1. POWER MARKET DESIGN IN INDIA
Power Market Design in India
Navajyoti Martha
MBA in POWER MANAGEMENT, National Power Training Institute,Faridabad
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II ELECTRICITY ACT, 2003
Abstract--India is on the path of rapid economic growth Though the installed power generation capacity has grown up
along with speedy overall development. Simultaneously, it 77 times till independence, the power situation in India is still
faces the global threat of power market. The Power unsatisfactory and there is a huge shortage of power. Different
industry in India is changing from regulated industry to a measures and efforts were taken since the introduction of
competitive industry. Power sector re-structuring Electricity Act 1910, Electricity Supply Act 1948, Electricity
program in recent years along with new Electricity Act in Regulatory Commissions Act 1998 and Electricity reforms of
India paved the path for the development of a power 1990s but they could not bring much success.
market in the country. In this transition phase, it is now
essential to design the most appropriate market suitable Introduction of Electricity Act 2003 provides a liberal and
for the country. The market design should consider the sustainable framework aimed at development of the Power
view of leading market models that has proved successful sector in India. It is an act to consolidate the laws relating to
in different parts of the world, along with localized issues, generation, transmission, distribution, trading and use of
which are very specific to the country. electricity and generally for taking measures conducive to
development of electricity industry, promoting competition
Keywords — Power Market, Real Time Market, Competitive therein, protecting interest of consumers and supply of
Electricity Market, Electricity Act 2003 electricity to all areas, rationalization of electricity tariff,
ensuring transparent policies regarding subsidies, promotion
I INTRODUCTION of efficient and environmentally benign policies.
POWER development in India commenced at the end of 19th
century with the commissioning of first unit of 130 KW Prior to Electricity Act 2003, majority of programs addressed
generators at Sidrapong in Darjeeling during 1897, followed the piecemeal reforms. The new Electricity Act has all the
by first steam driven power plant rated 1000 KW two years elements of systematic reforms and has the potential of re-
later at Calcutta in 1899. In the pre-Independence era, the defining the power system in India.
power supply was mainly in the hands of private sector that
too restricted to the urban areas. Shortly after power The long-standing traditional structure of the industry was
generation and distribution started in Calcutta, the Electricity based on the economic theory that electric power production
Act, 1903 was brought into force. Subsequently this Act was and delivery were natural monopolies, and that large
repealed and replaced by the Indian Electricity Act, 1910, centralized power plants were the most efficient and
which Act is still in force today, although with quite a inexpensive means for producing electric power and
numbers of amendments. delivering it to customers. Large power generating plants,
integrated with transmission and distribution systems,
After Independence, the Government of India felt the need for achieved economies of scale and consequently lower the
broadening electricity supply industry with a view to operating costs.
rationalize its growth all over the country. This was achieved
with the formation of Electricity (supply) Act, 1948, the The unbundling process started a few years back and at
Indian Electricity Rules, 1956, and the Electricity Regulatory present many of the State Electricity Boards (SEBs) are
Commission Act, 1998. unbundled in GENCO, TRANSCO and DISCOMs. All
GENCOs and TRANSCOs are government controlled. In
Recently, Indian Electricity Act, 2003 was enacted to some states, the Distribution companies are government
consolidate the laws relating to generation, transmission, controlled and in few states (Orissa & Delhi) the Distribution
distribution, trading and use of electricity and largely for companies are privatized.
taking measures conducive to development of electricity
industries, promoting competition, protecting interest of Post Electricity Act 2003, Generation is delicensed and the
consumers and supply of electricity to all areas, rationalization generating companies are allowed to set up generating plants
of electricity tariff, promotion of efficiency and in accordance with National Electricity Plan. Generators are
environmentally benign policies [5].
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2. AKGEC JOURNAL OF TECHNOLOGY, Vol. 2, No 1
free to sell power to any user. Post unbundling, the monopoly service, for example transmission, is used to
transmission is to be handled by Central and State influence the price of competitive generation. Second, given
Transmission utilities (CTU/STU) and the transmission the nature of electricity markets and the physics of the
business will remain as a regulated monopoly. Electricity Act transmission system, all participants in a competitive market
must have equal access to transmission with non-
2003 provides non-discriminatory open access to the
discriminatory and efficient prices.
Transmission System.
