Analysis Of Cerc White Paper Over Short-term Trading By Abhishek Mazumdar

Analyzing the impact of CERC staff paper over ‘Short-term power . trading’ Abhishek Kumar MBA- Power Mgmt.

Rationale • As of date power trading volumes = 3% of total generation • Weighted avg. sale price of traded power increased from Rs.4.64/unit in Apr-June’07 to Rs. 7.24/unit in Apr-June’08. • UI rates gone up from Rs.7.45/unit in Apr-June’07 to Rs.10/unit in Apr-June’08. • While most of the traded power is sourced from coal/hydro power plants in which the generation cost is not more than Rs 4/unit, the the price discovered in the exchange has been around Rs 68. • The deficit states perceive it as a profiteering

Proposed measures • The paper suggests price caps of Rs 5/unit during offpeak hours and Rs 6 during evening peak hours, based on replacement cost of electricity. • Ensuring impartial functioning of SLDC’s in order to increase power supply through “Open Access”. • Flexible scheduling framework so that bi-lateral transactions can be modified at short notice keeping in view the demand pattern. • Strict monitoring of overdrawal by the states during low frequency so as to induce grid indiscipline and planned purchases of electricity. • The proposed price cap is based on the replacement cost of electricity, which a consumer has to spend when scarcity prevails. This is nothing but the cost of diesel generation as offices and households switch on DG sets when the power goes.

Reasons • Increasing fuel cost. • Shortages of electricity. • Increases in The UI rate.

Key Statistics • Indian power sector is the third largest in Asia after China and Japan – – – – – – –

Installed Capacity: 1,45,588 MW (as on 31st March 2008) Peak Demand: 108,866 MW Demand Met : 90,793 MW Peak Deficit: 16.6% Energy Requirement : ~ 740 BU Energy Availability: ~ 666 BU Energy Deficit: 9.9%

• The per capita electricity consumption for 200506 at 631^ kWh (CEA General Review 2006), remains far below the world average of 2,429 kWh.

Cont… •

Unmet planned targets in generation capacity addition

• •

11th Plan (2007-2012) Target: 78577 MW Regional Demand-Supply Deficit (2007-08)

– In last 3 Plan periods, target versus achievement ~ 50%

– – – – –

Northern Region: Western Region : Southern Region: Eastern Region: North-Eastern Region:

9.1% 23.2% 9.0% 11.0%

Deficit

23.0%

• •

Aims for “Power to All” by the year 2012 Domestic energy resources not adequate to meet the total requirement

•

Need for diversification of energy resources and regional cooperation - for energy security

Mkt. Structure created by EA , 2003 CGS

TRADER

STATE GENCO

PX

CONSUMER

IPP

DISCOM

Types of Trading • • • •

Bilateral Agreements Banking Agreements Power Exchange Available other resource

EA03 & Regulations • Electricity Act 2003 – The intent and object of the EA 2003 is to develop power market through increased competition, more players and protect consumer interests – Development of Power Market – EA 2003, Section 66, “The Appropriate Commission shall endeavor to promote the development of power market…”, guided by the National Electricity Policy – Suitable safeguards to prevent adverse effect on competition – Recognized Trading as a distinct activity – Definition under section(2) (47): “Purchase of electricity for resale thereof” – Adequate and progressive provisions governing open access both : • to transmission networks (inter-state and intra-state) and • to distribution networks

Cont… • National Electricity Policy 2005 – Para 5.7 “ To promote market development, 15% of the new generating capacities, be sold outside long term PPAs”. -As the power markets develop, it would be feasible to finance projects with competitive generation costs outside the long term PPAs….this will increase the depth of power markets….and in long run would lead to reduction in tariff” • Ministry of Power A progressive ‘ Merchant Power Policy’ with

