“Market coupling can help to create a more integrated and efficient Indian electricity market” Prabhajit Sarkar, PXIL

Power Exchange India Limited (PXIL), launched in 2008, is India’s first institutionally promoted Power Exchange promoted by NSE (National Stock Exchange of India Ltd.) & NCDEX (National Commodity and Derivatives Exchange).

As the Managing Director & CEO of PXIL since May 2018, Prabhajit Kumar Sarkar has turned around PXIL into a profitable and fast-growing organisation. He is instrumental in leading PXIL’s growth and development while also playing a key role in shaping the power markets of the future for the country. In this interview with SaurEnergy, he shares his views on the sector and its future.

As a pioneering power exchange, how has PXIL evolved over the years in terms of growth in trading, new products and more?

Prabhajit Kumar Sarkar: Power Exchange India Limited (PXIL) has been a catalyst in the growth and development of power markets in India. Since its inception in 2008, PXIL has evolved to become a leading power exchange in the country and has played a crucial role in enabling the power market to function smoothly and efficiently.

Over the years, PXIL has seen impressive growth in terms of trading volumes and participants. In FY 23 (YTD-Feb) nearly 8,900 MU (million units) of electricity is transacted which is nearly 50% of volume transacted in FY 22. This is a significant achievement considering that PXIL would, for the first time since inception, be surpassing transaction volume of more than 9,500 MUs.

One of the key reasons for PXIL’s success is its commitment to innovation and technological advancements. It has invested significantly in building a robust and reliable trading platform that facilitates transparent and secure price discovery. PXIL’s platform is designed to cater to the unique requirements of Indian power markets and is capable of handling high volumes of transactions.

PXIL has also introduced new products and services that cater to the needs of market participants. For instance, it launched the Green-Term Ahead Market (GTAM) in March 2021, longer tenure contracts in September 2021 where delivery has increased from 11-days to 90-Days / 12-Weeks / 3-Months ahead. These longer tenure contracts introduced by PXIL have found good traction since its introduction.

We now have a third power exchange (HPX) that is pushing hard for market share gains and more. How do you see the market evolving? How many power exchanges are optimum for a market like India?

Prabhajit Kumar Sarkar: The operation of Third Power exchange signifies the potential of electricity market in future years. With targeted capacity addition of 500 GW in Renewable energy space by 2030 provides additional avenues of investments in Transmission, Distribution and Storage space. The Power exchanges will play prominent role in providing a transparent market-based platform for transaction in electricity for benefit of consumers. More the number of Power exchanges means larger the extent of competition, this in-turn provides more options to buyer & sellers to chose from.

Why has PXIL lagged when it comes to introducing green energy products?

Prabhajit Kumar Sarkar: Power Exchange India Limited (PXIL) has introduced Green-Term Ahead Market (GTAM) Contracts in March 2021 after receipt of approval from Hon’ble CERC vis-à-vis competition that received approval for introducing such Contracts in August 2020.

We wish to inform that the CERC has adopted a cautious approach by reviewing applicability of different provisions prior to its approval, e.g. deviation settlement by contracting entities, settlement of transactions by PXs, scheduling of different sources of energy, type of energy that can be transacted wind, solar, hydro and other types of RE sources, type of Contracts and duration applicable under such Contracts, price discovery mechanism applicable under such Contracts, etc.

Post introduction of GTAM Contracts, it has gained respectable market share of nearly 26% in FY 21-22 and nearly 48% till Nov-22 during this year. PXIL also introduced longer tenure Contracts for duration up to 90 days/12-Weeks/ 3-Months ahead. In near future as investments in Hybrid, e.g., Solar + Wind, Solar + Hydro, Solar + Hydro PSP, BESS + Solar, BESS + Wind, BESS + Hydro and types of Storage projects gain prominence, PXIL is poised to introduce innovative Contracts for meeting transaction requirements of market participants.

Tell us about how market coupling can support multiple exchanges.

Prabhajit Kumar Sarkar: Market coupling means the process where the collected Orders from all the Power exchanges are aggregated together and then matched to discover a uniform market clearing price. In this process, the market coupling operator takes the Order books from all the power exchanges, how many ever there might be, and combines these buy and sell Orders to develop one set of prices for the entire country.

Through this process, the transmission allocation can happen after accounting for all power flows netted within each bidding zone–thereby leading to the most efficient allocation of transmission.

Devoid of market coupling, transmission allocation taking place separately on each exchange creates suboptimal outcomes because in one exchange, you might have required a power flow from one bidding zone to another, whereas another exchange might have asked for an opposite flow based on their order book, and in the third exchange it might be completely different. An absolute addition of requirements emanating separately from the exchanges would lead to far more requirements than if these were netted within the bidding zones by combining the order books of all the exchanges. In essence, by aggregating individual requirement, a situation arises wherein new requirements for transmission capacity get created when there was no such requirement, if it was netted in each zone.

So, the smartest thing to do is to combine all these Order books together and arrive at a combined solution because along with the price discovery, the transmission is also coupled together. Under market coupling, once this price discovery is done on a combined basis, then the results are sent to all exchanges, and they clear and settle transactions for their respective participants.

