Power Trading

After the enactment of Electricity Act in 2003, the concept of Open Access and Power trading were created. Since generation and consumption of Power is not evenly distributed in India, the concept of Power trading enables surplus generation from one Region to flow to another Region which is deficit in Power or within the same Region. Power trading fundamentally means that a transaction where the price of power is negotiable and options exists about whom to trade with and for what quantum. Traditionally, trading licensee has been viewed as seller of electricity who fulfills the needs of the distribution companies (discoms) by arranging electricity supply at the discoms desired delivery point. Trading licensee can provide customized contracts according to the requirements of the buyers/sellers. Importantly, trading licensee act as risk absorbers between generators and discoms ensuring that generators are paid on time by bringing in their finances in case there is a delay in payment by a buyer. It absorbs both liquidity risks as well as credit risk of the discoms and insulates the generator from the financial condition of a discom.

Trading also facilitates competition among generators by offering various options for buying electricity to discoms. In India, power trading is in an evolving stage and the volumes of exchange are not huge. All ultimate consumers of electricity are largely served by their respective SEB’s or their successor entities, Power Departments, private licencees etc. and their relationship is primarily that of captive customers versus monopoly suppliers. In India, the generators of electricity like Central Generating Stations (CGSs), Independent Power Producers (IPPs) and State Electricity Boards (SEBs) have all their capacities tied up. Each SEB has an allocated share in central sector/ jointly owned projects and is expected to draw its share without much say about the price. In other words, the suppliers of electricity have little choice about whom to sell the power and the buyers have no choice about whom to purchase their power from.

The pricing has primarily been fixed/ controlled by the Central and State Governments which is now being done by the Regulatory Commissions at the Centre and also in the States wherever they are already functional. Power generation, transmissions are highly capital intensive and the Fixed Charge component makes up a major part of tariff. India being a predominantly rural economy, power demand is seasonal, weather sensitive and there exists substantial difference in demand of power during different hours of the day with variations during peak hours and off peak hours. Further, the geographical spread of India is very large and different parts of the country face different types of climate and different types of loads.

Power demand during the rainy seasons is low in the States of Karnataka and Andhra Pradesh and high in Delhi and Punjab. Whereas many of the States face high demand during evening peak hours, cities like Mumbai face high demand during office hours. The Eastern Region has a significant surplus round the clock, and even normally power deficit states with very low agricultural loads like Delhi have surpluses at night. This situation indicates enough opportunities for trading of power. This would improve utilization of existing capacities and reduce the average cost of power to power utilities and consumers.

In view of high fixed charges, average tariff becomes sensitive to PLF. Trading of power from surplus State Utilities to deficit ones, through marginal investment in removing grid constraints, could help in deferring or reducing investment for additional generation capacity, in increasing PLF and reducing average cost of energy. Over and above this, the Scheduled exchange of power will increase and un-scheduled exchange will reduce bringing in grid discipline, a familiar problem.

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