Role of Power Exchanges in Transforming Energy Markets and Economics

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– By Akhilesh Awasthy

India is taking giant steps to become the strongest economy in the world and the power sector is playing a major role in this process. India is the third largest producer and second consumer of electricity in the world. The country’s peak electricity demand passed the 200 GW mark and hit a record high of 210.8 GW. For India to take its rightful place in the global economy, it is of utmost importance to make its electricity market more competitive and efficient.

The enactment of the Electricity Act 2003 (EA) was an important step in this direction. The law made electricity trading a distinct activity and paved the way for efficient, transparent and competitive price discovery through power exchanges. Recently, with the Electricity Market Regulations 2021, Hon’ble Central Electricity Regulatory Commission (CERC) has incorporated the lessons of the past decade and provided new instruments to make transactions more efficient and reliable and with the approval of commissioning of another power exchange (Hindustan Power Exchange Ltd. or HPX), this process should gain further momentum towards this goal.

Currently, two exchanges are operating in India and the third exchange, HPX, is expected to commence operations from July 6, 2022. However, a question is sometimes raised as to whether there are multiple exchanges in one geographical area. To answer this question, we must consider the evolution of trade in developed countries.

In the case of Europe, initially each exchange operated as the sole provider of trading platforms in a country or group of countries. Subsequently, pan-European market coupling was implemented, with prices discovered on a common platform. This has benefited Europe as the spread of the market has increased resulting in substantial savings for participants as well as the economies of these countries.

After market coupling, European regulators allowed the existence of several stock exchanges in the same geographical area. Today, the Nordic countries have an existing exchange which is Nordpool, as well as EEX also provides its platform. The situation is similar in other parts of Europe.

When we compare this process of evolution in Europe with that of the Indian power market, we have three power exchanges (HPX soon starting operations) and neighboring countries (Nepal and Bhutan) are now part of the common market electricity. Market coupling discussions have already started with appropriate enabling provisions in the 2021 electricity market regulations. SAARC countries, the price determination process would be managed by an entity (which would be decided by CERC) and the power exchange would compete for market share based on their services. Thus, in both cases (Europe and India), the electricity market is evolving towards multiple trading models with common price discovery.

Traditionally in India, utilities and state producers enter into long-term power purchase agreements (PPAs) for power trading. These bilateral contracts typically last for more than two decades and support global capacity building. However, when these PPAs are performed beyond the requirements, they become burdensome for distribution companies.

PPAs do not provide flexibility for beneficiaries to take advantage of changing market situations. Power exchanges, on the other hand, provide different opportunities for participants to buy/sell electricity in the form of several market segments. As such, the need of the hour for all participants is to maintain a judicious mix between long-term commitment and short-term opportunities. Lessons learned from the recent debacle in the Australian energy-only market are also instructive for us to take products such as the capacity market seriously, so as not to fall into a similar crisis.

Trading on power exchanges is conducted in a fair and transparent manner and has advantages over the traditional bilateral approach. For example, production companies benefit greatly from timely payments. For buyers, power exchanges contribute to the efficient management of their electricity portfolios. If India has more electricity trading, it will deepen the market and encourage spot transactions for electricity. Currently only 6% of the country’s electricity is traded through spot deals and with power exchanges it would be possible to buy more Indian power through spot deals which can bring revolutionary results.

Today, power exchanges have become the preferred entities to enable the buying and selling of electricity and to create a more competitive and liberalized market. For a country like India which is rapidly emerging as a global superpower, ensuring the best possible use of the energy generated is crucial for economic resilience and energy trade certainly has a central role to play in this.

(Akhilesh Awasthy is the Chief Operating Officer of Hindustan Power Exchange. In his current role, he was responsible for successfully establishing HPX)

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