Global best practices of Market based

RE capacity addition
Introduction about IEX and Role of Power Exchange in India and Global benchmarking

Transparency | Competition | Liquidity

IEX Snapshot Market penetration (DAM) Global Benchmarks

• 32% CAGR growth since inception • Countries with higher RE penetration have
97.5% higher market penetration as well
Market Share • However, market penetration has remained
stagnant • Share of Power Exchange in developed
economies is more than 50% vis-à-vis meagre
6,000+ MW ~3-4% in India.
Average Daily Trade
Exchange Traded Volume, MUs
Exchange Traded Vol. as % of Total Generation
Exchange Traded Vol. as % of Total Generation

6,000+
Market Clearing Price (Rs./unit)
RE 31% 17% 30% 31% 11%
Participants 3.51
2.73
3.26 3.01 3.00 2.82 Share
2.41

4% 4% 4%
306 MUs 3% 3%
91% 88%
78%
Highest recorded daily volume 60,416
50,061 53,880
39,783 44,842 39%
28,124 33,956

1,500+ 6%
RE Generators and Obligated
entities UK Nord USA, Germany India
FY15 FY16 FY17 FY18 FY19 FY20 FY21 California

Source: IEX Source: IEX Source: CAISO, European Commission, IEA

Overview of Transition in Energy Sector

Source: IRENA 3
Focus on Greening the Grid in India

Policy push towards achieving sustainable development goals

Capacity Investments RE Tariffs

Target

45 Investment in India’s RE sector, Billion USD Trend of solar tariffs vs installed capacity
Wind Solar
0
50 12.16 15.00
RE Capacity (GW)
Completed 40
Solar Tariff (Lowest)
7.92 30 7.00 10.00
5.97 5.50 5.25
17 4.34
9 5.78 20 2.97 2.44 2.44 2.70
5 4.95 1.99 5.00
8 0 10
3 5 6 7
3 6
9 0 3 1 - 0.00
6 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
FY15 FY16 FY17 FY18 FY19 FY20 FY21 2022 2030 FY18 FY19 FY20
Source: CEA, SECI, FY 21 Data till Nov 2020
Source: PIB; Power Minister’s speech in Rajya Sabha; FY 20 numbers are till Dec 2019

• India now at 4th global position for overall

installed RE capacity
• Enhanced target of 450 GW by 2030
• ~50 GW of RE capacity added in last five years
with a CAGR of 17.33%
Govt’s commitment towards RE
• Investment of around 30 Billion USD/ annum
will be required in next 10 years to meet
Paris Climate goal & RE capacity target (Ref:
Eco Survey 2018-19; WEF).
• Sector attracted FDI of USD 9.7 Bn between
2000 and 2018 (Ref: WEF)
• Solar tariffs have reduced by 80% since Dec
2010
• Facilitation through large SECI auctions, decline
in Solar Module cost & regulatory support etc
are key factors

“There are huge renewable energy deployment plans for the next decade and are likely to generate business prospects of the order
of around $ 20 billion per year” – PM Narendra Modi
Policy Directions in India: Market based sourcing of Electricity

Vision 2024

“Government is committed to introduce suitable market mechanisms and also deepen the Spot

Monthly Avg. Generation MWH

market by enhancing its percentage share to about 25% during the year 2023-24
- Draft National Electricity Policy, 2021

❑ Introduction of New Market & Products

✓ Capacity Market for transition from rigid PPA to Market based capacity auction

✓ Longer Duration Contracts (Extension from currently available 11 day forward to 1 year)

✓ Electricity Derivatives contracts (Hedge risk of Participants in Spot Market)

❑ Introduction of centralized Dispatch of Power

Govt has proposed Market based Economic Dispatch of Power, which essentially aims to route dispatch of electricity through
Centralized market at country level
Role of Market in RE addition & RE integration

Among various measures, Power Market can play significant role in addressing the roadblocks to RE capacity addition

Power Utilities Facilitators RE Generators

Transmission Power Markets • Better forecasting and scheduling

• Investment in power evacuation
infrastructure
Generation
• Improve flexibility of generation
sources for absorbing RE variability
Distribution
• Demand side management for
absorbing RE variability
• Efficient scheduling and dispatch of power • Investments for capacity addition
• Payment security
• Larger balancing area
• Ancillary market for balancing
• Exchange of power from RE rich states to others
• Better price signals
Regulations
• Enforce grid discipline through F&S/ DSM rules
• Enablement of ancillary market
Commercial/ Lenders
• Concessional funding for RE projects
• Financial derivatives for hedging long term risk
Power Market: Key driver for RE capacity addition in developed economies

❖ Countries such as UK, US, Germany has more than 50% of electricity traded through Market.

