A NEW spat is brewing in the country’s energy sector between the center and the states, sparked by a plan by the Union government to jettison the existing decentralized, voluntary pool-based electricity market in favor of a radically different, broad-based mandatory pool model. Base India.
Dubbed Market-Based Economic Dispatch (MBED), the Union Department of Energy’s proposal calls for centralized scheduling for dispatching the entire annual electricity consumption of around 1,400 billion units. This will mark a marked departure from a decentralized model now being pursued, underpinned by the 2003 Electricity Act and subsequent reforms.
Central vs. decentralized power model
The new model proposes centralized scheduling of power distributions, both interstate and within states. Experts say this will affect states’ relative autonomy in managing their electricity sector, including their own power plants, and make discontinuity entirely dependent on the centralized mechanism.
The MBED model is believed to affect states’ relative autonomy in managing their electricity sector, including their own power plants, and makes the discoms (distribution companies largely state-owned) fully dependent on centralized mandatory market pool requirements. There are concerns that this could deprive states of their freedom to decide on their own electricity needs while managing seasonal and local demand trends. According to experts, states are already discussing these aspects.
While the Union Department of Energy is pushing MBED as a way to deepen electricity markets in line with the Centre’s “One Nation, One Grid, One Frequency, One Price” formula, there are concerns at the state level and from a range of industry experts The Indian Express spoke to them. Implementation of the first phase of MBED was originally scheduled to begin on April 1, but has been postponed to later this year, with a date yet to be announced.
SL Rao, former Chairman of the Central Electricity Regulatory Commission and a member of the Advisory Board of the Competition Commission of India, said the proposed MBED is “inconsistent with constitutional provisions, the existing legal framework and market structure” and “may end up leading to more challenges than it dissolves”. He said the proposal has implications from an overall grid management perspective, apart from the way it limits states’ autonomy.
The problem on the power distribution side (where there are questions about the viability of Diskus) is what really needs to be addressed, Rao said. But on the generational side, the new proposal violates existing structures and mechanisms, he said, adding he expects a legal challenge from states if the center moves forward.
The Center’s argument is that the current model of states implementing the planning is suboptimal. As part of this, an algorithm developed by the NLDC called Security Constrained Economic Dispatch (SCED) is cited as a solution, which aims to help regulators make informed inquiries about planning decisions nationwide. A query to CERC Chairman PK Pujari yielded no response.
When asked for comment, a senior government official involved in the exercise said that MBED is “consistent with the Centre’s One Nation, One Network, One Frequency, One Price” framework. “It will ensure that the cheapest power generation resources are deployed across the country to meet overall system demand and will therefore be a win-win for both distribution companies and generators, and result in savings for consumers,” he said the official.
Electricity is on the Constitution’s Concurrent List, with the power grid divided into state autonomous control areas managed by State Load Dispatch Centers (SLDCs), which in turn are overseen by Regional Load Dispatch Centers (RLDCs) and the National Load Dispatch Center (NLDC). From today’s perspective, each control area is responsible for balancing its demand with generation resources in real time.
The MBED model proposes to change this by establishing a central market operator that distributes both interstate and intrastate generating assets. It is also concluded that the new model will limit the multiple options currently available under the voluntary market design; As day-ahead contracts become obsolete and, from a government perspective, the Diskus and SLDC must buy or sell electricity on the real-time market, even if it is to maintain the balance between supply and demand in their control areas.
There are concerns that the new model could potentially collide with emerging market trends given the increase in renewable energy in the overall generation mix and the increasing number of electric vehicles coming on-grid – all of which will require greater market decentralization and voluntary pools for efficient grid management and operations, said an official with a regulatory background.
India has a diversified electricity market ranging from long-term power purchase agreements (PPAs), cross-border PPAs, short and medium-term bilateral contracts, day-ahead power exchanges and a real-time online market. Much of the installed power capacity — over 87 percent — is tied up by long-term PPAs of around 25 years. The remaining 13 percent are traded on the electricity markets, almost half of them via the electricity exchanges and the rest via short- and medium-term bilateral transactions.
Currently, each control area or state follows the merit order dispatch (cheapest electricity first) from the basket of domestic and interstate resources and buys or sells on the day-ahead electricity exchange. Schedules under long-term PPAs can be changed, but not for power traded on the day-ahead power exchange. The independent producers in the private sector are currently looking for buyers on the bilateral market and on the electricity exchanges on a voluntary basis.
This means that there is daily pan-India visibility of the available tradable power on the power exchange. Much of this will change under the MBED model.
An official with experience in the Central Electricity Authority, the planning arm of the Union’s Department of Energy, said that under the proposed model there are additional questions about the operation of some power plants such as Trombay TPS, Mumbai or Dadri TPS in the NCR region that are responsible for the Security of supply in important cities such as Mumbai or Delhi are crucial, and in isolated operation in the event of a power failure. Given the mandatory pooling requirement, the must-run status of these critical power plants could be questioned.
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“In addition, it is imperative that each state, regardless of the merit order for voltage and grid security, generally has capacities. This is of paramount importance from a grid stability and resilience perspective,” the official said. A proposed bilateral contract settlement or BCS mechanism under the system to reimburse the difference between the market clearing price and the contract price under the PPA, mainly to keep PPA prices intact, is another potential sticking point. This, he said, dilutes the stated goals of “market-based pricing” and complicates the entire billing and settlement process.
“There are considerations to change this antiquated market design of uniform MCP. We shouldn’t rush MBED if it’s under international review,” an official said. In Europe, for example, the gas crisis has exposed vulnerabilities in markets like the UK, where marginal electricity prices are tied to prices from the lowest-cost generator – typically a gas-fired power station in normal times. When the price of gas shoots up, there are consequences: A nuclear power plant is paid as if its feed-in costs had just quintupled, because the “clearing price” model has its pitfalls. All of this is currently happening on the European electricity markets. “The whole idea of MBED seems to be to subvert the sanctity of proven PPAs and create a volatile wholesale market with consistent clearing prices for every 15-minute time block of the day,” said the former CEA official cited above.