At a time Indian Energy Exchange (IEX), India’s first power exchange, is building up trading volumes, the proposed price cap of Rs 5 per unit on short-term trades will hit volumes and price discovery. The cap has been proposed by the power regulator.
With an overwhelming majority of trade at the exchange happening at above Rs 5 per unit, IEX will have to resort to “rationing” if the price cap is enforced. It will also incentivise states to overdraw from the grid, the penalty for which is only Rs 10 per unit.
“The price cap will devastate the exchange completely,” said a senior IEX official.
In a bid to “prevent profiteering at the cost of ultimate consumers of power”, the central power regulator has proposed a cap of Rs 5 and Rs 6 per unit on short-term and inter-state trades, respectively. The move has been criticised by various quarters of the power trading industry.
“IEX is a platform for short-term trading. No buyer or seller will come to us if the price cap goes through. Even if they come, they would like to trade at near the price cap of Rs 5. This will kill the price discovery mechanism,” the IEX official added. He said the cap would also lead to a significant decline in overall capacity addition as no merchant generator would like such a heavily-controlled market.
Merchant power plants are set up exclusively for trading and don’t enter into long-term power purchase agreements.
POWERS APPORTION:
If the price cap is implemented, “we will have to apportion power trading at the exchange. But let’s see, we have filed our response to the CERC,” said a top IEX official. Apportioning of trading volumes means uniform distribution of available power among buyers and sellers. This will lead to lesser supply to individual buyers due to shortage resulting from a reduction in volumes.
The CERC, which recently invited comments on the proposal, held a final hearing on the paper on September 29. Asked about the impact of the price cap on the exchange’s functioning, a senior official of the regulator said, “They (IEX) can choose to ration their trade. Their software allows them to do so.”
Rationing means the exchange will need to optimise price levels according to the volumes of trade being carried out.
Even India’s largest power trading firm, PTC India Ltd, has expressed concern over the impact the price cap will have on market forces.
“This cap will definitely reduce trading volumes at the exchange,” said Tantra Narayan Thakur, chairman and managing director, PTC.
Reduction in volumes, however, is not the only problem that may arise in the kind of regulated market the proposal will give rise to.
“Even banks will not finance such projects because if the trading becomes too regulated, the profitability and the ability of the producers to return the money will be jeopardised,” said the same IEX official.
“The cap, if it gets cleared, will mean that more and more people will resort to ways to bypass the exchange. This will lead to all the problems that erupt in an unregulated market,” said a senior analyst from an accounting and consultancy firm.
The range of prices at which trading has occurred since IEX was started three months ago has been Rs 0.99- 9. The price cap will mean that the players who want to trade between the range of Rs 5-9 will turn away and start generating revenues through unscheduled interchange (UI).
“When the market clearing price (MCP) becomes inferior than the UI rate, people will turn to underdrawing from the grid and earn from the UI rate rather than sell the power at the capped rate,” said a senior official from NTPC Vidyut Vyapar Nigam Ltd (NVVN), which accounts for about 22 per cent of the total trading market in India.
Unscheduled interchange includes all transactions among utilities or companies which are accounted for by procuring marginal power from a surplus source to match the demand at a given point of time. There are, however, separate charges for UI transactions for separate frequency levels in the grid. In a market environment where trading is capped, UI acts as a mechanism to bypass the exchange.
“If the cap has to be introduced, the UI charges should also be reduced accordingly,” the NVVN official added.
All this comes at a time when the energy exchange has been struggling to increase its trading volumes since its inception three months back. The exchange has traded a total of about 530 million units of power in the last quarter. Thus is only 7 per cent of the total 7226.7 million units traded in the corresponding quarter last year.
