Can energy exchanges help in sustainability transition?

Power markets are poised to play an instrumental role in facilitating the Government’s vision of a sustainable and energy efficient future for India. Initially conceptualised to streamline electricity trading, these platforms have become crucial in catalysing the energy sector's transformation to achieve India’s NDC target, which now aims to reduce emission intensity of the GDP by 45% (with respect to 2005 levels) and to become a Net Zero emitter by 2070.

Evolution of Power Exchanges in India

The need for power exchanges in India emerged from a critical necessity to address the country's significant power deficit and an inefficient electricity transaction system. This was compounded by dominant long-term Power Purchase Agreements (PPAs), which were rigid and inflexible to real-time demand fluctuations.

The Electricity Act 2003, a testimony of Indian polity’s commitment to policy reform and transition to a market-based economy, brought about major changes in power generation, transmission, distribution, trading, and the use of electricity. From a single-buyer model, India’s power sector was transformed into a competitive multi-buyer, multi-seller model. This unbundling provided a sound platform to promote inter and intra-state trading of electricity. The Act was fundamental in establishing the first power exchange in India in the year 2008, altering the landscape of electricity trading. Within a few months, a second exchange became operational, and today, India has three exchanges, all regulated by the Central Electricity Regulatory Commission (CERC).

Initially, these platforms offered limited trading options, but have since expanded their product range to cater to the diverse needs of India’s dynamic electricity market. They are currently trading more than 100 BU annually, accounting for around 7% of the country's total generation.

These platforms now offer a bouquet of around 25 contracts across market segments – from the Day Ahead Market (DAM) to the Real Time Market (RTM), the Term Ahead Market (TAM) serving up to 90 days, the Green Market, and the Ancillary Market. Customer needs, global climate advocacy and regulations also pushed the need to trade market-based instruments for renewable resources. Subsequently, exchanges made it possible to buy renewable attributes through certificates if entities were unable to meet their renewable purchase obligations. Renewable Energy Certificates (RECs) have been trading on exchanges since 2011. To reduce India’s carbon footprint and support the government’s Perform Achieve Trade (PAT) policy, Energy Saving Certificates (ESCerts) have been trading on the exchanges for over 6 years. Over the years, the concept of Cross-Border Electricity Trade (CBET) has gained traction as a tool to enhance energy security in South Asia. The first step towards the creation of this regional electricity market started with Nepal and Bhutan. While cross-border electricity was initially traded in the DAM segment, it has now been extended to RTM.

Benefits to the Power Sector

The establishment of power exchanges has introduced competitive and transparent price discovery of electricity, efficient planning for discoms, and flexibility in procurement. Exchanges provide the flexibility of trading in 15-min trading blocks, and delivery at a 1-hour notice. This allows buyers to procure power to meet the fluctuating demand during 96 different time blocks in a single day. Discoms can leverage this flexibility to ensure adequacy of power to meet fluctuating demand and provide uninterrupted 24x7 power to consumers and maintain good financial liquidity.

The inherent flexibility of RTM markets is enabling market participants to meet demand variations of electricity in shorter windows, support large-scale renewable energy integration, and maximise grid security. More so, exchanges have enabled commercial and industrial units to buy directly from the market, ensuring a more reliable and economically feasible power supply. The exchanges have also been able to provide signals on benchmark prices for additional generation capacity and transmission capacity projects within the sector. By helping discover the most efficient price, exchanges have maximised economic welfare for all participants. Over the last 15 years, exchange prices have proven more competitive than alternate modes of power procurement, resulting in financial savings for the distribution companies and large industries. Additionally, the Green Market at Exchanges is enabling proliferation of renewable energy across the country.

However, compared with countries in Europe that trade more than 50% of generation through power exchanges, exchanges account for only 7% of the market in India, leaving significant headroom for growth. The target to increase the share of spot markets to 25%, as per the National Electricity Policy, presents a big opportunity for further evolution of power exchanges in the country.

Regulatory Support 

Exchanges have regularly received valuable support from the Government and Regulators at various stages of their journey. The Power Market Regulations of 2010 and 2021, and more recently the implementation of the General Network Access (GNA), the Indian Electricity Grid Code (IEGC), and the Inter-State Transmission Charges Regulations, have all laid the groundwork for a more efficient and flexible energy grid, allowing exchanges to trade electricity.

