Power Exchange India Ltd (PXIL) is India’s first institutionally-promoted energy exchange and began market operations in 2008. Over the recent years, PXIL has seen a sharp increase in trading volumes that was supported by the introducing new trading instruments. In this interaction, we have Prabhajit Sarkar, MD & CEO, Power Exchange India Ltd, taking us through PXIL’s performance in recent years, and its medium-term growth plans. Sarkar also gives keen insights on how power exchanges can significantly improve their share in India’s short-term electricity market.
We recall that in FY21, trading volumes on PXIL had doubled year-on-year. How has the trend been in FY22 and in the first half of ongoing FY23?
PXIL’s trading volumes has been continuously increasing over the last few years. In the last financial year, FY22, the total transaction done on PXIL was 5,905 MU, which itself was more than the previous year and substantially more than the year prior to that.
The growth trajectory has continued in this financial year as well. By the end of November 2022, i.e. within eight months of FY23, the total volume traded is 7,041 MU, which is nearly 16 per cent more than the volume traded in the entire FY22.
The Term Ahead Market and Green Term Market are major contributors for increased volume, and our aim is to more than double from existing levels by end of the year.
PXIL has also been able to successfully demonstrate traction of its Day Ahead Market, where continued transactions have taken place for several months during the year. While the volumes are muted now, yet the need for competition in the Collective segment comprising of Day-Ahead and RTM is consistently demonstrated. Market participants across the country are looking forward to the implementation of market coupling to give a fillip to competitive efficiencies in the collective transactions segment.
In the last few years, PXIL has demonstrated high growth in its business leading to consistent financial performance. We have met our regulatory net worth requirements well within the time frame granted to us and have been consistently profitable and growing over the last five years.
“The Term Ahead Market and Green Term Market are major contributors for increased volume, and our aim is to more than double from existing levels by end of the year.”
PXIL recently introduced a new “any-day, single-sided, reverse auction” contract. Tell us more. How does this work? How has been the early response from market participants?
PXIL had been offering delivery-based Term Ahead Contracts from August 2009. However, these contracts were limited to a duration of up to 11 days from the date of transaction.
After issuance of Hon’ble Supreme Court’s judgement in October 2021, providing for delivery-based contracts to be regulated by CERC, and pursuant to Hon’ble CERC’s Order in June 2022, PXIL now offers various longer duration contracts with duration up to 90 days/12-Weeks/3-Months ahead.
One such contract type is the “Any-Day Single Sided Reverse Auction”, where any buyer may create auction events to meet their power requirements through the use of standardized contract specifications and undertaking the payments for the transaction through the standardized clearing and settlement systems.
PXIL introduced the Reverse auction Contract on September 26, 2022 in ‘PRATYAY’ system. Nearly twenty auctions have been conducted till November 30, 2022. Two auctions have also resulted in successful transaction. Over the next few months, when delivery duration is increased from 90 days to eleven months ahead, the transactions in reverse auction contracts will increase multifold.
“Market coupling means the process where the collected orders from all the power exchanges are aggregated together and then matched to discover a uniform market clearing price.”
We often hear of the concept of “market coupling” as seen in European markets). What does this mean? What is the current status with respect to its implementation in India?
Market coupling means the process where the collected orders from all the power exchanges are aggregated together and then matched to discover a uniform market clearing price.
In this process, the market coupling operator takes the order books from all the power exchanges, how many ever there might be, and combines these buy and sell orders to develop one set of prices for the entire country.
Through this process, the transmission allocation can happen after accounting for all power flows netted within each bidding zone, thereby leading to the most efficient allocation of transmission.
Devoid of market coupling, transmission allocation taking place separately on each exchange creates suboptimal outcomes because in one exchange, you might have required a power flow from one bidding zone to another, whereas another exchange might have asked for an opposite flow based on their order book, and in the third exchange it might be completely different. An absolute addition of requirements emanating separately from the exchanges would lead to far more requirements than if these were netted within the bidding zones by combining the order books of all the exchanges.
In essence, by aggregating individual requirement, a situation arises wherein new requirements for transmission capacity get created when there was no such requirement, if it was netted in each zone.
