Power Exchange Operation ERLDC, POSOCO

1. Power Exchange OperationERLDC, POSOCO ERLDC: POSOCO

2. Contents • Overview – • Evolution of Power Market • Fundamentals: Review • Power Exchange Concept • Implementation in India • Congestion Management • Experience Gained • Future Posibilities ERLDC: POSOCO

3. Transition from one voltage level to the other • The next voltage level was achieved after 15 years. • Technologically there was not much of a change in raising the voltage from 132 KV to 220 KV. • Change from 220 KV level to 400 KV level required adoption of new techniques.

4. Introduction • At the time of Independence power systems in the country were essentially isolated systems developed in and around urban and industrial areas. • The highest transmission voltage at the time was 132 KV. • The Electricity (Supply) Act, 1948 was enacted and CEA was formed for coordinated development of Power Sector State Electricity Boards (SEBs) were formed for development of generation, transmission, distribution and utilization of Electricity in their respective States and requirement of integration of the state grids felt for emergency assistance. Till such time the entire transmission was in HVAC at 132 KV.

5. Organisational setup of power sector • In 1964, for the purpose of integration of State Grid systems the country was demarcated into five Regions viz. the Eastern Region, the Northeastern Region, the Northern Region, the Western Region and the Southern Region • The Regional Electricity Boards were established in each of the regions for facilitating integrated operation of state systems • Inter state connections were aided by central government as centrally sponsored schemes for emergency assistance between the states

6. Regional grid formation • In early seventies power shortage started in various parts of the country. • In 1975, Central Sector generation utilities viz. NHPC and NTPC were created to augment generating capacity & Large capacity units planned to be added. • These companies were also mandated to provide transmission for their generation. • For movement of such large block of power 400 KV lines found optimal and for sustenance of bigger generators integration of state grids required to enhance system inertia. • Regional grids were formed with 400 KV transmission as back bone

7. POWERGRID formed To accelerate development • To give thrust to implementation of transmission system associated with Central generating stations and intra-regional transmission. • Inter-regional links were also planned and developed to facilitate exchange among the various regions for emergency assistance and transfer of operational surplus between the regions.

8. HVDC B/B INTRODUCED To facilitate inter-regional exchanges between asynchronously operating regional grids HVDC back-to-back links were developed. • 500 MW link between Northern and Western Region at Vindhyachal. • 1000 MW Western and Southern Region link at Bhadravati. • 2x500 MW between Eastern and Southern Region link at Gazuwaka. • 500 MW between Eastern and Northern Region link at Pusauli.

9. Landmark Events • 1948 ES Act • 1950-60 Establishment of state Grid system • 1962 First 220kV Voltage level • 1964 Constitution of Regional Electricity Boards • 1965-73 Formation of Regional Grids for integrated operation • 1975 Central PSUs in generation and transmission • 1977 First 400kV Voltage in state sector • 1980-88 Growth of regional grids-400kV back bone network • 1989 HVDC Back to Back for interregional controlled transfers • 1989 Formation of POWERGRID Corporation • 1990 First HVDC bi-pole Transmission line transfer within region

10. Landmark Events • 1990 Generation of electricity opened up for private sector • 1991 Synchronous operation of ER and NER Grids • 1998 Electricity Regulatory Commissions Act • 1998 765kV initially charged at 400kV • 2002 Inter regional HVDC Transmission system • 2002 Goal set for All India National Power Grid • 2003 EA 2003- Balancing and short term markets • 2003 Synchronous operation of Western with Easter and North Eastern Grid- Central Grid • 2005-06 National Electricity Plan • 2006 Synchronous operation of Northern , Western , Eastern and North Eastern Grid- first phase of National Grid Complete- The ‘NEW’ Grid • 2008 Power exchange( day ahead market)

11. Agenda • Competitive Power Markets • Evolution of liberalized power markets • Developments in the Indian context • Need for Competition • Development of Markets and Marketplaces • Development of Power Exchange in India • Way Ahead

12. Evolution of Liberalized Power Market • Vertically integrated monopolies used to supply electricity until 1980s, worldwide (deregulation of transportation / financial services / wholesale market for Natural gases). • De-regulation and unbundling into Generation, Transmission, Distribution, System Operation, PX (Pools) resulted in enormous efficiency gain & price reduction of electricity. • Liberalization of Electricity Markets • 1st serious attempt to form liberalized electricity market: Chile, 1982 • Followed by England and Wales in 1990 and Nordic Market (now Nordpool) in 1991 • Australia, New Zealand, North America, California, Netherlands: Later half of 1990s • Electricity Act 2003 ushered in wide-scale changes in the sector ERLDC: POSOCO

13. Power Sector in India: Prior to EA 2003 Need Felt to Develop a Competitive Power Market • Vertically Integrated SEBs • Only SEBs entitled to buy or sell electricity • Generation and Supply largely owned by state or central sector companies • Inefficiencies leading to enormous losses in the system – debt restructuring • Private participation almost non-existent • Generation needed license • No significant participation in Transmission, distribution • Cost plus model followed by generators and distributors • Power traded through Long Term PPAs of 25 years or so • Complete absence of competition • Large captive capacities come up due to continued poor and inadequate supply ERLDC: POSOCO

