Market coupling is an integral solution for India’s electricity woes. However, its successful implementation will need collaborative efforts, notes Dr Naveen Agrawal.
Market coupling is a pivotal solution for India’s electricity market woes, with the potential to harmonize pricing, integrate markets, and support renewable energy goals. However, its successful implementation necessitates collaborative efforts, overcoming regulatory hurdles, and addressing technical challenges. As India seeks an efficient, unified, and sustainable power sector, market coupling emerges as a key driver for change.
Over the past 15 years since the inception of power exchanges in India, trading on these platforms has accounted for approximately 7 per cent of the total market share. This falls significantly short of the government’s ambitious target of achieving a 25 per cent market share. Several key factors contribute to this disparity, with the primary issue being the lack of healthy competition among power exchanges.
One of the major obstacles hindering competition is the first-mover advantage enjoyed by the Indian Energy Exchange (IEX), which has captured over 95 per cent of the Day Ahead Market (DAM). Since DAM operates on a closed auction model for price discovery, both buyers and sellers tend to gravitate toward exchanges with higher trading volumes to secure favorable prices. Consequently, other power exchanges struggle to compete with the dominance of IEX.
Competition is a fundamental driver of efficiency in any sector, and the power exchange industry is no exception. In this context, the primary arena for competition lies in the quality of services offered by these exchanges. Given that the product (electricity) remains uniform across all exchanges, service quality becomes the differentiating factor. However, when buyers and sellers can obtain better prices on IEX due to its substantial market share, they may prioritize cost considerations over service quality, thereby undermining the competitive landscape.
The aforementioned market scenario can be categorized as monopolistic due to the dominance of IEX. The company has cultivated an environment where both buyers and sellers gravitate towards their platform, primarily because of their established market share. As a result, new entrants are compelled to join IEX, overshadowing other market players.
This monopolistic condition leads to several drawbacks, which are as follows:
Inadequate Implementation of Electricity Derivatives: The introduction of electricity derivative contracts in India could revolutionize the electricity market by offering a diverse range of contracts to help manage price risks. However, the progress in implementing these derivatives in India has been sluggish. One of the primary reasons for this is the lack of collaborative efforts among all three power exchanges. To foster market growth and innovation, it is crucial for these exchanges to cooperate and make electricity derivatives accessible.
Insufficient Trading Volumes in Various Products: Within the exchanges, there exists a variety of products such as Green Day Ahead Market (DAM), Intra Day, Day Ahead Contingency, Term Ahead, Real-Time Market, and Green Intraday. Unfortunately, except for the Day Ahead Market (DAM), these products suffer from low trading volumes. This indicates that limited attention and efforts are directed towards these products. For a thriving electricity market, all products need to succeed and garner substantial trading volumes. Achieving this requires a collective effort by all exchanges, with a focus on enhancing the appeal of these less-traded products.
Systematic Technical Risk: In a monopolistic situation where one player dominates over 95% of the market share, there’s a heightened vulnerability to systematic technical risks in the entire spot market. Any technical glitch within the dominated exchange can have a ripple effect, impacting the entire market. In scenarios where market coupling is employed, either through a single agency or a rotational basis among companies, if a technical issue arises within one auctioning platform, the presence of two other platforms provides redundancy and minimizes the potential disruption to the market. However, a more diversified and competitive market could further mitigate this risk.
In the Indian context, market coupling in the power sector is a concept that aligns with efforts to reform and improve the efficiency of the country’s electricity markets. India’s power sector has been undergoing significant changes and reforms to address issues such as power shortages, distribution losses, and the integration of renewable energy sources.
Now let’s discuss in detail that why market coupling is required in the Indian context:
- Market Integration: India has a diverse and fragmented electricity market with multiple states, each operating its own electricity market. Market coupling in India could involve harmonizing the rules, regulations, and pricing mechanisms across these states to create a more integrated and efficient national electricity market.
- Price Coupling: Price coupling in the Indian context would mean establishing a unified electricity price for the entire country. Currently, electricity prices can vary significantly between states due to differences in demand, supply, and regulatory practices. Price coupling would aim to minimize these price disparities, ensuring consistency in electricity pricing.
- Cross-Border Trading: India has a growing need for cross-border electricity trading, especially with neighboring countries like Nepal, Bhutan, and Bangladesh. Market coupling can facilitate cross-border electricity exchanges by simplifying trading procedures and ensuring transparent pricing, thus enabling more efficient utilization of resources.
- Auction Mechanisms: Implementing effective auction mechanisms, such as day-ahead and intraday market auctions, can help optimize the allocation of electricity supply and demand within India. These mechanisms allow generators, including renewable energy producers, to participate and compete in a transparent market.
- Grid Capacity Allocation: Efficient grid capacity allocation is crucial for the success of market coupling in India. It would involve managing the transmission infrastructure to support electricity flows between states and neighboring countries. Proper grid planning and investment are necessary to prevent congestion and ensure reliable cross-border electricity exchanges.
- Regulatory Framework: India’s power sector is regulated by various authorities at the central and state levels. For market coupling to work effectively, these regulatory bodies would need to collaborate and align their rules and policies. A consistent regulatory framework would provide a stable environment for market participants.
- Benefits in the Indian Context: Market coupling in India could bring several benefits. It could lead to better resource utilization, reduce price volatility, attract investments in the power sector, and promote the integration of renewable energy sources, aligning with India’s clean energy goals. It could also help address regional disparities in power availability and affordability.
In summary, market coupling in the Indian power sector has the potential to improve market efficiency, increase cross-border trading opportunities, and support the integration of renewable energy sources. However, its successful implementation would depend on collaborative efforts among central and state regulatory authorities, utilities, and market participants to create a unified and well-coordinated electricity market across the country. Implementing market coupling in India is not without challenges. It would require overcoming regulatory and institutional barriers, addressing technical issues related to grid management, and ensuring data transparency and sharing among different states and market participants. Political and regional considerations may also come into play.
Dr Naveen Agrawal is Assistant Professor (Energy & Finance), UPES ON
