Power Exchange Operations

1. Power Exchange Operations S.C. Saxena National Load Despatch Center

2. Presentation Outline • Review of Fundamentals • Power Exchanges • Concepts • Implementation in India • Regulatory Framework • Procedures for Collective Transactions • Congestion Management • Market Splitting • Sharing of Available Margins amongst the Power Exchanges • Experience Gained in India • Trading of Renewable Energy Certificates in the Power Exchanges • Taking the Markets to the Next Level • Proposal For Evening Market • Sub-Hourly (15 – Minute) Market in Power Exchange • Recent International Experience

3. Review of Fundamentals

4. Market A mechanism through which buyers and sellers interact to determine prices and exchange goods and services Entire set of conditions surrounding production, transport and distribution of a product Size determined by geography, transport, costs, etc.

5. In a market everything has a price !!! • Price • is the value (not cost) of the good/service in terms of money • represents the terms on which voluntary exchange of goods & services takes place • Serves as signal to the producers and consumers

6. Demand Need + Purchasing power = Demand Law of downward–sloping demand When price of a commodity is raised, buyers tend to buy less of the commodity, other things remaining constant (e.g., purchasing power, related goods, preferences, environment, etc.) Price Quantity

7. Supply Curve The supply curve shows the relationship between its price and the amount of that commodity that producers are willing to produce and sell, other things held constant (e.g., cost of production, technological advancement, related goods, etc.) Price Quantity

8. Equilibrium Quantity demanded is equal to quantity supplied ! Surplus Shortage Price of commodity Quantity

9. Shift in equilibrium

10. Price elasticity of demand Change in Quantity Demanded in response to change in Price More Elastic Elastic Perfectly Inelastic Less elastic Perfectlyelastic

11. Power Exchanges: Concepts

12. Bilateral (OTC) Markets • Common price through a co-operative approach • Major Concerns – • Price Discovery • Price Discrimination • Liquidity • Transaction Costs

13. Power Exchanges - Definition • An electricity Power Exchange provides a spot market, mainly day-ahead, for electricity, which like any other market matches demand and supply for each time block, while providing a public price index

14. Power Exchange – Characteristics (1) • A Market Place • Voluntary or Mandatory • Anonymous auction platform • Neutral • Liquidity • A competitive wholesale spot trading arrangement • Energy Only Markets • Do not account for any technical constraints or capacity payments • Bids • Sale Bid – Quantum and Minimum price • Buy Bid – Quantum and Maximum price

15. Power Exchange – Characteristics (2) • Price Discovery • Common price achieved through non co-operative approach • Price Discovery by matching of demand-supply • Price signals • Benchmark reference price • Congestion Management • Implicit Auction • Market Splitting

16. Power Exchange – Characteristics (3) • Standardized specifications • Contract structure • Robust Clearing & Settlement systems • Counter party credit risk absorbed • Risk Management • Payment Security • Standard margining system • Eliminates credit rating • Fair, Safe, orderly market • Rigorous financial standards and surveillance procedures

17. Bilateral (OTC) Contract vs. Power Exchange

18. Interplay: PX – Bilateral Markets (OTC) • 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

19. The PX Clearing House • Subordinate to the PX • Intermediary for transactions • Tracks all transactions • Primary role • Guarantee financial reliability to the participants • Participants required to maintain margin accounts • Effectively hedges against credit risk

20. Advantages PX • Promotes trade and competition • Reliable price discovery • Reference for bilateral contracts • PX recognizes value of the commodity (electricity) • Does not guarantee lower prices • Optimal utilization of sparse resources • Generation • Transmission • Credit risks covered by the PX • Congestion Management • Facilitates trading of short term arising on account of uncertainty in demand forecasting

21. Auction Models PRICE PRICE Demand Supply Supply Estimated Demand MCP VOLUME MCV MCV VOLUME MCP = Market Clearing Price MCV = Market Clearing Volume One Side Auction Two Side Auction MCP

22. PRICE Purchase Sale MCP MCV Social Welfare Maximization Accepted Purchase Bids (>= MCP) (Consumers’ Discount) Accepted Sale Bids (<= MCP) (Generators’ Surplus)

