One critical tool to reduce prices of electricity by promoting competition was when CERC notified the power market regulations in 2010 providing for a legal and regulatory framework for the setting up power exchanges in India.
Since then, more than two power exchanges have been established for price discovery to facilitate market for consumers to choose their source of supply.
In 2021, the power market regulations were amended and a concept of “market coupling” was introduced. This is a process whereby collected bids from all the power exchanges are matched, after considering all bid types, to discover the uniform market clearing price for the day ahead market or real time market or any other market as notified by the CERC, subject to market splitting.
The amended Regulations 2021 define “marketing coupling operator” as an entity notified by the CERC for operation and management of market coupling. Practically the market coupling operator will replace the power exchanges who will undertake the price discovery as and when notified by the CERC for day-ahead contracts and real time contracts.
The argument for “Market Coupling” is to apparently (1) determine uniform settlement price/single price for electricity derivatives; (2) improve the transmission corridor management and (3) maximise social welfare. Recently the Power Ministry asked the CERC to go ahead with market coupling in the context of multiple power exchanges.
Diminishing power exchanges
While one could argue that market coupling would diminish the objective of the power exchange as its role will be reduced to just collecting bids and transferring them to the market coupling operator, the issues highlighted by the CERC and other market experts require an examination.
The notion of single price of electricity in all the exchanges would go against the mandate of competition — one of the fundamental cornerstones of the Electricity Act, 2003. Not even in the bilateral market has one “ceiling of tariff” for retail sale of electricity been notified although, Section 61(1)(d) proviso makes an enabler for this. The arbitrage opportunities in the market will ensure that the prices will converge across different markets.
That the financial product market in electricity requires one uniform price is the second misconception since a uniform clearing price is neither a prerequisite for the launch of a financial product/derivative nor should be a hindrance for the commodity exchanges to choose the reference price for settlement of a financial product.
One cannot agree that all the power exchanges holding a meagre 5 per cent share of the entire electricity market in the country could influence better transmission infrastructure utilisation with the introduction of a market coupling operator.
Moreover, no issue has been identified for allocation of transmission corridor or bottlenecks being faced. It is unlikely that coupling of exchanges will lead to any better utilisation of the transmission infrastructure. With only 5 per cent of the overall volume and majority of transactions taking place in one exchange there cannot be any improvement in social welfare.
The downside
On the contrary, benefits of innovation, ease of transaction, technology solutions, dissemination of information, analytical tools, high quality service, will all be lost, if coupling of exchanges is centralised in one body.
The rationale for implementing market coupling is unclear in the Indian context because market coupling means merging of bids which typically occur across various countries and regions where distribution of power across borders is complex due to different types of production, barring demands and bottlenecks on cross borders cables. Coupling was done across power exchanges in different geographies in Europe.
Once a market coupling operator comes into play, and with clearing and settlement functions transferred to clearing corporation, power exchanges will lose all the institutional capacity with reference to their key offerings i.e., price discovery and financial settlement. This will significantly affect their business and, will surely raise issues of violation of Article 19(1)(g) as well as Article 14 of the Constitution.
The big question now will be whether this move by the Ministry to make inroads into the decision-making process of the CERC would further affect the investment climate. The other issue is the role of the government and the power of the regulators to do this. Can the regulator of the grid be the market provider without there being a conflict of interest?
To sum up, the proposal to introduce market coupling is a non-starter. It will not bring any benefit to the consumers or the market while requiring significant structural changes. Moreover, this will make for new entrants in the power exchange business unattractive.
Deo is former Chairman CERC; and Maitra is an Independent Counsel and power sector regulatory expert