The impact of power exchanges on electricity prices in the wholesale electricity market in India

Abstract

To facilitate competition in the wholesale electricity market in India (WEMI), the Central Electricity Regulatory Commission (CERC) accorded approval to set up power exchanges to Indian Energy Exchange Limited (IEXL) and Power Exchange India Limited (PXIL), which started operations in June 2008 and October 2008. This paper examines short-term transactions during July 2008 to September 2009 to understand the impact of power exchanges on the electricity prices in WEMI. The four trading mechanisms used in WEMI are: long-term power purchase agreements (PPAs), short-term bilateral contracts, unscheduled interchange (UI) and power exchanges. As price under long-term PPAs, determined on cost-plus basis, is not dependent on demand and supply, this paper examines impact of power exchanges on remaining three mechanisms. The study finds substantial increase in electricity prices of bilateral contracts and UI and positive correlation between electricity price in power exchange and UI rate. The study also finds marginal decrease in price in 2008 as compared to 2007, but accompanied with greater fluctuations in grid frequency. After start of PXIL, electricity prices in power exchanges (IEXL and PXIL) have generally been higher than UI rate and short-term bilateral transactions but no significant correlation is found between the prices in other mechanisms. The paper identifies wide difference in hourly bid area prices of electricity in IEXL and PXIL as well as in hourly market clearing price between the two exchanges. The paper suggests various measures such as adequate transmission capacity, maximum price cap, bridging demand-supply gap, efficient public data release, and regulatory governance. Keywords: Electricity, Competition, Market, Unscheduled Interchange.