India has made significant progress in recent years in resolving long-standing power shortages and establishing a reasonable level of electric supply. Furthermore, the country has committed to making renewable energy a significant part of its energy mix by 2030. In order to successfully transition to this new energy environment, a number of operational and market advancements must be made. Power markets and short-term energy trade could be key enablers in this scenario.
Power trading in India is motivated by the need to improve grid operations, develop renewable energy sources, achieve energy security, enhance market efficiency, and sustainably fulfil the country’s rising demand for electricity. Green power trading provides a mechanism to accelerate the deployment of renewable energy sources and develop a greener, more resilient power sector as the country works to meet its growing energy needs while mitigating carbon emissions.
Key drivers
Power trade in India is expanding and becoming increasingly significant due to a number of factors. With the goal of being carbon neutral by 2070, India has set aggressive targets for renewable energy growth over the next few decades. The country aims to substantially increase the proportion of renewable energy in its total power generation capacity. By allowing surplus renewable energy to be exchanged and utilised in areas with high demand, power trading contributes to achieving these goals. The establishment of a synchronous national grid in 2013 is also likely to benefit India’s move towards short-term electricity markets.
India has a diverse energy mix with a large proportion of it coming from clean energy sources, including solar and wind energy. Power trading can enable these different sources of energy to be effectively integrated into the grid, resulting in a steady and balanced supply of electricity. The country’s physical geography also presents a broad variation in resource availability and demand patterns. There are demand-supply imbalances across different regions/states and at different periods. Power trading can help reduce demand-supply imbalances in different states because it enables the effective allocation of power resources, ensures dependable supply, and prevents situations of power shortages or surpluses. Based on variations in seasonal demand patterns, there is sizable scope for trade between the states over seasons. Power trading also encourages market competitiveness, which results in effective price discovery and open pricing structures. India has implemented several market liberalisation and power sector reform initiatives to promote competition and private sector involvement. To enable buyers and sellers to exchange energy at market-determined prices, which can lead to more competitive rates for consumers and encourage investments in infrastructure and power generation, power trading is essential. Economies of scale and technological developments enable cost reductions in the generation of renewable energy as consumer appetite for it rises as a result of trading mechanisms. This makes renewable energy more competitive with traditional energy sources, ultimately benefiting consumers through lower power rates.
These markets also enable the movement of surplus electricity from areas with excess generation to areas with higher demand, maximising the use of the transmission and distribution infrastructure that is already in place. This raises the overall effectiveness of the power system, minimises transmission losses and increases grid stability. Moreover, there are opportunities for power trade across the geographical borders with India’s neighbours. Increasing cross-border electricity trade makes it possible to utilise excess energy and encourages regional energy cooperation, which is advantageous to both India and its neighbours.
Additionally, internationally operating power markets steer clear of contracts with extremely long durations. According to a recent analysis by the Ministry of Power (MoP), evidence from other countries shows that long-term power purchase agreements (PPAs) reduce dynamic efficiency. The ideal way to integrate renewable energy sources and their balancing energy sources is through market-linked processes, which will guarantee the adoption of technologies and methods that will maximise their utility for the grid and boost dynamic efficiency. Likewise, market-linked procurement would ensure financial restraint in the purchase of wholesale electricity and help resolve the long-standing problem of rising payables to generators.
Recent developments
The power trading landscape is dynamic and has witnessed several developments over the past six months. In June 2023, the MoP, in collaboration with the Central Electricity Authority (CEA), published recommendations for establishing an adequate resource planning framework. The recommendations will set in place a framework for distribution companies to acquire resources in advance in order to effectively meet power demand, ensuring there is adequate power available to fuel the country’s growth. In order to guarantee that there are sufficient resources at each level – from the national to the discom level – these rules provide an institutional structure for resource adequacy.
The MoP has also made a decision to move forward with the market coupling procedure. This approach aims to maintain consistency in energy price discovery at trading platforms. This move has been adopted with the aim of promoting greater transparency as well as uniform price discovery across exchanges. The action is also anticipated to dramatically lower electricity tariffs.
Further, in May 2023, the Central Electricity Regulatory Commission (CERC) approved the launch of the Tertiary Reserve Ancillary Services market across the three power exchanges. This is a notable step as tertiary reserves could serve as a replenishment for secondary reserves, which must be restored to their initial level in order to be prepared to meet the next contingency.
A redesigned day-ahead national-level merit order despatch procedure was also agreed to by the MoP in April 2023, with the aim of reducing the total cost of energy generation, which would further result in lower electricity costs for customers. The revamped process calls for a merit order for the cheapest producing resources to fulfil system demand and to be determined a day in advance as opposed to 1.5 hours under the current approach. Better planning for generation units and cost optimisation are expected to result from this.
Additionally, the CERC has lowered the electricity trading ceiling price. A price ceiling was initially imposed in the day-ahead market (DAM) and the real-time market, and it was later extended to all other market segments due to the uncharacteristically high demand that occurred in March 2022 without a corresponding rise in supply. Regulatory intervention was, therefore, necessary. Since then, the price cap has been in place to stop the anomalous market tendency and safeguard consumer interests.
