Power exchanges clock growth despite pending discom dues worth Rs 1.32 trn

A third player starts operations, pointing to the potential of this nascent business

India’s power trading market is a challenging place. It is dominated by two entities of which one accounts for a 95 per cent market share. It has recently faced payment disruptions and regulatory price caps. Yet, this has not deterred a third operator from starting operations and NTPC, the country’s largest power producer, from raising its stake in one of them.

The biggest of the energy trading exchanges is the 14-year-old Indian Energy Exchange, initially promoted by Financial Technologies India, which was divested of its holding in 2014 following regulatory transgressions. It accounts for 95 per cent of the power trading market.

Power Exchange India Ltd (PXIL), also set up in 2008 and promoted by NSE Investment and National Commodity and Derivative Exchange, accounts for the remaining 5 per cent market share.  Despite this skewed market, NTPC Vidyut Vyapar Nigam, a wholly-owned utility services subsidiary of state-owned NTPC, acquired a 5 per cent stake in PXIL in February.

Then in July this year, the four-year-old Hindustan Power Exchange, promoted by BSE, state-owned consultancy Power Trading Corporation, and ICICI Bank, received the go ahead from the market regulator, Central Electricity Regulatory Commission (CERC) to start operations.

Yet this year has also starkly highlighted two challenges of operating in this market. In April, CERC introduced a Rs 12 per unit cap on the maximum price at which electricity could be sold in the popular Day Ahead Market (DAM). The regulator felt that with demand soaring, buyers such as discoms would struggle to pay.  The cap was to run for three months but has now been extended till the end of September. Consequently, in July volumes declined 1.7 per cent across all market segments on a YoY basis, IEX data shows.

In August, Power System Operation Corporation (Posoco), the national grid operator, barred 12 states and one Union Territory from the spot market as a penalty for not clearing their dues of Rs 5,085 crore to the generators. Though most states paid up soon after, Posoco’s move pre-empted a payments crisis from engulfing the market, an endemic problem since key buyers — state-owned power distribution companies — remain near-bankrupt. 

So what accounts for the optimism? One is the immense potential of the business. 

This is principally because it shields generators from the wayward payment schedules of discoms under long-term supply contracts (power purchase agreements). Since the discoms, often under political pressure, undercharge some categories of customers, they are short of cash. Power dues to generators have been soaring relentlessly and are now above Rs 1.32 trillion in June, 2022, government data shows. 

“From the current 5 per cent of the total power trade in the country, the Central Electricity Authority expects the volumes will cross a quarter before the end of this decade. With those numbers, we will be in a happy situation if we can reach close to half the total market,” Akhilesh Awasthy, chief operating officer of HPX, told Business Standard.

Not just power, Awasthy added, there is already a nascent market for gas and he expected a similar market for coal soon too. These are attractive markets for the three exchanges to step into. 

How do these exchanges operate? They are platforms that bring generators and buyers together. These generators pay the exchanges for their trading rights. This correspondingly needs a high level of investment. All the three have the financial muscle for staying the course. The IEX, for instance, has cash and investments of about Rs 340 crore, according to an ICICI Direct report. These exchanges have about 6,800 participants, comprising distribution utilities, commercial and industrial consumers. On the sell side are 400-plus generation companies, public and private

In the power exchanges as of now the most popular product is the DAM, where every 24-hour period is divided into 48 half-hour cycles for trade. But the most popular product globally is the real-time market. Those are designed as half-hourly markets through the day where auctions are held at intervals of 15 minutes each. Like in any other market, bids are squared off against ask but because of the nature of the product traded, power exchanges are highly technologically sophisticated products. This means exchanges that stay ahead with the latest technological products, will offer more comfort to the players. 

HPX has begun offering what are known as contingency contracts, products that stretch beyond the DAM timeline. Not surprisingly, Awasthy says they will move into spot trading soon.

But for the market to expand, the regulators need to give the exchanges more leeway and foster greater competition. Only that will encourage investments in the latest technological platforms to come into play. The arbitrary price cap is one example, though it is unlikely to be extended beyond September since the power ministry has indicated its opposition to the move. In early August, the ministry released a set of draft guidelines, which suggested removing the cap to allow the markets to grow.

But regulatory issues in the power market have a long history. In 2009, commodity market platform MCX decided to introduce forward trading in electricity to expand its portfolio. But CERC, after initial approval, denied it permission because IEX was already in the business. That issue became a court battle and stretched for years. MCX claimed CERC was “usurping jurisdiction over forward and futures contracts”, whereas forward trading in any commodity was the preserve of the then regulator, Forwards Market Commission. The case travelled to the Supreme Court, which decided in October 2021 that an electricity trade up to 11 days qualified as a spot trade and therefore came under the energy regulator. Volumes had begun to soar in the energy markets in FY22. Cumulatively for FY22, there was a 38 per cent year on year growth in FY22 in the business, aided by the national peak demand for electricity reaching 200.5 Gw in FY22. 

Significantly, Nepal, Bhutan and Bangladesh have begun trading in the Indian power market, buying about 1.2 Gw a day. Can a sector regulator have the jurisdiction to decide on the inter-country market? Since Sebi also became the regulator for forwards markets in 2015 it has now picked up the argument with CERC over who should regulate the forwards market. The segment can only trade in non-transferable specific delivery contracts.  As the market expands and demand rises for a futures segment too, this could become the next challenge for the power exchange business.