So, the smartest thing to do is to combine all these order books together and arrive at a combined solution because along with the price discovery, the transmission is also coupled together. Under market coupling, once this price discovery is done on a combined basis, then the results are sent to all Exchanges and they clear and settle transactions for their respective participants.
The enabling regulation in this regard has already been brought in through the Power Market Regulations, 2021. The implementation of this is yet to be done though.
Most market participants have at various forums voiced the need to implement market coupling, considering the significant beneficial impact on the entire power market.
With multiple segments in the Day Ahead Market in the form of Green DAM and Conventional DAM and now an expected High-Price DAM segment and with three power exchanges operating, for each day, potentially 864 different prices can be discovered, leading to substantial fragmentation and confusion in the market.
It is therefore imperative now that Market Coupling is implemented at the soonest for the benefits of the market, its participants and for optimal utilization of national infrastructure.
“GTAM contracts have enabled participants to meet their renewable energy trading requirements.”
How has been the performance of G-TAM contracts on PXIL in recent months? Do you feel that RE generators are viewing this favourably to sell their surplus generation?
GTAM contracts have enabled participants to meet their renewable energy trading requirements. GTAM contracts were introduced on ‘PRATYAY’ system from March 24, 2021.
During FY22, nearly 1,435 MU of renewable energy was transacted in different GTAM contracts. During the 8-month period ending November 30, 2022, nearly 912 MU of renewable energy is transacted resulting in 59 per cent market share in this segment.
Further, PXIL introduced the Hydro bid type in TAM and Hydro Green Term Ahead Market (Hydro GTAM) contracts in August 2022. The Hydro bid-type in Intra-Day and Day-Ahead Contingency Contracts are subsets of Contingency contracts and the Hydro GTAM Contracts are subset of GTAM introduced by PXIL in March 2021.
Through these contracts, Hydro energy can be transacted to meet current day’s and next day’s requirement and also help in fulfillment of Hydro Power Obligation (HPO) or Other RPO as prescribed in MoP Order dated July 22, 2022.
We have seen increasing participation in the GTAM contracts as RE generators see the benefit of bringing merchant capacity in the market to earn better realization with the guarantee of immediate cash flows and reasonable prices.
The newly introduced long-duration contracts for transacting in renewable energy would also provide additional avenues for transacting in renewable power for longer duration up to three months ahead and is expected to meet the need of generators to lock-in their cash flows over a longer period.
We believe that the trade volume in GTAM contracts would increase consistently as it is closely aligned to India’s voluntary commitment of ensuring 50 per cent of installed generation capacity in 2030 from non-fossil fuel sources.
What is the latest status on the MBED mechanism that was supposed to be introduced in September this year?
There is a strong impetus to utilise the exchanges, given the benefits they have shown to development of the power sector in the country, by introducing more contracts of various tenures and segments. The draft National Electricity Policy has already mentioned the need to enhance the exchange-based transactions to 25% of the total electricity consumption from the present levels.
In the recent past, the Ministry of Power (MoP) has issued a discussion paper on ‘Market-based Economic Dispatch of Electricity’ (MBED). The paper proposes a day-ahead market where discoms and generators are to submit their demand and supply orders on power exchange platform. The objective is to first dispatch the power that costs the least, by giving discoms the ability to source power from cheap generators at exchange-discovered price, irrespective of the location of the generator, as long as grid security is maintained.
The MBED mechanism would lead to a better utilisation of generation resources across the country and would lead to lowering of overall purchase costs for the discoms. Since dispatch would be truly merit-based, generation assets with greater efficiency and lower prices would be despatched first.
It would also lead to better utilisation of transmission infrastructure in the country as inter-state and inter-regional transactions would be based on netted-off power. This would ensure that existing transmission assets are better utilised and based on such information future assets are built as per emerging requirements.
The highest prices and lowest prices discovered on the power exchanges today are based on a small slice of participation (about 4.5 per cent in DAM) compared to the overall power generated and consumed within the country. This is the reason that extremely high prices and extremely low prices are discovered every once in a while. With a larger participation in the market, MBED would give better and more robust price signals for the entire market. A deeper and liquid power market would also allow more merchant capacities to be set up, that would eventually help our country progress fast on the path of renewable capacity additions in line with the Nationally Determined Contribution of 50 per cent installed capacity in the form of renewables by 2030.
