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Power trading, just like any other form of trade, involves buying and selling of power. So, why a research report on trading? Is there something unique in trading of power as opposed to trading of other commodities? The answer is yes. Power is unique in all senses. Power is intangible, it can't be stored, and there is no concept of inventory of power. In electricity production raw material like coal, gas etc. are converted into finished product (electricity) and consumed by the final consumer within split seconds. The transport of power from power generating unit to the end customer takes place through a well developed national grid. But, minor mismatches of sanctioned and actual drawl of power from grid can misbalance the grid and the whole system defaults. Hence, traditionally power arrangements are worked out well in advance. There are other inefficiencies associated with negotiated power deals, called as Power Purchase agreements (PPA) which we will see in the next section. Short term power trading aims to overcome these inefficiencies by effectively matching demand and supply participants in power market in shorter time horizon, hence the price will depend on demand - supply situation and not be opaque like in the case of over the counter negotiated PPA's. Short term power trading is in an evolving stage in India and the volumes of exchange are slowly picking up.
TRADITIONAL SCENARIO AND ROLE OF POWER TRADING
Respective State Electricity Boards (SEB's) cater to the consumer of electricity in our country. All the power generators tie up their capacity well in advance through PPA's (recently through competitive bidding process - a slight improvement over the OTC deals). Each SEB draws its share of power without any say in the price of the power purchased. Both buyers and suppliers lack any choice of whom to sell, at what price to sell. Pricing is controlled by the Central Electricity Regulatory Commission (CERC) and the Respective State Electricity Regulatory Commissions (SERC's). There are little avenues to meet short term demands and emergency contracting of power is both expensive and involves lot of hassles. Also the demand patterns in the country are not properly matched. For example if East India has demand peaking in afternoon and Metros have demand peaking up in morning and evening hours, effective power trade can solve this issue and reduce the excess local capacities that have been created and can also defer the additional capacities planned due to this savings of power.
POWER TRADING BUSINESS
ROLE OF POWER TRADING COMPANIES AND POWER EXCHANGES
Power trading companies facilitate power received sourced from various sources like State utilities, CGS, IPP's, CPP's, Merchant power plants, small renewable energy and hydro plants to power consumers which include state utilities, private distribution companies and direct open access customers (HT customers)
Our Govt. is encouraging private sector participation in Power Generation. However the financing of these projects depend heavily on the PPA's. The credibility of these transactions is doubtful as these are over the counter, non - transparent contracts and are prone to counter-party defaults. To enhance the creditworthiness of these projects Power trading companies provide an alternate way. They act as the counterparty to both the buyer and the supplier of power. They enter into firm binding contracts among the power generators and the multiple buyers. This reduces the systemic risks involved in earlier transactions since the power generated is pooled and then distributed. The buyer and seller do not interact with each other and pricing is largely determined by demand - supply situation rather than OTC negotiations
The power trading companies work out short term arrangements on a term ahead or day-ahead basis. Power exchange is another innovative platform for power exchange which will be explained later. A power exchange works exactly like the stock exchange or commodity exchange by providing a platform for buyers and sellers of power to enter their desired trades. At power exchanges, power trade takes place on a day ahead basis i.e. the buyers and sellers punch in their trades for power requirement and available supply respectively for the for 24 one hour time slots of the next day. The power exchange matches the demand and supply situation for each one hour slot of the next day and arrives at the clearing price for each one hour. All the players whose trades are valid and possible enter into contract with the exchange and the exchange ensures that the players honor the trades through provision of penalties and bank guarantees. Hence short term power trading provides an efficient way to meet short term requirements.
MARKET POTENTIAL AND CURRENT VOLUMES
NEED AND EVOLUTION
Power generation projects were planned and set up based on the projected demand in the region or the availability of natural resource. However, due to the demand-supply mismatches, changes in demand patterns and changes in the usage profile of consumers leads to geographically unplanned capacity growth. Power demand is seasonal in India and also due to vast geographical spread of India demand loads are dissimilar. Hence there is enough power trading opportunities in India. The improvement in required infrastructure to facilitate this trade has also led to the emergence of power trading.
As quoted by CERC report in 2009, 92% power demand is met through long term contracts and 8% is met through short term trading.
The total electricity generated in India is close to 750 Billion units
Total trading in short-term power amounted to 30.6 Billion Units; an increase of 20.3% from 2008
This can be pegged to Rs. 19217 crores. Out of this, Rs 3220 crore was the value of electricity traded through power exchanges and rest through the trading licensees.
This also means that 4.08% of the total electricity generated through short - term trading compared to 2.93% in the year 2008. The reason for this substantial increase can also be attribute partly to power exchanges which started operation in 2008.
REGULATORY AND PRICING REGIME
PROVISIONS OF THE ELECTRICITY ACT, 2003 FOR POWER TRADING:
Competition and choice
Electricity Act, 2003 in June 2003 has been the most comprehensive legislation and significant regulatory development for the industry in recent times. The Act replaces the previous legislations by a comprehensive, single legislation. The Act is intended for the reforms agenda to proceed on all fronts. The Act looks forward to alter the Market Structure to be conducive to greater competition and choice. A strong and predictable regulatory regime is set to move the market to a more efficient and Demand-Supply determined by enabling more competition. Moreover trading was recognized as a distinct activity for the first time, and a restriction has been imposed on transmission companies being allowed to engage in Trading. This has enabled more equitable distribution as far as this activity is concerned and would give a great boost to a competitive power trading regime with increased no. of participants with varying business models and innovative services.
