Centralised Market for Electricity

The Central government and the State governments have differing opinions with respect to introducing a new electricity market model named ‘Market Based Economic Approach (MBED)’.

What is the issue?

• Electricity distribution companies (Discoms) in India predominantly buy electricity from the wholesale power market under long-term (typically 25 years), medium-term (up to 5 years), and short-term (up to 1 year) contracts.
• A majority of their daily power demand is met through long-and-medium-term contracts, while the rest is met through bilateral transactions between Discoms via traders or power exchanges.
• Though a Discom buys capacity through contracts of varying durations, it schedules power supply only on a day-ahead basis.
• To balance possible mismatches between procurement and supply, the Discom either buys additional power from the market or other Discoms or sells or curtails the excess contracted capacity.

What is the problem currently?

• In the current mechanism, power generators (Gencos) supply power to the Discoms as per their contracts.
• The Discoms schedule power based on their demand estimate and the available capacity for each 15-minute time block for the day ahead. However, demand and supply can fluctuate unexpectedly and across time blocks.
• Each of the 70+ Discoms in the country schedule their required power with their respective contracted Gencos. However, gencos are not obligated to disclose the cost (specifically, the variable cost) of their scheduled generation to the system operator.
• Interestingly, though there may be a Genco offering its excess capacity at relatively low prices, this cheaper power may go underutilised as Discoms are unaware of this availability.
• Given the financial distress of Discoms, it is critical that we reduce such systemic inefficiencies.

What is ‘Market Based Economic Approach’?

• In 2018, the Central Electricity Regulatory Commission (CERC) issued a discussion paper on MBED, proposing redesign of the current mechanism in India.
• The paper proposes a day-ahead market where Discoms and Gencos can make demand and supply bids based on variable costs to a centralised platform mediated by a market operator (power exchange).
• Objective — To dispatch the power that costs the least first by giving Discoms the ability to source power from all Gencos, as long as grid security is maintained.

How will it work?

• The market operator will arrive at a market clearing price (MCP) by matching the last generators’ supply offer matched to meet the demand offers.
• The Discoms would have to procure the required electricity from the market operator at the MCP, which, in turn, would be paid to the Gencos supplying power.
• The settlement for fixed costs shall be outside the ambit of this market.
• Discoms shall pay the same to their contracted Gencos based on the latter’s availability.
• However, if the MCP is higher than the contracted price (variable cost) a Genco had agreed with a Discom, then the Genco will refund the excess to the Discom.
• This ensures that the Discom will not be forced to pay more for its contracted capacity.

Benefits –

• Reduced power purchase costs — With a centralised pool of generation and demand offers, Gencos will be forced to become more cost-efficient or shut down, thus lowering the overall variable cost of power in India.
• Greater renewable energy integration — With power being scheduled and dispatched over a larger balancing zone, renewable energy is expected to be curtailed at a lower rate.

Challenges –

• Discoms already facing a cash-flow deficit may face problems making upfront payments under this market mechanism unlike the existing mechanism of PPAs where payment is typically done 60-90 days after buying power.
• Fuel supply contracts (domestic linkage or import-based) that have been signed keeping long-term PPAs in mind would need to be aligned in view of the new market mechanism.
• There would arise the need for tight market surveillance and monitoring to ensure efficient price formation and effective competition.

The Centre v/s States debate –

• The Central government and the State governments have differing opinions in introducing a new electricity market model named ‘Market Based Economic Approach (MBED)’.
• The MBED model is seen as impinging on the relative autonomy of states in —
  • Managing their electricity sector, including their own generating stations, and
  • Making the Discoms (distribution companies that are mostly state-owned) entirely dependent on the centralised mandatory market pool requirements.
• There are concerns this could strip states of their freedom to decide their own electricity requirement while managing seasonal and local demand trends.
• The implementation of the first phase of MBED was earlier planned to start with effect from April 1, but was put off for later this year, with a date yet to be announced.