The Indian Energy Exchange (IEX) is an electronic system used for power trading exchanges that are regulated by the Central Electricity Regulatory Commission (CERC). Rajesh Kumar Mediratta, Director, Business Development, IEX spoke to BE’s Isha Chakraborty about power trading, spot prices, renewable power etc.
Q) What do you think is driving the spot prices of power?
A) Since, Sept’2017 the prices have gone higher because of shortage of coal along with the low power generation in the wind and hydro sectors. Hydroelectric and wind energy was also deficient and the additional power had to be produced with coal. Further, the power demand this summer increased by more than 6%. The hydrogenation from the northern power plants has also not happened this summer, adding to the shortage further. With coal shortages, increased e-auction coal also has become costlier. Further, imported coal prices have also increased in the international market. During April, the average price on the exchange was Rs.3.98 while during May they ranged around Rs. 4.67. The power tariff is fluctuating between Rs. 4.50 and Rs. 6 due to the increased demand of about 7% when compared to that of last financial year. However, with the onset of monsoons and because of better wind and hydro generation, prices have softened to less than Rs. 3.5.
Q) Do you think the power sector is going to be affected by the power tariff war unfolding globally?
A) When we are discussing the power sector globally, coal and gas are two important factors. Gas is not buyable anymore because of its import prices which are around $10/ MMBTU along with the regasification and transport charges. Now, that means the cost of LNG increases to about Rs. 6 per unit which doesn’t make sense for the power plants to sell in the market. So, the imported gas based power plants are not viable.
In case of coal based power plants, the prices have increased too. Earlier the prices of Indonesian coal were $40 per ton whereas it increased to $60-65 per tonne in 2016 and 2018 respectively. During January’18, the prices even ranged as high as $75 per tonne but it decreased gradually and now costs around $60-65 per tonne. The imported coal from Indonesia is used by the power plants at western coast and Gujarat. The cost of power from imported coal comes down to around Rs. 3.50-4 for these power plants which has become viable in the increased price scenario since it is possible in the current market scenario when the prices are going beyond Rs. 4.
The domestic coal prices have also increased by a margin of 20-25 paisa and have impacted the power tariff as well. But with increased wind and solar capacity additions of 35GW and 20GW respectively, day-time prices have dropped. Nowadays, day prices are lower by 10% as compared to evening and night prices. All of this is eventually affecting the prices of power on time-of-day basis as well as have long-term impact on the market.
Q) What is the mechanism used for pricing the different energy commodities?
A) The prices of domestic coal are fixed by Coal India. Now an issue for certain power plants which have PPA’s of 25 years, the government provides them with linkage coal. In the case of linkage coal, the government either provides them with coal mines or links the two which is a lot cheaper than the general prices of coal but is regulated by the government.
Exchange is an online trading platform where all the buyers and sellers are meeting at a point for putting up their orders. While they are placing their order, the buyers are bidding for a particular price for which they want to buy the power and the sellers, on the other hand, quote for the prices they are going to sell their power at and the quantum of power they have to sell. On the basis of this total process where both the sides are bidding their prices, the prices are discovered. We are only responsible for discovering the price of power which is done a day ahead. There are two parts of it i.e. Market Clear Prices (MCP) and Area Clear Prices (ACP). Now if there is no issue in transmission in the system then there is only one single price otherwise if there is congestion, then there are different prices which are region specific known as the ACP.
Q) What are the benefits of this exchange?
A) First one doesn’t have to worry about the process of negotiating rather they just have to bid and the rest is taken care of by the exchange. In other cases, a buyer and a seller have to negotiate and sign a contract and then send the details to RLDC for scheduling. Therefore, cost of transaction is very low when compared to other bilateral markets. Exchange based market is way more competitive as well, since the price get discovered by around 700 participants every day. The third benefit would be the kind of transparency in our working structure which cannot be manipulated. The fourth benefit is payment security for the seller who gets money the very next day.
