A mandatory makeover

In the complex and ever-evolving landscape of the Indian power sector, the mechanism for price discovery plays a pivotal role. It not only determines the cost of electricity but also influences investment decisions, grid stability, and consumer bills. Recently, from August 28 to September 4, 2023, we witnessed a trend of prices consistently touching the regulatory cap in all blocks of the one or all collective segments of power exchanges. This occurrence underscores the urgency of reevaluating and reshaping the price discovery mechanism of the collective segments on the power exchanges following a double-sided closed auction “pay as clear” model. To take a reasoned view, we need to delve into the intricacies of the issue and propose steps to achieve a more efficient price discovery process in the collective segment(s) of the power exchanges.

The multi-exchange model

The multi-exchange model in the Indian power sector allows multiple power exchanges to operate concurrently, intending to foster competition and offering market participants a choice of platforms for trading electricity. It was introduced with the aim of promoting transparency, efficiency, and fair competition, both for the market and within the market. However, recent events in the collective segment (DAM and RTM) have raised the need to look at a more robust methodology of the price discovery mechanism within this structure.

Price discovery

Discovered prices in the collective segment serve as the signal that is referenced by the power sector participants. It determines the uniform clearing price at which electricity is bought and sold, impacting producers, consumers, and the functioning of the grid due to behaviour of the participants. In a well-functioning market, prices should reflect the actual supply and demand dynamics, ensuring efficiency and fairness. However, the recent instances of prices consistently hitting the regulatory cap throughout the day has necessitated the exploration of a more robust method of discovering prices. Prices in all blocks of the collective segments across power exchanges consistently reaching the cap price, indicates an imbalance between supply and demand as well as the power of the market participants to influence the prices.

Why does this matter?

Efficiency: Consistently hitting the price cap suggests that the market is constrained to efficiently balance supply and demand. This can lead to higher costs for consumers and uncertainty for producers. In fact, a study of demand and supply curves in individual blocks generates insights on how the discovery of the uniform clearing price is influenced by marginal bids placed by a few participants. Also, if there are single side bids on multiple exchanges (buy or sell), they are unexpressed in the marketplace.

Fairness: Market participants, especially small and medium-sized players, may find it challenging to compete in an environment when prices hit the regulatory cap in all time blocks.

Quality of services: A skewed liquidity structure also results in a dominant exchange garnering the entire volume of the collective segment. As a result, there is no incentive to improve the quality of service and provide advanced analytics for the users.

A roadmap to efficiency: To ensure a more efficient price discovery mechanism in the interest of all stakeholders, several steps need to be taken:

Increased liquidity

Unexpressed bids on competing exchanges should be bundled together to increase the liquidity. The current approach of a double-sided closed anonymous auction in the collective segment has been beset by a lack of liquidity. This imbalance threatens to render the price discovery mechanism based on a “pay as clear” structure redundant, particularly within the framework of a uniform clearing price structure.

Enhanced data transparency

Transparency is the cornerstone of a robust price discovery process. Power exchanges should provide comprehensive and real-time data on supply, demand, and market conditions. This data should be accessible to all market participants, allowing them to make informed decisions.

Market surveillance and oversight

Effective market surveillance and oversight are essential to prevent market manipulation and ensure fair play. For ensuring efficient price discovery, monitoring mechanisms should be swift and robust which are essential elements for effective oversight.

Coordination among exchanges

Power exchanges must work together to coordinate price discovery. This could involve sharing data, aligning trading hours, and harmonising rules to create a more unified market. Such coordination can reduce price disparities and enhance efficiency.

Market participants' education

Market participants should be well-informed about the dynamics of the power market. This includes understanding how prices are determined and the impact of their trading activities on the market. Education and awareness programs can help foster a more knowledgeable and responsible market.

Regulatory support for renewable energy

Promoting renewable energy sources, such as solar and wind, can contribute to a more balanced supply-demand equation. Regulatory support for renewable energy projects can help reduce the risk of price spikes by diversifying the energy mix.

Entity to run uniform price discovery

In the realm of India's power exchanges, where electrons are traded like commodities, a critical question arises – who should be responsible for the vital task of uniform price discovery? The method and entity entrusted with this crucial role hold the power to shape the efficiency and fairness of the entire power market.

An entity like Grid Controller of India (Grid India) with capabilities including expertise in managing complex situations and hands on experience in optimising the power system while considering the market constraints emerges as one choice to conduct uniform price discovery across collective segments of power exchanges in the Indian power market. Additionally, its proposed operation under government authority and oversight adds credibility to the uniform price discovery process. In terms of technical competence, we need an entity with capability in managing complex price discovery algorithms, crucial in a market with liquidity challenges, and Grid India’s access to extensive data will facilitate precision in determining prices, even in conditions of constrained liquidity. Moreover, the entity's government affiliation will enable the implementation of safeguards and audit mechanisms to prevent market manipulation, protecting consumers and producers. This entity will have the robust infrastructure and extensive networks to enable seamless communication and coordination with power exchanges, market participants, and regulatory bodies, ensuring efficient information dissemination. Government affiliation instills trust and credibility in the uniform price discovery process.

Conclusion

The recent episodes of prices consistently touching the cap in all blocks of the collective segments across power exchanges have highlighted the need to improve the price discovery mechanism. It is imperative that stakeholders in the Indian power sector come together to address these issues promptly.

By implementing measures such as bundling all bids expressed on the multiple exchanges, enhanced data transparency, market surveillance, reserve capacity mechanisms, and coordination among exchanges, we can create a more efficient and fair price discovery process. Moreover, a designated entity owned by the Government of India should be made responsible for uniform price discovery in the collective segments, which can bring greater stability, transparency, and technical competence to the system, giving assurance to the stakeholders.

As we look ahead, it is our collective responsibility to ensure that the Indian power sector thrives on principles of equity, efficiency, and sustainability. By reshaping the price discovery mechanism, we can pave the way for a brighter future for India's energy landscape—one that benefits consumers, producers, and the nation as a whole.

The writer is Chairman and Managing Director, PTC India Ltd. Views expressed are personal