The Aakhya Weekly #52 | A New "Power (market) Couple" in Town?
The Aakhya Weekly #52 | A New "Power (market) Couple" in Town?
In Focus: The visible hand in power markets
The Ministry of Power, on 2nd June, asked the Central Electricity Regulatory Commission (CERC) to initiate the process of “market coupling” of power exchanges by beginning the stakeholder consultation process for its implementation.
Power exchanges are commodity exchanges, where buyers and sellers come together to discover the ‘market price’ for the commodity being traded. On Indian power exchanges, one can transact for power under various contracts, ranging from the power traded on the same day to up to 11 days in advance. One can also trade renewable energy and associated environmental attributes, such as Renewable Energy Certificates. Power exchanges are similar to exchanges we are more familiar with, such as the Bombay Stock Exchange. One crucial difference, however, relates to the nature of the commodity being traded. Electricity requires transmission infrastructure for physical delivery of energy. Therefore, one also needs to allocate transmission capacity when trades are made.
There are currently three operational power exchanges in India - Indian Energy Exchange (IEX), Power Exchange India Ltd. (PXIL), and Hindustan Power Exchange (HPX). As of FY23, IEX commands a veritable monopoly, with nearly 90% of the market share. However, not all exchange of power, in India, is done via exchanges. Long-term, bilateral power purchase agreements (PPAs) still contribute the bulk (87%) of volume of electricity traded, with power exchanges trading only around 7-8% of the volume. That said, as electricity demand in India grows, and more electricity sector reforms are introduced, the volumes traded on exchanges are likely to increase, as will their significance.
The Ministry of Power’s new initiative is likely to shake up how these exchanges function. Market coupling, as is commonly understood for power markets, refers to interconnecting geographically distinct electricity markets to enable the flow of power from an area with low marginal price to an area with a high marginal price - as was the case when power markets of EU countries were coupled to enable better price discovery and maximise economic surplus generated.
In contrast, in India, there are no geographically distinct markets. All exchanges operate across India on the national power grid and perform the same functions. A power exchange collects bids from buyers and sellers, and then sets the market clearing price (MCP), which is paid by the buyers to the sellers of power. A market participant is free to choose their choice of exchange, discriminating on the parameters that are of importance to it (products offered, liquidity at hand, customer service, etc.).
What the Government intends to do, however, is establish a Market Coupling Operator (MCO) atop of the existing exchanges. The exchanges will be required to send their aggregated buy and sell bids to the MCO, which will then determine the MCP, matching buy and sell side bids. This will, therefore, take away the ‘price setting’ function performed by the exchanges, and turn them INTO mere bid collectors. Imagine if SEBI were to link the BSE and the NSE, such that it made no difference where you placed a trade, for all trades would be matched independently of the exchange where they were made. The Ministry of Power’s recent moves resemble such a situation.
The idea of coupling markets was first floated in the draft power market regulations, 2020. The rationale provided by the government in the explanatory memorandum was as follows: a multi-power exchange model may result in scenarios in which:
(i) there is difference in the prices discovered on different power exchanges for a particular market of collective transactions; or (ii) allocation of transmission corridor amongst the power exchanges is not optimal owing to skewed market share of various power exchanges; or (iii) overall economic surplus is not maximised since buyers and sellers may be spread out on various power exchanges; and (iv) financial products (under development) in the electricity market would require uniform price discovery in the Day Ahead and Real-time markets.
Closer inspection reveals flaws in many of the assumptions made above.
One, a difference in prices across exchanges exists, but is not significant. Power markets in India are in relative infancy compared to markets in more developed nations. If the markets are designed more efficiently, prices shall invariably converge across exchanges.
Two, currently, transmission corridor capacity is allocated on the basis of the volume of power traded on an exchange. Improvements in system planning and management have reduced congestion losses to under 1%, down from close to 15% a decade ago. Capacity allocation is a non-issue at the moment, and is unlikely to become a significant one in the future.
Three, the calculation of economic surplus also requires deep study of all aspects of markets. By the looks of it, adding another regulatory layer stands to increase compliance costs for all market participants. This cost will have to be compared to the potential benefits touted by the government.
And finally, financial products (such as electricity derivatives) do not require uniform price discovery in day ahead and real time markets.
Having multiple exchanges provides market participants with a choice to choose the best provider based on their offerings and services. This, in turn, incentivises exchanges to improve their services, and come up with new products to lure participants. In fact, there are plenty of instances where a particular exchange becomes dominant enough for particular commodity that they become price setters - such as the Intercontinental Exchange for coffee and sugar derivatives, and the Shanghai Futures Exchange for copper futures. The NSE, for example, has a 99.6% share of derivatives trading in India.
