Can market coupling enable fair price discovery at power exchanges?

Supporters of the market coupling point to higher efficiencies and optimal price discovery, its critics argue that it will eliminate competition and innovation at power exchanges

It is normal for new initiatives to generate for-and-against debates but few ideas in the history of the Indian power sector have generated the kind of split that market coupling, floated by the Central Electricity Regulatory Commission (CERC), has.

 

With a petition filed by the Indian Energy Exchange (IEX) against the move up for hearing at the Appellate Tribunal for Electricity (Aptel) later this month, sector experts are hopeful of finally understanding whether coupling will go ahead or not.

 

CERC had in February last year asked Grid-India to implement, on a shadow pilot basis, coupling of the real time market and the day ahead market of the three power exchanges. Based on the submissions made by Grid-India and various consultations held with the stakeholders and as per the provisions of market coupling specified in PMR 2021, the commission decided to initiate the process for implementing market coupling in a phased manner, CERC said in its July 2025 order.

 

Challenging the order, IEX filed a petition in APTEL in August. The tribunal has now asked the exchange to revise its petition and the hearing is expected later this month.

 

What is market coupling, exactly?

 

Under the so-called market coupling proposal, buy and sell bids from multiple power exchanges across the country will be aggregated into a single national pool, and a centralised algorithm will be used to determine a uniform market clearing price (MCP) for electricity traded in the spot market, with the aim of improving market efficiency and ensuring optimal price discovery.

 

The basic framework for the idea was created four years ago by the Power Market Regulations (PMR) 2021, which looked to create a comprehensive market structure to enable the transaction, execution, and contracting of various types of products in the energy market. At present, over 50 inter-state trading licensees and three power exchanges - IEX, Power Exchange of India (PXIL) and Hindustan Power Exchange (HPX) - operate under the framework of PMR 2021. The exchanges allow trading in multiple contracts to meet the short-term needs of market participants.

 

The CERC argues that though transactions through power exchanges constitute only about 7 per cent of the total electricity generation, the volume and the number of participants registered with the power exchanges has grown significantly. The multiple power exchange model often results in scenarios where different prices are discovered on different power exchanges.

 

"The power exchanges with lower volumes often point to the intrinsic nature of the collective transactions segment (Day Ahead Market or DAM, and Real Time Market or RTM) leading to a concentration of liquidity in one power exchange, due to which the benefits of competitive efficiency do not percolate to the market participants," the commission said in its staff paper of August 2023.

 

Considering the fact that collective transactions account for more than 70 per cent of the electricity transacted through power exchanges, and the share of only one exchange has been increasing, both PXIL and HPX - which have lower liquidity - have been advocating for market coupling. While the Commission provided enabling provisions in PMR 2021 to introduce the facility among the power exchanges to enable uniform price discovery, they are yet to be brought into effect.

 

Globally, market coupling has been introduced to integrate two or more electricity markets or different geographies. In the Indian context, the likely objectives of market coupling include the discovery of a uniform market clearing price, optimal use of transmission infrastructure, and maximisation of economic surplus.

 

Critics, however, argue that market coupling will reduce the role of a power exchange to just collecting bids and transferring them to the market coupling operator, and that it will not leave any incentive or room for power exchanges to innovate products or invest in technology because the bid matching platform will be centralised.

 

CERC had also noted in its staff paper that some stakeholders are apprehensive of market coupling as they argue it will reduce competition, discourage investments and lead to no improvement in transmission utilisation. "As the exchange market is only 7 per cent of the total generation, the objective of optimal utilization of transmission infrastructure by coupling the small share market does not seem to be relevant in the current market scenario," the paper stated while sharing the challenges to the idea as per some stakeholders.

 

According to Prof Ajay Pandey of the Indian Institute of Management (IIM)-Ahmedabad, different markets - PPAs, both medium and short-term, including exchanges - for physical delivery and dispatch should be integrated to discover a single price. Additionally, he says, the CERC needs to lay out a path for such integration at the national level or, at least to start with at the inter-state level, including implementation of Market Based Economic Dispatch (MBED).

 

"Till then, the case for market coupling is quite meaningless if only liquidity at the exchanges is integrated as practically there is only one exchange attracting all the volume in the DAM segment. Splitting this limited liquidity across exchanges forcibly will only increase the spread in each exchange without any benefit of improved price discovery," he said, commenting on the proposal.

 

Critics also argue that the Indian power market is not yet ready for a Europe-like market coupling. "The EU operates a zonal coupling system, while India functions as a single national market. Achieving EU-grade zonal or flow-based coupling would require the creation of multiple bidding zones, enhanced network modelling, and cross-border integration mechanisms — none of which currently exist," said R P Singh, a former chairman of the Uttar Pradesh Electricity Regulatory Commission says.

 

"The expected welfare gains are likely to be modest, since the Day-Ahead Market (DAM) represents less than 4 percent of total electricity consumption. Moreover, there is no designated Market Coupling Operator (MCO) yet, and responsibilities between exchanges, Grid-India, and CERC in case of failure or dispute remain unclear," he said.