Power Markets in India Rahul Banerjee Senior Adviser , Power Markets CERC - PowerPoint PPT Presentation

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Power Markets in India Rahul Banerjee Senior Adviser , Power Markets CERC PowerPoint Presentation
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Power Markets in India Rahul Banerjee Senior Adviser , Power Markets CERC
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Power Markets in India Rahul Banerjee Senior Adviser , Power Markets CERC

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Presentation Transcript

  1. Power Markets in India Rahul Banerjee Senior Adviser , Power Markets CERC Disclaimer : These are the person views of the Speaker

  2. We shall cover … • Market Related Sections in Electricity Act • Power Market Structure in India • Market Regulations of CERC • Power Market Data • Regulators Role in Market Development • International Power Markets • Market Related Discussion Points

  3. How to view electricity ? • Is electricity to be treated as a public good with universal service obligation of the state or is it a should be treated like a commodity and work on market based principles ? • Double sided bidding or supply side bidding ? • Unique Commodity- Higher Risk ? • Consumer as soon as produced • Network to Transmit • Network Code – Operation flexibility lower • Banker look for long term contracts

  4. Electricity Act 2003 • Foundation stone for creation of a modern electricity industry • Flows from overall liberalization of Indian economy • 1948 act was a nationalization of electricity -to supply to semi urban and rural areas , created monolithic SEB and financial losses followed • Created a new industry structure – unbundling of SEB , private sector, competition , open access , regulatory commissions • New law, multiple interpretation , takes time to settle

  5. Market related Sections in Electricity Act 2003 • Determination of tariff by( competitive) bidding process based on guidelines issued by GOI – Sec 63 • Preventing Market Domination- responsibility of Regulators - Sec 60 • Open Access to Generation ,Consumers by Transmission, Distribution cos -Sec 38, 40, 42 • Cornerstone of the act • Bring competition • Similar to FERC order 888 , 889 in 1996 • Access to line on payment of charges • Allow transmission to recover stranded cost through energy customers • All info in open market – OASIS Open access same time information system • NLDC, RLDC similar function , information asymmetry reduction

  6. Market related Sections in Electricity Act 2003 • Development of power markets including trading - Section 66 • NEP suggests 15% of new capacities to be sold outside long-term PPAs • NEP stipulates power exchanges • Generation delicensed –Sec 7 • Trading, Transmission, Distribution are licensed - Sec 14 • Regulatory oversight only on trading margin ,not on sale price by trader • Max & Min tariff for a period of 1 yr in periods of shortages – Sec 62 (3)

  7. Why have a Power Market ? • Markets - Ultimate payment security mechanism -superior to government guarantee • Induces price risk ,Reduces liquidity risk • Risk Mitigation mechanism –from take or pay contracts • Liquidity improves valuation of companies as risk reduces • Cost of capital reduces as alternative platform to sell available • Price acts as signal for new investments • Merchant Power capacity and private sector investment • Match short-term surplus with demand variation in a diverse country – optimal asset utilization • Bring latent generation capacity - captive power plants to market

  8. Why have a power market ? • Liquidity reduces business risk • Increases price volatility • Access to markets - Open Access – Key to competition • Alternative to consumers - by using open access • Industrial consumers getting access through PX and technology

  9. The shift • Till 1980’s-Government promoted • Capital Investment • 1990’s -Government guaranteed PPA • Single buyer • 2003 onwards - Market based • Multiple buyers and sellers • Market is the risk mitigation • Exit from contract in case of default • Should not be abused

  10. Stages of Market Development Structured Products financially settled Financially settled Derivatives Exchange/ Options Indian Power market is here OTC Derivatives Continuous Trading Auction markets Market Maturity Spot Markets on Exchanges OTC Markets Liquidity Improves, Pricing more efficient Multiple buyers - sellers Individual Buyer /Seller Time • In matured markets all these types of markets exist • Interplay between markets improves price discovery

  11. Power Market Structure in India Long Term Markets ( Short Term Markets (up to 1 year ) Real time balancing Regulated Assets – Interstate and as State level UI mechanism Cost curve + penalty Licensed Traders / Bilateral Power Exchange Competitive Bidding – case 1 and case 2

  12. Different Types of Market • Energy Market • We do not have pure energy and capacity markets • Capacity Market • Case 1 Case 2 are Capacity and Energy Markets • New Case 2 SBD is a pure capacity market • Day ahead in some sense • Real Time market • UI , but is based on marginal cost of the fuel • Transmission Market

  13. Capacity Markets • Generators risk for project financing is taken care of • Recovers his fixed cost , DSCR, ROE • How to price capacity – is a real call option • Buyer asks for electricity to be scheduled whenever the day ahead price is higher than the variable cost of this generators • Fuel cost is a pass through to DISCOM • Fuel cost is 60 % of total power cost • Can be an alternative to Power Derivatives ?