The enabling regulation in this regard has already been brought in through the Power Market Regulations, 2021.

With multiple segments in the Day Ahead Market in the form of Green DAM and Conventional DAM and now an expected High-Price DAM segment, for which PXIL is awaiting approval of Hon’ble CERC, and with three power exchanges operating, for each day, potentially 864 different prices can be discovered, leading to substantial fragmentation and confusion in the market.

We wish to inform that initial steps towards market coupling is being implemented by Hon’ble CERC while introducing Ancillary Services Market wherein from 1^st May 2023, the Tertiary Reserve Ancillary Services in Day Ahead Ancillary Services Contract and Real Time Ancillary Services Contract will requires the Power exchanges to collect bids for TRAS participants and share the same with National Load Despatch Centre (‘NLDC’). NLDC shall then collect Orders received from multiple PXs, discover price and despatch such Ancillary services to meet grid requirement. Further, in TRAS, the process of combining Orders received from multiple PXs will provide impetus to maintain adequate reserves in the grid, provide adequate safety and security to the grid and enable NLDC to deploy such capacities/Reserve services for smooth operation of the power system.

Market coupling can support multiple power exchanges in several ways:

• Increase Market Liquidity: By connecting different power markets, market coupling increases the number of buyers and sellers, which increases market liquidity. This makes it easier for power exchanges to match supply and demand and reduces the risk of market manipulation.

• Promote Price Convergence: Market coupling helps to ensure that electricity prices across different markets are more closely aligned. This can lead to a more efficient allocation of resources, as producers will be incentivized to sell their electricity to the market where prices are highest.

• Enhance Competition: Market coupling promotes competition between exchanges. This can lead to lower transaction costs and greater efficiency in the electricity market.

• Reduce Congestion: Market coupling can help to reduce congestion in the power grid by allowing electricity to flow from regions with excess supply to regions with high demand. This can help to ensure that electricity is delivered where it is needed most and reduce the risk of power outages or blackouts.

Overall, market coupling can help to create a more integrated and efficient Indian electricity market and support the growth of multiple power exchanges by increasing market liquidity, promoting price convergence, enhancing competition, and reducing congestion.

Do you think we are closer in terms of capability and depth for trading in electricity derivatives now?

Prabhajit Kumar Sarkar: As you are aware, the Hon’ble Supreme Court in its Judgement dated 06.10.2021 approved Regulation of delivery-based Contract under purview of CERC and Regulation of financially settled Contracts under purview of SEBI. We understand, supportive policy and regulatory measures have been taken-up by Regulators that would enable introduction of Derivatives in electricity for benefits of market participants.

What is the next big product that we should expect on power trading front?

Prabhajit Kumar Sarkar: We are at a very interesting time right now, with significant policy initiatives being taken to drive forward the power sector in the country.

In addition to the series of steps being taken to drive the power sector forward as we mentioned earlier, there is also a focused drive to enhance the efficiencies of the sector by utilising market frameworks. The power markets and especially PXs are an important instrument in this drive towards enhancing efficiency for all consumers in the country.

As discussed earlier, TRAS Contracts would be introduced from 01.05.2023, the implementation of Temporary General Network Access (T-GNA) provisions would enable PXs to increase the duration of existing longer tenure Contracts from 90 days to 11-months ahead, this would provide market participants to take longer view on Exchange enabled Contracts for transacting in Conventional and Green energy for different durations. Many power sector reforms are being introduced by the Government to bring efficiency, promote de-carbonization, and ensure a 24×7 reliable and affordable power supply.

To move towards a greener economy, the proposal for a National Carbon Market was announced in October 2021 with an objective to involve corporate and private sectors towards energy saving and carbon emission reductions. With implementation of the Energy Conservation (Amendment) Act from 1^st Jan 2023, the introduction of Carbon market has received the requisite legal support that will pave the way for a large-scale promotion of clean energy technologies in India leading to de-carbonization of Indian economy through active participation by various stakeholders. With successful operation of REC and ESCert markets by PXs over the past 12 years, the Exchanges are poised to play a significant role in development of Carbon market.

We have a highly supportive policy and regulatory environment today and a lot of opportunities to serve the marketplace through a wide variety of contracts of various tenures and catering to various segments of the market. Furthermore, there are regulatory provisions like Market Coupling, for which initial steps are being taken by its implementation in new TRAS Contracts. Once the provisions of market coupling is extended to existing Collective transactions, i.e. G-DAM, DAM, RTM and proposed HP-DAM, it would further enhance the competitive efficiencies of the power market.

Ultimately, the Exchanges are marketplaces, where the buyer and seller can efficiently and transparently manage their portfolios better and we from PXIL continue to strive to make that experience better for all our participants every day.

Does PXIL have any plans to get into carbon trading route through RECs or other products?