Last but not the least, MBED would usher in financial discipline in larger parts of the power sector. The benefits shown by power exchanges is due to the robust clearing and settlement mechanism that ensures that buyers and sellers pay and get paid respectively on a daily basis. The power sector has been suffering from the pain of long delays on payments, which add a substantial cost due to late payment surcharges throughout the value chain and ultimately on the final consumer. There have been various efforts to deal with these payment delays over the last three decades, with very little improvement. MBED can make a substantial positive impact on this front as buyers would need to pay for power on a daily basis.
MBED would be a net positive for the power sector in our country and would be a substantial value adding exercise if implemented quickly. Needless to say, such an exercise requires continuous communications with all stakeholders to enunciate the substantial value addition this would create. We hope this is implemented soon.
“We believe that the REC market is an important part of the power market driving forward the goal of greater renewable adoption.”
What is your view on the resumption of REC trading on power exchanges?
REC transactions were suspended in July 2020 after APTEL decided to postpone the trading by four weeks while hearing three separate appeals related to an issue of fixing floor and forbearance prices of RECs by CERC.
Later, APTEL and CERC gave the approval to begin REC transactions in their orders issued on November 9, 2022 and November 19, 2022, respectively. During FY22, nearly 8.9 million RECs were transaction, and in eight month period up to November 2022, nearly 5.5 million RECs were transacted. Volumes are expected to increase in Q4 of this year as obligated entities participate to meet their RPO targets of the year.
Recently, new REC Regulation 2022 has been implemented from December 5, 2022. The regulations provide for fungibility of RECs across different technologies, abolish applicability of price band for transactions enabling price determination by demand-supply forces operating in the market, RECs permitted to be transacted bilaterally through traders and RECs remain valid until redeemed.
Implementation of new REC Regulation 2022 has been challenged in Delhi High Court. The Delhi High Court on December 20, 2022 directed suspension in transaction in REC for a period of six weeks for RECs issued prior to October 30, 2022. This led to adverse impact on the total transaction volumes.
We believe that the REC market is an important part of the power market driving forward the goal of greater renewable adoption as it continues to help entities access a mode for fulfilment of their RPO without the need to necessarily identify and purchase RE power and we hope all concerns related to the REC Regulation 2022 are sorted out for the betterment of the sector.
India is moving aggressively towards renewable energy generation. In a general sense, how is PXIL planning to help increase trading volumes of RE power on the exchange?
The envisaged surge in renewable capacity addition in immediate future will lead to huge energy transformation. It is anticipated that increased addition of infirm power from wind and solar farms will promote short term transaction in renewable energy. PXIL offers an array of contracts that enables market participants to overcome the demand-supply imbalance in reasonable and efficient manner.
PXIL offers renewable energy-centric contracts in its ‘PRATYAY’ system, thereby providing unlimited opportunities for market participants to transact in renewable energy. Further, with more and more renewable capacity addition in different modes, i.e. standalone Wind/Solar, Hybrid Wind-Solar, Wind – Battery Energy Storage System (BESS), Solar-BESS, etc., in captive and merchant route in near future, short term transactions are expected to be concluded in power exchange platform.
PXIL has already introduced the Green – Day Ahead Market, Green – Term Ahead Market and the Renewable Energy Certificates in its portfolio to cater to renewable energy transactions requirements of market participants. More than just introducing new contracts, PXIL continues to undertake outreach programs with RE developers and generators to explain about the benefits of participation through power markets.
How do you think power exchange can improve their share in India’s short-term energy market? We understand that energy exchanges account for 50 per cent of the short-term market, and around 6 per cent of overall electricity consumption.
The purchase of power through power exchanges through all types of contracts including DAM, RTM and TAM has reached 7.7 per cent of the total electricity consumption. This growth has mostly been on the back of transparency in pricing of power as well as a payments framework which has ensured payments to be made and received on a daily basis without any defaults.