14. What is a competitive market? • Large number of participants interact • Through free, fair and transparent marketplace • To provide appropriate goods and services • At fair prices • Determined by both long-term and short-term demand-supply considerations ERLDC: POSOCO

15. How Does Competition Help? • Allows multiple participants to compete with each other to • Provide High Quality • At Low Prices • Allows participants to manage their supply requirements by • Purchasing deficits from the market • Selling excess to the market • Therefore, investments on unneeded capacities is not wasted • Allows participants to manage the cost of supply • Purchasing lower cost supply from market and back-down expensive generation • Availability of an efficient market allows investors to set-up capacities • Part of long term capacity kept for sale as merchant capacity • Even long term capacity is easily set-up with the availability of a market as a back-up ERLDC: POSOCO

16. EA 2003 sets the stage for Competition Commits the Nation to creating A Competitive National Market in Electricity • Allows multiple generators to come up and compete • Allows larger consumers to choose supplier • Prescribes competitive procurement of power on long term • Aims to create a National Market via compulsory open access • Policy framework assures • Reasonable and stable returns on investments • Well defined Regulatory mechanisms • Makes governments responsible for providing Power on demand ERLDC: POSOCO

17. National Markets require: ERLDC: POSOCO

18. Creating Independent & Efficient Marketplaces Power Exchange is the Market Place for Competitive Power Market • Power Exchanges provide : • Common infrastructure for all market participants to buy & sell • Transparent & Fair price discovery through Anonymous bidding • Equity in terms of trades • Common risk and reward structure provide comfort • Similar to standardized bidding documents in long term space • Helps tide over poor credit quality of Discoms • Daily payment culture setting in • Bring efficiency in usage of Transmission capacity • Providing encouraging investment signals to investors in generation ERLDC: POSOCO

19. Agenda • Competitive Power Markets • Development of Power Exchange in India • Regulatory roadmap • Exchanges in India and Benefits • New product development • Way Ahead

20. Regulatory Framework for Power Exchange In transition towards a competitive market structure ERLDC: POSOCO

21. Load Curve and Management of Demand Hours in 100 MW For illustrative purposes only BASE LOAD BASE LOAD Base Load – Managed through Long Term PPA’s Seasonal Variations – Managed through Short Term trades, by 1) Traders, 2) Bilateral Contracts or 3) Wheeling/Banking Arrangements Daily Variations – Managed through 1) Day ahead Power Exchange or 2) UI Balancing

22. INR/KWh Price Resources Commitments Imbalance MW Volume Metered generation Day-Ahead Schedule Day Ahead Contracts Day-ahead Spot Market Real Time Market Calculation of Imbalances MCP Day of Delivery Day of Delivery (minus ‘1’) • Final Day-Ahead Schedule includes PX transactions. • Deviations, linked to frequency of the Grid; - Balanced on a real-time basis - Penalties for over-drawal or under-supply - Benefits for under-drawal or over-supply • Double-sided closed bid Auction • Price / Volume Bids • Binding Contracts • Financial settlement based on Cleared Volume and Price The Day-Ahead-Market for Indian PXs has been fashioned on the NordPool Market

23. Product Development Life Cycle Market Maturity 1, 2, 3 Spot Market (DAM, Intraday, Contingency) 4 OTC through Exchanges 5 Forward Market (Week / Month Ahead) 6,7 Futures and Options 7 6 5 4 3 2 1 Time Market maturity depends on: a. Extent of liberalization of market b. Regulatory Support c. Participation by entities d. Liquidity of transactions Note: The time period varies from 2 to 8 years

24. Various Products

25. Longer Tenure Products – On Exchange • Longer tenure Products • Contracts directly between utilities or via traders • Contract structure continues to remain non-standardized • Risks have to be detailed for each transaction separately • Individual search has to be conducted for buyers / sellers • Information asymmetry among different entities causes huge price variations • Credit issues also create lack of liquidity and uncertainty of financial transaction • Single unit owners (like captives) have huge uncertainty in the absence of appropriate penalty and risk management structure • Longer tenure products available on the Exchange help by • Increasing information transparency by providing a central infrastructure • Exchange ensures payments for all transactions • Managing open access applications centrally through the Exchange

26. Agenda • Competitive Power Markets • Development of Power Exchange in India • Way Ahead • Experiences so far • Way Ahead

27. Experience so far - Policy & Regulatory Gap • Electricity Act is silent on Power market initiatives • “Section 66 - The Appropriate Commission shall endeavour to promote the development of a market (including trading) in power in such manner as may be specified and shall be guided by the National Electricity Policy referred to in section 3 in this regard” • National Electricity Policy makes a mere mention of it • 5.7 COMPETITION AIMED AT CONSUMER BENEFITS • 5.7.1 To promote market development, a part of new generating capacities, say 15% may be sold outside long-term PPAs…In the coming years, a significant portion of the installed capacity of new generating stations could participate in competitive power markets…:- • ...D. Development of power market would need to be undertaken by the Appropriate Commission in consultation with all concerned… • ...F. Enabling regulations for inter and intra State trading and also regulations on power exchange shall be notified by the appropriate Commissions within six months. • Need to define the development course to be adopted

