How Market Coupling Can Make Multiple Power Exchanges Competitive
Market coupling is expected to reduce inefficiencies in price discovery in spot trading: Power Exchange CEO Prabhajit Sarkar.
As multiple power exchanges have come up in the country, the significance of market coupling—where all the transactions are linked together to arrive at a single set of prices for the country—is being worked upon by regulators.
Market coupling, apart from increasing competition within the exchanges, would also optimise the transmission allocation at the national level and enhance efficiency of power markets in the country, Prabhajit Kumar Sarkar, managing director and chief executive officer of Power Exchange India Ltd., told BQ Prime.
"The market structure must be designed in a way that competition thrives between exchanges, competitive efficiencies result in economic welfare and participants have greater choice. Market coupling would allow that," he said.
Edited excerpts from the interview:
There are discussions over coupling of markets for power exchanges. Can you explain its relevance?
Prabhajit Kumar Sarkar: An expert committee was set up in 2015 to look at the transmission allocation between the power exchanges. That is where the first thought related to market coupling arose for the collective market segment.
In the collective market segment, which comprises Day Ahead Market and Real Time Market, transactions are conducted through double-sided blind auctions. Here, for DAM, during the auction period of 10 o’clock to 12 o’clock every day, any individual buyer or seller places their order on the exchange platforms but cannot see the orders of any other buyer or seller.
Each buyer or seller is only guided by the history of transactions and clearances and of historical prices. After placing the order, the participants have to wait for the auction window to close and thereafter, the price discovery takes place based on the accumulated orders on each exchange separately.
Once the price discovery happens on each exchange separately, the participants are cleared for delivery at that price only and do not have the flexibility to change their orders or move to another exchange.
Now, this process of double-sided, blind auctions has to be done by all the exchanges during the same time period. This means that the price discovery happens separately on the power exchanges with separate order books, leading to different prices being discovered.
Further, it is not just one price, there are 96 prices discovered for the next day’s delivery on each exchange–one price for each 15-minute time block for the 24 hours of the next day. Imagine the complexity for the market participants with three power exchanges discovering 288 prices!
In addition to splitting the liquidity on the power exchanges and creating different prices, this process also leads to transmission allocation being done separately for each exchange, leading to significant suboptimal outcomes.
Unlike a planned monopoly like the Nord Pool market, in the Indian context, this separation of collective segment on various power exchanges leads to substantial inefficiencies in transmission capacity allocation. With transmission capacity being a national asset, it is important to carry out changes in the power market structure to ensure that transmission capacity is utilised in the most efficient manner possible.
What is a Nord Pool market? Can you please elaborate?
Prabhajit Kumar Sarkar: The Nord Pool market is a power exchange set up by the four Nordic countries of Sweden, Finland, Denmark and Norway. The transmission system operators of these countries had joined together to form the Nord Pool market, which they developed as one single power market for this entire region–as a planned monopoly. This Nord Pool market structure was taken as a guiding template for the design of the power market in our country as well.
Unlike the planned monopoly in Nord Pool, in India we wanted competition to thrive in the power market envisioning multiple power exchanges, competing amongst themselves to provide the best services and systems to market participants.
However, if we want competition to thrive among exchanges, then our market design cannot be based on something that is designed as a monopoly. An unintended consequence of this design template was that we now have a monopoly in the collective segment.
Has this issue been recognised in India, and if so, what steps are being taken?
Prabhajit Kumar Sarkar: This issue has indeed been recognised and in 2018, a discussion paper on market-based economic dispatch was published by the Central Electricity Regulatory Commission. This paper elaborated on a mechanism to optimise the functioning of the electricity market by scheduling and dispatching all generation purely on economic principles, subject to technical constraints.
In addition, the paper also expounded on the idea of market coupling to optimise transmission allocation and economic welfare on a market-wide basis.
This principle of market coupling was thereafter included in the Power Market Regulations, 2021.
How does market coupling work?
Prabhajit Kumar Sarkar: Market coupling means the process where the collected orders from all the power exchanges are aggregated together and then matched to discover a uniform market clearing price.
In this process, the market coupling operator takes the order books from all the power exchanges, however many there might be, and combines these buy and sell orders to develop one set of prices for the entire country.
Through this process, the transmission allocation can happen after accounting for all power flows netted within each bidding zone–thereby leading to the most efficient allocation of transmission.
Transmission allocation taking place separately on each exchange creates suboptimal outcomes because in one exchange, you might have required a power flow from one bidding zone to another, whereas another exchange might have asked for an opposite flow based on their order book, and in the third exchange it might be completely different. An absolute addition of requirements emanating separately from the exchanges would lead to far more requirements than if these were netted within the bidding zones by combining the order books of all the exchanges.
