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SAARC Electricity Market – Role of Energy Exchange
Rajesh K Mediratta
SAARC countries form geographically a subcontinent. Weather, water and air streams all flow seamlessly through this sub-continent. Electricity flows actually should not see the boundaries and must cross sub continent through cross electrical networks. Hydro potential in North, Coal rich deposits in the central region and gas potential in the on-shore and off-shore in South-east coast are diverse rich energy sources. Not only conventional resources, the renewable sources like sun, wind, biomass, geo-thermal sources are also spread across the subcontinent.
Significant sun potential in North-West like Thar region in India and Pakistan, windy coast in West and South in Gujarat and Tamil Nadu. These diverse energy resources make a perfect case of wider interconnected electric systems. The mankind has successfully converted all forms of energy into most convenient form i.e. electricity. Electricity can flow easily across the region and can be controlled if required through DC interconnections. It is therefore best manner to exchange energy.
The interconnected systems of the neighboring countries provide significant values in terms of economic benefits, reliability, system security and environmental benefits. The benefits from electricity exchanges are estimated to be more than from any other single commodity.
At present most of the SAARC nations are short of electricity generation capacity and energy to meet their demands. Still currently there are pockets of surplus regions. Still there are time slots within day, season and within a year where there are surpluses. Such surpluses are also created because of events like festivals, sporting events, national holidays etc, Power can flow during such periods at short notice and in small packets. But benefits are huge. The unserved demand has large values which are lost once they had remained un-met. Particularly all SAARC nations are either emerging or developing economically. In India, according a study, the value of lost load varies from INR 35-110/kWh or 70-200 US cents/kWh. Therefore most conservative estimates are savings or value of a 100MW is about $ 600 million . The cost a 400kV double circuit line with step-down substations is $20 million . Should there be better reason for building an interconnection?
Electricity Exchange...Experience in India
In India the electricity exchange commenced with IEX which has since then played a credible role in creating a transparent market in the sector. With IEX the market has moved from a regulated regime to market-driven regime. Increasingly buyers like distribution companies and industries and generators are opting to trade electricity through electricity exchanges.
IEX started Day-Ahead Market in June 2008, added weekly and daily contracts upto two weeks in September, 2009. Both of these markets are physical delivery based markets of electricity. The markets witnessed volumes of trading grow from 4000MWh daily in Aug08 to 45000MWh daily in 2011-12.
DAM auction is used for trading 15-minute block contract, one day prior to the delivery of electricity. Both buyers and sellers electronically submit their anonymous bid during the bid call session. The market clearing price is determined on the basis of intersection point of demand and supply curve. This Uniform price (MCP) is offered to both selected buyers and sellers. Price discovery in DAM market is true function of demand and supply only.
Every day, from 10AM to 12PM, double-sided closed auctions are received from the participants across the country, which are free to bid in quantum and price according to their requirement. For bidding, a Trader Work Station (TWS) is established at the Member’s end. Based on the bids received from buyers and sellers, a market clearing price is calculated for every hour of the day using an automated algorithm. In case of congestion in any transmission corridor, the market gets split and area clearing prices starts showing marginal cost of power in that area after taking constraints into consideration. The costlier power station in deficit constrained area will get dispatched and the area prices will reflect the marginal cost of power in that area. Similarly, surplus area will have lower area price than unconstrained MCP.
Phases of Market Development
Phase 1 (June 08-Aug 09): In first phase of market development, distribution utilities were buyers and few other distribution companies along with IPPs, CPPs.
Phase 2 (Aug09 onwards): The industrial consumers connected to the lower voltages at 132 kV and below started using the exchange after receiving clearance from its incumbent utilities and SLDCs in August 09 and that started new era in power markets.
Electricity exchange provides for a transparent, neutral, electronic and pan-country platform for trading of electricity. Exchange provides non-discriminatory market place, national-level access to all buyers and sellers & transparent method of price discovery. The Day Ahead Market enables participants to better forecast its energy requirements and hedge against Unscheduled Interchange (UI) risks. The price discovered at exchange platform gives the price signal for new generation capacity addition and requirement of investment in transmission network. It has generally improved the market environment to encourage investment in new generation capacity and helping India towards becoming power sufficient country.