28. PX is important part of competitive electricity market • PX promotes competition in generation that leads to improved efficiencies, increased supply & reduced price. • PX is an important mechanism to utilise transmission capacities between regions, thus promoting a better national & inter-regional utilization of sparse generation resources. • PX promotes Demand Side Response of price signals. Demand Side Response is essential in any competitive market & contribute in effect as an alternative to Generation Capacity. • PX provides financial security for long term investments in generation & transmission. Runs competitive auctions of electricity on non discreminatory basis. ERLDC: POSOCO

29. Benefits of PX in Indian Electricity Sector • Reduce Transmission Costs • Efficiency in Price Discovery • Optimize Generation Capacity Utilization • Optimize Transmission Capacity • Facilitate Sell from Captive Generators • Optimize Cost of Electricity Procurement • Facilitate Policy Objectives related to “Merchant Gen. Capacity” • Managing Counter Party Risk • Boost Investments ERLDC: POSOCO

30. Constituents of a Competitive Elec. Market A competitive electricity market generally consists of five elements working together for efficient operation of the market: • Government, Regulator – Enabling Framework • Network Owner, System Operators - Infrastructure • Power Exchange, Bilateral Market – Market Places • Generators, Consumers, Suppliers, Traders – Market Participants • Balance Responsible, Portfolio Managers – Service Providers ERLDC: POSOCO

31. Constituents of a Competitive Elec. Market • Government & Regulator – Govt. provides legal & policy framework for development of competitive electricity market. CERC responsible for regulation of inter-state entities & SERCs for intra-state entities. • Infrastructure Providers – Transmission Utilities – CTU owns & operates all inter-state lines & STU own & operates all intra-state transmission assets. System Operators – Responsible for Real time operation of power System ensuring security & stability of grid operation. • Power Exchange & Bilateral Market – Both the market co-exists & provides platform for trading. Price reference of bilateral market is from PX. ERLDC: POSOCO

32. Constituents of a Competitive Elec. Market • Market Participants – Generator, Consumer, Supplier & Trader • Generators – Operate both in wholesale market & PX. Generator includes ISGS, State Generators, IPP & Captive Generators • Consumers/End users – Large scale consumers may operate in wholesale market & PX • Suppliers – Normally serve end-users based on their own generation or power purchased in wholesale markets • Traders – Although all PX participants are trader in a sense, buying & selling energy, the term is used to classify entities without ownership/control of physical assets to back up their positions. The traders facilitates transactions between buyer & sellers and takes position in the market to arbitrage on price fluctuations. ERLDC: POSOCO

33. Constituents of a Competitive Elec. Market • Balance Responsible – RLDC’s are responsible for operating the inter-state balancing markets(UI Mechanism). Each of the states is a balance responsible entity. However on implementation of intra-state balancing market (intra-state ABT) each of entities become balance responsible entities as per the provision of Intra-State balancing market regulation. • Portfolio Managers – Service providers are participants who themselves do not have positions in the electricity market. These entities are “Portfolio Managers, are companies who provide trading services on behalf of their clients. This can include trading, electricity procurement, risk management, forecasting, profiling, settlement and invoice service. ERLDC: POSOCO

34. Fundamentals: Review

35. 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.

36. 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

37. 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

38. 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

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

40. Shift in equilibrium

41. Price elasticity (responsiveness) of demand %age Change in Quantity Demanded in response to a one percent change in price. More Elastic Elastic Perfectly Inelastic Less Elastic Perfectlyelastic

42. Power Exchanges: Concepts

43. Power Exchanges 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

44. Role of an Exchange • Standardized Specifications - Contract structure. Tool for system operator to obtain the real-time balance • Standard margining system • Eliminates credit rating(stakeholder’s ability to pay debt) • Risk Management in a volatile market • Robust Clearing & Settlement systems • counter party credit risk absorbed • Fair, Safe, Orderly market • Rigorous financial standards and surveillance procedures

45. Role of an Exchange • Price Transparency • Anonymous auction platform • Price discovery by matching of demand-supply • Long term price signals • Transparent real time, pan-geographic price dissemination • Benchmark Reference Price • Liquidity to Participants • Risk Management • Separation of Pricing Function • Neutral, Secure and Self Regulated Market

46. Bilateral Markets Bilateral: Cooperative Approach • Major Concerns – • Price Discovery • Price Discrimination • Liquidity • Transaction Costs Power Exchange: Non-Cooperative Approach

47. Exchange vs. OTC Contract

48. 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 (Practice of taking advantage of a price difference between two or more market)  • Hedging (Practice of taking a position in one market to offset and balance against the risk adopted by assuming a position in a contrary or opposing market or investment)

49. The PX Clearing House A clearing house is a financial institution that provides clearing & settlement services for financial and commodities derivatives and securities transactions. It stands between two clearing firms and reduces the risk of one (or more) clearing firm failing to honor its trade settlement obligations. • 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

50. 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