❖ This has been a key driver of RE capacity in these countries & RE power is participating in the market in competition with all other forms of power

RE* share in Generation

0% 10% 20% 30% 40% >50%

RO FiT CFD, Capacity Markets UK

(2002) (2010) (2013)

Resource PIRP (2013) Western Energy

RPS USA (California)
Adequacy (2006) Imbalance Market
(2002)
(2014)
FiT EEG (2000) Market Premium/ CFD Market Reforms
(2012) Germany
(1991) (2015)

FiT Auctions Brazil

(2002) (2007)

FiT RPO
(2013) (2015) China

Legend
India
Tariff related support
RPO/ REC support
*Excluding hydropower
Power market reforms
RE journey of India vs other countries
PIRP – Participating Intermittent Resource Program FiT – Feed in Tariffs
EEG – Renewable Energy Act
CFD – Contracts for Difference RPS – Renewable Portfolio Standards
Understanding of Contract for Difference
Mechanism for protecting revenues of RE generators

Market based Bilateral Contract Settlement (BCS)

If Market Price is more than Guaranteed
Under this Model, Nodal agency enters into contract with RE Price, difference is paid by the generator
Generator with commitment to pay Strike Price (auction
discovered). RE Generator sells power in the Whole sale
market

➢ When Market rates > Strike Price (auction discovered),

generators pays excess to the Nodal agency

➢ When Market rate < Strike Price (auction discovered),

Nodal agency the shortfall to Generator.
If Market Price is less than Guaranteed
➢ Settlement between Nodal agency & Generator can be
Price, difference is paid to the generator
done on annual basis.

• CFD has been adopted by several countries like UK, Germany, Australia, France, Italy, Portugal, Sweden, Spain, Switzerland etc.
 Working of Contract for Difference model in UK & Germany

UK CfD Model Germany Feed in Premium Model

✓ UK’s Energy Act 2013 made a provision for Electricity ✓ Renewable Energy Sources Act 2017 came into force in the
Market Reforms (EMR) to incentivise investment in low year 2000 and till Jan 2017, the support to RE was through
carbon generation. administratively declared Feed-in Tarif Model.

✓ Each year different RE capacities are auctioned. ✓ Through Jan 2017 EEG reforms, the support to RE given
through “Feed-in-premiums” through competitive
✓ LCCC (Low Carbon Contracts Company) has been auctions.
entrusted with responsibility to manage CFDs throughout
their lifetime, managing the Pool & settlement through its ✓ Each month different RE capacities are auctioned.
settlement arm (EMR settlement).
✓ Nodal agency compensates for difference between feed-in-
✓ The deficit in the Pool is socialized through levy of tariff (auction discovered) and Market Price.
Suppliers Obligation Levy.
✓ The deficit in the Pool is socialized through levy of
✓ Tenure of the PPA is 15 years. Renewable Energy Surcharge.

✓ Tenure of the PPA is 20 years.

Source: Annual Report LCCC,UK, FY19 Source: Federal Ministry for Economic Affairs and9Energy, Germany 9
Trends of CfD based auctions in UK

❑ 1st Round of CfD Auction, 2015

▪ Capacity Auction ~ 1.9 GW TRENDS OF UK CFD AUCTIONS

▪ Avg. discovered Rate – 100 £/MwH (Rs 10/KwH)
15 150

❑ 2nd Round of CfD Auction, 2017 10 100

£/MwH
GW
▪ Capacity Auction ~ 3.3 GW 5 50
▪ Avg. discovered Rate – 57.5 £/MwH (Rs 5.8/KwH)
▪ Almost 50% decline wrt to 1st Auction 0 0
2015 2017 2019 2021
GW Capacity Auctioned Avg. Discovered Rate
❑ 3rd Round of CfD Auction, 2019 £/MwH

▪ Capacity Auction ~ 6 GW
▪ Avg. discovered Rate – 40 £/MwH (Rs 4/KwH)
✓ There has been almost 60% decline in discovered tariff under CfD,
▪ Almost 30% decline wrt to 2st Auction
since 2015.

