Analysis of CERC White paper over short-term trading BY Abhishek Mazumdar

8/14/2019 Analysis of CERC White paper over short-term trading BY Abhishek Mazumdar

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Analyzing the impactof CERC staff paper

over Short-term powertrading.

Abhishek KumarMBA- Power Mgmt.


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Rationale

As of date power trading volumes = 3% of totalgeneration

Weighted avg. sale price of traded powerincreased from Rs.4.64/unit in Apr-June07 to Rs.

7.24/unit in Apr-June08.

UI rates gone up from Rs.7.45/unit in Apr-June07to Rs.10/unit in Apr-June08.

While most of the traded power is sourced from

coal/hydro power plants in which the generationcost is not more than Rs 4/unit, the the pricediscovered in the exchange has been around Rs 6-8.

The deficit states perceive it as a profiteering


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Proposed measures

The paper suggests price caps of Rs 5/unit during off-peak hours and Rs 6 during evening peak hours,based on replacement cost of electricity.

Ensuring impartial functioning of SLDCs in order toincrease power supply through Open Access.

Flexible scheduling framework so that bi-lateraltransactions can be modified at short notice keepingin view the demand pattern.

Strict monitoring of overdrawal by the states duringlow frequency so as to induce grid indiscipline andplanned purchases of electricity.

The proposed price cap is based on the replacementcost of electricity, which a consumer has to spendwhen scarcity prevails. This is nothing but the cost ofdiesel generation as offices and households switch onDG sets when the power goes.


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Key Statistics

Indian power sector is the third largest in Asiaafter 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 2005-06 at 631^ kWh (CEA General Review 2006),remains far below the world average of 2,429kWh.


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Cont

Unmet planned targets in generation capacity addition In last 3 Plan periods, target versus achievement ~ 50%

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

Northern Region: 9.1% Western Region : 23.2% Southern Region: 9.0% Eastern Region: 11.0% North-Eastern Region: 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 regionalcooperation - for energy security


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Mkt. Structure created by EA ,2003

CGS STATE GENCO IPP

TRADER PXDISCOM

CONSUMER


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Types of Trading

Bilateral Agreements

Banking Agreements

Power Exchange Available other resource


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EA03 & Regulations

Electricity Act 2003 The intent and object of the EA 2003 is to develop power

market through increased competition, more playersand protect consumer interests

Development of Power Market EA 2003, Section 66,

The Appropriate Commission shall endeavor topromote the development of power market,guidedby the National Electricity Policy

Suitable safeguards to prevent adverse effect oncompetition

Recognized Trading as a distinct activity

Definition under section(2) (47): Purchase ofelectricity for resale thereof Adequate and progressive provisions governing open

access both : to transmission networks (inter-state and intra-state) and to distribution networks


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Cont

National Electricity Policy 2005 Para5.7 To promote market development, 15% ofthe new generating capacities, be sold

outside long term PPAs.-As the power markets develop, it would befeasible to finance projects withcompetitivegeneration costs outside the long termPPAs.this will increase the depth of powermarkets.and in long run would lead toreduction in tariff

Ministry of Power

A progressive Merchant Power Policy with-


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Power Market

The market determined prices in the short termmarket has encouraged IPPS and merchantgenerators to look at the sector with renewedvigour and as an investment destination .

An evidence of this is that PTC has entered intoPPAs to procure long term power with IPPS formore than 10,000 MW and / MoUs for around30,000 MW.

Power market has in fact become a catalyst forprivate investment in power sector.

75,000 MW under development by IPPs withoutany Government support.

Rs. 40,000 to Rs. 45,000 Crores investment already


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Cont.

The wholesale market for electricity in India iscompletely voluntaryby design - that none of themarket participants are obliged to operate through arestricted 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 frequencyto float within a range, providing tremendousflexibility to market participants.

Further, the rules regarding standards of supply are

more liberal, permitting greater flexibility to utilitieson demand side res onse.


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Cont.A fledgling, nascent market

Limited growth of volumes ofshort term traded market dueto

Overall deficit scenario

Limited number of activeplayers and resultantliquidity crunch

Transmissionconstraints/congestion

Rising cost of traded power:

(The average cost Rs.4.50/kWh in 2007-08)

Due to overall shortagesituation (widening demand-supply gap)

Lack of capacity additions

Linkage with UI rates andRising fuel prices

1.90%

2.00%

2.10%

2.20%

2.30%

2.40%

2.50%

(%)

2003-04 2004-05 2005-06 2006-07 2007-08

(Period)

Volume of Electricity Traded by the Trading Licensees in Total

Generation (%)


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Integrated Energy Policy

24 BU

1%

401 BU

11% 375 BU

10%

2828 BU

78%

Hydro Nuclear Thermal RE

Source: Integrated Energy PolicyTotal 3628 BU

India - Installed Capacity

153220

306

425

575

778

155233

337

488

685

960

0

200

400

600

800

1000

1200

2006-07 2011-12 2016-17 2021-22 2026-27 2031-32

GW

8% GDP Growth 9% GDP growth

Generation Mix 2031-32

(8% GDP )

India InstalledCapacity


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Trading Scenario

Inter-state tradinglicenses (25 Yearsvalidity) in thepurview of CERC

Twenty Six (26)

Trading licensesissued by CERC Volume of bilateral

exchanges is still low(about 2.5% to 3% of

energy generation) Total short term

market approximately21 billion units* in2007-08

* Includes cross- border

Trading Volumes (in MUs)

1102911846

1418815023

21301

0

5000

10000

15000

20000

25000

FY 04 FY 05 FY 06 FY 07 FY 08


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Cont

Most of the supplies are locked up in long term PPAs.

