Recent Trends in Power Trading & Power Market Development Rakesh Kumar PTC India Ltd.

1. Recent Trends in Power Trading & Power Market Development Rakesh Kumar PTC India Ltd. Power Summit 2008, Kathmandu 24 September 2008

2. Indian Power Sector : Key Statistics • Indian power sector is the third largest in Asia after 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 2,429 kWh.

3. An Overview of Indian Power Sector (1) • Coal-dominated fuel mix: • Coal : 53% • Hydro : 25% • Gas : 10% • Renewable : 8% • Nuclear : 3% • Oil : 1% • Share of hydro declining in the generation mix • Unmet planned targets in generation capacity addition • In last 3 Plan periods, target versus achievement ~ 50% • 11th Plan (2007-2012) Target: 78577 MW

4. An Overview of Indian Power Sector (2) • 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 regional cooperation - for energy security

5. Scene prior to introduction of power market concept (1) • Monopoly Suppliers (SEBs, Private Licensees) • Generators (CGSs, IPPs and SEBs) with capacity fully tied up • Each SEB had an allocated share in a Central/ Jointly owned station • Price setting by Central/ State Governments – SEBs hardly having any say • Entire sector developed on fixed rate return • Interplay of market forces remained non-existent • Utilities would back-down in case of low demand and resort to load shedding in case of excess demand • Power as a resource for earning revenue did not exist in this cost based regime

6. Scene prior to introduction of power marketconcept (2) • Prior to power trading as a business concept: power exchanges between the States/vertically integrated utilities were characterized by: • Small , Intermittent volumes • Mostly in the nature of emergency support • Without any commercial arrangements • Non-payment or payment delays with resultant disputes • The exchanges were further limited due to lack of transmission inter-connections • Sustained shortages, both in energy and peak demand, discouraged initiatives • Skepticism about success of trading was widespread

7. Genesis of power trading in India • PTC was formed in 1999 as a Government of India initiative for development of power market and incentivising market based investments to the Power Sector, specially from the private sector: • Pioneer Role : Initiated development of short term power market and introduced innovative products for customers • Efforts lead to beginning of sustained trading during 2000-01 (1.6 Billion units ) and also optimum utilization of existing resources • Exponential growth established the viability of trading as a business concept • Facilitate development of Power Projects particularly through private investment • Promote Power Trading to optimally utilize the existing resources • Develop power market for market based investments into the Indian Power Sector • Promote exchange of power with neighbouring countries

8. Introduction of New Products • Short & Medium Term transactions for peak/off-peak load balancing: different products brought in the market • Duration of Transactions (Few hours to 3 years) • Hours of Supply • Round the Clock • Evening Peak / Morning Peak • Night Off Peak / After Noon Off Peak • “As and When Available” Power for balancing Scheduled Interchanges • “Weekend / Holiday Power” • Banking of Power Continuous development of new products as per market requirements

9. PTC India – Key achievements • Established the viability of concept • Power market can play key role in growth of sector • Credible intermediary • Payment Security Mechanism • Weekly billing to reduce credit risks • Right to divert in case of default • Relationship of trust, transparency • Comfort to developer of power projects –by addressing market risks • Comfort to lender – by addressing credit risks • A catalyst for private investment in the sector

10. Generation Transmission Distribution Emerging Industry Structure GENCO GENCO GENCO TRADER OPEN ACCESS : Transmission DISCOM DISCOM DISCOM OPEN ACCESS : Distribution TRADER Customer Customer Customer

11. EA 2003 and enabling provisions on Power Market • Electricity Act 2003 • The intent and object of the EA 2003 is to develop power market through increased competition, more players and protect consumer interests • Development of Power Market – EA 2003, Section 66, “The Appropriate Commission shall endeavor to promote the development of power market…”,guided by the National Electricity Policy • Suitable safeguards to prevent adverse effect on competition • Recognized Trading as a distinct activity • Definition under section(2) (47): “Purchase of electricity for resale thereof” • Adequate and progressive provisions governing open access both : • to transmission networks (inter-state and intra-state) and • to distribution networks

12. National Electricity Policy on Power Market • National Electricity Policy 2005 – Para 5.7 “ To promote market development, 15% of the new generating capacities, be sold outside long term PPAs”. -As the power markets develop, it would be feasible to finance projects withcompetitive generation costs outside the long term PPAs….this will increase the depth of power markets….and in long run would lead to reduction in tariff” • Ministry of Power A progressive ‘ Merchant Power Policy’ with a view to add 15,000 MW capacity by 2011-12

13. Power Trading Scenario In India • Inter-state trading licenses (25 Years validity) in the purview of CERC • Twenty Six (26) Trading licenses issued by CERC • Volume of bilateral exchanges is still low (about 2.5% to 3% of energy generation) • Total short term market approximately 21 billion units* in 2007-08 * Includes cross- border

14. Key Players and Market Share (2007-08)

15. Benefits of Trading (1) 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 Trading results in optimization of resource utilization

16. Benefits of Trading (2) • The short term market has created “value” for power. There is a distinct shift towards higher revenue realization Power as a resource for earning revenue did not exist

