Power markets in India and their working

• Context (IE): To meet peak power demand, the government has allowed the trading of surplus electricity generated from “linkage coal” in the country’s power markets.

What is Coal linkage?

• Coal linkages are agreements that ensure a steady supply of coal from mines to consumers like power plants, steel, and cement industries.
• Types of coal:
  • Long-term linkages: Agreements lasting several years, offering stability and predictability.
  • Short-term linkages: Shorter duration agreements that are adjustable 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, generation units traditionally use long-term Power Purchase Agreements (PPAs) spanning 25 years. However, PPAs are losing favour due to their inflexibility and capacity lock-in.
• Power markets allow generators to sell surplus power at market prices to address short-term fluctuations.
• This benefits renewable energy generators, who can trade excess power instead of curtailing it.

Power exchanges (PEs) in India

• PEs facilitate the trading of electricity, enabling buyers and sellers to transact efficiently.
• India has Three major PE regulated by the Central Electricity Regulatory Commission (CERC).
• The Indian Energy Exchange Ltd (IEX) dominates with more than 90% market share, followed by Power Exchange India Limited (PXIL) and Hindustan Power Exchange Ltd (HPX).

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

Key terms related to power exchange

Market coupling

• It is a process that matches bids from all power exchanges to discover a uniform market clearing price.
• The concept was first introduced in CERC’s Power Market Regulations, 2021.
• Advantages: It could lead to more efficient price discovery, reduced price disparities across regions, and increased market stability.

Capacity markets

• Capacity Market (CM) is designed to provide long-term stability and security in the power system by preventing a deficit of generation capacities.
• Hence, it almost completely eliminates electricity price volatility.
• Only a few countries, including UK, parts of Australia, and South Korea, have developed capacity markets.