CERC Staff Paper “ Developing a Common Platform for Electricity Trading in the Country”: our comments PTC India Ltd.

2 General  CERC’s own research and findings/ a timely effort on the subject  Draws reference from power markets in countries such as Nordic countries, USA, UK and South Africa  Power Exchange (PX) is stated to provide a trading platform that is efficient, equitable and transparent  PX to meet day-ahead power requirements, besides the existing bilateral trading through short term contracts and UI mechanism  Recommends  setting up of a National Power Exchange  a cautious approach due to prevailing power deficit Thinking ahead - to create a roadmap for the future with a view to organize competition!

3 Trading – the current scenario  EA 2003 recognizes trading as a licensed activity  Staff paper recognizes that electricity trading is essential for meeting peak demand and for overall resources optimization  Bi-lateral physical trade: Volumes are about 3% of electricity generation  Today 22 entities have trading licensees  Few active, many dormant  Buying and selling power remain a voluntary, transparent process  The cost of traded power in our country, to a large extent, reflects the value accepted by the market Better price discovery requires larger volumes, more liquidity!!!

4 Trading and PX  Electricity Trading market is still in a nascent stage  Rising cost of traded power –legitimate market signals in a deficit situation  Voluntary, not mandatory  Utilities exercise load-shedding/power cuts  A need for promoting both bi-lateral trading and Power Exchange  Policies and regulations need to ensure non-discrimination between PX and Bilateral Trades “ The social responsibility of business is to make profit” – Milton Friedman, Noble Prize winner

5 Power Exchange: A Trading Licensee? (Para 6.4.2)  The staff paper tries to equate Power Exchange with a trading licensee  PX does not trade at its own behalf, it does not take positions; it does not invest its capital in transactions.  Hence, in our view, granting of trading licence to PX may not be a proper proposition..

6 Promoters of Power Exchange (Para 6.4.3)  The proposed Power Exchange at national level is envisaged to be a separate entity promoted by generators, trading licencees, distribution licencees, CTU, banks/ FIs.  Since the PX is a voluntary market place, perception of impartially, neutrality and transparency are important ingredients.  CTU among promoters will facilitate better harmony between market operator and system operator

7 Membership of PX not to be limited to grid connected entities (Para 6.4.4) - (1)  The PX membership, which qualifies a market player to participate in the bidding, has been limited to grid connected entities  This means electricity traders would not be eligible to participate in the bidding for day ahead power, which is contrary to the objective of equitable trading stated in para 1.3 as well as para  Electricity Act 2003 does not restrict trading to be carried out by grid connected entities.  Many grid connected entities, not financially solvent, may still intend to act through intermediaries to avail the PX services. They will be denied the benefits of PX.

8 Membership of PX not to be limited to grid connected entities (Para 6.4.4) - (2)  Traders can increase the market liquidity  For example, In Nord Pool there are as many as 400 members against 70 grid connected users.  Thus, there should be no restriction on market players as long as they are financially solvent and have physical contracts to back the bid

9 Trading Licencees should have Primary Membership in the PX (Para 6.4.5)  Trading Licencees have been given a secondary position as associate members, although they are eligible to be the promoters of Power Exchange.  This is a discriminatory provision and must be removed.  Trading Licencees should be eligible both as promoters of PX as well as for primary membership.  In Nord Pool Spot, there are ‘Direct participants’ as well as ‘Traders’

10 Trading Licencees should be allowed to bid from the short term capacity (Para 6.4.5)  The Power Exchange is for day-ahead power, which is a short term requirement. Therefore, a trader has the option to tie up the capacity for day ahead at a competitive price through a short term contract  For example, in Nord Pool, if one has a day-ahead physical contract and wants to bid this into the day-ahead market, one is free to do so and there is no differentiation between a long term and a short term contract.  Thus traders must be allowed to bid in the day-ahead market from the short term or long term capacity as the case may be.