Short term trading constitutes 3% of the total supply.

Trading essentially between surplus & deficitdistribution utilities.

Trading is essential for resource optimization andmeeting short term peak demand.

Most of the trading is inter-regional


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Key Player & Market share

Market Share 2007-08

46%

16%6%

8%

7%

4% 12%1%

PTC

NVVN

AdaniTata Power

JSW

Reliance Energy

Lanco

Others

Trading

LicenseesVolumes (MU)

PTC # 9889

NVVN 3324

Adani 1322

Tata Power 1682

JSW 1479

Reliance Energy 776

Lanco 2600

Others 229

Total 21301


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Benefits

Increasing realization among

utilities of power as a source for

revenue earning

Improved PLF, particularly of State

Power Utilities

An example: DVC - a rise of

5% in PLF

No backing down

Reduction in load shedding

82

74

75

73

72

6970

60

65

70

75

80

85

2001 2002 2003 2004 2005 2006 2007

Trading results in optimization of resource utilization


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Cont.

Price volume break up (%)98

36

92

59

125

48

26

FY 05 FY 06 FY 07

Rs 1-3 Rs 3-4 Rs 4-5 Rs 5-6

The short term market has created value for power. Thereis a distinct shift towards higher revenue realization


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Cont.

Encouraged IPPs to invest in generating assets- spurt in investmentbased on competitive tariffdue 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 forCapacity addition

Jharkhand 9,110 MW

Chhattisgarh 30,000 MW

Orissa 17,000 MW

Tamil Nadu 10,000 MW


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Default Market for trading

UI rate serves as default rate fortrading.

UI rate depends on frequency isindicator of demand-supply gap

Rate depends on demand-supply gap-

efficient market.

Encourages trading agreements tohedge risk of UI charges


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

19/08/2008


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Date:19/07/2008 IEX Rate

in Rs/MWh UI RATEFREQ1 8,076.09 9.73 49.032 8,059.63 9.73 49.033 8,059.17 9.73 49.034 8,043.78 9.73 49.035 8,043.48 9.01 49.11

6 8,051.17 9.01 49.117 8,050.99 9.01 49.118 8,050.95 9.01 49.119 8,058.55 9.01 49.1110 8,271.77 8.11 49.2111 8,289.10 8.11 49.21

12 8,289.10 8.11 49.21


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Date:19/07/2008 IEX Rate

in Rs/MWH UI RATEFREQ13 8,289.10 8.11 49.2114 8,289.10 8.11 49.2115 8,300.88 8.11 49.21

16 8,300.88 8.11 49.2117 8,300.88 7.84 49.2418 8,529.99 7.84 49.2419 8,533.05 7.84 49.2420 8,534.32 7.84 49.2421 8,534.32 7.84 49.24

22 8,534.32 9.46 49.0623 8,300.91 9.46 49.0624 8,091.48 9.46 49.06


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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.


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Problem/Outcome

The imposition of price caps, which are

aimed to prevent profiteering at the costof ultimate consumers of power deficit

states, would be possible only after athorough review of unscheduledinterchange(UI) charge and after bringingthe hydro power projects under the

regulatory mechanism.


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Results

Fuel-cost & Power-shortages have not much impactover price of electricity being sold in short-term.

There is a direct correlation between price of short-term traded power and UI rates.

Sellers may resort to discriminatory methods inselecting 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 regulatoryoversight in such transactions would automaticallyget reduced.

The price caps may also drive up the average price

of power.


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Suggestions

While it is a fact that the price at which power isbeing traded bears no correlation with the cost ofpower generation -- a point that is highlighted in the

paper -- it is also a fact that it is this price of tradedpower which is encouraging investments in thepower generation sector, especially investments inwhat are called MPPs. A higher price of power in theshort term is therefore the route to ensure lower

prices of power in the long term, through supplyaugmentation. Price caps will most certainly chokesuch investment in generation, and in the processwiden the demand-supply gap in the long run.


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Cont..

It should look at tapping the increased ability, andwillingness, of the consumer to pay a premiumfor power. The average consumer in Pune iswilling to pay a surcharge to get assured 24 x 7

power. That would also be true of many othercities in the country.

It is time for the regulator to shift its focus fromprice to assured availability.

There is no power that is as expensive as nopower.


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Further Scope

D-F test.

Granger Causality.

ECM.


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Power Market Ripple Effect

Power trading share is 3% of Indias total energy generated butits indirect impact on the power sector is several times bigger


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THANK YOU !!

Analysis of CERC White paper over short-term trading BY Abhishek Mazumdar

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Transcript of Analysis of CERC White paper over short-term trading BY Abhishek Mazumdar