Authorised trading companies
The following players cannot engage in power trading:
National Load Dispatch Centre (NLDC)
Regional Load Dispatch Centres (RLDC)
The State Load Dispatch Centre (SLDC)
The Central Transmission Utility (CTU)
The State Transmission Utility (STU)
A transmission licensee.
The deemed holders of a trading license are:
CERC on recommendation of the Central Govt.
The open access provision is the most defining principle for power trade business. The Act says that the Central Transmission Utility (CTU) has to provide a non-discriminatory access to its transmission system to a distribution licensee, on payment of transmission charges. This provision has encouraged investment in power generation since producers are assured of the selling channel. Also this is the underlying opportunity for the power trading business.
Impact on downstream players:
Clear definition of short - term (1 year or less) and long-term contract (5 years or more) for transmission capacity.
Power distributors are not required to obtain separate trading license and can set up franchises for distribution and power trading.
Multiple licensees have been permitted in each distribution area.
Transmission licensees are allowed to use common assets for different businesses.
Transmission to be opened to private sector hence facilitating power trade.
The Act's impact on players in the upstream segment is likely to be:
Generation has been delicensed which encourages additional capacity which gave rise to the trading model since multiple producers are competing to sell power at competing prices to consumers.
Captive generation was encouraged and power traders get an opportunity to pool power from various small suppliers to achieve economies of scale.
Similarly encouragement of renewable energy plants provides traders an opportunity to tap several suppliers and pool power.
Given the above impacts, and the following provisions for power trading, the overall impact of the Act on the activities related to power trading has been positive. Major thrust has been provided by the Act to make conditions suited for development of the Market.
CAPITAL ADEQUACY & TECHNICAL REQUIREMENTS
CERC is the regulatory body which sets the norm for Power Trading. Major provisions in the regulations are:
Any person interested in obtaining inter-state trading license shall apply to the CERC.
The trader has to comply with the minimum technical requirements and Capital adequacy and credit worthiness standards in relation to the volume traded.
The licensees have to operate within the trading margins specified by CERC
Traders should have minimum one full time professional in:
Power system operations and commercial aspects of power transfer
Finance, commerce and accounts.
The latest Rules as laid down by CERC specify that Trading margins would be capped at 4 p per unit if the selling price of electricity is less than or equal to Rs3 a unit. The ceiling of the trading margin shall be 7paise a unit if the selling price of electricity exceeds Rs3 a unit. The 4p a unit cap regime was not adequate to cover the operational and market risks faced by trading companies due to strong competitive pressures, especially in the short-term buy and sell agreements.
In case of short-term buy and short term sell contracts i.e. contracts where the duration of the power purchase agreement and power sale agreement is less than one year, market prices are currently dominated largely by the demand-supply gap prevalent in the country. In such a condition, there is a high probability of deficient utilities buying power at higher than justified rates to prevent excessive load shedding. Continuation of trading margins prevents surplus states from profiteering at the cost of deficient states.
The ceiling on the margin include total margin for all traders if more than one trader is involved.
Rationale of trading margin regulation as opposed to a free market:
A fixed Trading margin of 4 p/kwh was issued by CERC as during the year 2004-05 that the trading margin charged by the licensees was 5 p/ kwh or less. However, the weighted average trading margin charged by the licensees during the year 2005-06 went up to 10 p/kwh (April-Sept 2005-06). New margin regulations have now been implemented. Most of the traded power is sourced from coal/hydro power plants, of which power production cost (tariff at cost plus norms) is not more than Rs 4 per unit but the prices discovered in Power exchange (which are not different from the bilateral traded power) have been in the range of Rs.0.90 to Rs 9 per unit. But mostly the prices in the time blocks have been in the range of Rs. 6 to 8 per unit. T
TOP PLAYERS WITH MARKET SHARES
In all 42 trading licenses have been granted by CERC but not all are doing business. The industry volumes are still picking up. In fact it is the top 5 players who are doing the majority of the business. The oligopolistic nature of the business is indicated by the high HHI index of the industry. HHI index above 0.18 indicated high concentration of market share among few players. HHI index of 1 indicates monopoly.
KEY ISSUES, CHALLENGES AND CONCLUSION
Power Market is more akin to oligopoly than perfect competition due to its special features such as, a limited number of producers, large investment size (barrier to entry), transmission constraints and congestion which could isolate consumers from effective reach of some generators and transmission losses which discourage consumers from purchasing from distant suppliers. CERC is doing great work in bringing effective market institutions in power market to manage the risks associated with the operation of extremely price volatile market of electricity. To overcome the bottleneck in transmission and issues such as the competitive power market, power quality and demand side management the trading arrangements needs good support from CTU and other transmission companies. Power trading does indeed offer a good solution to achieving a transparent process in transportation of power from the generators to the consumers.