Finally, buyers and sellers should have access to all relevant
Electricity Act 2003 also made provision for open access in information and all costs must be internalized There are
Distribution system. Distribution companies will act as a mainly two distinct market concepts that prevail today in the
common carrier providing nondiscriminatory open access. power market namely Single market concept and Two-market
The Act also recognized trading as a distinct licensed activity. concept. Single market concept is based on centralized
At present there are number of traders (Tradecos) that operate dispatch contract. In centralized dispatch, the system operator
in inter-state power trading. If there is a need, the regulator controls the entire power market and the schedules are based
on generator offers and demand bids.
may fix the trading margin for the Tradeco. In short, the basic
objectives of the reform program defined by the framework The single market concept has been adopted in PJM (Market
contained in the Electricity Act 2003 are aimed at: system for Pennsylvania, New Jersey and Maryland) market
in USA. In a two-market model, the market participants
(i) Attracting enough private investment to this sector, in control their own schedule and the market operates on a Day-
generation, transmission and distribution to meet the growing Ahead spot Market as well as a Real Time Market. In the Day
demand for power. ahead spot market, the price is the electricity energy price,
whereas in the Real time market the price represents the
(ii) Establishing a regulatory environment which will ensure capability of the system to balance supply (generation) and
that generation costs are kept at a minimum through a process demand (Load).
of competitive bidding for setting up of capacity and also
ensure that adequate incentives are provided for The real time market operates by the transmission system
improvements in operational efficiency, cost reduction and operator (TSO) In a two-market model, the market
enhancement in the quality of customer service in the participants control their own schedule and the market
transmission and distribution sectors. operates on a Day-Ahead spot Market as well as a Real Time
Market. In the Day ahead spot market, the price is the
(iii) Providing incentives for energy conservation. electricity energy price, whereas in the Real time market the
price represents the capability of the system to balance supply
III. POWER MARKET DEVELOPMENT IN INDIA (generation) and demand (Load).
Presently, In India electricity trading has started with a limited
scope in wholesale electricity market across different regions / In UK, the New Electricity Trading Arrangement (NETA) has
states, there is now enough scope to develop a full-fledged been formed to eliminate the central pool and force all trading
power market in the country. Generators and distributors into multiple private markets. The real time (balancing)
provide competition in a power market. market is managed by National Grid company (NGC) using a
centralized integrated balancing mechanism. Most concerns,
The wholesale price is normally dependant on competition in after the first few months of operation of NETA, centre on the
generation whereas distributors (Retailers) competition is impact of the Balancing Market (BM).
reflected in retail pricing. Since most of the supply cost
constitutes generation cost, India like many other countries are Generators and retail suppliers that do not forecast their
opening up the market at the wholesale level and should supply and demand balance accurately are forced to pay the
progressively move towards retail level competition. costs incurred by the System
There are several prerequisites for competitive markets to Operator buying in the BM. Costs in this market are
operate efficiently. First there must be no market power. This unpredictable and often very high. If a generator or retail
means that no buyer or seller acting alone or in collusion with supplier has a shortfall in a period that the BM price is high,
others can influence prices in any significant or long lasting they could be put out of business. On the generator side, the
way. Market power may present itself as horizontal market problems are particularly acute for small generators, such as
power, i.e. any one player has too much control over a given co-generators and renewables, which cannot readily predict
market; or as vertical nature, in which case control of a their available supply.
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3. Appropriate market design in Indian context should consider POWER MARKET DESIGN IN INDIA
the following characteristics of the Indian power sector
IV.GLOBAL POWER MARKET STRUCTURES
• Most of the power being traded in wholesale power The power markets operating in different parts of the world
market today is either through bilateral or can be broadly classified into four basic generic structures.
multilateral contracts.
• Also, as of today there is a limited demand response. 1. Monopoly model
• It also seems that the present condition in the country 2. Single-buyer model
is not suitable for retail competition. 3. Third-party or open-access model
4. Power pool (wholesale market or spot market) model.
In this view, it is not very easy to design an appropriate power
market suitable for Indian power sector. Some of the factors Monopoly model: The monopoly model offers little scope for
that must be considered for the design of the power market are competition. Hence, the choice centres around the other three
described below: models. Each of these generic models may have variations
within itself in respect of the agency responsible for
India is a power deficit country and there is still a management of the market and its governance and regulation.
considerable mismatch in demand and supply whereas most of
the standard market models (Nord pool, PJM, UK etc.) that Single-buyer model: In a single-buyer model, a single entity
exist in developed countries operate in a “power surplus” purchases power from all generators on a competitive basis
environment. and in turn sells it to the supply entities. This model has the
following advantages.
􀂉 Present Transmission capacity of the country is not suitable
in an integrated trading scenario and this must be taken into 1. It is simple and has minimum transaction costs. It
consideration in terms of adopting zonal (regional) trade or facilitates design of equitable bulk supply tariff.
integrated market model till the time the transmission capacity 2. Planning for capacity addition and strengthening of
gets augmented. transmission systems is better coordinated.
3. Splitting of existing contractual agreements with different
􀂉 Since most of the trading arrangement in India is through generation companies is not necessary.
bi-lateral trading arrangement, there is a very limited surplus
power available in the open market. The demerits associated with this model are listed below.
