Blog

Aug 31, 2023

Central Electricity Regulator Issues Staff Paper On Power Market Coupling

The Central Electricity Regulatory Commission has issued a staff paper on the market coupling of Indian power exchanges and sought the views of stakeholders by Sept. 30. The staff paper, which is not

The Central Electricity Regulatory Commission has issued a staff paper on the market coupling of Indian power exchanges and sought the views of stakeholders by Sept. 30.

The staff paper, which is not going to be binding on the commission, its chairperson, or the members, has been circulated to initiate discussions on various aspects of market coupling in the Indian power market and solicit their opinion, the staff paper disclaimer said.

Indian power exchanges and regulators have been discussing the possibility of implementing market coupling on the lines of European countries to achieve a uniform market clearing price for all three power exchanges in India: Indian Energy Exchange Ltd., Power Exchange India Ltd., and Hindustan Power Exchange Ltd.

At present, around 99% of electricity volume in the collective segment, that is the day-ahead market and the real-time market, are traded on IEX, which leaves no volume for trade on the other two exchanges. To overcome the issue, PXIL and HPX had approached the electricity regulator to implement power market coupling, which would enable uniform price discovery for all three exchanges.

Under power market coupling, an operator would pool the buy and sell bids from all the exchanges to arrive at a single reference price through a system-based algorithmic process. A single reference price would help traders move to other exchanges as well, as they were attracted to IEX till now due to its better price discovery and liquidity on the exchange.

Visibly, PXIL and HPX suffered due to poor buyer-seller ratios on their exchanges, according to data shared in the staff paper.

It is claimed that by merging the buy-sell bids from all the exchanges and clearing them in one go, the utilisation of transmission infrastructure will be efficient. Earlier, transmission corridors reserved for low volume exchanges remained underutilised by around 50%, the staff paper said.

According to the staff paper, there is one school of thought that argues that price coupling would result in less incentive for product innovation and reduce the role of exchanges to that of a bid-collecting agency.

Also, innovation, ease of transaction, technology solutions, dissemination of information, analytical tools, and high-quality services would be lost if the coupling of exchanges were centralised.

However, another school argues that coupling could lead to increased liquidity, efficiency, and competition among exchanges based on the services they offer. Higher competition could result in lower transaction fees, which would reduce the overall cost to the participants and may further increase the volume transacted.

The paper has also sought opinions on:

The type of market coupling operator—whether exchanges could be the operators on rotation or there could be a third-party operator.

What should be the design, structure, role, and functions of the operator?

Cooperation between the exchanges.

The integrity of the result should be accepted by all without question.

Identification of parameters to audit the operators and their data.

According to Satyajit Ganguly, managing director and chief executive officer of PXIL, market coupling provides a single common price that acts as a ‘benchmark price’ for seamless introduction and settlement of derivatives in electricity envisaged to be introduced on commodity exchanges.

"Such financial instruments will help in hedging the off-taker risk and provide flexibility and certainty of supply to both distribution licensees and generators that are counter-parts to a transaction," he said.

A competitive multipower exchange-based market place can thrive on a foundation of an enabling market structure like market coupling, fair rules that allow competition to thrive and ensuring ease of participation on different exchange platforms, Ganguly said.

PXIL would be submitting its observations to enable the regulator for quicker implementation of market coupling in collective transactions as provided in CERC (Power Market) Regulations, 2021, he said.