17. Benefits of Trading (3) • Encouraged IPPs to invest in generating assets- spurt in investment based on competitive tariff due 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 for Capacity addition • Jharkhand 9,110 MW • Chhattisgarh 30,000 MW • Orissa 17,000 MW • Tamil Nadu 10,000 MW A paradigm shift fromCost plus return regime to “market determined returns”

18. Bilateral Electricity Trading with Bhutan Salient Features: • Nodal agency for exchange of power with Bhutan • PTC entered into long term power purchase agreement with Department of Energy, Bhutan • PTC purchasing surplus power on long term basis from following three projects in Bhutan: • Chhukha HEP (336 MW) • Kurichhu HEP (60 MW) • Tala HEP (1020 MW) • Run-of –the River Projects • 4 Hours peaking

19. Indo-Bhutan Power Exchange

20. Indo- Nepal Power Exchange • PTC - an active member of Indo-Nepal Power Exchange Committee • Pursuing opportunities for short term and long term trade in electricity for mutual benefits • Acting as facilitator for transmission inter-connection between the two countries- Investment in transmission capacity • Arranged 25 MW RTC power to NEA • Initialed PPA with SMEC West Seti for purchase of 750 MW power and MoU with Braspower for purchase of 309 MW power from Arun III HEP • Proposing to facilitate formation and partner in a company in Nepal for accelerating hydro power development.

21. West Seti Project- Salient Features • West Seti HEP of 750 MW (5 Units of 150 MW) is a reservoir type hydro project located in western part of Nepal • Being developed by SMEC West Seti Hydroelectric Power Corporation Ltd. as an Export Project- financial closure expected shortly • To generate average energy of 3300 GWh per annum • Full off-take by PTC • Reservoir Capacity –Equivalent to one full month generation-which could provide peaking power for about 8 Hrs at full capacity round the year Market values such power highly due to peaking support and flexibility !

22. Power Market –Facilitating Private Investments • The market determined prices in the short term market has encouraged IPPS and merchant generators to look at the sector with renewed vigour and as an investment destination • An evidence of this is that PTC has entered into PPAs to procure long term power with IPPS for more than 10,000 MW and / MoUs for around 30,000 MW • Power market has in fact become a catalyst for private investment in power sector • 75,000 MW under development by IPPs without any Government support Rs. 40,000 to Rs. 45,000 Crores investment already committed

23. Power Market: Salient Features • The wholesale market for electricity in India is completely voluntary by design - that none of the market participants are obliged to operate through a restricted 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 frequency to float within a range, providing tremendous flexibility to market participants. • Further, the rules regarding standards of supply are more liberal, permitting greater flexibility to utilities on demand side response.

24. Current Status of Power Market • A fledgling, nascent market • Limited growth of volumes of short term traded market due to • Overall deficit scenario • Limited number of active players and resultant liquidity crunch • Transmission constraints/congestion • Rising cost of traded power: (The average cost Rs. 4.50/kWh in 2007-08) • Due to overall shortage situation (widening demand-supply gap) • Lack of capacity additions • Linkage with UI rates and • Rising fuel prices

25. Power Exchange : Some Interesting Trends • IEX commenced operation with effect from 28th June, 2008 • The data up to 20th August, 2008 reflects that the average purchase bids received (in MUs) are about four times the average sale bids received (in MUs) • Even more interesting is that whatever is on offer by the sellers at perceived high prices are not being accepted by the buyers and less than 50% sales bid has actually been cleared by the market at market clearing price. • This data, interalia, establishes without doubt that the buyers are exercising their choice to procure prudently, keeping in mind “affordability” and “prudence-checks” to voluntarily not off-take power from sellers what they perceive as high cost. • Integrated Energy Policy:

26. Key Challenges • Market depth to be increased – more players, regional participation • Open Access Implementation • New Segment of prospective participants  Industry SEZs  HT consumers Group Captives Merchant generators • Sufficient transmission capacities required for a vibrant power market • Government to initially support through ‘viability gap funding’

27. Power Market Development – Next Steps • Main thrust of the Electricity Act 2003 is competition, and power market development- it has many enabling provisions. Strict Implementation of EA 2003 enabling provisions is essential • Efforts are on to further deepen the market by introducing new trading products, easing open access and trade through Power Exchange • 1st National Level Power Exchange in India i.e., Indian Energy Exchange (IEX) has become operational since June 2008 • Power Exchange has started giving transparent signals on: • Price • Demand • Liquidity • New Products on anvil – week ahead, fortnight- ahead, month-ahead, year ahead etc • Regional Energy Cooperation

28. Integrated Energy Policy Projections India – Installed Capacity Generation Mix 2031-32 (8% GDP )

29. Window of Opportunities • Nepal is rich in hydro potential • > 43000 MW techno-economic • Indian Power Market is a voluntary market – tariff competitiveness is key • Nepal Power Projects, due to moderate transmission distance involved up to load centers could be competitive • Integrated Energy Policy of India encourages hydro power from Nepal • A huge market next door, waiting to be tapped!

30. Power Market –Ripple Effect Power trading share is 2.5% of India’s total energy generated – but its indirect impact on the power sector is several times bigger Visit us at <www.ptcindia.com>