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| POWER TRADING |
BACKGROUND:
Power trading inherently means a transaction where the
price of power is negotiable and options exist about whom to
trade with and for what quantum.In India, power trading is in
an evolving stage and the volumes of exchange are not huge.
All ultimate consumers of electricity are largely served by
their respective State Electricity Boards or their successor
entities, Power Departments, private licencees etc. and their
relationship is primarily that of captive customers versus monopoly
suppliers. In India, the generators of electricity like Central
Generating Stations (CGSs), Independent Power Producers (IPPs)
and State Electricity Boards (SEBs) have all their capacities
tied up. Each SEB has an allocated share in central sector/
jointly owned projects and is expected to draw its share without
much say about the price. In other words, the suppliers of electricity
have little choice about whom to sell the power and the buyers
have no choice about whom to purchase their power from.
The pricing has primarily been fixed/controlled by the Central
and State Governments. However, this is now being done by the
Regulatory Commissions at the Centre and also in the States
wherever they are already functional. Power generation/ transmission
is highly capital intensive and the Fixed Charge component makes
up a major part of tariff. India being a predominantly agrarian
economy, power demand is seasonal, weather sensitive and there
exists substantial difference in demand of power during different
hours of the day with variations during peak hours and off peak
hours. Further, the geographical spread of India is very large
and different parts of the country face different types of climate
and different types of loads.
Power demand during the rainy seasons is low in the States of
Karnataka and Andhra Pradesh and high in Delhi and Punjab. Whereas
many of the States face high demand during evening peak hours,
cities like Mumbai face high demand during office hours. The
Eastern Region has a significant surplus round the clock, and
even normally power deficit states with very low agricultural
loads like Delhi have surpluses at night. This situation indicates
enough opportunities for trading of power. This would improve
utilization of existing capacities and reduce the average cost
of power to power utilities and consumers.
In view of high fixed charges, average tariff becomes sensitive
to PLF. Trading of power from surplus State Utilities to deficit
ones, through marginal investment in removing grid constraints,
could help in deferring or reducing investment for additional
generation capacity, in increasing PLF and reducing average
cost of energy. Over and above this, the Scheduled exchange
of power will increase and un-scheduled exchange will reduce
bringing in grid discipline, a familiar problem.
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OPEN
ACCESS AND TRADING : The Electricity Act, 2003 which has
come into force from 10th June, 2003 repeals the Indian Electricity
Act, 1910; Electricity (Supply) Act, 1948; and Electricity Regulatory
Commissions Act, 1998. In view of a variety of factors, financial
performance of the state Electricity Boards has deteriorated.
The cross subsidies have reached unsustainable levels. A few
States in the country have gone in for reforms which involve
unbundling into separate Generation, Transmission and Distribution
Companies. To address the ills of the sector, the new Act provides
for, amongst others, newer concepts like Power Trading and Open
Access.
Open Access on Transmission and Distribution on payment of charges
to the Utility will enable number of players utilizing these
capacities and transmit power from generation to the load centre.
This will mean utilization of existing infrastructure and easing
of power shortage. Trading, now a licensed activity and regulated
will also help in innovative pricing which will lead to competition
resulting in lowering of tariffs. |
| DEFINITION
OF “OPEN ACCESS” IN THE ELECTRICITY ACT, 2003:
The non-discriminatory provision for the use of transmission
lines or distribution system or a associated facilities with
such lines or system by any licensee or consumer or a person
engaged in generation in accordance with the regulations specified
by the Appropriate Commission” |
| A
MORE GENERAL DEFINITION OF “OPEN ACCESS” : Enabling
of non-discriminatory sale/purchase of electric power/energy
between two parties utilizing the system of an in-between (third
party), and not blocking it on unreasonable grounds”. |
ISSUES:
a) Freedom to buy/sell, and access to market
b) Adequacy of intervening transmission
c) Transmission/wheeling charges
d) Treatment of transmission losses
e) Energy accounting, scheduling, metering and UI Settlement.
The present level of inter-regional electricity exchange is
still quite limited and the constraints for enhancing the same
are the relative lack of commercial awareness with SEBs, lack
of proper market mechanism (absence of tariff structure to promote
merit-order operation and encourage trading of power), inadequate
transmission capacity, lack of statutory provisions for direct
sale by IPPs/CPPs/ Licensees outside the State, grid indiscipline
and financial viability of State Utilities, among others.
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EXAMPLE: Suppose
a company from Maharashtra wants to sell 100 MW to a Discom-A
in Andhra Pradesh.