11 Restrictions on traders to aggregate supply from more than two sources to be removed (Para 6.4.5)  Para stipulates that trading licencees should not be allowed to aggregate from 2 or more sources. There seems to be no rationale behind this proposition.  In Nord Pool, the traders can give bids from aggregated sources, but the aggregated sources have to be allocated to the same spot bid area. If the sources are in different bid areas the sources can not be aggregated.  PX generally deals with standard electricity products. Aggregation is one of the most important value propositions the traders bring to the market.  If aggregation is not allowed freely ( except meeting the condition that such aggregation should be in one electricity region/price area only), it may lead to serious liquidity problems and will be detrimental to the growth of the market.

12 Pre-Assignment of Transmission Corridors to PX – A Discriminatory Step (Para 5.2)  The Staff Paper introduces a separate category of transmission customers and seeks pre-assigned transmission capacity on inter-regional corridor for PX  Both these requirements are contrary to the provisions of non-discriminatory open access to transmission system in the Electricity Act 2003 and CERC’s Regulations on Open Access to transmission system  Further Regulation 6 clearly specifies, “Within a category (long term or short term) there shall be no discrimination  An equitable method seems to be that in case of congestion, the available transmission capacity of inter-regional link is shared between bilateral contracts and that through Power Exchange pro-rata Main problem is limited surplus capacity – redundancy needs to be improved

13 Discriminatory Provisions for PX on Transmission Charges (Para 5.3)  There are a number of discriminatory provisions related to transmission charges that favour PX transactions over bilateral short term transactions. For example:-  (a) One transmission charge for bidding through Power Exchange  (b) Transmission charges for PX shall be on energy (MWh) basis while that for bilateral contracts will be on MW/day basis;  (c) Transmission charges shall be as per implemented schedule for PX whereas for bilateral transactions the charges shall be as per contracted capacity;  (d) It also seems that operating charges of RLDCs and SLDCs have been waived for transaction through PX, whereas bilateral transactions have to bear such operational charges

14 Transmission Pricing Regime –Need for review  Equitable sharing of transmission charges and losses –a challenge  Present method of price discovery does not take into account the transmission charges and losses  Asymmetry between the buyers and sellers bid prices and quantity  In Nord Pool this issue has been addressed by adopting Point-of- Connection Tariff and Transmission charges and losses are bought by TSO  If PX is to be set up, transmission tariff is to be reviewed

15 Specific Comments  A National Power Exchange preferable over Regional PX-subject to viability of investment. (Para 4.2.2)  Decentralized dispatch concept is preferable over Centralized dispatch  Market liquidity is the most critical factor and necessary environment is to be created that leads to more market participants, more volumes and freeing of large capacity tied up in long term bi-laterals  PX should be able to gradually capture the current day-ahead scheduling of ISGS, the upcoming generation capacities and also cross-border resources.

16 Specific Comments  Voluntary PX versus Mandatory (Para 4.2.3) In principle, the participation in PX is to be voluntary as is the case in many markets. Since power is a concurrent subject in our country and states exercise autonomy in system operation, voluntary PX would have more chances of success.  Single side bidding versus two side bidding (Para 4.2.4) The principle of two-sided bidding by suppliers and buyers resulting in single uniform market price discovered by aggregate supply and aggregate demand quantities and prices could be adopted in our case. Efficacy of participants bidding on marginal costs seems doubtful in our case. Transmission Pricing and losses need to address the issue of inequitable sharing of such charges and losses

17 Specific Comments  Block Bidding Versus Multi-part bidding (  4.2.9) Block bidding has been preferred due to simplicity but multi-part bidding would be more appropriate for merchant plants in which in addition to price quantity bids, he can also quote start- up charges and minimum load charges for optimization by the PX.  Varying bid price caps (Para 6.1.3) Price caps distort the market mechanism and tend to move prices towards the caps. No voluntary, liquid market use price caps. Varying price caps will completely defeat the purpose of the Power Exchange.

18 Organizing Electricity Market A challenging task Requires –Detailed study –Preparation and –Investment EA 2003 gives directions for taking measures conducive to –development of electricity industry, – promoting competition therein, and –protecting interest of consumers PX need to co-exist with bilateral trading, UI being non-firm should be for balancing power only Development to be inclusive! Traders should not be discriminated!

19 Enthusiasm is at the bottom of all progress. With it, there is accomplishment. Without it, there are only alibis. - Henry Ford