When the role of the exchange is limited to just a bid collection platform instead, it loses the incentive to innovate. Instead, exchanges will be forced to compete by lowering their service fees, which needs to be approved by the CERC anyway. In addition, the amount of liquidity offered by an exchange, which is the primary driver for participants flocking to one exchange over the other, no longer remains an advantage for any exchange. Even if we accept the assumption that the government will come up with a perfect matching and clearing algorithm, questions remain around who will bear the settlement risk? Some market participants have gone on to question the role of these exchanges in the first place, and if they are even necessary.
While it is true that almost no other major country has geographically overlapping power exchanges, the intent behind development of such a system was always to foster more competition. In its latest directives, however, the government seems to have strayed away from its original intent and gone from enabler to enforcer.
Top Stories of the Week
Cyclone 'Biparjoy' hits West Coast
The western coastal states of India are on high alert, with Cyclone Biparjoy having just made landfall near the Kutch-Saurashtra region in Gujarat. The western city of Mumbai has already been hit be tidal waves and heavy rain. While the cyclone's potential has been downgraded from “extremely severe” to “very severe”, armed forces have still taken the necessary precautions by evacuating coastal towns and villages along the region, anticipating high level of damage to property and potential loss of life. Teams from the army, navy, airforce, and coast guard are on standby with helicopters, relief material and search teams. As of 3:45 pm yesterday, over 98,000 people have been evacuated from 8 coastal districts in Gujarat and shifted to shelters. It was expected that the storm will weaken into a severe cyclonic storm later on Thursday night with winds of 105 to 115 kmph (gusting to 125 kmph). By the early hours of Friday it will turn into a cyclonic storm with winds between 80 to 90 kmph (gusting to 100 kmph). Satellite images are able to show how the cyclone formed and intensified over the Arabian Sea.
Several trees and electricity poles are reported to have been uprooted, hoardings and tin sheets (used in house construction) have also been blown away by the strong winds. According to the Indian Meteorological Department's forecast, the cyclone is expected to depress later today and its speed will reduce to 40kmph. Helpline numbers for all 33 districts in Gujarat may be found here.
Delhi bans bike-taxis
The Supreme Court has upheld the decision of the Delhi government to ban bike taxis operated by aggregators such as Uber, Ola, and Rapido in the national capital. This ruling overturns the previous order of the Delhi High Court, which allowed bike taxis to continue operating until specific state regulations were notified. The legal battle between the aggregators and the Delhi government began in February when the transport department issued an order banning all players from providing bike taxi services in the city. Additionally, a penalty of INR 1 lakh was imposed on aggregators found to be violating the ban.
Principal Secretary and Commissioner, Delhi Department of Transport, Ashish Kundra, stated that if aggregators persist in offering bike taxi services, their vehicles will now be impounded. He emphasised the need to prioritize passenger safety over pursuing profits in light of increasing incidents of operating beyond the regulatory framework and failing to comply with the law. On the other hand, aggregators argue that bike taxis are a cost-effective mode of transportation, benefiting not only the 35,000 operators but also the general public. They claim that banning bike taxis would deprive people of this convenient and affordable service. In response to the developments, the Delhi transport department published the "Draft Delhi Motor Vehicle Aggregator and Delivery Services Provider Scheme" last month, which aims to license and regulate aggregators providing passenger transport services among others. The government informed the Supreme Court that the policy for granting licenses to bike taxi aggregators will be effective by July 31, 2023.
While the Supreme Court stayed the Delhi High Court's interim order, thereby upholding the ban on bike taxis, the final decision on the case is yet to be determined based on its merits. For now, the court has granted the aggregators the liberty to approach the High Court for an early hearing of their plea against the Delhi government's decision.
A Few Good Reads
Check out EAM S. Jaishankar’s interview with the Economist.
Dani Rodrik outlines “productivism” - an alternative to previous paradigms of economic policy, where governments and civil society attempt to create productive economic opportunities across the breadth of the economy.
As developed countries debate the merits of neo-liberalism, Arvind Subramanian [bats](https://www.project-syndicate.org/commentary/a-developing-world-perspective-on-neoliberalism-by-arvind-subramanian-2023-06?) for the recognition of perspectives from low- and middle-income countries.
Paul Wood writes an intriguing profile of Yevgeny Prigozhin, a convict, chef and mercenary who may just succeed Putin as the next Russian president.
Packy McCormick and Rahul Rana dive deep into the history and future of nuclear fusion.