Power Market & Trading

Industry Information Insights 2014

Table of Contents

Introduction

Power Market Structure

OTC Market

Power Exchange Market

Electricity Transaction Trends

Risks in Power Trading

Trading Margin

Introduction

In India the scope of trading power is huge even with its current power shortage scenario.The power sector has come a long way from being a bilateral contract driven long-termmarket to one which is also driven by short-term trades.

There has been a steady growth in the number of short-term power trades, with the numberof participating utilities in short-term open access (STOA) increasing steadily.

The most distinguishing feature of electricity as a commodity is that it has no storage value.At a time when a large number of captive and merchant power plants are expected to beadded in the coming future, there is a need to encourage the peaking power plants and bringthe surplus captive generation in the grid.

Short-term transactions of electricity refers to the contracts of less than one year periodthrough Inter-State Trading Licensees and directly by the Distribution Licensees, PowerExchanges (Indian Energy Exchange Ltd (IEX) and Power Exchange India Ltd (PXIL)), andUnscheduled Interchange (UI).

Introduction

Presently, there is an imbalanced disposition of resources in India. On the one hand, theeastern region is rich in coal sources and so a lot of pit head based load plants have been setup there. The north eastern region also holds a lot of hydro power potential. Whereas, thewestern and northern regions of the country suffer from a heavy deficit of such power due totheir immense industrial and agricultural load.

Power trading is an effective way to procure electricity from the short-term market.

The growth in power trading is of significant interest to independent power plant owners,merchant power plant owners, distribution utilities, open access consumers, captive-plantowners, transmission companies, electricity traders and power exchanges.

Short Term Power Markets

Power Market (Short Term)

OTC Market

Direct between Buyer & Seller

Electricity Trader

Back to Back Deals

Deals with Open Position

Power Exchange

Intraday

Contingency

Day Ahead

Term Ahead

UI

Market Participants

Generation companies

Distribution Licensees

Open Access Consumers

Electricity Traders

Power Exchanges

Over the Counter (OTC) Market

Over the Counter Market is the inter-State market where buyers and sellers directly transactor transact through an electricity trader.

The price and terms of the contract are determined through negotiations as agreed betweenthe parties or through competitive bidding process or through a electricity trader. The risk incontracts executed in such markets is managed between the parties themselves or by theelectricity trader.

Power Exchange Market

Power Exchange Market is a market where buyers, sellers, electricity traders, members ofpower exchange transact on standardized contracts.

The Power Exchange or Clearing Corporation is counterparty to contracts. Scheduling is doneby Regional Load Despatch Centre or National Load Despatch Centre unless actual deliveryis dispensed with.

OTC Market

OTC Contracts directly between Buyers and Sellers

The interstate transactions in which buyers and sellers enter into a contract and decide priceand other terms of the contract either through negotiation or based on competitive biddingprocesses.

OTC Contracts through Electricity Traders

Back to Back Deals: Electricity Trader buys a specific quantity of power for a particularduration from one party and simultaneously sells it to another party on same terms andconditions. Such transaction does not expose the trader to any price risk. It may expose thetrader to credit risk and operational risk.

Deals with Open Position: Electricity Trader takes a position in a power purchase or salecontract based on price and other factors in view and adopts a strategy which he deems fit.

Power Exchange Market

Short term market means a market with contracts for a period not exceeding one year.

Term Ahead Market (TAM)

Market where physical delivery of electricity occurs on a date more than one day (T + 2 ormore) ahead from the date of transaction (T) and the contracts in such market can betransacted weekly, monthly or yearly or more in advance and have a defined delivery periodon expiry of contract.

Day Ahead Market (DAM)

Contracts where transaction occurs on day (T) and delivery of power is on the next day (T+1).

Contingency Market: Intraday Contract

Contracts where transaction occurs on day (T) after the closure of day ahead transactionwindow and the delivery of power is on the same day (T) or next day (T+1).

Electricity Transaction Trends

The short-term power market, which covers contracts of less than a year through bilateralagreements and power exchanges is well developed.

In 2012-13, approximately 11% of the total electricity market was transacted through short-term power market. The balance 89% percent of generation was procured mainly bydistribution companies through long-term contracts and short-term intra-state transactions.

Year Short-Term Transactions Electricity Generation Percentage

2009-10 65.90 764.03 8.63%

2010-11 81.56 809.45 10.08%

2011-12 94.51 874.17 10.81%

2012-13 98.94 907.49 10.90%

Share of electricity trading (in billion units) by trading licensee, power exchange, distributioncompanies and UI (Unscheduled Interchange) in short term electricity transactions.

Trading

Licensee

36%

Power

Exchange

24%

UI

25%

Discoms

15%

For 2012-13Year

Trading License

Power Exchange

UI DISCOMs

2009-10 26.72 7.19 25.81 6.19

2010-11 27.70 15.52 28.08 10.25

2011-12 35.84 15.54 27.76 15.37

2012-13 36.12 23.54 24.76 14.52

Risks in Power Trading

Credit Risk

Risk emanating in a contract due to change in financial condition of any of the contractingparties.

Operational Risk

Risk emanating in a contract due to systems, processes, technology error or breakdown, nonscheduling of power due to technical reasons.

Price Risk

Risk emanating in a contract due to change in price of the contract or asset during tenure ofthe contract.

Trading Margin

When power trading started in 2004-05, the licensees voluntarily charged 5 paise/kwh or lessas the trading margin. However, it increased in 2005 and the weighted average tradingmargin charged by the licensees went up to 10 paise/kwh during April to September 2005period.

Then, the CERC decided to regulate the margin and fixed the trading margin at 4 paise/kwhvide "CERC (Fixation of Trading Margin) Regulations" notification dated 26 January, 2006.

Based on feedback and experience with 2006 regulations and considering various risksassociated with the electricity trading business, CERC revised the trading margin in 2010.

The trading licensee can not charge trading margin exceeding 7 paise/kWh in case the saleprice is exceeding INR 3/kWh and 4 paise/kWh where the sale price is less than or equal toRupees INR 3/kWh.

This margin includes all charges, except the charges for scheduled energy, open access andtransmission losses.

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