Introduction

India’s electricity sector is witnessing significant transformations to meet peak power demand, especially during the exceptionally hot summer months. The government’s recent allowance for trading surplus electricity generated from “linkage coal” marks a pivotal development in the country’s power markets.

The Transition from PPAs to Power Markets

• Traditionally, power generation units in India have relied on long-term Power Purchase Agreements (PPAs), which span up to 25 years.
• These agreements obligate generators to supply power to buyers, typically public utilities, at fixed rates.
• However, PPAs are becoming less favored due to their inflexibility in adapting to dynamic market conditions and their tendency to lock in significant generating capacity.
• In contrast, power markets offer a flexible, reliable, and transparent alternative. These markets enable generators to respond swiftly to short-term demand fluctuations and sell surplus power independently at market-determined prices.
• This flexibility is particularly beneficial for renewable energy generators, who can trade excess power during off-peak hours instead of curtailing generation.
• This market-driven approach optimizes output and revenue for generators while helping utilities meet variable power demands more efficiently.

How Power Markets Operate ?

• Power markets operate through a bidding process where buyers and sellers place bids and offers, respectively.
• The market clearing price, at which electricity is traded, is determined by the equilibrium of demand bids and supply offers.
• These markets are categorized based on the timing and duration of electricity delivery:

• Spot Market: Includes the real-time market (RTM) for near-immediate delivery and the intraday market for same-day trades hours before delivery.
• Contract Markets: Facilitate longer-term trades. The day-ahead market (DAM) deals with closed auctions for 15-minute time blocks for the following day, while the term-ahead market (TAM) handles trades from 3 hours to 11 days in advance.
• Additionally, the Renewable Energy Certificates (REC) mechanism allows utilities to meet renewable purchase obligations (RPOs) by buying RECs, each representing 1 MWh of renewable electricity.
• This system benefits states lacking sufficient renewable capacity by enabling them to purchase RECs for green energy generated elsewhere.
• Utilities exceeding RPO targets can trade extra RECs, allowing other utilities to meet their targets.

Power Exchanges in India

• India’s power markets are hosted on power exchanges, which facilitate competitive pricing, improved resource allocation, and greater market liquidity.
• Power exchanges first appeared in Europe in 1990-91 and now operate in about 50 countries worldwide.
• In India, the Electricity Act of 2003 established the framework for exchange operations, with exchanges commencing in 2008.
• The introduction of the spot market in 2020 further enhanced the flexibility and responsiveness of the power trading system.
• India has three major power exchanges regulated by the Central Electricity Regulatory Commission (CERC): the Indian Energy Exchange Ltd (IEX), Power Exchange India Limited (PXIL), and Hindustan Power Exchange Ltd (HPX).
• IEX dominates the market with over 90% share. In FY 2023-24, IEX traded about 110 billion units (BU) of electricity, growing 14% year-on-year and representing almost 7% of India’s total power demand of 1,626 BU in FY24.
• The government has recently amended various regulations to encourage and incentivize participation in power exchanges, reflecting their growing importance in India’s electricity market.

The Road Ahead for Exchanges

• Indian regulators are exploring Market Coupling and Capacity Markets as the next evolutionary steps for the country’s power markets.
• Market coupling involves matching bids from all power exchanges to discover a uniform market clearing price, providing a reliable reference price for policymakers.
• Introduced in CERC’s Power Market Regulations, 2021, market coupling could lead to more efficient price discovery, reduced price disparities across regions, and increased market stability.
• Capacity markets would allow generators to be paid for their available capacity, not just the electricity they produce.
• This mechanism ensures long-term grid reliability by encouraging investment in generation capacity, especially for peaking power plants that are crucial during high-demand periods but don’t run frequently.
• Only a few countries, including the United Kingdom, parts of Australia, and South Korea, have developed capacity markets.
• These advanced market structures could align India’s power markets with mature international markets, attracting more investment and increasing competition in the sector.

Conclusion

India’s power markets are improving to become more flexible, reliable, and efficient. Moving away from long-term PPAs to dynamic markets, and possibly introducing market coupling and capacity markets, indicates a strong future for the electricity sector. These changes will boost the efficiency of power generation and distribution, ensuring a stable supply to meet India’s increasing energy needs.