Notably, these regulations have enabled generators with long term PPAs to also sell surplus power in the DAM without requiring the consent of buyers. Additionally, generators are now being allowed to meet their commitment in case of forced shutdowns of plants by purchasing power through the exchanges. Inter-State Transmission Charges and Losses are now only applicable to buyers, providing a level playing field for all generators, irrespective of their location, thereby supporting competition on the exchanges. These regulations are expected to increase the share of exchanges in the overall power generated in the country, through improvement in sell side liquidity. This, in turn, will lead to further optimisation of power prices by Discoms and C & I consumers by procuring via exchanges.

Renewable Energy Transition and Power Exchange

Globally, power exchanges have played a crucial role in reducing the cost of renewable energy integration and providing efficient price signals for newer capacity addition. Given the RE trajectory that India’s policy makers have set out to follow, power exchanges will be instrumental in accelerating the integration of RE into India's power grid. According to a recent study conducted by Deloitte, it is seen that for the next 15 years, market based RE projects can command better IRR vis-à-vis RE projects set up through the existing bidding route. Market-based RE capacity will also resolve issues such as delays in signing PPAs, schedule curtailment, and payment delays.

Earlier this year, an expert group constituted by the Ministry of Power for ‘Development of Electricity Market in India’ charted out a road map for the sector. The expert group took cues from countries such as the UK, US, Germany etc. which were able to increase their renewable energy penetration to more than 30% by implementing market-based renewable capacity. Looking at international experiences, the total RE capacity awarded through market-based mechanism in the UK stands at 33.7 GW. Similarly, Germany added 15 GWs in RE capacity till 2020 and their target is for the electricity grid to be 80% renewables by 2030 through this mechanism. In India also market based renewable addition can accelerate capacity addition in the country.

The report on ‘Development of Electricity Market in India’ also includes the proposal to introduce financial products for electricity to hedge against price volatility in spot markets, leading to further deepening of power markets. The recognition of the inefficiency and inflexibility of long-term PPAs is expected to result in a stronger role of power exchanges and enable efficiency in electricity procurement. Improving the efficacy of the day-ahead market will lead to a merit order dispatch of electricity, resulting in effective cost optimisation.

Other market models that are being prominently discussed among stakeholders include Virtual PPAs. Under this model, a bilateral agreement is signed between a power producer (RE generator) and a buyer at an agreed contract price, called the strike price. The generator sells electricity on market as conventional power, and the difference between strike price and the market price is paid by the buyer. Under this contract, the buyer obtains the green attribute separately to comply with the requirement of green power.

The missing link so far for renewable power integration into the grid has been energy storage. Once storage acquires size and scale, renewable based power will be available round the clock at cost-effective prices. This is where Battery Energy Storage Systems (BESS) are seen as a future growth driver for the sector. Recently, SECI awarded India’s first pilot project of 500 MW battery storage, providing 40% open capacity. This open capacity will be sold through power exchanges.

Looking Ahead at Opportunities 

As India marches towards achieving its net zero targets, there is bound to be a much larger involvement of exchange platforms in the country’s energy landscape. This growth will be driven by the development of innovative trading products and services for efficient energy market management.

In the conventional power market, the anticipated extension of Long Duration Contracts (LDCs) up to 11 months will provide greater stability and adaptability in energy procurement.

A significant transformation expected in India's power market, although some time away, is the establishment of a capacity market. This market and its associated contracts are envisioned as the link between the power generation mix planned by states and the balancing of power demand. The capacity market framework will determine the optimal energy mix or resources that each state should have through a formula, and when a State runs out of resources, it will buy electricity capacity from the market.

There are untapped visible opportunities for exchanges with a growing role of Green Hydrogen and the gradual emergence of Peer-to-Peer (P2P) Trading. These areas are anticipated to revolutionise the way Indians receive their power, thereby nudging the sector towards the global trend of decentralised energy solutions.

Anchored in this evolving landscape, technological innovation and customer-centricity have served as the cornerstones of power exchanges, enabling them to introduce market-friendly products and enhance operational efficiency to facilitate the nation’s energy transition. To remain competitive, power exchanges would need to maintain a technology-focused approach and persist in investing in state-of-the-art technologies to complement the evolving energy market, thereby achieving the sustainability targets of both the nation and the world.

As we approach 2024, power exchanges will continue to play a crucial role in advancing efficiency and sustainability in India’s Power Sector. With India’s commitment to achieve 500 GW of renewable capacity and 50% of power generation through non-fossil fuels by 2030, there will be an increasing thrust on electrification, spanning from cooking to railway traction and EVs. Additionally, there will be a focus on green energy banking solutions, such as pumped storage, batteries, hydrogen, etc.This will lead to new products on exchange markets, with exchanges playing a key role in catering to India’s changing energy mix and growing energy demand.

(Satyanarayan Goel is the Executive Chairman & Managing Director at Indian Energy Exchange Ltd.)