Power Trading in India

1. POWER TRADING IN INDIA CONCEPTS

2. INTRODUCTION • Electricity is a non-storable commodity, which indicates the electricity generated should be consumed timely. In competitive environment, the price is determined by stochastic supply and demand functions. The price can change at any time.As a consequence of increased volatility, a market participant could make trading contracts with other parties to hedge possible risks and get better returns. • Open access is the key to a free and fair electricity market. Power producers (sellers) and dealers/customers (buyers) have to share a common transmission network for wheeling the power from the point of generation to the point of consumption. Thus, interconnected transmission system is considered to be a natural monopoly so as to avoid the duplicity, the problem of right-of-the-way, huge investment for new infrastructure and to take the advantage of the interconnected network viz. reduced installed capacity,increased system reliability and improved system performance.

3. IMPORTANT DEFINATIONS • According to the Electricity Act 2003, “Power trading is an activity in which the utility having surplus power transfers electricity to the utility having deficit of power, at some price (mostly Rs/Kwh)” • According to Section 2(Definitions), Sub-section 71 of the Act, "Trading‟ means purchase of electricity for resale thereof.

4. According to Section 12 (Authorized persons to transmit, supply, etc., electricity) of the Act, No person shall • Transmit electricity • Distribute electricity • Undertake trading in electricity, unless he is authorized to do so by a license issued under Section 14, or is exempt under Section 13 • According to Section 14 (Grant of license) of the Act, The appropriate commission may, on an application made to it under Section 15, grant a license • To transmit electricity as a transmission licensee; or • To distribute electricity as a distribution licensee; or • To undertake trading in electricity as an electricity trader, in any area as may be specified in the license. In this regard, CERC has given license to 43 no of entities till date for trading in electricity

5. POWER TRADING MECHANISM • Long-term Power Purchase Agreements Power from various generating stations is allocated to State Electricity Boards (SEBs) and distribution companies (Discoms) at the price determined on the basis of historical cost based tariff principles notified by the regulatory commission or as per the Power Purchase Agreement (PPA). The SEBs/Discoms, which have the obligation to provide electricity to their consumers, mainly rely on supplies from these long-term contracts. The annual transmission charges, which are determined after deducting adjustable revenue from short term customers, are shared by the long term customers. Generally for the last couple of years on an average 89% of electricity has been traded by long term power purchase agreements and 11% by short term trading. Short-Term Bilateral Contracts: Short-term contracts are mostly inter-state or inter-regional, requiring open access through the Central Transmission Utility (CTU) network and purchase and sale of electricity takes place mostly through traders, which have been granted license by the CERC.

6. TYPES OF TRANSACTIONS • “Bilateral transactions”means a transaction for exchange of energy (Mwh) between a specified buyer and a specified seller, Directly or through a trading licensee, or discovered at power exchange through anonymous bidding from a specified point of injection to a specified point of drawl for a fixed or varying quantum of power (MW) for a fixed or varying quantum of power for any time period during a month. • “Collective Transaction” means a set of transaction discovered in power exchange through anonymous, simultaneous competitive bidding by buyers and sellers.

7. THREE TYPES OF ELECTRICITY TRADING

8. SHORT-TERM BILATERAL CONTRACTS • Short-term contracts are mostly inter-state or inter-regional, requiring open access through the Central Transmission Utility (CTU) network and purchase and sale of electricity takes place mostly through the traders, which have been granted license by the CERC. • Bilateral Trading in Short term Transaction Market : As Power Market is expanding rapidly, more intermediaries are emerging out as a licensed trader. The benefit which the trader gets through intermediaries is that the search costs are reduced. They had not to spend money in finding customers; intermediaries match buyer and seller and act as a facilitator in concluding trading arrangements. Both types of arrangement serve as a symbol of mutual bargaining process where the actual price is not disclosed. In short term electricity market the bilateral trading take place through following methods • Through bilateral short term contracts between buyers and sellers • Un-Requisitioned Surplus of NTPC stations.

9. Bilateral Contracts between Buyers and Sellers: It is a back to back contract between a Specified buyer and a specified seller for a definite point of injection to definite point of withdrawal

10. POWER EXCHANGE (PX) • DEFINATION • Power exchange is a spot market mainly day ahead, like anyother market matches demand & supply for each time block, providing a public price Index.