More recently, the government approved the creation of India’s first domestic, regulated carbon market through a gazette notification, which led to the announcement of the Carbon Credit Market Scheme.
Challenges
India’s green power trading sector faces a number of challenges, which can be attributed to multiple factors. There are obstacles due to the structure of the power markets and the regulatory environment. The inconsistent policy framework around the trade of renewable energy is a key impediment. Frequent changes in laws, prices and incentives impede the growth of a stable market for green electricity. Moreover, the power system infrastructure is not entirely equipped to cope with the large-scale integration of renewable energy sources. Inadequate transmission and distribution facilities can cause grid congestion and curtailment of green electricity, making it difficult to trade renewable energy efficiently. The current market mechanisms for trading green power, such as renewable energy certificates (RECs) and PPAs, also have certain shortcomings. Low liquidity and difficulties with price discovery have weighed down the REC market, while payment delays and problems with contract enforcement have been the key issues with PPAs.
The competitiveness and efficiency of the green power trading market may further be hampered by the concentration of power trading and distribution within a small number of significant players. Lack of competition could restrict consumer choices and impede market expansion.
The world’s top power exchanges have implemented the uniform market clearing price (UMCP) mechanism in the DAM. The seller’s surplus, or the difference between the UMCP and the bid price, is what allows sellers who bid lower prices to make greater profits. Concerns have been raised over certain sellers generating substantial gains as a result of the market auction design in light of recent occurrences in the energy market where prices have reached worrying levels. To resolve these issues, regulators and policymakers are now examining various pricing mechanisms. Furthermore, a lack of understanding among many stakeholders, such as customers, regulators and utilities, regarding the benefits and prospects of green power trading could be a barrier to its wider implementation. Building technical and institutional competence is also necessary to effectively manage green power trading activity.
A recent report of the Group on Development of Electricity Market in India by the MoP also highlighted some of the issues that need due consideration while redesigning the country’s power markets. These include the predominance of rigid long-term contracts, the incorporation of renewable energy sources into the power market, dispersed control areas, lack of resource adequacy, and uncoordinated procurement planning. Renewable energy is typically purchased in India through long-term contracts and is a compulsory resource. Discoms, therefore, need to anticipate their procurement after taking renewable energy into account when calculating demand. Discoms often source their energy via rigid, protracted PPAs. However, in addition to raising questions about efficiency, this lack of flexibility in power exchanges has long-term ramifications for incorporating renewable energy into the market. This creates an increasing need to switch to market-based despatches for renewable energy.
Countries with high renewable energy penetration have a sizeable amount of renewable energy participating in the market and competing with other conventional forms of electricity. These countries have put in place a number of legislative and policy measures, including feed-in tariffs, contracts for difference and renewable portfolio standards, to encourage investments in renewable energy. Integration of renewable energy into traditional power markets may, thus, be considered.
The discoms’ existing planning procedures are inadequate for incorporating greater proportions of variable renewable energy in their energy systems. The development of an ideal resource mix, which would serve as the foundation for future capacity contraction, requires scientific resource adequacy planning. The implementation of policies such as market-based economic despatch and more effective energy market operations depend on adequate resource availability. Moreover, India lacks a standard framework or a nationally coordinated strategy for procurement planning. In order to assure the availability of solid reserves, it is crucial to take into account the scale of India’s power system and the rising levels of variable renewable energy.
In order to overcome these barriers, the government, the regulators, the utilities and other stakeholders must work together to establish effective market mechanisms, improve grid infrastructure, promote investment, and undertake awareness and capacity-building programmes.
The way forward
Green power trading is a catalyst for India’s green energy transition as it offers a pathway to a cleaner and more resilient power market. To take advantage of the possibilities of short-term green energy markets going forward, greater collaboration across balancing areas or the creation of bigger balancing zones is needed. Additionally, it is important to enhance access to historical or real-time bidding data so that users can better understand real-time insights and take necessary action prior to market clearing. Monitoring and surveillance of real-time data can aid in improving market efficiency and output. The electricity market also needs other enablers to operate effectively. These could include the provision of financial products for risk hedging, demand response, market monitoring and surveillance, and the adoption of market methods.
Besides, advanced power markets across the globe are increasingly shifting to shorter despatch periods because of greater renewable energy penetration. In India, generation and drawal schedules are currently produced for every 15-minute time block. Smaller despatch intervals, such as 5-minute scheduling and despatch, may offer considerable advantages in the form of improved management, smaller deviation and improvement in demand forecasting as renewable energy penetration rises. This could lead to a reduction in the quantity of reserves needed. As a result, in the future, power exchanges may need to modify their bidding and clearing processes, and establish laws that are compatible with shorter duration time blocks.
Moving forward, to further cement India’s position as a global leader in green power trading and advance its clean energy commitments, it is important to address the current and future challenges, learn from global best practices, and create an enabling environment.
By Kasvi Singh
