Case Study: Powering India
Renewable Type
Wind
Solar (Photo Voltaic) Solar Thermal Biomass
(Andhra Pradesh)2
Cogeneration (Andhra Pradesh)3
Small Hydro
Levelised Tariff (Rs/kWh)
5.63
18.44 13.45
4.15
4.93 3.90
CAPEX (Rs/MW)
5.15 17 13
4.5
4.45 7
term. They have also been buying long-term power from new IPP projects coming up, thereby assisting the financial closure of projects. From a regulatory initiatives perspective, the trading margin
regulation has been modified. There are no longer trading margin restrictions on long-term contracts and the margins allowed for short-term transactions have been increased to 7 paise/kWh for prices above Rs 3/kWh and is 4 paise/kWh for prices less than Rs 3/kWh. With the liberalisation of trading margins, it can be expected that electricity traders will bring more innovative products and execute structured deals for power sector participants (especially with no trading margin on long-term contracts) and be able to price the risk of contracts more appropriately.
Power Exchanges: It has been over two years since power
exchanges commenced operations. There are two Power Exchanges; Indian Energy Exchange Ltd. (IEX) based in New Delhi and the Power Exchange India Ltd. (PXIL) based in Mumbai. These are electronic exchanges and use double sided closed bid auctions for price discovery in day-ahead markets. In case of congestion in the transmission system, a market splitting mechanism is used. This discovers different prices in different regions based on demand and supply in the region and import/export capacity of the transmission system in the region. The exchanges have also helped in the creation of benchmark electricity prices in day-ahead markets and electronic price dissemination across the country. This has ‘democratised’ information and empowered participants across India by reducing information asymmetry among them. Power exchanges have also helped in lowering transaction costs. The exchanges have also attempted weekly and monthly physically delivered forward electricity contracts but, as yet, liquidity is yet to pick up in these types of contracts. However, multiple physical exchanges bring their own complexity, especially in allocation of the transmission corridors between them. It leads to the sub-optimal allocation of corridors reducing social welfare maximisation – the principle used in price discovery on the power exchange. The volume of electricity transacted through power exchanges was 5.79 BU in 2009. Transaction volumes doubled
worldPower 2010
ROE: 10, 11 yrs onwards
19%, 24% 19%, 24% 19%, 24%
19%, 24%
19%, 24% 19%, 24%
Note: 1,2,3 These tariffs vary by plant size and location. Details are available on CERC’s website. Useful
Life (yrs) 25 25 25
20
20 35
from 314 MU in Jan 09 to 640 MU in Dec 09. However, this is less than 1% of total power generated in India. It can be expected that liquidity will improve in day ahead and short-term markets as more merchant power plants come
online. The national electricity policy envisages up to 15% of new capacity to be earmarked for short-term markets. The regulatory initiative in the area of short-term markets
was the introduction of power market regulations in January 2010. The regulations define the market structure, types of markets, type of contracts, and type of participants. It defines the principles of the market and the market design for power exchanges. It also details the framework for the operation of power exchanges. They also set market oversight and surveillance procedures and reporting requirements for both power exchanges and electricity traders.
3. Renewable Market Renewable energy is being encouraged across the globe
and India is no exception. Under the National Action Plan on Climate Change, the Solar Mission envisages 20,000 MW by 2022. In the near-term by 2013 (Phase 1), 1,000 MW will be deployed and 10,000 MW will be added by 2017 (Phase 2). India, being largely a tropical country, has solar power for longer hours with great intensity, and hence solar is considered a key potential future energy source. Other renewable resources are also being promoted. CERC
recently published a renewable energy tariff and this provides an attractive Return on Equity for investments in renewable energy plants. A brief snapshot is given in the Table above. Alongside the tariff, a Renewable Energy Certificate
(REC) market is also being developed. This alternate market mechanism will be an option available to renewable generators other than accepting the preferential tariff set by the regulator and ready to take risks for a higher return. REC will also help states (buyers) which do not possess sufficient renewable resources to be able to meet their renewable energy procurement requirement (by law) from states endowed with sufficient renewable energy. There will be several institutions involved for the roll-out State agencies (State Load Despatch Centre) which will accredit generators and certify quantities of renewable power produced. The central agency (National Load Despatch Centre) will act as a depository for RECs (and extinguish these once transactions are executed) and power exchange where these REC will be transacted under a price
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