✓ This model is now a successful & Proven model with 3 auctions

❑ 4th Round of CfD Auction
already done & 4th auction is expected by year end.
▪ 12 GW (Expected to be auctioned soon)
Source: CFD Allocations, KPMG 10
Price trends after CfD reforms: International Trends

Impact of market based mechanisms on RE price discovery and capacity addition

United Kingdom Germany

USD/ Kwh CFD mechanism MW USD/ Kwh Market Premium MW

introduced (2013) model introduced
0.50 40,000 0.35 1,20,000
(2012)
0.464 0.327
35,000
0.40 0.30 1,00,000
30,000 0.244
0.30 25,000 0.25
0.233 80,000
20,000
0.150 0.20
0.20 15,000 0.149 60,000
0.107 0.087
10,000 0.15 0.112
0.10 0.096
5,000 40,000
0.10
0.00 0.062 -
2000 2003 2006 2009 2012 2015 2018 0.05 20,000
0.074
0.00 -
2000 2003 2006 2009 2012 2015 2018
Wind (MW) Solar (MW)
Wind (MW) Solar (MW)

Pre-reform Post-reform Pre-reform Post-reform

• Price reduction: 1.6% CAGR • Price reduction: 6.5% CAGR • Price reduction: 3.6% CAGR • Price reduction: 4.2% CAGR
• Capacity Added: 14 GW • Capacity Added: 21 GW • Capacity Added: 59 GW • Capacity Added: 39 GW

Source; IRENA; Data for period 2000 to 2018; Price reduction shown for wind generation as data for Source; IRENA; Data for period 2000 to 2018; Price reduction shown for wind generation as data for
solar is available from 2010; Capacity addition for wind and solar combined solar is available from 2010; Capacity addition for wind and solar combined
11
Longer Term Price Signals – EU experience

❖ The power sector is a rather capital-

intensive business with long investment
cycles, because plants operate for 20
years or more

❖ Even assuming further technology cost

reductions of renewables, their ability to
recover full costs under the current
market framework, which is based on
short-term price signals, will be subject
to high uncertainty

❖ Bilateral long-term contracts generally

face the challenge of a counterparty
default risk, which results in a cost of
guarantee, i.e. an amount that is
compensated, if the contract is annulled.

German Forward Market - On today’s forward markets, the most

popular contract types have a duration of one year and offer
various forward periods.
Market based Models addresses key sectoral addresses

Meets requirements
of all stakeholders
Forecasting & Deviation

PPA protection Adoption of all technologies

(Solar/ Wind/ Storage etc.)
Generators

Reduction in Cost CFD Enhanced Grid Parity

of Energy
Discom/
Consumers
Payment Security Larger balancing area

RPO
Lenders

Market based Models: Mechanism for resolving sector issues and

facilitating RE capacity addition
Model : Nodal Agency executes PPA, aggregates and sells electricity & RECs in Market

❖ Nodal Agency gets RECs & Sells in Market.

❖ Nodal Agency executes PPA with Generators. ❖ Nodal Agency owns the responsibility to fund Pool deficit, if any &
❖ Nodal Agency buys Power from REG & sells in market. settlement of payment with Generators.

Takes realization for Electricity & RECs Nodal Agency pays to Generators as per payment cycle
Market Price Auction /Strike Price
Sells electricity +
in integrated
DAM Market
- Nodal Agency & REG executes PPA
Nodal through auction
DAM+REC G-DAM
Agency
RE Generators
Nodal Agency buys Power
from REGs
Nodal Agency uses Pool to
settle Generator’s dues

Deficit, if any, can be paid through:

1. ISTS Charges 2. Green Cess on Coal
3. RPO Penalties

Nodal Agency transfers the realization from market

to Pool Pool

14
Roadmap to large scale RE Capacity addition

Transition from PPA to market based mechanism for new capacity addition

Introduce RE on Enhance RE share in Entire RE on

exchange market markets

Possibilities in current 175 GW RE 450 GW RE

market
CFD + Merchant
Merchant Capacity + CFD

Merchant/Market traded capacity

PPA Route RE Traded on Market

• Most of the Capacity under PPA to be

exchange traded, protected through
bilateral CFD
• 90% capacity under PPA + 10% capacity
merchant basis
• Higher Portion of Merchant RE
• Majority RE capacity addition under Merchant mode.
capacity

