By SL Rao
Ensuring affordable, clean, and reliable energy to India’s growing population will require the country’s power market to evolve continuously. Competitive price, flexible procurement, transparency, efficiency and payment security characterise the market today, enabling transaction of 145 billion units – 6% of the overall electricity consumed in the country. The present-day decentralised and voluntary pool market design is based on an inclusive and integrated structure and is consistent with the federalised power sector of India. But the proposed Market-Based Economic Dispatch (MBED) model goes against the grain of the same.
A large percentage of India’s installed power capacity (~ 88%), is tied up under long term PPAs, of 25 years. The remaining 12% is represented by power markets, of which 6% is represented by the power-exchange market. The Centre has declared the objective to deepen the power markets by increasing their share from 6% to 25% by 2024. To this end, the ministry of power has proposed the market-based economic dispatch (MBED) model further reinforcing the One Nation, One Grid, One Frequency, One Price framework.
The MBED proposes a centralised scheduling model for dispatching India’s total annual electricity consumption of ~1,400 billion units. This remains inconsistent given power is a concurrent subject, with the right to legislation shared by both the Centre and the states. Power dispatch, too, is premised on a decentralised model for the last so many years, reinforced by the Electricity Act 2003 and the subsequent reforms. The proposed MBED effectively challenges the legislative powers of the states.
Even though MBED is proposed as a way forward in reinforcing and deepening power markets, there remain significant challenges. The mechanism is not in alignment with the future trends of the market. The centralised nature of the mechanism challenges the provisions of the Electricity Act 2003, and the Indian Contract Act, 1872. Greater clarity is also needed on the legality of the proposed Bilateral Contract Settlement (BCS) mechanism under the scheme for refunding the difference between the Market Clearing Price and the contract price to keep intact the PPA prices.
Further, the mechanism will make the discoms completely dependent on the centralised mandatory market pool requirements, thus striping the states of their freedom to decide their own requirements, in conflict with the state regulations. The mechanism is expected to weaken market competition, thus stifling efficiency and innovation in the process.
This also goes against the requirements of the emerging market trends with the increasing penetration of renewable energy and electric vehicles that will require decentralized markets and voluntary pools for effective functioning.
The mechanism also seems to be a deterrent to the resource adequacy efforts of the discoms yjay have entered long term PPAs and will bear the fixed costs and Long-Term Access (LTA) charges.
Besides, the projected savings of Rs 12,000 crore seem inflated as they it does not take into consideration the technical constraints associated with generating stations, transmission corridor, technical upgradation, among others.
The proposed MBED remains inconsistent with the existing legislative framework and market structure, creating more challenges than it resolves. Instead of moving towards complete centralisation, steps to reinforce the existing voluntary pool-based markets must be considered. An appropriate regulatory framework may be created for discoms and gencos to schedule transactions through the market. The states can be encouraged to offer their power in the open market on a ‘voluntary’ basis, bringing in additional capacity to the markets and increasing liquidity. This will help India move away from long-term PPAs, deepen power markets, and enhance efficiency/flexibility.
The author is former chairperson, CERC, & member, Advisory Board, Competition Commission of India