The National Stock Exchange (NSE) and National Commodity and Derivatives Exchange (NCDEX)-promoted, Power Exchange India Ltd (PXIL) believes that a competitive marketplace will thrive under a single price discovery of electricity traded in two or more exchanges by a mechanism of market coupling.
The two existing power exchanges operate in the same geographical area with completely independent order books and independently-run price discovery systems. Consequently, different prices also known as dual prices are discovered for market participants for the same time and geography in the two exchanges. This difference in prices between the two exchanges is sometimes used by participants to compute notional gains and losses, which in turn is used to determine whether to continue participation or not. Such loss-gain computation is a fallacious exercise because the price differences itself are notional and an outcome of the change in participation from one exchange to another.
This was one of the key outcomes of PXIL’s second market advisory committee and stakeholder consultation meeting held last week to discuss key market regulatory reforms concerning the power industry. PXIL has also shared such views with the power sector regulator, Central Electricity Regulatory Commission (CERC) at its public hearing of the Draft Power Market Regulations 2020.
PXIL emphasised on the need of converging prices in the collective segment, congratulated the market participants for having demonstrated the need to have competition between exchanges, and, finally, on the benefits the proposed market coupling is likely to bring to the market and market participants. PXIL believes that the government has been promoting competition in the procurement of various services in the electricity sector, in general, and electricity procurement, in particular, falls under the guiding principles to foster competition and transparency.
While talking about market coupling, pricing and need for market participation, Prabhajit Kumar Sarkar, Managing & CEO, PXIL said, “The rapidly changing framework of the entire power sector demonstrates the key role that power markets have to play. The underlying need for competition in the power markets is, therefore, gaining acute significance in the industry. A competitive marketplace can thrive on a strong foundation of an enabling market structure like market coupling, fair rules that allow competition to thrive and ensuring ease of participation on various marketplaces.”
As per CERC’s Draft Power Market Regulation, 2020, price discovery of day-ahead contracts and real-time contracts shall be done by power exchanges or by a market coupling operator. Price discovery mechanism shall adopt the principle of maximisation of economic surplus (sum of buyer surplus and seller surplus), taking into account all bid types. The bidding mechanism shall be double-sided closed bid auction on a day-ahead or real-time basis, as the case may be. The price discovered for the unconstrained market shall be a uniform market clearing price for all buyers and sellers who are cleared.
The objectives of market coupling are the discovery of a uniform market-clearing price for the day-ahead market or real-time market and optimal use of transmission infrastructure. The algorithm for enabling market coupling shall be developed and managed by a designated market coupling operator and implemented with the approval of CERC.