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Losing Out In Power Play

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Sometime close to April next year, the Delhi-based National Power Exchange (NPEX) will go live. It is backed by heavyweights such as National Thermal Power Corporation, National Hydroelectric Power Corporation, Tata Consultancy Services and Power Finance Corporation. But there is already talk of a merger between NPEX and one of the two power exchanges set up earlier: the Indian Energy Exchange (IEX) promoted by Financial Technologies (India) and the Power Exchange of India (PXIL) promoted by National Stock Exchange and National Commodity and Derivatives Exchange. Meanwhile, a fourth, Marquis Energy Exchange, is all set to gatecrash.

A power exchange is where buyers who have a shortfall and sellers who have surplus power transact. An overwhelming majority of power producers in India sign long-term power purchase agreements (PPA) with distributors to reduce risk. But most of them also have a certain amount of surplus power which they sell at the highest price they can get in these exchanges. Similarly, most distributors tend to have long-term, fixed-price agreements for the bulk of their requirements but depend on power exchanges to meet the shortfall when power demand exceeds the normal.

The stage for the exchanges was set on 10 June 2003 with the formulation of the Electricity Act. The new regime sought, among other things, to streamline electricity trades, and do away with opaque bilateral deals. In February 2007, the Central Electricity Regulatory Commission laid down the ground rules; in June 2008, IEX was rolled out followed by PXIL four months later. But even as power exchanges proliferate in the country, they are grappling with all sorts of issues — from regulatory clarity to lack of enough "products" to sell.

In India, short-term electricity transactions are done via bilateral contracts, power exchanges and unscheduled interchange (UI). Some 10 per cent of the total electricity generated in India is transacted via the short-term market; power exchanges make up for 2 per cent of the total share. In January 2012, while 89.6 per cent of the electricity was tied up through long-term contracts, 6.1 per cent was traded via bilateral contracts, 2.9 per cent through UI and 1.5 per cent via exchanges.

We now have a unique power exchange market: a power-deficit market peppered with multiple exchanges. During April 2011-February 2012, the power deficit was more than 8 per cent; it shot up to 11 per cent during peak hours. Against the generation target of 855,000 million units (MU) for the period, we generated only 7, 98,949.49 MU. Data on the growth of the power exchange market during the period was not available. However, it grew from Rs 3,563 crore in 2009-10 to Rs 5,389 crore in 2010-11.

"Mumbai wakes up an hour earlier than Calcutta; there are periods when surplus power flows from the northern region to the south and vice versa," says Jayant Deo, managing director  and CEO, IEX. In case of a power deficit market, exchanges deal in residual power coming from different parts of the country in small quantities, which is pooled together to make a substantial quantum.

"The benefit of deemed open access has not been seen yet"
Jayant Deo, MD and CEO of the Indian Energy Exchange

During monsoons, a few states in the south draw less power; the drier north and central India pull more; the east has a surplus almost throughout the year; and the big metros are always power hungry. But while IEX has been successful, PXIL has been struggling. It has a low market share and a diminishing net worth — its net worth had turned negative last year. The Central Electricity Regulatory Commission (CERC) has asked PXIL to present a detailed plan for improving its numbers. According to the regulations, all exchanges have to maintain a minimum net worth of Rs 25 crore.

Trades, Damn Trades
Power exchanges receive 2 paisa each from the seller and the buyer as fee per unit. The volumes traded in  the DAM (Day-Ahead Market), the first product launched by IEX and PXIL, drives the exchanges' fee. Explaining DAM's utility, M.G. Raoot, managing director  and CEO of NPEX says, "It (DAM) tides over daily contingencies such as transformers tripping or a surge in power demand during festivals."

Gradually, power exchanges have managed to wrestle away DAM trades from the OTC (over-the-counter) market. Says a Tata Power Trading Company (TPTC) insider, "DAM trades were low in the OTC market. They never generated big revenues for traders. When power exchanges moved in with their transparent model of price discovery, they became the biggest players in DAM." Deo agrees, "The exchanges opened up a lot of bottled up capacity. And power started moving from surplus states to deficit states."

300 projects are
listed with IEX
for renewable
energy certificates

Over time, the exchanges have not only built a stronghold on the DAM but have also developed the market. Out of more than 44 traders listed with CERC, only 10 trade actively in the OTC segment; five of them have cornered 80 per cent of the volumes as of 2010-11, the latest period for which data is available. They include the likes of PTC India (35 per cent), NTPC Vidyut Vyapar Nigam  (17 per cent), National Energy Trading & Services (14 per cent), Reliance Energy Trading (11 per cent) and Tata Power Trading Company (8 per cent).

But trading volumes on the power exchanges can be misleading. "Both the exchanges (IEX and PXIL) account for 15 billion units of the total 60 billion units of power in short-term trades. But this is only in DAM as we have not been allowed to deal in monthly contracts," says Rajesh Mediratta, senior vice-president at IEX. The total electricity transacted on both IEX and PXIL was recorded at 2.77 billion units in 2008-09; it was 7.19 billion units in 2009-10 and 15.52 billion units in 2010-11. While DAM trades picked up quickly, it was different in the case of TAM (Term-Ahead Market), which includes intra-day, day-ahead contingency, daily and weekly products. Trade in the TAM segment,  which was introduced in 2009, was only 0.0982 billion units in 2009-10 and 1.98 billion units in 2010-11.