  14. Market Structure Participant Markets Contracts Grid Connected Entities Licensed Traders Power Exchange Clearing Corporation Exchange Member Other Exchange Other Transacting parties

  15. Some Features of Short Term Power Markets • Trading licensees (44) – Top 5 control 80 % of market • HHI Index to monitor market power • Traders also facilitating investments in new capacities • New smaller category created to penetrate market • Two Power exchanges - electronic platform for day ahead markets , week ahead markets ,intra day (Similar to Nordpool) • Assured payment security and risk management • Prices Dissemination across country • Reduce information asymmetry • Provide equal bargaining power to all players in a supply deficit environment

  16. Short Term vs Long term Contract • Utilities can enter into long term contracts for their future demand projections and in case demand does not grow as per their anticipation can sell any extra supply in the short term market as a part of their portfolio management • System Operation - Large volume of short term transaction creates congestion in transmission due to unplanned power flow

  17. Short Term vs Long Term Contract • ST- Acts as a payment security mechanism in case of default in long term contracts • ST- Generation resource optimization and helps transfer power from surplus to deficit region in a geographically seasonally diverse country like India • Is short term market a procurement market or a balancing market? • Utilities to decided their own expectation of the market prices and demand projections. • In long term contracts , utilities are stuck to a technology • Long term contracts help to bring certainty of cash flow and are necessary for making projects bankable • Long term contract can be done only if , contacts on fuel side can be done ,else risk not mitigated , chance of contract reneging

  18. Regulations

  19. Trading Margin Regulation • Trading - a licensed activity - Capital adequacy needed as taking risk on behalf of participants • Networth , Liquidity criteria • Capital intensive players absorb credit risk of DISCOM, risk mitigation for suppliers • Trading margin imposed by regulator • To ensure prices do not increase much • Stymies innovation as there is no incentive to innovate and structure deals • No margin on long term transactions • Credit risk has gone up significantly for trader recently • Liquidity and working capital constraint • Bank not lending to Dicsom • Margin on Short Term Transactions • 4 paisa margin if power price less than Rs 3/kwh • 7 Paisa margin if power price more than Rs 3/kwh

  20. Long Term Contract

  21. Procedure, Terms and Conditions for grant of trading licence and other related matters Regulations, 2009 • Notified in 24.02.2009 • 3 Amendments • 16.10. 2009 – Intra state removed • 02.06.2010 – Category 4 added • 11.10.2012- • Inter state License also includes Intra-State trading as per Rule No. 9 of the Electricity Rules, 2005 already provides for it.

  22. Networth required to maintained at all times

  23. Salient Provisions • Technical Qualification for availing Trading Licence- At least 1 full time professional possessing following qualification • 10 years experience in power systems, engineering qualification • 5 years in Finance commerce- CA/ ICWA/ MBA Finance • Publication of license in newspaper as public notice • Volume limit for a category inclusive of intra-state trade volume • Networth requirement for both existing and new companies would be for last one year while applying for the licence • Up-gradation of licence to a higher category without publication process as due diligence already completed • Disgorgement of excess profit charged

  24. Salient Provisions • Regulatory Audit of account in case necessary • Intrastate reporting • Deemed license to submit trading reports • Contravention and Penalties defined into serious and non serous categories • Warning to debarring upto 6 months

  25. Power Market Regulation • Market Structure • Market design and principles • Power Exchange • Approval, Prudential Norms • Various Committees for governance • Trading Systems • Risk management and Default Settlement • Market Oversight • Market monitoring • Reports and analysis

  26. Principles Of Market & Market Design • Power Exchange shall ensure fair, neutral, efficient robust price discovery • Day Ahead Market on Exchange • Economic principle of social welfare maximization and to create buyer and seller surplus simultaneously during price discovery. • Bidding mechanism shall be double sided closed bid auction on a day ahead basis.

  27. Prudential norms for establishment of Power Exchange (PX) • PX shall always have a minimum networth of Rs. 25 crore • Settlement Guarantee Fund (SGF) – • SGF investment in safe investments / principal amount is not at risk. • Fifty percent of the SGF proceeds shall be kept in safe liquid investments. • Shareholding norm for Power exchange- • Anchor investor can have maximum of 25% shareholding in the Power Exchange. • A member can have a maximum of 5% shareholding • All members together can have 49 %

  28. Ownership and Governance structure of Power Exchange: • At lease one third of the members of the Board or a minimum of two directors, whichever is higher, shall be independent directors selected from a panel constituted by the Power Exchange and approved by the Commission. • CEO cum Managing Director shall be solely responsible for running the day to day operations of the Power Exchange. • Annual Registration charge for Power Exchange:

  29. Management of Power Exchange: • 2 Senior Management professional with • 10 years experience in power systems, engineering qualification • 5 years in Finance commerce- CA/ ICWA/ MBA Finance • Power Exchange shall constitute a • Risk Management Committee • Market Surveillance Committee • headed by an independent director • SGF management committee with adequate representation from members of • Exit policy predefined • No uncertainty for market participnats

