A platform for power

Coupling reverses momentum of reforms

The power ministry’s proposal to introduce power-market coupling has been taken a step forward with the industry regulator, the Central Electricity Regulatory Commission (CERC), issuing a staff paper and inviting comments from stakeholders. The broad suggestion outlined by the paper is to merge all existing power-trading platforms and the contracts they offer into a unified body called the Market Coupling Operator (MCO). Alternatively, the mechanism could be operated by a separate institution, such as state-owned Grid India, which operates India’s electricity grid. The overall attempt appears to be to enhance government control over power trading and distribution.

The ostensible intention is to determine a single price for electricity derivatives such as the day-ahead market or real-time markets to smooth the transmission corridor and, apparently, promote “social welfare”. The logic here is hard to follow, not least because the move towards a single price appears to contradict the spirit of the Electricity Act, which mandates competition as a means of lowering power prices — which is surely a measure that promotes social welfare. More to the point, this new proposal would end up destroying value by diminishing the role of the three private power-trading platforms, India Energy Exchange (IEX), Power Exchange of India Ltd (PXIL), and Hindustan Power Exchange (HPX). These platforms act as intermediaries between suppliers (generators and distribution companies) and industrial and commercial consumers, and offer a variety of products such as term-ahead, renewable-energy certificates, and so on, promoting a measure of robust price discovery.

Under the market-coupling regulation, their role would be reduced to bid-collection agencies on behalf of the MCO rather than dynamic market intermediaries. Expectedly, the share prices of the two listed power traders, the IEX and PXIL, have fallen sharply since the proposal was mooted. It is the former, with a 90 per cent share of the day-ahead spot power-trading market, which stands to lose the most. The PXIL, which started operations a few months after the IEX in 2008, has a 40 per cent share of the term-ahead and renewable-energy-certificate market. State-owned power generator NTPC recently bought a 5 per cent stake in this company, which is promoted by the National Stock Exchange and National Commodity and Derivatives Exchange. The HPX started operations last year, and is promoted by the BSE, state-owned Power Trading Corporation, and ICICI Bank. The latter two are likely to gain at the expense of the widely-held IEX, which is why both platforms have indicated their support for the MCO proposal. Indeed, NTPC has argued that an MCO would consolidate and enlarge the power-trading market. But apart from the prospect of gaining market share via a regulatory change, it is difficult to see how these platforms envisage their roles beyond passive “post-office” functions. It is not obvious that limiting power-trading platforms’ role in this way will result in better transmission utilisation or improve the price-discovery mechanism.   

The MCO concept has been borrowed from the European electricity market, where an MCO acts as a price-discovery mechanism for cross-country trading across different transmission networks. This is not the case in India, where there is one transmission operator and one grid manager in the state-owned Power Grid Corporation of India. The proposal reverses the broad momentum of liberalising reform in the power sector, and the government would do well to not hasten on this account.