Centre, states tussle over a centralised market for electricity


A FRESH slugfest between the Centre and states is brewing in the country’s power sector, the trigger being a plan by the Union government to jettison the existing decentralised, voluntary pool-based electricity market in favour of a radically different mandatory pool model on a pan-India basis.

Called the Market-Based Economic Dispatch (MBED) mechanism, the Union Ministry of Power proposal envisages centralised scheduling for dispatching the entire annual electricity consumption of around 1,400 billion units. This will mark a clear shift from a decentralised model followed now, which has been buttressed by the Electricity Act 2003 and follow-on reforms.

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Centralised vs decentralised power model

The new model proposes a centralised scheduling of power dispatches, both inter-state and intra-state. This, experts say, will impinge on the relative autonomy of states in managing their electricity sector, including their own generating stations, and make the discoms entirely dependent on the centralised mechanism.

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. Experts said states are already discussing these aspects.

While the Union power ministry is pitching MBED as a way forward to deepen power markets in line with the Centre’s ‘One Nation, One Grid, One Frequency, One Price’ formula, there are concerns being flagged at the state level and by a range of sectoral experts The Indian Express spoke with. 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.

SL Rao, former Chairperson, Central Electricity Regulatory Commission, and Member, Advisory Board, Competition Commission of India, said the proposed MBED is “inconsistent with the constitutional provisions, existing legislative framework and market structure”, and could “end up creating more challenges than it resolves”. He said the proposal has implications from an overall grid management perspective, apart from the way in which it infringes on the autonomy of states.

The problem on the electricity distribution side (where there are questions regarding the viability of discoms) is what really needs to be tackled, Rao said. But on the generation side, the new proposal is violative of existing structures and mechanisms, he said, adding he expected to see a legal challenge coming in from the states if the Centre pushes ahead with it.

The Centre’s argument is that the current model of states doing scheduling is suboptimal. As part of this, an algorithm developed by the NLDC called the Security Constrained Economic Dispatch (SCED) is being cited as a solution, which is aimed at assisting regulators in making informed calls on scheduling decisions on a nationwide basis. A query sent to CERC Chairman PK Pujari did not elicit a response.

When reached for a comment, a senior government official involved in the exercise said the MBED is “in line with the Centre’s One Nation, One Grid, One Frequency, One Price framework”. “It will ensure that the cheapest electricity generating resources across the country are supplied to meet the overall system demand and will therefore be a win-win for both the distribution companies and the generators and result in savings for consumers,” the official said.

Power is in the Concurrent List of the Constitution, with the electricity grid being divided into state-wise autonomous control areas managed by the State Load Dispatch Centres (SLDCs), which in turn are supervised by Regional Load Dispatch Centres (RLDCs) and the National Load Dispatch Centre (NLDC). As things stand, each control area is responsible in real time for balancing its demand with generation resources.

The MBED model proposes to change this by putting in place a central market operator to dispatch the inter-state as well as intra-state generation plants. Also, there is an inference that the new model will narrow the multiple options currently available under the voluntary market design; with day-ahead contracts turning redundant and, from a state’s perspective, the discoms and SLDC needing to buy or sell power in the real-time market, even if it is for the sake of maintaining demand-supply balance in their control areas.

There are concerns that the new model could potentially clash with emerging market trends, given the increase in renewable energy in the overall generation mix and the increasing numbers of electric vehicles plugging into the grid – all of which necessitate greater decentralisation of markets and voluntary pools for efficient grid management and operations, an official with a regulatory background said.

India has a diversified electricity market ranging from long-term power purchase agreements (PPAs), cross border PPAs, short and medium term bilaterals, day-ahead power exchange, and a real-time online market. A major percentage of the installed power capacity –over 87 per cent – is tied up under long term PPAs of around 25 years. The remaining 13 per cent is transacted in the power markets, with nearly half of this over the power exchanges and the remaining through short-term and medium-term bilateral deals.

At present, each control area or state follows merit-order dispatch (cheapest power dispatched first) from the basket of intra-state and inter-state resources and buys or sells on the day-ahead power exchange. The schedules under long-term PPAs can be revised, but not for the power traded at the day-ahead power exchange. The un-tied generators in the private sector scout for buyers in the bilateral market as well as on the power exchanges on a voluntary basis currently.

What this means is that there is a pan-India visibility of the available tradable power on a daily basis on the power exchange. Much of this is set to change under the MBED model.

An official with experience of having worked in the Central Electricity Authority, the planning arm of the Union Ministry of Power, said under the proposed model, there are additional questions over the operations of some power stations such as Trombay TPS, Mumbai or the Dadri TPS in the NCR region that are critical for security of supply to key cities such as Mumbai or Delhi and in islanding operations in the event of a grid failure. Given the mandatory pooling provision, the must-run status of these critical power plants could come under question.

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“Also, it is imperative that each state should generally have some capacity on tap, irrespective of merit order for voltage and grid security. This is of paramount importance from the perspective of grid stability and resilience,” the official said. A proposed Bilateral Contract Settlement or BCS mechanism under the scheme for refunding the difference between the Market Clearing Price and the contract price under the PPA, primarily to keep the PPA prices intact, is another potential sticking point. This, he said, diluted the stated objectives of “market-driven prices” while complicating the entire accounting and settlement process.

“There is a thinking that has emerged to change this antiquated market design of uniform MCP. We should not rush into MBED when internationally it’s under review,” an official said. In Europe, for instance, the gas crisis has exposed vulnerabilities in markets such as the UK where marginal electricity prices are tied to the prices of the lowest cost producer – typically a gas plant in normal times. When the gas price spikes, there are consequences: a nuclear power station is paid as if its input costs had just risen fivefold since the “clearing price” model has its flaws. All of this is currently playing out in European electricity markets. “The whole idea of MBED seems to be to erode the sanctity of time tested PPAs and create a volatile wholesale market with uniform clearing price for each 15 minutes time-block of the day,” the former CEA official quoted above said.





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