Q) Is the Renewable Energy Certificate helping in the case of renewable sectors or industry?
A) Renewable generators sell their power to the different distribution companies at a premium tariff. However it is only possible when these discoms are ready to purchase the power at a premium tariff. But these discoms sometimes don’t buy from renewable generators for premium tariffs but rather, they pay the normal tariff. So, what these generators do is that they sell the power to their discoms at a normal tariff and they additionally get a Renewable Energy Certificate which is sold through exchange. One REC is equivalent to 1000 units of power and after it is sold to the exchange it is further bought by some discoms that need to meet their renewable purchase obligation. India’s total capacity of renewable power generation is 70,000 MW out of which around 4,500 MW is the capacity of projects registered under REC mechanism. There are many generators where the states don’t purchase the renewable generation so these generators sell the power at normal tariff to the state and then sell these certificates in the market which earns them additional revenues. So, premium tariff is equivalent to the revenues earned through normal tariff from the discoms and the cost of RECs from the exchange.
Q) Has the number of members increased in terms of registration in the recent years?
A) We have approximately 100 members in our exchange which increases by four to five members every year. Since the maximum number of people who are performing these transactions do it as clients and not members, since all large discoms generators and industries have already been registered with our exchange. New participants are generally of smaller size and therefore, they find it registering as client to be cost effective. For an example, when you become our member you have to pay us Rs. 65 lakh but when you are only a client you just have to pay Rs. 1 lakh. Now, in both the cases you have to pay two paisa per unit on transaction volume, the only difference being that when you are a client you need to pay trading fees to the traders. Now, suppose your requirement of selling power is only 10-20MW which comes under smaller participants then becoming a client is the wiser choice but when your requirement is higher then being a member is beneficial. So, for the last FY, we had an increase of only three members but we got around 225 new clients.
Q) Is the supply of power matching the demand? Is it excess or less?
A) At present, India’s total generation capacity is 3, 40, 000 MW whereas the peak demand recorded in our system for the last month was 1,70, 000 MW which is almost 50% of the generation capacity. Now out of the excess capacity, 70,000 MW of the capacity is for the renewable generator for which the load factor is about 20%. The conventional thermal generators can only operate 80% of their capacity and for hydro they can operate around 40% of their capacity. Therefore, private sector coal based plants are operating at 55-60% of the capacity. So, the coal based plants are not earning enough revenue whereas some of the plants with long term tie-ups are earning normal by generating at the load factor of about 70% or more.
Q) How are the renewable energy companies doing in our country?
A) The government is aiming for creating a capacity of about 1,75 000 MW for renewable generators by 2022 out of which only 70,000 MW is achieved so far. The government is keen on transforming the whole structure into a renewable sector so that we are no more dependent on coal, oil or gas for the production of energy. Last year, more solar capacity was added as compared to thermal power plants and wind-based plants.
Q) Which sector would be the best one to invest in right now?
A) The growth sectors are now solar and wind and thus it would be the best sectors to invest in. Since we have coal based plants with capacity of around 2, 00, 000 MW operating at 6% load and they can operate at higher levels, say 80%, so we don’t need more coal based plants.
Q) What are the concerns about the market at present? What are your suggestions for the improvement of the market?
A) A major concern is, once the significant renewable capacity is added, signing a 25-year contract is very risky for the discoms. Consumers will be putting up solar panels on their roof tops and using that for their requirement. Now, if consumers become producers, then who would the distribution companies sell the power to? So, if a discom is committing to a 25 year long PPA and then the consumers stop purchasing the power, then the company would be under a huge burden. Long-term PPAs have two parts, a fixed charge and a variable charge. Now the fixed charge continues for 25 years even after you stop using power whereas variable power continues for the time for which you run the power plant. So, this is a huge concern for these distribution companies.
A suggestion would be the futures market or derivative markets in electricity. Through such markets, both buyers and sellers can hedge against price risks, so discoms can insure their cost of power for future. You get same certainty of power as PPA but have the choice to exit and enter at your will.