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India's power exchange market is set for a shakeup with two more power bourses getting launched this financial year. With this, India will have four operating power exchanges.

The new entrants are Ahmedabad-based Marquis Energy Exchange and Delhi-based National Power Exchange (NPEX). Marquis is in the process of completing the required licensing process, while NPEX is set to hit the market by the end of this financial year. NPEX's promoters include Tata Consultancy Services, National Thermal Power Corporation, National Hydro Power Corporation, and Power Finance Corporation.

The existing power exchanges were established in 2008. After the Central Electricity Regulatory Authority came out with ‘guidelines for setting up power exchanges' in February 2007, Financial Technologies (India)-promoted Indian Energy Exchange (IEX) announced operations in June 2008 and the National Stock Exchange and National Commodity & Derivatives Exchange-promoted Power Exchange India (PXIL) started in October the same year.

NPEX was also planned in 2008 but its commissioning date kept getting postponed due to various reasons. "We have been treading very cautiously and waiting to see how the power market takes to the exchanges. It is a very shallow market with hardly 2 per cent of the overall electricity produced in the country being traded on the exchanges," says M.G. Raoot, MD & CEO, NPEX.

Even four years after the introduction of power exchanges, the development in the product portfolio has been slow. The two functional exchanges only trade in the day-ahead market and the term-ahead market, and the recently introduced Renewable Energy Certificate trading. The bourses are yet to introduce mid-term and long-term products, which have been held up due to regulatory hurdles. This has also been a reason for the low share of exchanges vis-à-vis bilateral and long-term power purchase agreements.

Analysts, however, say that more than two exchanges will spoil the broth. "The need is for a maximum of two exchanges; more exchanges are going to be superfluous and will not have any significance. When the National Stock Exchange can handle high volumes, two power exchanges should easily be able to handle 10-15 times of the present volume of their trade. It will be great if a third exchange can offer something new, otherwise consolidation is the only way," says Seshan Balakrishnan, director, transaction advisory services, E&Y.

An important power market regulation that can impact the dynamics of the Indian power exchange market is that any exchange with less than 20 per cent market share for two consecutive years will either cease to exist or take the option of merging with any of the other exchanges. While IEX has always maintained a lead with more than 90 per cent share, PXIL has been perennially struggling to maintain its share.

Sources say that given the list of promoters backing NPEX, both the present exchanges are in talks for merging with the new player. All the parties involved preferred to reserve their comments on the development, but a clear picture might emerge in the next few weeks.

(This story was published in Businessworld Issue Dated 07-05-2012)