Power Markets in India and Their Working

To address peak power demand, the Indian government has allowed trading of surplus electricity generated from “linkage coal” in the country’s power markets.

What is Coal Linkage?

• Coal linkages are agreements that guarantee a continuous supply of coal from mines to consumers such as power plants, steel, and cement industries.
• Types of coal linkages:
  • Long-term linkages: These agreements last several years, offering stability and predictability.
  • Short-term linkages: These are shorter-duration agreements that can be adjusted based on immediate needs and market conditions.

Power Markets

• Power markets are systems through which electricity is bought and sold.
• They facilitate the trade of electric power and help in balancing supply and demand.

How Do Power Markets Work?

• In India, power generation units traditionally operate under long-term Power Purchase Agreements (PPAs) that last around 25 years. However, PPAs are becoming less popular due to their inflexibility and capacity lock-in.
• Power markets enable generators to sell surplus power at market prices, addressing short-term fluctuations in supply and demand.
• This is particularly beneficial for renewable energy generators, who can trade excess power instead of curtailing it.

Power Exchanges (PEs) in India

• Power exchanges facilitate the trading of electricity, enabling buyers and sellers to transact efficiently.
• India has three major power exchanges regulated by the Central Electricity Regulatory Commission (CERC):
  • Indian Energy Exchange Ltd (IEX), which dominates with over 90% market share.
  • Power Exchange India Limited (PXIL)
  • Hindustan Power Exchange Ltd (HPX)

Evolution of Power Exchanges

• Power exchanges were first introduced in Europe in 1990-91 and now operate in about 50 countries worldwide.
• The spot market was introduced in India in 2020.
• The Electricity Act of 2003 established the framework for exchange operations in India, with exchanges commencing in 2008.

Key Terms Related to Power Exchanges

• Market Coupling:
  • This process matches bids from all power exchanges to discover a uniform market clearing price.
  • Introduced in CERC’s Power Market Regulations, 2021.
  • Advantages include more efficient price discovery, reduced price disparities across regions, and increased market stability.
• Capacity Markets:
  • These are designed to provide long-term stability and security in the power system by preventing a deficit of generation capacities.
  • Capacity markets almost completely eliminate electricity price volatility.
  • Only a few countries, including the UK, parts of Australia, and South Korea, have developed capacity markets.