Does India Really Need Market Coupling In Power Exchanges

Power exchanges in India are seeing red in a staff paper circulated by the Central Electric Regulatory Commission seeking views from market participants on the need for market coupling in India’s wholesale market.

The government intends to dilute the market monopoly of the India Energy Exchange through the market coupling route. Incidentally, IEX and PXIL started their operations on June 27, 2008 and Oct. 22, 2008, respectively. By the time PXIL commenced its operations, IEX could hardly get any share in the market. Therefore, both of the exchanges had similar opportunities to grow. Despite that, it was IEX, in the segment of collective transactions, attracted most of the stakeholders.

Now, PXIL and HPX are pushing hard for market coupling. Standing on the other side is IEX which says the move would be totally disastrous for the market.

Lobbyists are at work in the corridors of the power ministry, arguing their point of view. 

In the staff paper floated by CERC on market coupling, the regulator has tried to argue that the move is aimed at discovery of uniform market clearing price for the Day Ahead Market or Real Time Market or any other market as notified by the Commission; Optimal use of transmission infrastructure; and maximisation of economic surplus, after taking into account all bid types and thereby creating simultaneous buyer-seller surplus. 

Unfortunately, the value created by a power exchange for its buyers and sellers seems to be largely compromised.

Expectedly, the CERC move has set the proverbial cat among the pigeons, and power exchanges are asking why the Indian government wants to push market coupling.

For the records, it is important to understand market coupling and its experiences and analyse its evolution. Market coupling was introduced in the EU in 2006. The idea was to create integration of various electricity markets (or Power Exchanges) of different countries through implicit allocation of cross-border transmission capacities. 

So, what happened before 2006? Before the implementation of market coupling, the EU Power Exchanges used to run separate auctions for cross-border capacity and electricity. 

But experts across the world called it a very ineffective and inefficient practice that was transitioned to a single auction through implementation of market coupling. This also led to maximisation of social welfare by better utilisation of cross-border transmission capacity and optimum utilisation of diversity of generation resources.

Expectedly, many in India are asking what is the need for market coupling, ostensibly because unlike in the EU, India’s electricity market follows a de-centralised model wherein each distribution utility self-schedules power mostly through long term & medium term PPA and dependence of utilities on power exchanges is mostly attributed to small surpluses or deficits. 

It needs to be highlighted here that in India, power exchanges meet only 5-6 percent of the country’s total demand. In 2017, CERC released a discussion paper on market based economic despatch (MBED) which proposed a transition to centralised dispatch model through power exchanges. In this paper, the concept of coupling and role of an independent entity for collecting the bids from all exchanges for price discovery was proposed. However, this couldn’t be implemented due to various operational and legal issues.

Market coupling in India - claim experts - is unlikely to yield any benefit as it would be only coupling of power exchanges without adding any new geographies. Further, with almost 100 percent market share in collective transactions with one Exchange, there would be no change in either the price discovery or liquidity, and therefore, no change in social welfare.

Worse, the transmission congestion is almost nil in India’s power system due to prudent planning. In the case of the EU, coupling was implemented to optimise use of cross-border transmission capacity. But that is not applicable in India’s context. Further, CERC vide its order dated 09.05.2022 has provided that in case of congestion, the transmission corridor shall be allocated to the exchanges in the ratio of initial market clearing volume, alleviating all such issues thus far.

There are other matters of concern. 

Market coupling would diminish the role of power exchanges to mere bid collectors, making them virtually redundant. And then, the quality of services facilitated by the exchanges may be adversely impacted as there would be no incentive for exchanges to provide them. Further, coupling may also result in overall increase in cost for the consumers due to MCO & Clearing corporation etc.

The fears continue to increase. The centralised MCO platform could be rigid as any modification in algorithm would take a lot of time for building consensus and implementing changes. Further, such anti-privatization and centralization of an institution may also affect the investor’s confidence. In case of centralisation of algorithms, there would be no incentives to compete in terms of innovation & product development. Competition - actually - shall be limited to transaction fee only, but this will be at the cost of investments in technologies and innovation.

This will bring some adverse impact on the wholesale market. After all, the exchanges have been doing a lot of market development activities. With the centralised model, there would be no incentives for Exchanges for these initiatives. Energy transition will create a need for innovation in Exchange product & bid types to support emerging models such as V2G, local energy markets, flexible demand response, non-energy products etc. Centralised algorithms will be rigid and may lack agility to incorporate product innovation & complex bid types.

In short, one of the primary concerns is the potential dampening effect on investments in the power sector. Market coupling disrupts the established business model of power exchanges, introducing uncertainty and regulatory risks that may deter potential investors. Given the substantial capital requirements and long-term commitments typical of power projects, changes in regulatory policies can send conflicting signals to investors, hindering sector growth and development. Investors in the power sector make long-term financial commitments, often spanning decades.

Market coupling will fundamentally alter the rules governing the sector, posing a substantial risk to these investors. The prospect of jeopardising the stability that a 25-year licence validity for exchanges provides may dampen investments and discourage new entrants, potentially impeding overall sector efficiency. Market coupling also has significant implications for current shareholders. The Electricity Act of 2003 aimed to encourage competition in the power sector, attracting diverse shareholders with 60% institutional and 40% individual holdings. However, the implementation of market coupling, which alters the concept of price discovery, may lead to substantial reductions in share prices. 

Market coupling's potential impact on innovation is another concern. Exchanges may lose the capacity to levy transaction fees, reducing their incentive to stimulate participation and efficient price discovery. Moreover, centralization beyond private enterprise could stifle innovation in the industry, critical for enhancing grid efficiency and sustainable energy adoption. 

Can the Power Ministry rethink its strategy and ask the lobbyists to go home?

Shantanu Guha Ray is the Asia Editor of Central European News. He is author of 'Black Harvest: The India Coal Story' that will hit the stands in a few months.

The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.