'Physical market entities alone can be our members'

TRADE TALK: Joseph Massey

Trading in power on an electronic platform will be a reality soon. MCX Deputy Managing Director Joseph Massey explains the rationale for setting up an exchange for power trading and tells how exactly the trading will take place in an interview with Dilip Jha. Excerpts:

How will the Indian Energy Exchange (IEX) be different from the other commodity exchanges?

The IEX has been incorporated as a consortium of Power Trading Corporation (PTC), Tata Power and other partners. The IEX or the power exchange will collect the available transfer capability (available power) on all inter-regional links from regional load dispatch centres.

It will collect bids and offers from both potential buyers and sellers during the bid-call period. The bids will be for each hour of the next day (hourly contracts) through trading work stations provided by Financial Technologies India (FTIL). It will be possible for bidders to modify their own bids till the end of the call period.

The bids and offers will be processed to determine the market clearing price (MCP) and market clearing volume (MCV). All successful bidders will pay or receive common uniform prices arrived at.

Regional load dispatch centres (RLDCs) will allocate appropriate transmission capacities for the trades settled through the exchange depending on the capacities requisitioned. Transmission bottlenecks on the inter-regional links will be managed by appropriate congestion management techniques such as market splitting.

The final schedules issued by RLDCs will be considered as the delivered volume at uniform prices. The bidders will pay/receive for their trades to/from the exchange. The exchange will bear the counter-party risk.

Transmission charges and losses are proposed to be apportioned on all trades to make them equitable under the present CERC regulations. All payments will be routed electronically through clearing banks authorised by the power exchange.

What role will the FTIL Group Interest in Setting up IEX?

An exchange is a highly specialised business model unlike any other corporate structure. It is because of such a unique structure that there is an urgent need for a demutualised corporate entity, where trading rights are separated from the ownership.

Demutualisation ensures that an exchange is a 100 per cent neutral platform, where players of any size can come without any apprehension and take positions.

According to the global demutualisation process, any entity with trading or broking interest has been asked to keep its holding to a maximum of up to 5 per cent so that large players cannot influence the neutrality of the platform.

We felt the power exchange ought to be nurtured and anchored, especially after bearing in mind the failure of the Over The Counter Exchange of India (OTCEI), which was bereft of an anchor and so was nobody's baby. We have arrived at a model, where the Financial Technologies Group is the anchor and takes the responsibility for the creation of a neutral, unbiased platform for each market player.

What is the current status of the IEX?

The company has been incorporated and we have filed an application with the Central Electricity Regulatory Commission (CERC) for a permission to establish the power exchange. The in-principle approval is expected soon.

PTC India has given an in-principle consent to take a 26 per cent equity stake in the exchange. The association of PTC India, the leading power trading company in the country, will help the exchange develop and design products suitable for the Indian power market.

Is there any premium or discount the exchange will charge its consumers during peak and non-peak hours of delivery?

The rates of electricity would be decided through the double-sided closed auction for every hour of the day on a day-ahead basis. Prices for these hours will reflect the demand-supply situation at that hour of the day.

Therefore, the exchange will not fix any premium or discount for peak or non-peak hours of delivery. However, the auction model itself will ensure that prices emerging out of it reflect such premium or discount.

Whom have you tied up with for trade and delivery?

Members on the exchange will only be those entities who are connected with the physical market. As far as delivery is concerned, individual members, whose bids are accepted in the auction, will be responsible for their respective delivery and drawal obligations for their cleared quantities.

Delivery of the electricity will be arranged through the grid system of Power Grid Corporation of India (PGCIL) and the state transmission utilities.