  30. Membership in Power Exchange Membership Categories: • Electricity Trader • Distribution licensee including deemed distribution licensee or a grid connected entity • Advisory Member • Member service charge shall not be more than 0.75% of transaction value • Electricity traders margin will be as per trading margin Regulations

  31. Information Technology Infrastructure and Trading System of PX • Audit of software application used for price discovery • Periodic IT system audit for data security, data integrity and operational efficiency and submit its reports to Commission annually • Disaster recovery site and alternate trading facility in case of emergency

  32. Information dissemination by Power Exchange • Prices, volumes and historic prices shall be made available on the website of the Exchange and should be in downloadable format. • An Exchange shall report price, transaction volume, buyers and sellers on its platform on monthly basis. • Whistle blower policy

  33. Power Exchange • Multiple power exchange model • Voluntary participation • Demutualised and Ring fenced • Public interest independent directors • For profit organizations- Market operator • Co ordinate with system operator • Two Power Exchanges operational , 3rd in principle approval • Electronic platforms • Transparent price discovery and anonymous bidding • Equal bargaining power to buyer and seller • In a supply deficit market • Helped in introducing open access at ground level • Technology has acted as a great leveler • Large participation , different from other markets where only wholesaler participates

  34. Power Exchange • Standardized products • High Liquidity • Pricing improves • Standardized risk management • Electronic price dissemination • Quick and nation wide • Reduces information asymmetry

  35. Transmission Congestion • How frequently congestion is happening • Congestion has occurred every day in December 2012 and in all 15 minute time blocks every day • How much flow is getting restricted due to congestion • ((Uncongested volume cleared – Volume cleared taking into consideration congestion) / Volume cleared taking into consideration congested ) X100

  36. Transmission Congestion • In how many corridors congestion is happening • S1- S2, W3, N3, ER- NER ( recently phenomenon) • What is the cost of congestion • Price and Volume both matter • When market-clearing price lies on a very elastic portion of demand curve, i.e. quantity demanded is very sensitive to price, buyers will have less surplus, and when market-clearing price lies on a very elastic portion of supply curve, sellers will have less surplus

  37. Market Breakup What is the right mix of long term and short term market ?

  38. Short Term Power Price-Volume Trend Prices showing a declining trend in Short term power market Short Term volume has grown at CAGR of 25 % over last 4 years

  39. Short Term Price and Volume Trends * Till Nov. 2012 Short Term Market though 8 %, is a $ 4Billion Market (1$=52 INR)

  40. Electricity Trading Margin Trading Margin has reduced

  41. Risk Model for a Company Fuel Price Risk Financial /Credit Risk and Operational Risk Power Price Risk Power Plant Output Electricity Input Natural Gas / Coal Spark Spread Contracts to Hedge If can pass on the risk to customers no need to hedge If Competitor gives fixed price , may need to hedge Long term physical contracts on both sides – is also a hedge

  42. How a hedge works ? Power Price increases to Rs 5 / Kwh Sells financial Contract at Rs 5 /Kwh Profit of Rs 1 /Kwh Buys in Day Ahead at Rs 5/ kwh Effective Price = 5 - 1 = Rs 4 / Kwh Discom today buys Electricity futures expiring in 1st Dec 2013 expiry at Rs 4 / Kwh. This is the Futures contract price Price Fixed at Rs 4/ Kwh come what may ! No price risk Time Price decreases to Rs 3/ Kwh Sells financial contract at Rs 3 Loss of Rs1/ Kwh Buy in day ahead at Rs 3/ Kwh Effective Price = 3+ 1 = Rs 4/ Kwh 1 st Feb2013 1st Dec 2013 Both physical and financial position to be looked at together in a hedge else is a speculative position

  43. PJM • RTO and market operator, Non profit organization • 13 US sates with 700 members • Gencos, Discom, Trading Cos, Large Eng users ,captives • Capital intensive cos- Aluminum, steel , Cement • Is a centralized dispatch model – security constrained economic desptach • Energy market • Day ahead forward ( both buyers and sellers) • Real time balancing- 5 minute based on grid condition • Day ahead Scheduled Reserve market – 30 minute , offer based price for gencos, after PJM forecast of day ahead market • Operating reserves - offer based price for gencos • LMP = marginal power price+ transmission congestion + marginal loss

  44. PJM • Reliability Pricing model – Capacity Market • Capacity auction market upto 3 years ahead • Every year incremental capacity auctioned as forecast improves • All load serving entities have to forecast peak demand and procure capacity through self supply, bilateral contracts , remaining through PJM capacity auctions • Long term price signal for new genco investment • Mandatory to participate in day ahead energy market thereafter participate

  45. Financial electricity derivatives in US • NYMEX,ICE • Derivative contracts settled on PJM prices • Large number of contracts settled at various hub prices • To hedge LMP price risk • Large number of OTC contracts , Clearing done though exchange • Not as liquid as gas markets

  46. Financial Transmission Rights • LMP at each hub different due to transmission congestion , generation cost at the hub • Price risk = LMP gen- LMP Disco against the bilateral contract done • FTR to hedge this price risk