India

States and the center tussle over a centralized electricity market

A FRESH conflict among the Centre and states is in the making in India’s power sector The trigger is a proposal to the Union government to eliminate the current electric power market, which is a voluntary, decentralised market to create an entirely different mandatory pool model for all of India on a pan-India basis.

Also known as the Market-Based Economic Disatch (MBED) mechanism known as the Market-Based Economic Dispatch (MBED) mechanism, the Union Ministry of Power proposal proposes centralised scheduling to dispatch all of the annual electricity demand of approximately 1400 billion units. This represents a major change from the decentralised model that is currently being used, which has been bolstered by Electricity Act 2003 and follow-on changes.

Centralised vs. Decentralised Power Model

The new model suggests centralised power dispatches, both between states and intra-state. The proposed model, according to experts, could affect the independence of states in managing their power sector, which includes their own generators and render the discoms completely dependent on the centralized system.

This MBED model is viewed as a threat to the independence of states when it comes to managing their electric sector, including their own generators and discoms (distribution firms that are predominantly owned by states) totally dependent on centralised market pool requirements for mandatory market pools. There are fears that this may take away states’ freedom to determine their own requirements for electricity while regulating the local and seasonal demand patterns. Experts say states are currently considering these issues.

The Union power ministry is promoting the idea of MBED as a method to improve the efficiency of power markets conformity with the Centre’s “One Nation One Grid, One Frequency, and One Price formulation, there are some concerns that are being raised at the state level as well as by a wide range of experts from the sector Deccane Era spoke with. The initial section of MBED was initially scheduled to begin on April 1st, but it was delayed until the end of this year, and a date was not yet set.

SL Rao, former Chairperson, Central Electricity Regulatory Commission and a member of the Advisory Board, Competition Commission of India, has said that the proposal to create MBED has been found to be “inconsistent with the constitutional provisions, existing legislative framework, and market structure” which may “end up creating more challenges than it resolves”. The proposal is said to have implications from a global perspective of grid management, aside from the fact that it violates the rights of states to be autonomous.

The issue on the distribution side of electricity (where there are concerns about how long it will take to implement discoms) is what is needed to be solved, Rao said. On the other hand, on the generation side the proposed plan violates existing systems and processes Rao said, and added that the possibility of an appeal to the courts from the US in the event that the Centre pursues the plan.

The argument of the Centre is that the current system of states that the schedule is not optimal. To address this issue an algorithm created by the NLDC known as”SCED” Security Constrained Economic Dispatch (SCED) is being promoted as a solution. It is designed to assist regulators to make informed decisions regarding scheduling decisions on an overall basis. A request at CERC Chairperson PK Pujari was not met with any response.

When asked for a response an official from the government who was involved in the project confirmed that this MBED was “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 stated.

Power is included in the Concurrent List of the Constitution and the grid of electricity is divided into autonomous state-wise control zones supervised by State Load Dispatch Centres (SLDCs) and, in turn, are overseen by Regional Load Dispatch Centres (RLDCs) as well as the National Load Dispatch Centre (NLDC). At present, the control areas are accountable in real time to balance their demand and generation resources.

This MBED plan proposes to alter this by establishing a unidirectional market operator who will control inter-state as well the intra-state generation facilities. Additionally, it is possible that this new design will limit the range of options that are currently offered under the market-based voluntary model, the day-ahead contracts becoming obsolete and from the standpoint of the state discoms and SLDC having to purchase or sell power on the market in real-time however, it’s to maintain the equilibrium of demand and supply in their regions.

There are fears that the new model may possibly clash with new market trends, due to the rise of renewable energy within the production mix, as well as the rising amount of electric vehicles plugged into the grid. All of these call for greater decentralisation of markets and pools of voluntary participation for efficient grid operations and management an official with a background in regulation explained.

India is a multifaceted electricity market that includes long-lasting power purchase agreements (PPAs) and cross-border PPAs, short – and medium-term bilaterals to day-ahead power swaps, along with a 24/7 online market. A large portion of the power capacity installed more than 87 percent of it is secured to long-term PPAs that last about 25 years. A further 13 percent of the capacity is sold through the power markets and nearly half through power exchanges, and the remainder by way of agreements with a medium and short-term duration.

Presently, each state or control zone is governed by the merit-order dispatch (cheapest power is dispatched in the first place) from the collection of inter-state and intra-state resources. Each state also purchases or sells power through the daily power exchange. The schedules in long-term PPAs may be modified but not for power sold on the power exchange that operates day-ahead. Generators not tied to the private sector search for buyers on the market for bilateral buyers as well as on energy exchanges in a non-voluntary basis at present.

This means that there is a pan-India view of the available power that can be traded every day via the electricity exchange. The majority of this is scheduled to change according to the MBED model.

A person with experience working in the Central Electricity Authority, the department that plans the Union Ministry of Power, explained that under the model proposed there are other concerns about the operation of certain power stations like Trombay TPS, Mumbai or the Dadri TPS in the NCR region, which are crucial for the safety of supply to cities like Mumbai or Delhi as well as in islands during the case of grid breakdown. Due to the requirement for pooling and the mandatory run condition of these crucial power stations could be in scrutiny of.

“Also it is essential that every state have a certain amount of capacity available regardless of merit orders for grid security and voltage. This is crucial from the standpoint of reliability and stability of grids,” the official said. A proposal for a Bilateral Contract Settlement or BCS mechanism that would be used under the scheme to refund any difference in the Market Clearing Price and the contract price in the PPA in order to maintain the PPA prices in place is a possible issue. The proposed mechanism, according to the author, could undermine the purpose that is “market-driven prices” while complicating the whole accounting and settlement process.

“There is a new thought that has been developed to alter the outdated market design of MCP uniformity. We shouldn’t be rushing into MBED while it’s currently being put under review,” an official stated. In Europe For instance, the crisis in gas has revealed the weaknesses of markets like the UK where electricity prices that are marginal are linked to the price of the producer with the lowest price which is usually a gas station during normal times. If the price of gas increases the consequences are for a nuclear power plant: it is treated as if the cost of production had increased fivefold, which is why that time. The “clearing price” model has some flaws. The whole scenario is being played out within the European market for electricity. “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 mentioned above stated.

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