Following steps need to be taken:
a) The company and Discom-A to agree on terms and conditions
of sale
b) The company to get the consent of MSEB and "no-objection"
of MSERC
c) Discom-A to get the consent of APTransco and "no-objection"
of APSERC.
d) MSLDC and APSLDC to ascertain transmission adequacy, and
agree to arrange necessary metering, scheduling, energy accounting
and UI settlement.
e) WRLDC and SRLDC to ascertain transmission adequacy in their
regional transmission systems.
f) All concerned to have a common understanding about treatment/sharing
of transmission losses, and levy of transmission/ wheeling charges
for the use of intra-State and inter-State systems |
IMPACT OF “OPEN
ACCESS SYSTEM” ON DISCOM’S:
Electricity Act 2003 has mandated that with immediate effect
open access should be implemented. While everyone accepts that
it may serve the consumer interests, there are two contradicting
views regarding the implications of the open access system on
the electricity entities especially the DISCOMs. The first view
is that competitive power generation will bring down the ultimate
costs to the consumers. Cost reduction is possible only by reducing
the T&D losses, keeping under control the operating costs
and keeping the additional power purchase costs low. Given the
facts that power purchase costs keep increasing and the HT tariff
has been mandated to be brought down closer to the average costs
(thereby reducing the cross-subsidy) according to a fixed time
schedule to be set by the regulator, the first group argues
that taking up additional liabilty by way of HT consumers at
such high marginal costs of power purchase would be financially
imprudent for the electricity entities.
The other view is that electricity entities have heavy responsibility
to meet the needs of agricultural consumers and small domestic
consumers at a lower rate than the average cost. Consumers who
are currently the HT consumers and commercial consumers paying
a higher tariff are providing the means to do this. If such
consumers walk away from Grid supply subsidy from Government
will have to increase. The correct position would depend on
the statewise situation regarding relative tariff of the different
consumers, the possible rates of growth of category wise consumption
and the potential for purchasing additional power at low rates
in the future. |
MARKET DEVELOPMENT:
In the legal framework before enactment of the new Act,
the development of market in power was highly constrained as
the industry structure was horizontally and vertically integrated.
The electricity supply to a customer is through a chain of monopolies
earlier regulated by the Government and now by the Regulatory
commission.
With the new Act, a liberalized market structure is sought to
be provided. A customer has a number of choices to get his power.
The generators can also compete among themselves for distribution
companies/individual customers. There is a provision for surcharge
to meet current level of cross subsidy, if a consumer opts to
get electricity directly from generator or any source other
than his own distribution licensee and has been allowed open
access by the Regulator. However, there is no surcharge when
distribution company buys power from a generator directly. There
is also a provision for bilateral contract for supply of power
through a competitive process between a generator and distributor.
With the provision of non-discriminatory open access to transmission,
the competition for bulk supply to distribution companies could
become a reality in the near future. The market structure will,
perhaps, require to be transformed.
The commission is committed to the development of a fully competitive
power sector.
However, given the current realities of the sector (shortages,
cross subsidies, long term PPAs, capacity allocation from CGS
to state etc), the market development has to go through a number
of intermediate phases. It may be noted that the retail competition
has yielded perceptible benefits to consumers in the countries
having surplus generation. There are a number of complex issues
such as transition risks, settlement of imbalances in power
injected and drawals, effective metering, efficient pricing
of transmission, management of congestion etc. on which the
Commission would float a separate discussion paper in due course.
As per an estimate, Captive Power capacity in the country is
about 20,000 MW of which about 14,000 MW is grid connected.
Surplus is available with many Captive Power plants and also
with IPPs and Licensees of some of the States. They need permission
from the State Govt. as well as consent for usage of SEB's transmission
network, which besides being difficult to come by, is also usually
irrationally priced. Many Captive plants are keen to trade their
power at a remunerative tariff, but there is no statutory provision
presently for direct sale of surplus power by them to outside
States. A provision for this however, exists in the Electricity
Bill. |
POWER MARKET:
The Wholesale transactions for electric power globally are through
spot contracts, forward and future contracts and long term bilateral
contracts. The primary driver for change in the power market
in India today, at least from the consumers' point of view,
is the desire to see lower prices in the wholesale electricity
market. For this objective to bear fruit, attention has to be
paid to the ideal power exchange for India backed with adequate
regulations, as poor exchange design may lead to market failures.
The envisaged power market will rely on competition, instead
of regulation, to minimize generation costs and additionally
will obtain long-term financing for power systems / generating
companies.