There is a strong impetus to utilise the exchanges, given the benefits they have shown to development of the power sector in the country, by introducing more contracts of various tenures and segments. The draft National Electricity Policy has already mentioned the need to enhance the exchange-based transactions to 25 per cent of the total electricity consumption from the present levels.
In the recent past, the Ministry of Power (MoP) has issued a discussion paper on ‘Market-based Economic Dispatch of Electricity’ (MBED). The paper proposes a day-ahead market where Discoms and Generators, both inter-State and Intra- State generators, are to submit their demand and supply orders on Power exchange platform. The objective is to dispatch the power that costs the least, first, by giving Discoms the ability to source power from cheap generators at exchange-discovered price, irrespective of the location of the generator, as long as grid security is maintained.
New contracts in regulatory consultations are “Ancillary Services Market Contract”, “Capacity Contracts” and longer tenure contracts (up to 11 months ahead) to meet transaction requirements of market participants.
We believe all these efforts would soon translate into an overall improvement in the utilisation of power exchange platforms in the country.
“The purchase of power through power exchanges through all types of contracts including DAM, RTM and TAM has reached 7.7 per cent of the total electricity consumption.”
Do you have some policy recommendations, which, in your view can boost trading on energy exchanges?
Power markets and the sector are at a very interesting stage right now, with significant policy initiatives being taken to drive forward the power sector in the country.
In addition to the series of steps being taken to drive the power sector forward, there is also a focused drive to enhance the efficiencies of the sector by utilising market frameworks. The power markets and especially power exchanges are an important instrument in this drive towards enhancing efficiency for all consumers in the country.
Many power sector reforms are being introduced by the Government to bring efficiency, promote de-carbonization, and ensure a 24×7 reliable and affordable power supply
In order to move towards a greener economy, the proposal for a National Carbon Market was announced in October 2021 with an objective to involve corporate and private sectors towards energy saving and carbon emission reductions. The carbon market will pave the way for a large-scale promotion of clean energy technologies in India leading to de-carbonization of Indian economy through active participation by various stakeholders. With successful operation of REC and ESCert markets by power exchange over the past 12 years, the Exchanges are poised to play a significant role in development of Carbon market.
We have a highly supportive policy and regulatory environment today and a lot of opportunities to serve the marketplace through a wide variety of contracts of various tenures and catering to various segments of the market. There are regulatory provisions like Market Coupling, which needs to be implemented quickly so as to reduce fragmentation and inefficiencies in the market.
Ultimately, exchanges are market places, where the buyer and seller can efficiently and transparently manage their portfolios better and we, at PXIL, continue to strive to make that experience better for all our participants every day.
“Power markets and the sector are at a very interesting stage right now, with significant policy initiatives being taken to drive forward the power sector in the country.”
Please summarize your plans for PXIL for the medium-term, with respect to launching of new trading platforms, and other initiatives.
PXIL commenced its market operations in 2008 and is now in its 14th year. It has renewed its focus to meet the requirements of market participants by innovating its technology offering and products.
In January 2020, PXIL introduced the ‘PRATYAY’ software system to meet the ever-changing transacting needs of market participants. The ‘PRATYAY’ system is developed with modular approach that provides flexibility to introduce new contracts in ‘plug-and-play’ model thereby reducing ‘time-to-market’ for any new Contract. The technology platform at PXIL is in a continual state of development as newer contracts are introduced or changes made to reflect policy/regulatory orders or as better functionalities are introduced for customers for existing contracts.
PXIL has introduced longer tenure contracts for duration up to 90 days ahead with different price discovery mechanisms, e.g. uniform price similar to existing DAM/RTM/REC and Reverse auction similar to existing auction transactions opted by discoms.
New contracts that are in regulatory consultations are Ancillary Services Market Contract, Capacity Contracts and increased tenure of longer tenure contracts up to 11 months ahead to meeting transaction requirements of market participants.
As the short-term power market expands and the above contracts are introduced by PXIL, the business volume of the exchange would increase in a short period of time. As discoms strengthen their internal system/process to undertake accurate demand-supply analysis they would concentrate their purchases through the exchange platform instead of solely depending on the costlier power contracted under long-term PPAs, the outlook for PXIL remains encouraging.
All photographs are for representation only