Cross-Border Exchange-Probable Model
In Day-Ahead Market, India is divided into 12 market areas. While bids are submitted across the market, the areas are demarcated for the purpose of splitting the market when the transmission capacity is short of market requirement. In this model, a new market can be added as new market area. The participants from new areas would bid as if they are part of complete market. The market price discovered is common across all areas when there are no transmission constraints, however, the area prices differ when there are constraints for flow of power across two areas. Day-Ahead Markets are also known as collective market where the transactions are pooled. Several small buyers get power from one single seller and combination changes in transaction periods. Presently transaction period has been changed from one hour to fifteen-minute timeblock. The day is now divided in 96 timeblock since April12.
SAARC countries namely Nepal, Bhutan, Bangladesh, Pakistan, Sri-Lanka can be integrated in such markets. Afghanistan can be integrated through Pakistan. Each cross-border country will buy when deficit and sell its surplus and the exchange will facilitate determination of a common area price and volume for all the bid areas.
Phase-wise development of common market
It is suggested that for each cross-border bid area a nodal agency can be defined for the purpose of bidding and financial settlement. Presently in India, trading licensees are nominated nodal agencies for trading of electricity with Nepal, Bhutan and Bangladesh. These trading licensees manage to organize buyers/sellers within India and coordinate with single-agency in neighboring countries. With exchange coming as trading platform, they as licensed to buy and sell and being competent to undertake trading can arrange for necessary compliances for managing the participation and activities like bidding and financial settlement on the exchange. They also would coordinate with system operators for settlement of deviations in actual interchange with reference to scheduled transactions. Till the time, the cross border participants are single or bundled utility or group of consistent generators, the question of settlement deviation is a settled matter. However, as the number of participants turn into multiples, the deviation settlements need special treatment.
Following, is the list of the key conditions which needs to be met for full-scale market development. Though, some are essential for starting cross-border transactions however, some conditions may come up later. The need of transmission connectivity is anyway starting point. The list below contains those which are besides the transmission infrastructure.
- A. Clearing & Settlement arrangement: In case of Day Ahead Market, the clearing and settlement is done on a daily basis and international banking being time consuming (3-4 days required for co-ordination) a local company/organization can be made the nodal agency for coordination of C & S activity. The three factors need to be looked into are:
- International banking is time consuming
- Co-ordination for C & S across the border extremely important
- Payment/Fund transfer mechanism need to be put in place
- B. Payment Security mechanism: For a cross border exchange to be successful we will need a proper payment security mechanism in place, counterparty for providing payment security to the buyer and seller needs to be designated.
- C. Available Transmission Capability Determination: For day to trade and transfer of power between the countries we need a coordinated mechanism for determination of available transmission capability.
- i. Nodal Agency for ATC: Each country will have a nodal agency for determination of ATC for two-way exchange. The import or export capability within the country can be determined based on downstream network capability. for examples, India-NLDC and Nepal – NEA.
- ii. Both countries will determine Available Transmission Capacity (ATC) considering downstream networks.
- iii. ATC in both directions and transmission capacity of the link can be determined using power flow simulations
- iv. Minimum of ATCs specified by both Nodal Agencies including capacity of the link in each direction declared as ATC.
- D. Deviation Settlement: A transparent and strong mechanism is must need for settling the deviation. At present in India the deviation from schedule is settled under the Unscheduled Interchange (UI) mechanism.
- E. Dispute resolving mechanism: A strong dispute resolving resolution need to be worked upon between the countries, which will ensure smooth and dispute free operation of the exchange.
- F. Proper risk hedging mechanism: A proper risk hedging mechanism for buyers and sellers need to be put in place for running a common platform for trading. Two criteria that can be fixed for risk hedging are:
- 100% advance payment from buy side
- Sellers may be paid after delivery
- G. Transmission corridor maintenance and development: Transmission nodal agency of both the countries for e.g. PGCIL in India and NEA in Nepal need to be given the full responsibility of maintenance and development of transmission corridor connecting the two countries.
