The country is going
through energy transition where more and more renewable energy is being added
into the system – about 200 GW added in last 10 years with solar capacity
growing at a CAGR of ~37%. The success of this transition will not only be
determined by increase in generation capacity but also design of the power
market. Integration of renewable energy in the system is a key challenge. We
are facing situation where more than 2 billion units of solar electricity had
to be curtailed in a span of about 6 months, because the grid could not absorb
it. This was due to fast rate of solar capacity addition as compared to
inter-state transmission lines addition, technical minimum requirement for
thermal plants and inadequate storage capacity in the country.
Therefore, a robust
electricity market with innovative products customized to the needs of buyers
and sellers is essential to manage this situation. Better designed markets are
necessary to provide appropriate price signals, incentivize electricity
storage, flexible generation and trading between surplus and deficit regions.
In this context,
Market Coupling is a reform which has been in discussion from quite some time.
In simple terms, it would mean discovery of one price by a Market Coupling
Operator (MCO) as opposed to different prices discovered by different power
exchanges presently. This would pave the way for other reforms in the power
market. Critics question the rationale behind Market Coupling citing minimal
benefit from it and label it as a move to reduce dominance of Indian Energy
Exchange (IEX), which commands more than 85% market share overall and more than
95% in collective segments. Also, it is argued that making Grid India as the
MCO (as proposed in the Draft CERC (Power
Market) (Second Amendment Regulations) may stifle competition in the market as
it is primarily a government owned system operator.
Comments:
Introduction of
Market Coupling should not be viewed in a narrow sense as against one of the
exchanges and a government entity as MCO not being innovative one. IEX may not
be abusing its dominant position but concentration of volume with one entity is
also a legitimate concern. From point of view of operational resilience and
cyber-security, preventive regulation is necessary. Also, a single national
clearing price shall promote transparency and would pave the way for future
reforms in the sector.
One significant
regulatory concern is whether the price discovery process by a government
entity be free from influence of government. Market functions on the confidence
that price is discovered independently using transparent algorithms reflecting
supply and demand conditions. However, a MCO linked to government raises
concern regarding independence of price discovery particularly in times of
price volatility and supply shortages. The country has previously witnessed how
governments facing political pressure tried to contain high prices by
introducing price caps in the market, which impeded long-term development of
competitive power markets because of distorted price signals. Therefore, if
Grid India is finalized as the MCO, robust institutional safeguards must be
established through regulatory oversight ensuring transparent algorithm and
operational independence.
The draft regulation no. 38
simply states that Grid India shall form a separate cell for discharging the
functions of MCO. However, to quell fears of any interference, the regulation
must clearly ring-fence MCO function from other departments and activities of
Grid India. Employees engaged in MCO must not simultaneously perform any other
function in Grid India and ultimately MCO must be separated from Grid India as
a distinct entity/subsidiary. MCO will possess extremely sensitive bid
information. Therefore, the personnel, access controls, IT systems, decision
making, reporting lines, audit etc. must be separate from the parent company
(Grid India).
There are no
provisions related to the governance structure of the MCO in the draft
regulations. Like power exchanges, the management and ownership of the MCO must
be separate and demutualized ensuring separation of control, independent
governance and minimization of conflict and interference. A way to ensure this
is to have a Market Coupling Governance and Oversight Committee with
representatives from CERC, market expert (s), algorithm expert, economics
expert, cyber security expert, power exchanges etc. Its role would be
oversight, audit and governance. The committee should be established by
regulation with clearly defined powers. As and when MCO is hived off from Grid
India, this Committee may act as the governing Board of MCO.
The draft regulation no. 39C
directs Grid India to formulate Power Market Coupling Procedure (PMCP) which
primarily focuses on procedural issues in terms of operational sequence, roles
and responsibilities of other entities involved in Coupling etc. There seems to
be high institutional concentration on Grid India as it will formulate PMCP,
design matching algorithm and then operate the algorithm as MCO. Instead, the
PMCP should be formulated in consultation with other actors especially Power
Exchanges as they have the necessary operational and functional expertise.
Moreover, there is no provision for independent technical audit of the
algorithm or matching engine. MCO must be subject to all the rigorous approvals
like power exchanges including independent audit, stakeholder consultation,
approval through adjudicatory process etc.
Regulations must
clearly bar any interference with respect to acceptance, rejection or
modification of a bid received. Outcome of a trading session i.e. the Market
Clearing Price (MCP) once discovered must remain unchanged. Parameters,
constraints and variables of the matching algorithm must be freezed at the time
of approval of the algorithm and must remain unchanged without following
judicial approval by CERC through adjudication. The algorithm must follow
end-to-end encryption as mandated for power exchanges presently. Also, there
should be no ex-post intervention in the form of price caps through executive
orders. Price caps, if any should be through regulations on the basis of
objective criteria following due process including stakeholder consultation.
The regulatory burden
of CERC in choosing a government entity as MCO would become higher and not
lower. An institution doesn’t automatically become neutral or unbiased only
because of government ownership. There is the issue of perceived or even actual
interference. The governance, management, audit and reporting related
regulations applicable on power exchanges in the CERC (Power Market)
Regulations 2021 should also be mandated for MCO as a starting point.
Additionally, the safeguards suggested above would increase MCO’s credibility.
