All You Need To Know About A Reform That Could Lower Power Costs

The Power Ministry has sought inputs from all stakeholders by the end of June. It is eyeing a rollout by April 1.

Power transmission lines and power grid (Photographer: Kerim Okten/Bloomberg)
Power transmission lines and power grid (Photographer: Kerim Okten/Bloomberg)

India has proposed a nation-wide short-term power trading mechanism where supply from generators quoting the lowest pricing gets sold first, a system that could help producers struggling without long-term supply pacts.

Asia's third-largest economy has an integrated power grid but lacks a uniform price of procurement, according to a draft paper floated by the Ministry of Power earlier this month. The proposed market-based economic dispatch is aimed at ensuring that the cheapest generating resources are put to use to meet overall demand, the draft said, calling it a step in the direction of a “one nation, one grid, one frequency, one price” system.

The proposal would benefit more than 35-gigwattt capacity of thermal and renewable power projects that have not been able to get buyers for long-term supply.

The draft comes nearly two-and-a-half years after the Central Electricity Regulatory Commission floated a discussion paper on market-based economic dispatch to redesign day-ahead scheduling and operations of the electricity market in India. The Power Ministry has sought inputs from all stakeholders by the end of June. It is eyeing a rollout by April 1.

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How It Will Work

The new electricity market design will accumulate demand from all states in a central pool, and allocate power from the cheapest source available, according to the draft. The government aims to charge a uniform rate across the country.

The proposal makes it mandatory for buyers and sellers to participate. According to the draft:

  • Discoms or buyers of powers will be required to submit bids for all the time-blocks of the upcoming day.

  • Scheduled generators—selected by discoms or states—will submit offers with tariffs.

  • The market clearing engine will optimise costs—by matching bids and offers after taking technical constraints into account.

  • Demand will be met by dispatching the lowest cost mix of electricity while ensuring that security of the grid is maintained.

The draft proposes to begin with the thermal stations of state-run NTPC Ltd. That, it said, will help participants, power exchanges and regulators gain experience, keep disruptions at minimum and limit commercial exposure of power distribution companies. The first phase would also help test the efficacy of the mechanism, identify deficiencies or potential issues before a nationwide rollout.

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How It Will Help

The Power Ministry estimates annual savings in excess of Rs 12,000 crore for the electricity consumer. On an average, MBED saves about 4% in power procurement cost, the draft said. Cost optimisation could take benefits to 12-15%, it said.

This system will force all players to route transactions through power exchanges, Rohit Natrajan, assistant vice president, research at Antique Stock Broking, said in a note. The proposed reform will benefit renewable energy companies and low-cost generators as it will provide them a bigger market, he said, citing projects of JSW Energy Ltd., Torrent Power Ltd. and CESC Ltd. that do not have supply pacts.

More than 20GW of thermal and over 15GW of renewable capacity is without power-sale agreements, according to Antique Stock Broking.

A spokesperson for Tata Power Ltd., in an emailed response to BloombergQuint, said the mechanism would be driven by market forces and efficiencies. That, he said, would allow power producers without supply pacts to participate in this market.

According to Subrahmanyam Pulipaka, chief executive officer at the National Solar Energy Federation of India, MBED holds a great promise for the renewable industry if it’s rolled out with mandatory participation for power producers and buyers. The mechanism will aid generation of market-based capacity and boost penetration of solar and wind energy, he said.

But Indian Energy Exchange, which has a monopoly in the power trading market, suggests keeping it voluntary. Generators and beneficiaries should be given a choice rather than making participation mandatory, Rajesh Madiratta, director-strategy and regulatory affairs at power trading platform, said in an emailed response. Every discom, he said, wants to have to some freedom with contracted capacities.

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The Challenges

Tata Power said two issues prevent discoms from optimising power costs for customers:

  • Fixed charges stemming from high cost of generation.

  • Forced scheduling of contracted generation (honouring contracts even when cheaper power is available) on account of technical issues.

Power tariff includes two components. Fixed costs that include the cost of equipment, land, financing, project management, grid connection, and construction of the power plant. And variable costs covering cost, operation and maintenance expenses and carbon dioxide emission charges, if applicable.

The current draft seems to protect the fixed costs of contracted generation and other charges applicable to local state generation companies, said Tata Power’s spokesperson.

The proposed system will also put stress on discoms facing liquidity crisis as they will have to make daily payments against the existing practice of clearing it after a month, Tata Power said.

Sabyasachi Majumdar, senior vice president at ICRA Ratings Ltd., agreed that it may increase the working capital funding for discoms because of upfront payment.

As of now a monthly invoice for the aggregated amount of electricity sold to the discom by the generator is issued in the first week of the ensuing month and allows the power distributor 45 days to pay. The MBED entails selling power on exchanges on upfront payment of margin.

Emailed queries to power trading platform PTC India Ltd., and electricity producers JSW Energy Ltd. and ReNew Power Ltd. remained unanswered.

Majumdar also expects an adverse impact on thermal power stations without long-term supply agreements and a higher cost of generation.

Implementation will require several policy, regulatory and operational changes. Majumdar said that would require cooperation from all states and effective IT and communication systems for scheduling power at the central level.

A reason why Pulipaka said the success will depend on separate meter operator or a tracking system given the lack of scheduling, need to match demand with time blocks, and accounting and settlement requirements.

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