Power Market • The market determined prices in the short term market has encouraged IPPS and merchant generators to look at the sector with renewed vigour and as an investment destination . • An evidence of this is that PTC has entered into PPAs to procure long term power with IPPS for more than 10,000 MW and / MoUs for around 30,000 MW. • Power market has in fact become a catalyst for private investment in power sector. • 75,000 MW under development by IPPs without any Government support. Rs. 40,000 to Rs. 45,000 Crores investment already

Cont…. • The wholesale market for electricity in India is completely voluntary by design - that none of the market participants are obliged to operate through a restricted and compulsory market. • This is because the buyer is free to choose from any of the following options: – – – – –

Long term PPA based mechanisms Medium Term Short term bilateral trades Day ahead market (through the power exchange) Real time mechanisms (UI)

• Even the real time arrangements are completely voluntary, since the UI mechanism permits frequency to float within a range, providing tremendous flexibility to market participants. • Further, the rules regarding standards of supply are more liberal, permitting greater flexibility to utilities on demand side response.

Cont…. •A fledgling, nascent market •Limited growth of volumes of short term traded market due to Overall deficit scenario Limited number of active players and resultant liquidity crunch Transmission constraints/congestion

•Rising cost of traded power: (The average cost Rs. 4.50/kWh in 2007-08) Due to overall shortage situation (widening demandsupply gap) Lack of capacity additions Linkage with UI rates and Rising fuel prices

Volume of Electricity Traded by the Trading Licensees in Total Generation (%)

2.50% 2.40% 2.30% (%) 2.20% 2.10% 2.00% 1.90% 2003-04 2004-05 2005-06 2006-07 2007-08 (Period)

Integrated Energy Policy India - Installed Capacity

1200 960

1000 Generation Mix 2031-32 (8% GDP growth) 1%

800

401 BU 11%

375 BU

GW

24 BU

685

10%

600 400 200

220 233

488

575

0

2828 BU

2006-07

78% Hydro

153 155

306 337

425

778

Nuclear

Thermal

RE

Total 3628 BU Source: Integrated Energy Policy

Generation Mix 2031-32 (8% GDP )

2011-12

2016-17

2021-22

2026-27

8% GDP Growth 9% GDP growth

India – Installed Capacity

2031-32

Trading Scenario • Inter-state trading licenses (25 Years validity) in the purview of CERC • Twenty Six (26) Trading licenses issued by CERC • Volume of bilateral exchanges is still low (about 2.5% to 3% of energy generation) • Total short term market approximately 21 billion units* in 2007-08 * Includes cross- border

Trading Volumes (in MUs) 25000 21301

20000

15000

10000

14188 11029

15023

11846

5000

0 FY 04

FY 05

FY 06

FY 07

FY 08

Cont… • Most of the supplies are locked up in long term PPAs. • Short term trading constitutes 3% of the total supply. essentially • Trading distribution utilities.

between

surplus

is essential for resource • Trading meeting short term peak demand.

• Most of the trading is inter-regional

&

deficit

optimization and

Key Player & Market share Market Share 2007-08 PTC 4%

12%

7%

1%

NVVN 46%

Adani Tata Power JSW

8%

Reliance Energy 6%

16%

Lanco Others

Trading Volumes (MU) Licensees PTC # 9889 NVVN 3324 Adani 1322 Tata Power 1682 JSW 1479 Reliance Energy 776 Lanco 2600 Others 229 Total 21301

Benefits •

Increasing

realization

among

85 82

utilities of power as a source for 80

revenue earning • Improved PLF, particularly of State

75

75 72

74

73 70

Power Utilities

69

• An example: DVC - a rise of 5% in PLF •

70

65

60 2001

No backing down

2002

2003

2004

2005

• Reduction in load shedding

Trading results in optimization of resource utilization

2006

2007

Cont…. The short term market has created “value” for power. There is a distinct shift towards higher revenue realization

Price volume break up (%)

98

59 48 36 26 5

2 FY 05

9 12

FY 06 Rs 1-3

Rs 3-4

FY 07 Rs 4-5

Rs 5-6

Cont…. • Encouraged IPPs to invest in generating assets- spurt in investment based on competitive tariff due to widening demand –supply gap • Market-based returns • No sovereign/government guarantee

