As India prepares for centralised power market shift, EU moves a different way

EU proposal aims at new market for long-term contracts on lines of PPAs that give power plants a fixed price

As India readies a template to dismantle its existing power market design — a decentralised, voluntary and short-term market that coexists with long-term power purchase agreements (PPAs) signed outside the spot market — in favour of a radically different, mandatory-pool model that entirely jettisons fixed-price contracts, the European Union has signalled a move in exactly the opposite direction.

Brussels has readied a proposal that aims to establish a new market for long-term contracts on the lines of PPAs that provide power plants with a fixed price for their electricity, primarily to yield more stable electricity bills for users amid volatility in prices in their energy market triggered by a combination of factors: the impact of surging gas prices following the Ukraine war on Europe’s largely gas-powered grid and the flaw that this gas price surge has exposed in its current marginal pricing market design.

The EU is attempting to tweak its power market design to avoid a repeat of last year, when Russian gas supply cuts pushed electricity prices there to new highs. Because Europe’s marginal pricing market design means electricity prices are set by the costs of the marginal producer — generally a gas-fired plant — the spike in fuel prices precipitated an electricity price shock that affected households and industrial users.

In a public consultation earlier this week, the European Commission laid out multiple options to revamp the way power plants sell electricity as part of the broader market reform. This includes plans to expand Europe’s use of long-term contracts that provide power plants with a fixed price for their electricity — or what are called contracts for difference (CfD) — and PPAs. Both of these are expected to generate a buffer between energy consumers and volatile prices in the short-term energy markets, yielding more stable electricity bills for households and companies.

Even as Europe has signalled the move back to more long-term contracts, India is readying the blueprint to move towards a new electricity market model called the Market-Based Economic Dispatch (MBED) mechanism, under which the Union Ministry of Power proposes to centralise scheduling for dispatching the entire annual electricity consumption of around 1,400 billion units. If implemented, this will mark a clear shift from a decentralised model followed now, which has been buttressed by the Electricity Act 2003 and follow-on reforms. The implementation of the first phase of MBED was earlier planned to start with effect from April 1 last year, but was put off, with a date yet to be announced.

India’s current electricity market operates on a multi-layered model. The first layer is legacy PPAs, to which newer, competitively-bid agreements, regulated PPAs and cross-border PPAs have been added. The second layer is medium-term PPAs, followed by short-term PPAs.

Under this market design, the rules of scheduling and transmission charges vary and the day-ahead spot market with double-sided closed auctions is also gaining traction. The average energy transacted is about 150 million units per day. Unlike the Western markets, there is currently no mandatory pool. India has now added yet another layer of real-time market that operates round the clock for contingency needs and to absorb the variability of renewable energy. Also, a new grid code is under finalisation and a liberal and flexible transmission access regime called GNA (general network access) is also in the works. The proposed shift to the MBED, though, has triggered concern among sectoral players, including states.

“Our choice of a voluntary short-term market co-existing with long-term PPAs has withstood the test of time. Aping the West might not serve our purpose, and we should act in accordance with our concrete circumstances,” said Ravinder, former chairman of the Central Electricity Authority. To treat electricity as a single product and then to expect to have a uniform price could involve pitfalls. “Electricity is a spectral product with various hues depending on time of the day, reliability, variability and environmental impact. So price diversity is intrinsic in electricity.”

While designing the electricity market in 2007, India had chosen to retain the sanctity of legacy PPAs as a hedge for discoms (distribution companies), even as a spot market was introduced for free trading of electricity to provide additional resources in a deficit scenario.

“We learnt our lesson early from the California fiasco, where the spot market was rigged by Enron and others. Our diversified market model with multiple prices has worked well for our consumers. There has been no price shocks or windfall gains. The spot market share being less than 10 per cent volume, its volatility can be absorbed by the market. Our power exchange (IEX) has been opened up to Bhutan, Bangladesh and Nepal. The obsession for uniform clearing prices to make electricity look like ordinary goods is entirely irrational,” a sector expert said.

Electricity markets have been liberalised only in some markets, including countries in the West and others such as Australia, while countries such as South Africa (South African electricity public utility Eskom) backed out and now operate on regulated tariff. The European Commission, a strong votary of mandatory spot markets, now clearly wants to move back to PPAs. As per the proposal put forward by the Commission, the participation in the mandatory pool will be a procedural formality for PPAs and whatever is the price discovery, it will be neutralised by a second contract outside the power exchange called the CfD.

In its current model, India already maintains the sanctity of PPAs and has kept it outside the power exchanges, albeit in a neater way. But the conversion of our voluntary market into a mandatory pool could potentially land the country into a similar mess as what the European Union finds itself and is attempting to now modify, according to multiple experts.

SL Rao, former chairperson, Central Electricity Regulatory Commission, and Member, Advisory Board, Competition Commission of India, had deemed the proposed MBED as being “inconsistent with the constitutional provisions, existing legislative framework and market structure”, and could “end up creating more challenges than it resolves”.

He had told The Indian Express that the proposal has implications from an overall grid management perspective, apart from the way in which it infringes on the autonomy of states.

The Centre’s argument is that the current model of states doing scheduling is suboptimal. Power is in the Constitution’s Concurrent List, with the electricity grid being divided into state-wise autonomous control areas managed by the State Load Dispatch Centres (SLDCs), which in turn are supervised by Regional Load Dispatch Centres and the National Load Dispatch Centre. As things stand, each control area is responsible in real time for balancing its demand with generation resources.

The MBED model proposes to change this by putting in place a central market operator to dispatch the inter-state as well as intra-state generation plants. Also, there is an inference that the new model will narrow the multiple options currently available under the voluntary market design; with day-ahead contracts turning redundant and, from a state’s perspective, the discoms and SLDC needing to buy or sell power in the real-time market, even if it is for the sake of maintaining demand-supply balance in their control areas.

There are concerns that the new model could potentially clash with emerging market trends, given the increase in renewable energy in the overall generation mix and the increasing numbers of electric vehicles plugging into the grid — all of which necessitate greater decentralisation of markets and voluntary pools for efficient grid management and operations, an official with a regulatory background said.