Contractual Protection Scheduling Safeguards Market participation

Thank you
@IndianEnergy @indian-energy
@IEX_India_
ExchangeLtdIEX -exchange-limited

Phone: 0120 4648100

Email: contact@iexindia.com

Website: www.iexindia.com

16
Comparison of Scenario:

Parameter Base Case Scenario 1 Scenario 2

Demand Growth 4.9% 6.3% 5.46%

(Avg CAGR)

Monthly Avg. Generation MWH

Demand 2030 Before Agri Shift - 291 GW Before Agri Shift - 328 GW Before Agri Shift –
After Agri Shift – 348 GW After Agri Shift – 406 GW After Agri Shift –
Energy – 2158 BU Energy – 2280 BU Energy – 2231 BU

Thermal Decommissioning 35 Years of Operation 50 Years of Operation 40 Years of Operation

Monthly Avg MCP for 2024- Rs 4/Unit Rs 4.37/ unit Rs 4.35/Unit

2039

Yearly Avg of Wt.Avg Monthly Rs 3.10 Rs 3.45/Unit Rs 3.32/Unit

realization for Solar from
Market for 2024-2039
(Without REC)
Market based Mechanism : BCS based Market Model

Market based Bilateral Contract Settlement (BCS) BCS based Market Model
Under this Model, Nodal agency enters into contract ➢ Different capacity and different range of technologies can be
with RE Generator with commitment to pay Strike Price added in the Pool each year based on auction discovered prices.
(auction discovered). RE Generator sells power in the
Whole sale market ➢ Weighted Avg. Tariff of the Pool keeps declining each year as
newer generation capacities are added at lower cost, due to
➢ When Market rates > Strike Price (auction
declining cost of RE.
discovered), generators pays excess to the Nodal
agency Illustratio
n
➢ When Market rate < Strike Price (auction
discovered), Nodal agency the shortfall to Auction Auction Wt. Avg
Generator. Year 2022 Year 2023 Tariff

➢ Settlement between Nodal agency & Generator can Capacity Auctioned 500 MW 1000 1500
be done on annual basis. MW MW
➢ This mechanism of RE capacity addition is followed
in UK & Germany.
Discovered Strike Price Rs 2.5/Unit Rs Rs 2.30/Unit
➢ In UK, this mechanism is called ‘Contract for 2.20/Unit
Difference” (CfD) & in Germany this mechanism is
called “Feed-in-Premium model” (FIP).
18
Trends of FIP based auctions for RE capacity addition in Germany

Renewable Energy Sources Act, 2017 (EEG)

✓ Since 2017 Reforms, series of auctions have been conducted and more than 15 GW has been auctioned.
(4.8 GW in 2017, 5.10 GW in 2018, 4.7 GW in 2019 & 2.8 GW in 2020)
✓ Germany has adopted multiple auctions instead of yearly auction (UK).
✓ Over next 10 years, 30 GW of Onshore wind and 12 GW of Solar would be auctioned through Feed-in-Premium Model.

MW

1 € Cent (Ct) ~ 90 Paisa

Source: Federal Ministry for Economic Affairs and Energy, Germany Source: Auctions for the support of renewable energy in Germany, AURES 19
Cost of Grid Integration in India

Lowering the cost of RE integration through Power Markets

Absence of deep power markets may create grid variability issues leading to higher cost of energy for
consumers
Following facets of power markets can help
resolving these issues
Increasing capacity in RE rich states
without larger balancing area may
lead to curtailment
Upto 8.3% curtailment1 with 275 GW 1 Long term price signals
RE capacity in country
RE Curtailment
2 Short term price signals
Thermal Flexibility

3 Larger balancing area

Without co-optimized reserves
procurement, balancing costs will
increase 4 Grid Discipline
Opex cost2
of Rs. 0.45/unit for running
plants at min load
5 Transparency in scheduling

United States of America (California)

6 Payment Security
34% of California ISO’s load served by 50% In 2015, RE capacity added was almost double of
34% renewables in 2018 requirement under RPS mandate3

Source: 1) Greening the Grid Report

2) CEA Report on flexible Operation of Thermal Plants
3) Annual report of US RPS standards