TRANSMISSION AND WHEELING :
With the introduction of mandatory open access, there will be
demand by third parties for wheeling of power through the existing
transmission networks in addition to wheeling being undertaken
at present for various beneficiaries importing power from outside
the region. In this context, CERC has jurisdiction for regulation
of transmission and wheeling charges for all inter-state and
inter-regional power flows. As per the existing notification,
the wheeling charges are payable at the same rate as the transmission
charges for a particular region. |
METHODOLOGY FOR SHARING
OF TRANSMISSION CHARGES: Although the principles for sharing
of transmission charges/wheeling charges have been enumerated
in detail in the present notification, there appears to be need
to bring further clarity in the matter. The following methodology
for sharing of transmission and wheeling/congestion charges
is proposed for discussion:
a) Transmission charges for the inter-regional lines may be
shared by the two contiguous regions on 50:50 basis and further
shared among the beneficiaries within the respective region.
b) Transmission charges for the inter-regional lines may not
be pooled with those for the other transmission assets in the
respective regions.
c) Transmission charges (after deducting the wheeling/congestion
charges realized from others) for the regional assets (other
than the inter-regional assets) may be shared by the "regional
beneficiaries" (Regional beneficiaries means beneficiaries
located in the region concerned)
d) If an inter-regional asset is used for wheeling by a third
party, the balance transmission charges after accounting for
the payable wheeling/congestion charges, may be shared by the
beneficiaries of the contiguous region on 50:50 basis. |
RECOMMENDATIONS: The
best system would be one in which the consumer has a choice
that comes out of competition. Establishment of markets with
rules for their operation and a regulator to see that they are
followed will give acceptable results for consumers and investors
both. Competition and markets do not have to wait for shortages
in supplies to be overcome. Trading is a bridge even in shortage
situations and regulators can rightly be expected to look after
the interests of the less powerful.
However, the lessons from around the world indicate that adequate
availability of power, its unrestricted flow across geographical
boundaries, strong commercial mechanisms that determine market
operations and the paying ability of consumers are vital necessities
that would need to be in place for competition at all levels
to be truly sustainable. Rules and regulations are to be formulated
for interstate, inter-regional and international transactions
which have built-in relaxation that encourages trading and makes
transfer of power easier. Streamlining levy of reasonable transmission
charges, wheeling charges and losses on power to be traded are
important, otherwise trading will not remain competitive with
incidental use of transmission system to be priced on incremental
cost basis. Transmission losses should also be charged on actuals,
rather than on a normative basis.
There is an immediate need for strengthening the upstream and
down stream transmission networks to better utilise the existing
Inter-regional transmission capacity. Also better reactive power
management would lead to significant additions to existing transmission
capacity utilisation. Bottled-up capacities of the IPPs and
Captive Generators as well as underutilized capacities of Utilities
needs to be tapped urgently through a more commercial approach.
Trading of such capacities would mean availability of extra
energy at only the variable cost, thus bringing down the average
cost of power not only to bulk consumers but also reducing the
burden of rate increases on ordinary consumers too.
India is already on its way to establishing a power market.
This requires considerable and continuous effort starting from
continued strengthening of inter-regional power transmission
links, open access to transmission and later to distribution
links, releasing the underutilized captive capacities, to the
designing of an effective market mechanism suited to India's
needs. The institutional set-up of the Market could make a significant
difference to the final market price. In the short term, market
rules should promote economic efficiency, so that customer loads
are served and reliability is maintained at the lowest possible
cost. In the long term, the market should produce prices that
stimulate appropriate levels of investments in new generation
and transmission capacity.
In addition, the market rules should be such as to encourage
broad participation and ensure fairness. Such a process will
reduce the need for government oversight because it will be
to a large extent self-policing and it will be difficult for
individual participants to manipulate results in their favor.Of
the two market mechanisms evaluated, Pool day-ahead market,
with Pay SMP settlement, may produce lower prices than the bilateral
model. However, in the case of a power exchange with a small
number of buyers and sellers, often there may be not enough
bids to provide an assurance that the price is competitive,
thus creating the need for more market participants.
To ensure that sufficient generating capacity is available to
prevent capacity shortages and wholesale price spikes an installed-capacity
requirement may be made mandatory as proposed in California.
This standard would require all retail providers to acquire,
either through contracts or physical assets, sufficient capacity
to meet peak demand plus a certain reserve margin. Combining
the above mentioned reforms with a more transparent bidding
and price setting mechanism, could also lead to more demand-side
participation, and hence greater price elasticity. |
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