One Nation, One Grid: A problematic power equation

Concept of centralised electricity market sounds sensible in theory but is likely to be unworkable in practice

The emerging controversy over the creation of a centralised market for electricity demonstrates in microcosm avoidable tensions in federal relations. The concept of “One Nation, One Grid, One Frequency, One Price”, announced in October last year, is part of the National Electricity Policy of 2021, which proposes to double the penetration of short-term power markets by 2023-24. It sounds sensible in theory but is likely to be unworkable in practice for a variety of reasons. The intention of this policy is to reduce the price of power to the consumer, but the procedure by which this goal will be achieved appears problematic. The policy is based on the market-based economic dispatch, or MBED, mechanism, under which the power ministry plans to set up a central scheduling and pooling system that will algorithmically allocate power at an optimal price by prioritising the least-cost and most efficient generators and weeding out more expensive ones. This mandatory system, which aims to reduce consumers’ power-purchase cost by 5 per cent initially, is to replace the existing decentralised and voluntary system, which operates through a network of state load dispatch centres connected to regional load dispatch centres and, finally, to national load dispatch centres, which form an inter-regional power grid. In effect, each state and region monitors and balances demand and generation.

Replacing this current system, which is admittedly imperfect, with a centrally mandated system largely ignores two critical but well-known realities of the power market. The first is that generators tie up the bulk of their capacity under long-term power-purchase agreements (PPAs) of up to 25 years with state distribution companies (discoms) at negotiated prices. How the MBED will factor in these long-term PPAs into its “lowest-cost” pricing template is unclear. In theory, efficient generators may well prefer the MBED mechanism but as things stand they will be in a position to commit less than 13 per cent to this centralised network since they also enter short- and medium-term bilateral deals and have a limited amount of power to offer in the “day-ahead” and real-time power markets.

The second bigger and chronic problem is the issue of states’ proclivities to offer power to politically sensitive groups below cost, the single-biggest reason for the persistently parlous state of discoms — their current combined dues stand at Rs 1.3 trillion. Several central schemes to address their problems over the past decade and a half have proven unsuccessful — the latest one underway is the revamped distribution sector scheme. Implementing the MBED, therefore, is contingent on state governments acquiring the political courage to price electricity at economic cost across the board, a reality that has eluded India for decades. Finally, the MBED has the potential to create constitutional problems. Power is on the concurrent list of the Constitution and centralising pricing and supply decisions would amount to infringing on the autonomy of states. It is no surprise, then, that the deadline for phase one of the MBED mechanism has been postponed from its original start date of April 1 this year. No new date has been announced yet, pointing perhaps to the practical problems attached to implementing this catchy slogan.