 % power purchase
through exchange seems not feasible for few more decades.

As per data from www.next-kraftwerke.com, power exchanges are in use in European countries
only. As per this data, the only successful power exchange is in European countries.

The reason behind its success is pooling of different sources of energy like hydro plants in Norway
and thermal and nuclear plants in Sweeden. With time other countries also started pooling and
selling their power through exchange mostly cross border. Renewable energy sources can produce
electricity in specific time and not for 24 x 7 like solar can produce electricity in day time only and
that too is free from clouds. If power is not sold in that time only then it cannot be used later.
Pooling of their energy sources complemented each other and power exchange reached at 60 % of
power market share in European countries. It is necessary to consider that this share is stagnant
from last five years and it shows that in matured markets also base load is being taken care by long
term PPAs.
As per CEA’s July’2019 data, India’s installed capacity is as follows.

Coal = 227 GW, Nuclear = 7 GW, Hydro = 45 GW, RES = 80 GW, Total = 360 GW.

RES has 22 % share and hydro has 12 % share only. When it is being said that renewable energy
complement base load by taking care of peak load requirement doesn’t mean that it complement as
a whole. Most of the time RES complement each other only like when solar is generating good in
summers and day time, wind generates good in monsoon and evening time. RES & hydro’s share is
too less to dominate the energy exchange.

There are transmission constraints with adding up of RE in main grid because of its fluctuation in
generation.

A father should not feel happy in saying that his child earn by polishing shoes but to support him to
his adulthood to make him a better competitor in this competitive world. Indian power market is not
matured enough to take care of itself and it needs policy support for some more time.

This balancing can be done by meeting the base load requirement through long term PPAs and
meeting peak load requirements through power exchange. This peak load requirement fulfilment
needs to be done through obligatory purchase from renewable sources only.

It is possible to increase the share of power exchange by pooling with neighbouring countries. Scale
of economies also plays a significant role in power exchange.

Conclusion

It seems that this is a never ending circle of subsidies and realization of payments through other
means, but it is not. The only thing is that our power market is not mature enough and needs policy
support for few more decades and it is understood that trading will have its share in Indian power
market which will further increase at slow rate. This increase will be their because of obligation of
power purchase from renewable energy and renewable energy will itself take few decades to
become a sustainable market.

Long term PPAs are required generally for coal thermal power plants and because of coal’s
availability in abundance, it is expected by Indian power sector that it will dominate for few more
decades.

Long term PPAs are also required to make the power sector capable to meet the demand at any
point of time and attract investors to install required capacity. With incentives to renewable and non
to conventional source of energy leads to low PLF.

It simply shows that power exchange dominance will come with dominance of renewable energy in
Indian power market.

Economic Times of 23.08.2019 reported that Union Power Secretary said IBC can’t resolve power
sector crisis, but ARCs can. Overall stressed portfolio in power sector is around Rs 4 trillion or over
65000 MW. He also said that ARC model is also not developed in India. Further he said that power
ministry is making scheme on the lines of Uday scheme to ensure that DISCOMS will pay timely for
the power using by them. It will be backed by incentives and investment support by government. It
is also known that Rs 40000 crore of bills are unpaid till now and DISCOMS started delaying
payments after Uday scheme.

It is for sure that policy support is required for next few decades, followings are required make the
market competitive and sustainable:-

1. Tariff should be linked with PAF rather than PLF as in case of hydro.
2. Decide the base load after complementing the RES & hydro with each other.
3. Pooling with neighbouring countries to make it more feasible as it works on economies of
scale.
4. Bring the conventional source power under trading with certain incentives.
5. Tax incentives to investors and generators to sign short term PPAs through exchange.
6. Pre paid electricity smart meters for realization of payments by DISCOMS.
7. Subsidies to poor citizens through direct payment in their accounts.