Tuesday, April 28, 2009

Indian electricity market modelled

In a previous post, I had explained the electricity market in India, using a parable. This post will seek to represent the market in a graphical model.

It is assumed that all distribution is done by government distribution utilities, and the sell side prices are fixed, thereby ruling out any possibility of price pass-through. Populist political compulsions mean that distribution utilities have to meet the entire demand by purchasing all the power available in the market at whatever price they are available.

Before de-regulation, the consumers are subsidized to the extent of the differential between P(cap) and P(sell). After de-regulation and the introduction of open access and trading, two things happen.

1. A significant number of generators shift their sales to the trading exchanges. The result is that the distribution utilities end up paying higher prices, varying from P(sell) to P(trade). In fact, they end up incurring an additional expenditure for the displaced quantity of power, represented by the area of FEK.

2. The few new generators, attracted by the high trading prices, invariably prefer to sell in that market. An additional quantity, represented by Qd minus Q(sup1), becomes available in the trading exchange. The distribution utility incurs an additional expenditure represented by the area of the trapezium KEIG for purchasing and distributing this power.

D curve - the end consumer demand curve
S curve - the supply curve for distribution utilities
P(cap) - price fixed by regulator for sales to consumers
P(sell) - price fixed in the long-term PPAs
P(trade) - Maximum price at which power is traded in the exchanges (when Qd is met)
Qd - Quantity of power demanded at P(cap)
Q(sup1) - quantity willing to be supplied at P (sell)
Q(sup2) - quantity willing to be supplied after trading and open access is introduced
Q(sup1) minus Q(sup2) = displacement towards trading market

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