Monday, July 5, 2010

Power trading in India

Excellent graphic in Mint about the power trading market in India. It again baffles me as to why we persist with over the counter (OTC) traders when there are well-established exchanges in place.

Short-term power trading (for a period less than an year), which includes the UI transfers (40%) and trades done through traders (41%), exchanges (10%) and on bilateral basis (9%), formed around 8% of the total energy generated in 2009. In other words, this means that exchange traded power, whose price discovery is the most efficient and administration is the most transparent, forms just 10% of the total short-term traded power or a minuscule 0.8% of the total energy consumed.

Increasing transparency and improving efficiency of traded power is especially important since all the major buyers and sellers are governments themselves or government entities. States like Himachal Pradesh, Chhattisgarh, Gujarat and West Bengal, which had surplus power due to the availability of free/power purchase agreement-based power under contract from developers, were among the top sellers in the open market through traders/exchanges.

A policy framework that facilitates the transition from all OTC trades into exchange trades is surely beneficial for all stakeholders. It will improve the liquidity in the exchanges and facilitate more efficient price discovery and provide more reliable price signals for all market participants, including new generators. In fact, as the exchanges develop the requisite depth and breadth, it may be appropriate that even the frequency-based UI pricing be linked to the exchange prices.

As on April 2010, the total all-India capacity was 159,648MW with thermal power capacity of 102,704MW (64%), hydel power capacity of 36,863MW (23%), nuclear capacity of 4,560MW (3%) and renewable capacity of 15,521MW (10%).


Anirudh said...

very useful info. I was looking for material on the power trading scenario in India and landed on your blog.

4th year B Tech student
NIT warangal

Indian Power Market said...

Its pretty late to comment of this one. But I happened to read it now only..

@Author ... The OTC trades are a necessary part of the power market and growing(though u are correct that its not that transparent and efficient)and it would not be possible to do away with them in near future.

Main Reasons :

1. Power Exchanges (PX) cater mainly to Spot market (Day ahead trades).
2. PXs cannot trade contracts beyond 11 days of delivery (the FCRA Act of 1956 prevents the same)
3. So basically PXs cannot schedule power for transmission beyond 11 days. It is noteworthy that transmission corridor for inter state transmission is mostly in scarcity.
4. State discoms prefer to buy/sell power on longer term basis (monthly contracts are preferred)
5. CERC is at loggerheads with Forward Market Commission (FMC) for not allowing longer term contracts on PX. Case is with Supreme Court.

Besides this there are other market design issues in doing away with OTC trades.