- H. Congestion management: Congestion is basically traffic in the transmission network; it arises due to lack of transmission capacity in the network. In case of congestion management is one of most important key issue in case of an exchange. Congestion is managed by way of market splitting and this leads to different prices in different areas.
- Congestion fund = (Buy & Sell Volume difference) * (Difference in price of interconnected bid areas)
- Utilization of the Congestion fund generated due to deficit market in respective country/ bid area
- Option 1: Can be directly given to the SPV operating the across border transmission corridor
- Option 2: The Govt. of the particular country may be given the congestion fund and they may further utilize that fund for development of the transmission corridor
Cross-border Transmission Connectivity – Status
India-Nepal Connections: At present India & Nepal is connected through northern region and eastern region through 22 inter-links of 132/33/11 kV. A 400 KV interlink covering a distance of 125 km connecting Muzaffarpur (India) and Dhalkebar (Nepal) is under construction.
India-Bhutan Connections: The eastern part of Bhutan is linked to Bongaigon and Rongia in Assam (India) by 66 kV and 33kV lines, and the western part is linked to Siliguri in West Bengal (India) by a 220 kV line. Bhutan’s electricity export is transferred to the eastern and northern regions of the Indian power system through the construction of a 400 kV double-circuit line (1,200 km long, 3,000 MW transfer capacity). Through 11 kV and 33 kV interconnections, Bhutan imports about 25 GWh a year from India.
India-Sri Lanka Connections: A MoU is signed between GoI & GoSL for feasibility study to be carried out by POWERGRID and CEB for development of HVDC line connecting India and Sri Lanka.
India-Bangladesh Connections: With Bangladesh HVDC connectivity of exchange of 500 MW power.
Cross-Border Exchange: International Experience
Nord Pool: Nord Pool Spot runs the largest market for electrical energy in the world, measured in volume traded (TWh) and in market share. It operates in Norway, Denmark,
Sweden, Finland, and Estonia. More than 70% of the total consumption of electrical energy in the Nordic market is traded through Nord Pool Spot. It was the world's first multinational exchange for trading electric power. Nord Pool Spot offers both day-ahead and intraday markets.
European power Exchange: EPEX SPOT is the exchange for the power spot markets at the heart of Europe. It covers France, Germany, Austria and Switzerland. Together, these countries account for more than one third of the European power consumption. The Paris-based company with a branch in Leipzig has been created in 2008 through the merger of the power spot activities of the energy exchanges Powernext SA in France and EEX AG in Germany. A total of 314 TWh was traded in the Year 2011.
South Asian Cross-Border Energy Exchange: Way Forward?
The few energy transactions taking place as of today are more to keep ‘lights on’ in boundary areas than economic or commercial in character. There are no long-term contracts with price adjustment mechanisms and formulae, and dispute resolution mechanisms.
To make South Asian Cross-Border Energy Exchange a reality we will need a Public Private Partnership arrangement in cross-border energy export projects combined with the best of political commitment and commercial delivery, especially from the ministries of External Affair, Commerce and Power. The International experience around the globe has shown us how a cross-border exchange can operated and run successfully for the mutual Benefits of the Power Systems of countries. We will need to establish balancing & settlement rules across countries for taking care of payment security and commercial terms without any disputes. Grid connectivity standards need to agreed and issued for managing and operating grid.
Further we need to address the Jurisdictional Issues such as allowing Grid connected entities from SAARC nations, uniformity in Settlement Deviations. System studies have shown the technical feasibility of interconnected grid of India, Nepal, Bhutan and Bangladesh. It could support power transfer capacities in the range of 50 MW to 500 MW. Cost of transmission could fall to 0.2 cents/kWh when interchanges amount to 500 MW. The project is expected to have acceptable rates of return, an easy-to-implement five year time frame, and no major environmental issues. Possible problems of synchronous operation of the four systems have to be identified and resolved. Given the modest cost, this may be a good beginning for the multilateral electricity trade in South Asia. To start with we can have a common market for Nepal-Bhutan-India-Bangladesh. Later it can be enlarged to include Pakistan, Sri Lanka and Afghanistan.
Rajesh K Mediratta: Sr Vice President (Business Development), Indian Energy Exchange Limited.Last Updated on Wednesday, 17 October 2012 18:25