Bright spot

There is no better way to discover the ‘true' price of a commodity than having a platform that brings all buyers and sellers, while simultaneously ensuring their anonymity. Such an impersonal mechanism minimises, even if it doesn't eliminate, the scope for collusive price setting by big buyers or sellers. Prices are, then, determined by the ‘pure' forces of supply and demand. It is heartening to see this beginning to happen in the electricity sector, where a market for short-term contracts (technically for less than one year, as against power purchase agreements that are for up to 25 years) has already developed. The short-term power market currently accounts for a tenth of India's total electricity generation. But what is significant is that even within this short-term market, there is a steady rise in the share of transactions being put through the two operational power exchanges (IEX and PXIL) – from hardly 7.9 per cent in 2008-09 to over 19 per cent in 2010-11. The last fiscal saw 15.52 billion units routed through the two exchanges, which, at an average price of Rs 3.47 a unit, was worth about Rs 5,400 crore. This was more than the 10.25 billion units that distribution utilities bought and sold through direct negotiations. While the biggest chunk of the market is still controlled by PTC and other power traders, their share has fallen from nearly two-thirds to roughly a third in the last three years.

What this shows is a trend, where consumers are increasingly opting for exchange-traded deals over the less transparent so-called over-the-counter trades, struck bilaterally between utilities or brokered through traders. For industrial buyers and state utilities, the main attraction is the lower prices discovered at the exchanges: In 2010-11, these averaged Rs 3.47, as compared with Rs 4.79 arrived at through direct negotiations. For sellers too, the exchanges provide payment security by being the counter-party for all trades, besides offering a market window for their surplus power. That matters particularly for private developers, as many of them are setting up merchant capacities without any firm purchase agreements. All this has facilitated the emergence of a genuine nationwide electricity spot market.

The other point worth noting about the power exchanges is that the 800-odd participants are largely industry stakeholders, whether electricity generators, utilities or industrial buyers. This is unlike in the other commodity exchanges, where the volumes are driven not by primary producers, processors or traders, but by speculators with no underlying interest in the product. Take guar-seed, where the country's entire annual output gets traded in hardly three days! In the power exchanges, the trades are limited to only the day-ahead or week-ahead forward contracts, with the responsibility for delivery and drawal of the contracted quantities lying with the bidders themselves. The Government may well restrict it to just that now and wait for the market to mature fully before considering any plunge into full-fledged futures trading.