11. PX- BILATERAL MARKETS • Rivals Competition between two types of markets • Complementary Competition limited to day-ahead Preference to OTC in longer time frame • Inter-dependent Prices on the PX & OTC must be very close else arbitrage occurs Hedging

12. PX CLEARING HOUSE • PX Clearing House is a subbordinate to Power exchange and acts as an intermediatary for transactions. It tracks all transactions under Power exchange. The primary role of PX Clearing house is to guarantee financial reliability to the participants. Participants are required to maintain margin accounts and Clearing House effectively hedges against credit risk.

13. ADVANTAGES OF POWER EXCHANGE • Promotes trade and competition • Reliable price discovery • PX recognizes value of the commodity (electricity) • Does not guarantee lower prices • Optimal utilization of sparse resources • Credit risks covered by the PX • Congestion Management • Facilitates trading of short term arising on account of uncertainty in demand forecasting

14. POWER EXCHANGE IN INDIA • Multiple Power Exchanges • Competition amongst Exchanges • Voluntary participation • Double sided bidding • Uniform pricing • Day-ahead exchange • Hourly bids • Congestion management by market splitting

15. INDIAN POWER MARKET DESIGN

16. SUCCESS FACTORS IN POWER MARKET • Open, free and competitive market • Demand –Supply optimization • Portfolio optimization • Continuous and hassle-free trading • Dealing with grid-constraint

17. BENEFITS OF POWER EXCHANGE 1.Creating Liquidity 2.Promoting Competition 3.Standardized Contracts 4.Unbiased 5.Creating a sustainable Market 6.Risk Management 7.National

18. ROLE OF PXIL, IEX, PTC IN POWER TRADING IN INDIA

19. PXIL • Power Exchange India Limited (PXIL) isIndia's first institutionally promoted Power Exchange that provides innovative and credible solutions to transform the Indian Power Markets. • A deep understanding of the local markets is matched by PXIL’s non-partisan, unbiased and often fearless functioning, at times even in the face of uncomfortable conclusions. • core values are – integrity, excellence, commitment and continued innovation. These are the bedrock on which the edifice of PXIL stands. • PXIL’s unique combination of local insights and global perspectives helps its stakeholders to make better informed business and investment decisions, improves the efficiency of the power markets, and helps shape policies and projects. • PXIL is India's first and only Quality Management System "ISO 9001:2008" certified Power Exchange in the country.

20. PROMOTERS OF PXIL • NSE- National Stock Exchange • NCDEX- National Commodity & Derrivative Exchange Ltd.

21. MAJOR PARTICIPANTS ON PXIL PLATFORM

23. FUTURE ASPECT OF PXIL • Positively affecting the policy and regulatory environment for sustainable development • Enhancing our product offerings A .Long tenure products B .Ancillary services C .Energy efficiency certificates D .Peaking products e. Capacity contracts • Building a national level clearing corporation • Bringing international standards to the national electricity market. • Extending our participants base • Reaching out to short term Open Access customers

24. INDIAN ENERGY EXCHANGE (IEX) • The Indian Energy Exchange (IEX) is an automated electronic trading exchange regulated by the Central Electricity Regulatory Commission (CERC). Since its development on June 9, 2008, IEX had recorded 37.4 million transactions, the same month that electricity prices on the exchange hit a record low 13 paisa/KWh. In November 2009, IEX won Best E-Enabled Customer Platform at the second annual India Power Awards for developing what was described as "a robust platform for energy trading. " IEX operates a day-ahead market based on closed auctions with double-sided bidding and uniform pricing; it has 259 registered clients and in 25 Indian states, 150 private generators and more than 100 industrial electricity consumer.

25. POWER TRADING CORPORATION OF INDIA LTD. (PTC) • Power Trading Corporation of India Ltd. (PTC), the leading provider of power trading services, in India is trading power on a sustained basis since June 2002 through purchase from surplus utilities and sales to deficit State Electricity Boards (SEBs) at an economical price, providing best value to both the buyers and sellers and ensuring that the resources are utilized optimally. • PTC is a ‘pure-play’ trading entity, and does not own any generating units or transmission facilities.PTC acts as a single-window service provider that manages both financial as well as operational risks for the buyer and seller entities in its trading transactions.

26. On the one hand timely payments are ensured to the sellers of power and on the other hand a definite quantum of power is delivered to the buyers of power in a reliable manner. For its services, PTC charges a predeterminedamount of transaction charges, worked on a per unit (KWh) basis or as a percentage of the cost of power. • The pricing and margin information is known to both the counterparties in a transparent manner. In some instances PTC has both bought and sold power from the same entity at different times of the day depending upon the load profile of the entity.