Ironically, the factors which helped the exchanges to carve out a niche in DAM trades have proved to be a hurdle to TAM trades. That is because the exchanges require buyers to make an upfront payment for them to provide a security payment to sellers. This amount increases because of longer TAM contracts. So buyers prefer to enter into bilateral OTC agreements that do not require advance payments. In the OTC market, a buyer is required to provide a letter of credit to the seller but industry insiders say this is not always complied with, thus increasing the attractiveness of the OTC market for the buyers.

"Exchanges are best suited to sell surplus power on a daily basis where payments are assured, and for selling or buying small quantum of power to meet contingency needs. But as a seller, we prefer the OTC market as there is too much fluctuation in the exchanges. Also, prices are better in the OTC market, and for thermal generators like us who source coal from the international market where prices are linked to international indexation, it is not possible to sell via exchanges," says Satish Jindal, CEO (Power Trading) of JSW Energy Trading.

However, trade in RECs (Renewable Energy Certificates), which came into play last year, offer a silver lining to the exchanges. RECs address the mismatch in renewable energy resources in different states and the requirement of the obligated entities to meet their renewable purchase obligation (RPO). REC trades are exclusive to power exchanges and happen on the last Wednesday of every month. One REC certificate equals 1 MW hour of renewable energy generated.

The volume of REC transactions on IEX rose to 200,000 RECs in March 2012 from 200 RECs in March 2011. "It adds substantially to our revenue generation and it is one of the major streams we have got. It has proved to be much better than expected. This year we traded 9.5 lakh RECs and we expect an increase of 30-40 per cent. In one year, revenues from REC trading have come close to 10 per cent of our total revenues," says Mediratta.

"We will need to open our markets for off-shore trade to take place"
M.G. Raoot, MD and CEO of the National Power Exchange

IEX has presently 300 projects registered with it, with a total capacity of 2,000 MW. Says Mediratta, "We saw an increase in the registration of the capacity. Also, the last REC trading session saw — other than obligated entities such as discoms, open-access consumers and captive consumers — the participation of Power System Operation Corporation (POSOCO) to offset their carbon footprint. This is a good sign, and corporates can look at this avenue as part of their corporate social responsibility obligations." There is also an offshore interest in REC trades. Says Raoot, "We were recently contacted by a company in Amsterdam that wants to buy RECs to meet their obligations. So, we have to open our market for such trades to take place." Possibilities aside, power exchanges feed off revenues from DAM and REC trades.

Turf Battles And All That Mess
Regulatory hurdles in introducing medium-term and long-term products have caused the share of power exchanges to be stuck at 2 per cent. While trading companies make most of their gains in the monthly contracts, exchanges are still caught up between the power regulator and the commodities market regulator, both of which are battling each other over the right to regulate. The exchanges planned to bring in weekly and monthly contracts in 2009 but got caught between CERC and the Forward Markets Commission's claims on the futures market. So they can deal only in DAM and TAM until the matter is resolved by the Supreme Court.

Traders are confident of retaining their stronghold in the futures market. "The exchanges will not be able make a big impact even if they entered the medium-term and long-term market. The week-ahead product launched by the exchanges received a lukewarm response from the market and the same would happen to the monthly contracts. So, in that way exchanges cannot be much of a competition for us," says the TPTC expert. While the exchanges wait for the two authorities to settle the issue and enable them to launch medium- and long-term products, even they believe that it will not add much to their revenue base. "Since we provide payment security by taking an upfront margin from the buyers, they will find it difficult to cough up huge advance payments required to trade in the weekly and monthly markets. Since traders don't take money, buyers will find OTC market more attractive. We don't expect a huge shift from traders to exchanges in the futures market," says Mediratta.

Price is another advantage that traders seem to have over the power exchanges for attracting sellers. Insiders say that there is a price difference of 20-25 per cent between the power exchanges and the traders. The price of electricity transacted through traders touched Rs 7.29/kWh in the year the exchanges were set up. It came down to Rs 5.26/kWh in 2009-10 and Rs 4.79/kWh in 2010-11. In comparison, the price of electricity transacted at the power exchanges touched  Rs 7.49/kWh in 2009-09, it came down to Rs 4.96/kWh and Rs 3.47/kWh in 2009-10 and 2010-11, respectively.

While at the exchanges, a market-cleared price is discovered, which helps in keeping the prices low, traders come out with electricity prices based on one-on-one negotiations. Also, the volume of electricity traded by trading licensees is on the higher side. The figures available for the month of February 2012 are true to the trend. While traders transacted electricity at Rs 4.45/kWh, it was Rs 3.34-Rs 3.50 for the power exchanges. With the cost of electricity generation at Rs 2.50-Rs 3.0, the prices prevailing at the exchanges do not offer enough incentive to the generators. Most of them prefer to trade in the OTC market and bring the buyers along with them.

25% The estimated price difference between power exchanges and traders

Power exchanges have also been waiting for open access consumers to come out and start trading in the open market. The Open Access Act provides consumers of one megawatt and above the freedom to choose their own supplier. According to the Act, distribution utilities no longer have the universal service provider obligation and, consumers, in case they choose another supplier, will only have to pay a wheeling and a cross-subsidy charge to the utilities.

The law ministry cleared the roadblocks in the implementation of this mechanism towards the end of last year when it came out with its note stating, "...all 1MW and above consumers are deemed to be open access consumers and that the regulator has no jurisdiction over fixing the energy charges for them". However, the enthusiasm seems misplaced now. Even after five months of this clarification issued by the law ministry, exchanges are yet to see any demand from open access consumers. "The benefit of deemed open access has not been seen yet. The industries are not clear about the final procedure; there is a need for clear regulations in the market," says Deo of IEX.


(This story was published in Businessworld Issue Dated 04-06-2012)