In essence, if you were to aggregate the individual requirements, you might find that you have created requirements for transmission capacity when there was no requirement, if netted in each zone.
So, the smartest thing to do is to combine all of these order books together and arrive at a combined solution because along with the price discovery, the transmission is also coupled together.
Under market coupling, once this price discovery is done on a combined basis, then the results are sent to all exchanges and they can do the clearing and settlement for all the participants.
Are there any precedents for such market coupling?
Prabhajit Kumar Sarkar: We have the European example, where they have demonstrated through this mechanism that there is a greater efficiency in transmission allocation as well as in fostering a competitive and efficient power market in all the countries.
Those countries, where only one exchange was working earlier, now have multiple exchanges operating successfully in each country. It has led to a uniform price across several participating countries in Europe, leading to significant beneficial outcomes for the final consumers.
In fact, market coupling has been so successful and beneficial that after Brexit, when Great Britain had to exit the market coupling, significant inefficiencies were observed and they have sought to become a part of the European market coupling again.
By when can we expect market coupling to start in India?
Prabhajit Kumar Sarkar: The enabling regulation in this regard has already been brought in through the Power Market Regulations, 2021. The implementation of this is yet to be done though.
Most market participants have at various forums voiced the need to implement market coupling, considering the significant beneficial impact on the entire power market. We feel it must have been duly noted and am sure appropriate steps would be taken soon for the implementation.
How has been the performance of Power Exchange India in the last few years?
Prabhajit Kumar Sarkar: PXIL has made a turnaround in the last 4-5 years. Today, PXIL is a consistently profitable organisation, exceeding the net worth norms as per the requirements of the Power Market Regulations, 2021, through organic growth and servicing customers through our digital transaction platform. PXIL’s business growth is reflected in our bottom line, which rose 77% in FY22 to Rs 15.74 crore.
What is your market share in the term-ahead market?
Prabhajit Kumar Sarkar: In the term-ahead market, including green TAM which we could start late due to late approvals, we had about 40% market share in FY22.
In this space, we have always been competitive. In TAM, the buyers and sellers have found the benefits of competition amongst the power exchanges, and customers have found substantial value in our service levels.
How is your performance in the day-ahead market?
Prabhajit Kumar Sarkar: The day-ahead segment is heavily skewed towards only one exchange leading to a sort of unintended monopoly. This participation is an issue of behavioural economics; it has nothing to do with the capabilities of the exchanges or their service levels.
It has everything to do with the behavioural part related to price discovery because the moment you have two exchanges, there will be two different sets of prices, and participants start comparing between these prices to determine their gains/losses.
This behaviour and the resultant uncompetitive situation would be rectified the moment we have market coupling.
Will market coupling increase participation in the day-ahead market at your exchange?
Prabhajit Kumar Sarkar: It would give choice to the market participants to figure out which exchange they can go to. Right now, because of the way the markets are structured, the participants don’t really have a choice.
The mere presence of multiple marketplaces or multiple exchanges does not result in competition. The market structure must be designed in a way that competition thrives between exchanges, competitive efficiencies result in economic welfare and participants have greater choice. Market coupling would allow that.
People informed that new renewable projects will gradually move to exchanges instead of signing long-term power purchase agreements. What is your view on that?
Prabhajit Kumar Sarkar: For new renewable energy projects to be developed as merchant capacity, it is important that liquidity of transactions is enhanced on the power exchanges. These merchant capacities need to be bankable, that is investors in such capacities need to be able to raise funds for developing them.
Some way of doing that is through development of a framework where renewable energy transactions can be settled on the exchange platforms at market-determined prices and a sort of bilateral settlement is done between buyers of the renewable energy with the seller.
Unless we set this portion right, that is an ability for a generating company to get funding based on transactions done on the exchanges, it would always be marginal merchant capacities that will come to the exchanges.
Marginal capacities of barely 10% or 15% of new capacities get transacted through the exchanges. Most of the transactions on the exchange are down-sells, i.e. excess capacity purchased through long-term PPAs, which need to be sold during certain months.
Large-scale capacity addition, which can get reflected on transaction volumes of exchanges, can happen once we are able to provide adequate liquidity and contractual structures which are usable by these entities to get project funding.
What is your overall outlook for the power sector?
Prabhajit Kumar Sarkar: We are at a very interesting time right now, with significant policy initiatives being taken to drive forward the power sector in the country. The power markets are but one instrument in this drive towards enhancing efficiency for all consumers in the country.
We have a highly supportive policy and regulatory environment today and a lot of opportunities to serve the marketplace through a wide variety of contracts of various tenures and catering to various segments of the market. Furthermore, there are enabling regulatory provisions, which once implemented would further enhance the competitive efficiencies of the power market.
Ultimately, the exchanges are marketplaces where the buyers and sellers can efficiently and transparently manage their portfolios better.