A recent study by Rocky Mountain Institute, an international clean energy think tank, analysed the potential of India’s proposed centralised electricity market in Maharashtra and Tamil Nadu and found increased prospects of financial savings for distribution companies.
The centralised electricity market concept, referred to as the Market-Based Economic Dispatch mechanism, proposes a centralised, national electricity trading market, under which all the participating electricity generators can pool their power under a single market. India currently operates under a decentralisled electricity market in which the electricity distribution companies have long-term Power Purchase Agreements with selected power generators from whom they purchase power at a majority of their power requirements at a fixed price.
Distribution companies are financially distressed and collectively owe more than Rs 1000 billion in debt, resulting in delayed payments to generators, inadequate investment in grid infrastructure and insufficient resources for effective operations, noted the study. “This contributes to the financial risk faced by renewable generators. A fiscally healthy distribution sector and robust renewable growth are vital for India to meet its rising electricity demand and nationally determined contributions targets,” the report said.
With the Market-Based Economic Dispatch mechanism, distribution companies have the advantage of a bigger pool of generators to source power for distribution, likely at a lower price owing to the competition. The Market-Based Economic Dispatch mechanism uses the Day-Ahead-Market method, in which generators and distribution companies trade electricity through auctions and bidding, a day ahead of the scheduling of electricity by the distribution companies for consumers.
Electricity cost savings
In its analysis of savings through Market-Based Economic Dispatch, Rocky Mountain Institute studied the possibility of cost savings for distribution companies when the surplus capacity of electricity production is reallocated under Market-Based Economic Dispatch.
It considered the daily generator-level data on the variable and fixed costs. The capacity of generation and actual generation between July 15 and August 15 of 2022 is considered peak demand season, and December 15 to January 15 is regarded as an off-peak demand season. It also determined the joint variable costs of the two states under the existing case when the actual generation takes place.
To find out the savings per day, the researchers found the difference in cost under the existing case and the price under a pooled case. “The empirical analysis utilises generator-level data on costs, declared capacity, and actual generation for plants for two historical periods representing peak and off-peak demand seasons. Our analysis reveals potential savings of Rs 1.5 crore to Rs 4 crore per day across peak and off-peak seasons or 2.8% to 7.0% annual savings…respectively,” the report said.
However, though the government has conducted some pilot projects and planned to implement Market Based Economic Dispatch in a phased manner from April 1, 2022, there are some logistical and other challenges, keeping it from taking off.
“Market transitions are not easy even in a developed economy. It is a gradual step and takes time and due deliberations. It took time to slowly transition into it, even in advance countries where it has been tried. The Indian power sector had legacy issues. Different states and distribution companies have different situations altogether. Some are cash-strapped and struggling. Replication of successful models of market transition from other countries as it is not rational as the geographies and challenges are different. It needs to be an inspiration, but India specific solutions to forward market transition are needed,” said Jagabanta Ningthoujam, principal (Power Sector) at Rocky Mountain Institute India.
Advantages and challenges
The Central Electricity Regulatory Commission, earlier in 2018, issued a discussion paper on the issue of Market-Based Economic Dispatch and sought views from different stakeholders. The Ministry of Power in 2021 also issued another framework for implementing the Market-Based Economic Dispatch market and batted for initiating the new national-level wholesale electricity market in a phased manner. Phase I, which was slated to start on April 1, 2022, was meant first to cover selected thermal power plants.
“Ministry of Power recognised the need for a consensual and phased approach in implementing Market-Based Economic Dispatch that will help participants, power exchanges and load despatch centres to adapt gradually to the new regime…The Ministry of Power noticed substantial alignment amongst all key stakeholders on a phased approach and the process to implement Phase 1 of Market-Based Economic Dispatch, starting with the mandatory participation of the Inter-State Generating Stations. Generation plants of others can also participate in Phase 1 voluntarily,” a statement from the power ministry said.
The Rocky Mountain Institute report claimed that the long Power Purchase Agreements of the distribution companies prevent them from getting the full benefits of the declining generation costs of renewables. These long Power Purchase Agreements, which are for around 25 years, could be more flexible, limit distribution companies to purchase low-cost power, and affect their financial viability as they often are forced with high fixed charge payments for inefficient plant capacity minimally used. The report claimed that inefficient power procurement usually raises the national average power purchase cost, increasing 13% between 2015-’16 and 2021-’22.
It also added that many renewable energy generators are also at financial risk as their power is often curtailed due to insufficient grid availability and other technical reasons. Under Market-Based Economic Dispatch these power generators will have more opportunity to sell.
Other experts claimed that implementing the new market regime is also mired with challenges to the distribution companies. Ann Josey from Prayas Group from Pune said that one of the significant impacts under such a system could be on the distribution companies too. Several distribution companies in India are financially strapped and suffer from several vulnerabilities.
“There are multiple risks with the proposal of mandating Market-Based Economic Dispatch. The need for upfront payment will strain distribution companies finances. As transmission charges are unaccounted in the price discovery, distribution companies may not have savings. The proposed mechanism assumes the distribution companies are adept traders which may not be the case. Pilots and studies to assess savings, risks are needed before this scheme is launched,” Josey told Mongabay-India.
The report recommended that for the success of Market-Based Economic Dispatch, the government needs to propose a robust transition plan giving details on the structures and responsibilities of the different stakeholders, make a public data portal to assess the wholesale electricity market operations, update the transmission planning process and develop a roadmap for the complementary wholesale market to increase the benefits under the Market-Based Economic Dispatch mechanism.
This article first appeared on Mongabay.