27. PTC catalyses the development of power projects by entering into multi-year contracts for future trading of power.These Power Purchase Agreements with PTC are being recognized by lenders as security for financial closure of power projects. Typically, the counterparty contracts for these projects or Power Sale Agreements are structured with multiple buyers, through which about 80% of the power generation from the project is tied up for long term sale, and 20% is kept as reserve for the short-term market. • PTC has been identified as the nodal agency for cross border trading with neighboring countries: Bhutan, Nepal and Bangladesh, which are rich in hydro power resources. Utilities in Bhutan account for the nearly 24% trading volumes from cross-border sources. Being the pioneer in trading in India, PTC sees a developmental role for itself to increase the depth and breadth of the market under new Electricity Act 2003. • PTC also views an opportunity in alliances with emerging entities for setting up their operations in the manner that the business is recognized globally. In future, it intends to set up an online trading platform similar to a power exchange.

28. CONTRACTS OF POWER TRADING

29. DERRIVATIVE INSTRUMENTS • A derivative is a financial instrument (contract) between two parties with opposite views on the market, who are willing to exchange certain risks. Many derivative instruments are used in electricity trading, but the most common ones applied to energy risk management strategies are future, forward and option contracts. In some instances, these financial contracts can be used to accomplish what might be termed as virtual divesture.

30. TYPES OF DERRIVATIVE MEASURES TO HEDGE PX RISKS 1.Future Contracts. 2.Forward Contracts. 3.Contract For Differences (CfD’s). 4.Option Contracts.

31. FUTURE CONTRACTS • Future contracts include an obligation to buy or sell aspecified quantity of an asset at a certain future time for acertain price. The futures are standardized contracts which aretraded on and cleared by an exchange and the exchange couldguarantee that the contract would be honored. Note,however, that the only point of negotiation is the price. Allother terms and conditions are pre-specified, thereby making ita standardized contract.The main justification of futures contract is that it permitsspecialization between two elements of the economic process:the function of holding commodities and the function ofbearing the risk of price changes.The seller of a futurescontract on a commodity does not normally intend to deliverthe actual commodity nor does the buyer intend to acceptdelivery; each will, at some time prior to delivery specified inthe contract, cancel out obligation by an offsetting purchase or sell.

32. FORWARD CONTRACTS • Forward contract are in some aspects similar to futurecontracts. They include an obligation to buy or sell a specifiedquantity of an asset at a certain future time for a certain price.Forward contracts are traded bilaterally or over the counterbetween two financial institutions or between a financialinstitution and one of its corporate clients and the contractedparties usually customize the contract in order to make it fittheir needs.Usually, in future contracts, there is a range of possibledelivery date. Whereas forward contracts have a specificexpiration at which the asset is delivered and payment is made. The buyer of contract is called long whose purchaseobligates him to accept delivery unless he liquidates hiscontract with an offsetting sale. The seller of the contract iscalled short.

33. CONTRACT FOR DIFFERENCE • CfDs, which are mechanisms to stabilize the power costs toconsumers and revenues to generators, is one form of forwardcontract. These contracts are suggested due to the fact that thespot price set by PoolCo fluctuates over a wide range anddifficult to forecast over a long periods.A CfD can be either one way or two-way. A two-wayCfD is similar to financial future contract and is defined interms of a strike price (Rs./MWh), and a quantity (MWh). It is when spot price is above the strike price, theseller pays buyer an amount equal to difference between the spot price and strike price and when the spot price is below thestrike price, buyer pays the seller an amount equal to thedifference between strike price and spot price. Thus bothparties have hedged their exposure to spot price.

35. A one way CfD is similar to financial option contract andalso include an option fee in addition to strike price andcontract quantity. Under one way contract, differencepayments are made only if spot price rise above the strikeprice.

36. OPTIONS CONTRACT • An option contract includes a right (not obligation) to buyor sell a specified quantity of an asset at a certain future timefor a certain price. In case of futures/forwards, contract iseither held for delivery or liquidity, but option contracts may be held for liquidity, delivery or expire worthlessly. To enter an option contract, the buyer pays a premium to theseller of options, while in futures and forwards, the buyer doesnot have to pay any charges. A call option gives the holder theright to purchase the underlying asset at some future date, anda put option gives the holder the right to sell the underlyingasset at some future date.

37. REFERNCE • www.srldc.org/var/ftp/.../Training_Power_Exchanges_18-May-2011.ppt • http://www.pmintpc.com/interface/research_activities_published_paper_ICPS04.pdf

38. THANK YOU BY M V S SAI HEMANT BBA FOREIGN TRADE II YR 4TH SEMESTER