23. Price Calculation Algorithm -Day ahead– Hourly Bids AGGREGATED PURCHASE BIDS AGGREGATEDSALE BIDS Market Clearing Price (MCP) : 270 p Market Clearing Volume (MCV): 600MW

24. Types of Bids • Single bids • Price – Quantity pairs, one for each hour • Block Bids • A Block bid is all or none type of a bid i.e. bid will get accepted by the system only if price and volume condition is getting satisfied. • Can cause unpredictable movements of prices and volumes System Operator Training

25. Power Exchange Implementation in India

26. The Milestones • July 2006 • Staff Paper by CERC • February 2007 • CERC Guidelines for establishment of Power Exchange • August 2007 • In principle approval to the first power exchange in the country • January 2008 • Revised Regulations for Open Access in Inter-state Transmission, Effective 1st April 2008 • June 2008 • Procedure for Scheduling of Collective Transactions by CTU • Commencement of operations • October 2008 • Second Exchange begins operations

27. Power Exchange in India – Salient Features • Multiple Power Exchanges • Competition amongst Exchanges • Voluntary participation • Double sided bidding • Uniform pricing • Day-ahead exchange • Hourly bids • Congestion management by market splitting

28. Regulatory Framework System Operator Training

29. Regulator’s Approach • CERC Guidelines for setting up of a Power Exchange: “The general approach of the Commission is to allow operational freedom to the PX within an overall framework. The regulation would be minimal and restricted to requirements essential for preventing derailment/accidents and collusion. Private entrepreneurship would be allowed to play its role. The Commission shall keep away from governance of PX, which would be required to add value and provide quality service to the customers” NLDC

30. CERC Power Market Regulations, 2010 (1) • Scope & Extent • OTC Markets • Power Exchange Market • Other Power Exchange Markets • Derivatives • Types of Contracts • Delivery based OTC Contracts • Financially settled electricity derivatives contracts transacted in OTC market • Delivery based contracts transacted on Exchange • REC Contracts • Capacity, Ancillary, Derivative based contracts (future) System Operator Training

31. CERC Power Market Regulations, 2010 (2) • Prior to grant of permission to Power Exchange, CERC may examine • Type of contract (day ahead, term ahead etc); • Price Discovery methodology and matching rules proposed; • Transaction period – When transaction shall commence and for what tenure transaction session shall continue before delivery commences; • Risk Management mechanism • Margining mechanism • Final Price Settlement mechanism • Delivery mechanism, delivery duration System Operator Training

32. CERC Power Market Regulations, 2010 (3) Objectives of the Power Exchange (Regulation 10) • Ensure fair, neutral, efficient and robust price discovery • Provide extensive and quick price dissemination • Design standardised contracts and work towards increasing liquidity in such contracts • Explanation: Liquidity is a measure of ease of entering or exiting into a transaction (generally large transaction) with minimal impact in the market price of the transacted contract. System Operator Training

33. CERC Power Market Regulations, 2010 (4) Principles of Price Discovery (Regulation 11) The economic principle of social welfare maximisation and to create buyer and seller surplus simultaneously during price discovery. The bidding mechanism shall be double sided closed bid auction on a day ahead basis. The price discovered for the unconstrained market shall be a uniform market clearing price for all buyers and sellers who are cleared In case of congestion in transmission corridor, market splitting mechanism shall be adopted. The delivery / drawl of power shall be considered at the regional periphery. System Operator Training

34. CERC Power Market Regulations, 2010 (5) • Other Provisions • Prudential Norms • Governance Issues • Ownership Patterns • Registration – Fees • Membership • Clearing House • Interface with System Operator System Operator Training

35. Open Access Regulations, 2008 • Earlier Regulations notified in February 2004 (amended in 2005) stand repealed • Covers Short Term Open Access Transactions only • Categories of Transactions • Bilateral • Collective Transactions discovered on a Power Exchange • Nodal Agency • Bilateral: RLDCs • Collective: NLDC

36. Open Access Regulations, 2008: Provisions For Collective Transactions • Transmission Charges • Shift from “Contract Path” to “Point of Connection” • Both buyers and sellers to pay • IR Links – no separate treatment • Transmission Losses • Applicable on both buyers and sellers • Disbursement of Transmission Charges • 25% retained by CTU • 75% to be credited to long-term customers