1. Competition is limited.
􀂉 There are a good amount of captive power plants that exist 2. The buyer may not have the incentive to seek out the most
in the country. There should be definitive step to make all economical source of supply.
these captive power on boards so that they can participate in
the bidding process. The above drawbacks can be overcome to some extent
through the adoption of a competitive bidding system for
While it is expected that the vast majority of energy bought power purchase by the single buyer and imposition of an
and sold will continue to be under negotiated long-term appropriate regulatory control.
contracts, the nature of electricity requires the availability of a
spot market for the last-minute sales or purchases needed to For effective competition, it would be necessary that supply is
ensure system reliability. not constrained and that no large generator commands
excessive market power. Many developing countries are found
This balancing function is currently performed vastly by the to prefer a single-buyer model, especially during the transition
ABT (Availability based tariff) mechanism. However, it is phase of the reform.
envisaged that in the near future, the TSO or ISO must use a
real-time market for energy to resolve imbalances. Open Access Model: Under the open-access model, the
generators are in a position to enter into direct contract with
A transparent spot market not only helps keep the system distributors or large consumers without the need of an
reliable and lowers costs but also provides important price and intermediary buyer. This, however, requires an open access to
other information to all market participants on an equal and the transmission system.
open basis. It also gives the public a timely way to assess the
functioning of the market. These markets will also facilitate It is also important that the access to transmission is regulated
customer response to prices as well as ease the introduction of and pricing policies are compatible, transparent, and efficient.
some renewable and other innovative supply technologies. The main merit of this model is that it provides a better
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4. platform for competition that would eventually help bring considered while designing the best suited market model. The
down the cost of supply. ultimate objective of the power market is to produce
AKGEC JOURNAL OF TECHNOLOGY, Vol. 2, No. 1
However, implementation of this model would entail the symmetries and discipline required for adequate investment
following. and to ensure a reliable and reasonably priced supply to the
1. Transmission system development would become more consumers.
complex with increased uncertainty in planning.
2. The concern for stranded costs would increase. VI. REFERENCES
3. Transaction costs would be higher. [1]. Takashi Ishikida and Pravin P Varaiya, “Pricing of Electric Power under
4. Regulatory control on transmission access and pricing uncertainty: Information & Efficiency”, IEEE Transaction on Power Systems
Vol.10, No.2, May 1995, Pg 884-890.
would be critical. [2]. Jussi Keppo and Mika Rasanen, “pricing of electricity tariffs in
competitive markets”, Energy Economics 21(1999), pg 213-223.
Power Pool Model: The power pool model envisages different [3]. O.P Rahi, H.K Thakur and A.K. Chandel, “ Power sector reforms in India
generators selling to a pool and the distributors or large : A case study” IEEE Power India conference, 2008, pp. 1-4.
[4]. A. Srivastava and M. Shahibehpour, “Restructuring choices for the Indian
consumers buying from it. The pool functions as a Power sector”, IEEE Power Review, vol. 22, Issue 11, Nov. 2002, pp 25-29.
marketplace for trading. An open access transmission system [5]. Tripta Thakur, S.G Deshmukh, S.C Kaushik and Mukul Kulshrestha,
is a prerequisite for this model too. “Impact assessment of the Electricity Act 2003 on the Indian Power Sector”,
Energy Policy, 33, 1187-1198.
[6]. J.T Cain, “Power System Restructuring [Asian and Australian Power
Compared to the other models, this one offers the best Policy]”, IEEE Power Engineering Review, Vol. 16, Issue 2, Feb. 1996, pp.9.
framework for competition. These pools are designed to [7]. Indian Electricity Act, 2003.
maximize competition in generation, compete on price not
cost, and remain open to all market participants. These are
fundamentally different from the tight power pools that have
been operating for many years in the US which were created
to improve reliability, minimize operating costs, and facilitate
decision making by vertically-integrated utilities.
The new type of pools are operating in England and Wales,
Victoria (Australia), Alberta (Canada), and Scandinavia
(Norway and Sweden), and at least 10 more countries are
reportedly planning to operate these. The successful operation
of these pools would require highly developed information
and decision support systems and a strong reliance on the
market forces.
Although classified together, these pools present many
variations regarding complexity of operation, governance, and
regulation. The Nord pool which covers the Scandinavian
countries and deals in spot and real time trading appears the
most complex. The pool operation may get vitiated if the
transactions are heavily hedged by bilateral contracts. This is a
concern in the case of the pool in England and Wales.
V. CONCLUSION
Power Sector Reforms, is a process, which can be broadly
characterized as liberalization, which in turn means the
introduction where possible of significant degrees of
competition. New Electricity Act 2003 with its de-licensing in
generation, provision for open access in transmission and
distribution provided the basis for designing an effective
power market.
There are different successful market models adopted by
different countries worldwide. However, there are certain
considerations specific to the country that need to be
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