Prabhajit Kumar Sarkar: The notification of Energy Conservation Amendment Act 2022 is a path breaking event towards establishment of Carbon credits market in the country. The amendment provides a legal framework for a Carbon market with the objective of incentivising actions for emission reduction.

This follows up on numerous other actions like the declaration of net-zero target by 2070 to demonstrate India’s leadership and ambition for climate change mitigation. In this backdrop, the type of carbon markets and perspective of Indian stakeholders on its shape and form plays a vital role in evolution of Carbon credit market.

In India, two alternative approaches of carbon markets, viz. ‘project-based‘ and ‘cap-and-trade‘ are being deliberated at different forums. Carbon markets are intended to bring a price signal to greenhouse gas (GHG) emissions leading to emission reduction.

Market-based Carbon pricing instruments will enable industries to pro-actively plan their future capex and factor-in the cost of carbon emission in their business decisions. BEE has published the draft National Carbon Market paper providing for phase-wise plan for migrating from Perform Achieve Trade (PAT) scheme to an Emission Trading Scheme (ETS).

The EC Amendment Act 2022 proposes to create a ‘Voluntary’ carbon credit market where carbon credits issued by Nodal agency will be sold to voluntary buyers, including organisations and individuals. The proposed Carbon markets have a crucial role in effectively and efficiently channelising the climate finance towards sustainable projects by providing market signals to investors and corporates.

It is possible for PXIL or other power exchanges in India to introduce carbon trading as a separate product or as part of their existing offerings in the future. PXIL is keenly observing the Policy and Regulatory developments in the Carbon space and is keen to make its contribution towards development of Carbon market.

How practical is the target of 25% power purchases through the exchange route by 2030?

Prabhajit Kumar Sarkar: India has set a target of achieving 25% of its power purchases through the exchange route by 2030. While this is an ambitious target, it is feasible given the increasing demand of 10% per year for electricity in India, the growth of the power exchange market, and the government’s efforts to promote open access and competition in the power sector.

Besides the three power exchanges, the government has taken several steps to promote open access and competition in the power sector, such as the implementation new regulations that creates competition between Exchanges, which allows consumers to choose their power suppliers.

However, there are some challenges to achieving the target of 25% power purchases through the exchange route by 2030, we need to successfully navigate the commercially viability of power distribution sector in the States.

Power distribution continues to be the weakest link in the supply chain of the power sector. Most distribution utilities are financially distressed due to burden of high-cost rigid structure of long-term PPA, poor distribution network, and leakages in Metering, Billing and Collection (MBC) leading to high commercial losses and an inability to recover the cost of power supply and service.

Appropriate cost-reflective tariffs, payment of subsidies directly to consumers and substantially improving the MBC and overall operations are some of the essential next steps for the distribution segment to improve.

In Power exchange space, in the foreseeable future, we expect a significant increase in digital transactions and the introduction of many new products with deepening of power markets. Power Exchanges would be introducing new Contracts related to Ancillary Services Markets, Capacity Contracts. Market Based Economic Despatch (MBED), adding diversity and scale to its existing offerings. The expanding role of power markets may go a long way in addressing the issues of clean, reliable, and quality supply to consumers at affordable costs and help realise the goal of 25% power purchases through PX route by 2030. 

Do you see power/electricity prices have to rise continuously, or is there a possibility we will see power costs grow slower than say, the rate of inflation?

Prabhajit Kumar Sarkar: It is possible that power costs in India may grow slower than the rate of inflation in the future, although it depends on a variety of factors. One factor that could contribute to slower growth in power costs is the increasing adoption of renewable energy sources such as solar and wind power, which have become increasingly cost-competitive with traditional fossil fuel sources of electricity generation. As renewable energy technology continues to improve and become more efficient, it is possible that the cost of electricity generation from renewable sources will continue to decline, potentially leading to lower electricity prices.

Another factor that could contribute to slower growth in power costs is increased investment in energy efficiency measures, which can help to reduce overall energy demand and lead to lower electricity bills for consumers.

However, it is also important to note that there are several factors that could contribute to rising electricity prices in India. For example, if the demand for electricity continues to increase rapidly, it may be necessary to invest in new power generation capacity, which could drive up costs.

In recent past, as the war in Ukraine and other geo-political issues impacted the imported coal segment, there was a period when coal supplies got affected, leading to a scenario of high prices for a short while. However, that was successfully overcome in a matter of days with the coordinated efforts of the Ministry of Power along with Coal and Railway Ministries as well as by the immediate action by Distribution Companies and power generators spread across the country.

We have had the benefit of a highly dynamic and progressive policy environment where multiple issues related to payment security mechanisms, payment delays, coal availability, power transactions and development of markets have been quickly redressed. Longer term goals related to sectoral efficiencies like the Electricity (Amendment) Bill 2022, Energy Conservation (Amendment) Act 2022 have been taken up that should help in driving economic efficiency in electricity space.

Overall, while it is possible that power costs in India may grow slower than the rate of inflation in the future, it is difficult to forecast electricity prices with certainty. The trajectory of electricity prices will depend on a range of factors, including technological advancements, government policies, and market conditions.