• Large merchant capacity is being funded • States Governments of Chhattisgarh, Jharkhand, Orissa, Himachal Pradesh, J&K, Uttaranchal, etc. have recognized “ Power as Resource” • Planned rapid capacity additions – have devised policies to become Power Hubs • MoU with developers for Capacity addition • Jharkhand

9,110 MW

• Chhattisgarh

30,000 MW

• Orissa

17,000 MW

• Tamil Nadu

10,000 MW

Default Market for trading • UI rate serves as default rate for trading. • UI rate depends on frequency is indicator of demand-supply gap • Rate depends on demand-supply gapefficient market. • Encourages trading agreements to hedge risk of UI charges

Market Clearing Price for the period 12/08/2008 to 19/08/2008

Date: 19/07/2008 1 2 3 4 5 6 7 8 9 10 11 12

IEX Rate in Rs/MWh 8,076.09 8,059.63 8,059.17 8,043.78 8,043.48 8,051.17 8,050.99 8,050.95 8,058.55 8,271.77 8,289.10 8,289.10

UI RATEFREQ 9.73 9.73 9.73 9.73 9.01 9.01 9.01 9.01 9.01 8.11 8.11 8.11

49.03 49.03 49.03 49.03 49.11 49.11 49.11 49.11 49.11 49.21 49.21 49.21

Date: 19/07/2008 13 14 15 16 17 18 19 20 21 22 23 24

IEX Rate in Rs/MWH 8,289.10 8,289.10 8,300.88 8,300.88 8,300.88 8,529.99 8,533.05 8,534.32 8,534.32 8,534.32 8,300.91 8,091.48

UI RATEFREQ 8.11 8.11 8.11 8.11 7.84 7.84 7.84 7.84 7.84 9.46 9.46 9.46

49.21 49.21 49.21 49.21 49.24 49.24 49.24 49.24 49.24 49.06 49.06 49.06

Work in progress • • • • •

Present issues in Power market. PX, ABT & Trading. Emerging factors conducive to electricity trade. The new CERC UI regulations. Small work to answer… – – – – – – –

What is likely D-S scenario in 2012 Can India afford all this power. Is the regulatory scenario condusive to investment. Will the xmission network support. What are the option for sale of power. Fuel sourcing options. Typical contracting structures.

Problem/Outcome The imposition of price caps, which are aimed to prevent profiteering at the cost of ultimate consumers of power deficit states, would be possible only after a thorough review of unscheduled interchange(UI) charge and after bringing the hydro power projects under the regulatory mechanism.

Results Fuel-cost & Power-shortages have not much impact over price of electricity being sold in short-term. There is a direct correlation between price of shortterm traded power and UI rates. Sellers may resort to discriminatory methods in selecting buyers. Capping could play havoc with market sentiments. Might lead to undoing of the capacity creation programme of IPPs/MPPs/CPPs. As the situation improves,the need for regulatory oversight in such transactions would automatically get reduced. The price caps may also drive up the average price of power.

Suggestions While it is a fact that the price at which power is being traded bears no correlation with the cost of power generation -- a point that is highlighted in the paper -- it is also a fact that it is this price of traded power which is encouraging investments in the power generation sector, especially investments in what are called MPPs. A higher price of power in the short term is therefore the route to ensure lower prices of power in the long term, through supply augmentation. Price caps will most certainly choke such investment in generation, and in the process widen the demand-supply gap in the long run.

Cont….. • It should look at tapping the increased ability, and willingness, of the consumer to pay a premium for power. The average consumer in Pune is willing to pay a surcharge to get assured 24 x 7 power. That would also be true of many other cities in the country. • It is time for the regulator to shift its focus from price to assured availability. “ There is no power that is as expensive as no power.”

Further Scope • D-F test. • Granger Causality. • ECM.

Power Market –Ripple Effect

Power trading share is 3% of India’s total energy generated – but its indirect impact on the power sector is several times bigger

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