37. Open Access Regulations, 2008: Provisions For Collective Transactions • Thrust on Empowerment of SLDCs • SLDC Concurrence [Clause 8(2)] • NOC/Standing Clearance to be obtained by State Utilities/Intra-State Entities from the SLDC for trading through PX • SLDC to respond within 3 days • SLDCs may charge appropriate fee for such NOC/Standing Clearance (as per SERC or Rs. 5000 if not notified by SERC)

38. Procedures for Scheduling of Collective Transactions System Operator Training

39. Eligibility Conditions • Entities scheduled by RLDCs • Deemed Regional Entity • Entities whose metering and energy accounting done by RLDCs • Entities scheduled by SLDCs • SLDCs to assess TTC/ATC for their State system • Prior Consent from respective SLDCs • Standing Clearance / NOC • New Entities • To Satisfy conditions as laid down in IEGC • Obtain Prior Approval from RLDCs/SLDCs as per jurisdiction NLDC

40. Commercial Conditions (1) • Charges for Collective Transactions payable to SLDCs • Transmission Charges: As per SERC, if notified or else Rs. 80/MWh • Operating Charges: Rs. 2,000 per day for each point of transaction • Each point of injection and drawl to be counted separately by SLDCs • PX to settle SLDC charges directly with respective SLDC

41. Commercial Conditions (2) • Charges for Collective Transactions payable to NLDC • Application Fee • @ Rs. 5,000/-, payable by PX to NLDC at the time of application • Transmission Charges • Applicable for each point of injection and drawl • Charges for use of ISTS @ Rs. 100 per MWh • Operating Charges • @ Rs. 5,000/- per day per group involved • Buyers and Sellers in a State to be clubbed into separate groups • Each group to be counted as a single entity by NLDC • Payment by PX to NLDC • Transmission and Operating Charges: By next working day • Preferred Mode: Electronic Fund Transfer

42. Treatment Of Losses • Average transmission losses of the respective region to be applied, both on Buyers and Sellers • Sellers to inject extra power (MW) in addition to contracted power (Contracted Power + Losses) • Buyers to draw less power (MW) than contracted power (Contracted Power – Losses) • Applicable losses to be declared in advance • Intra-State losses to be taken care of by the respective SLDCs • Additional losses for wheeling, if necessary • To be notified in advance by NLDC • Applicable only for Injection NLDC

43. Real Time Congestion Management • Curtailment • By RLDCs at the periphery of Regional Entities • SLDCs to further incorporate this curtailment for State Utilities/Intra-State Entities • Settlement • Transmission Charges: Pro-rata refund by NLDC to PX • Operating Charges: Not to be revised • Direct settlement between PX and its participants

44. Information Exchange Power Exchange Constraints, if any Acceptance by NLDC Information exchanged over leased line between NLDC and PX Request for Scheduling Provisional Solution N L D C Over WAN Trades Schedules RLDCs Over Internet (RLDC Website) Schedules SLDCs Final Trade Results for State Utilities & Intra State Entities to be sent by PX directly to SLDCs

45. Congestion Management NLDC

46. Demarcation into Bid Areas NLDC

47. SR ER+NER WR NR SKEWED LOAD GENERATION BALANCE • Scenarios: • 4D • 3D + 1S • 2D + 2S • 1D + 3S (Congestion) • 4S

48. Congestion Management - Market Splitting Case – I : No Transmission Constraint Zone – A Load=100 MW Zone – B Gen=120 MW Case – II : Constraint = 40 MW • Solution: • Increase price in Zone A to reduce demand to 40 MW • Decrease price in Zone B to reduce supply to 40 MW MCP=125 Cost of Congestion: 2000 NLDC

49. Transmission Congestion Management: Methods • Pricing Based • Explicit Auction • Implicit Auction • Market Splitting • Remedial • Counter Trade • Re-dispatching NLDC

50. Congestion Management in Multi Exchange Scenario (1) • ISSUE • Sharing of available margins • Possible Methods • Priority Based Rules • Explicit Auction • Merging of Bids • Priority Based Rules • Lowest MCP • Highest MCV • Highest MCP X MCV • Maximization of Social Welfare, consumer surplus, etc. • May not lead to an overall economy NLDC