Author : Dharmil Doshi

Expert Speak Young Voices
Published on Feb 26, 2024

While India emphasises on harnessing the potential of integrated power exchanges, regional trends worldwide suggest “market coupling” as a conceptual tool to achieve such integration

“Market coupling” in the power sector: Is India doing enough?

India's ambitious pursuit of 500 GW of non-fossil energy capacity by 2030 demands a more robust power market. While grid infrastructure has been cumbersome, realising the benefits of power market integration hinges on regional market design and regulatory governance. Presently, over 27 cross-border connections link Bhutan, Bangladesh, India, and Nepal, offering potential access to Nepal's significant hydroelectric potential via an improved trade framework.

However, three primary forms of power trade pose distinct regulatory challenges: (i) tenant generation; (ii) bilateral power purchase agreements (PPAs); (iii) integrated market exchange. While India primarily emphasises capitalising on the potential of integrated power exchanges, regional trends worldwide suggest “market coupling” as a conceptual tool to achieve such integration.

Indian scenario

The Central Electricity Regulatory Commission (CERC) and the Ministry of Power focus on deepening power markets, bolstering transmission systems, and optimising procurement costs for discoms (power distribution companies). Power exchanges—platforms akin to stock exchanges—established under the CERC provide over-the-counter transactions to power market participants to buy or sell electricity from them or registered power traders at the correct market price. India currently houses over 47 inter-state trading licensees and three power exchanges—Indian Energy Exchange Ltd. (IEX), Power Exchange of India Ltd. (PXI), and Hindustan Power Exchange Ltd. (HPX)—operating under the Power Market Regulations, 2021.

Power exchanges—platforms akin to stock exchanges—established under the CERC provide over-the-counter transactions to power market participants to buy or sell electricity from them or registered power traders at the correct market price.

IEX and PXI operate in live market mechanisms, setting prices in line with generation costs. The IEX plays a pivotal role with over 99 percent of the market share, offering an automated trading platform for various energy contracts, Renewable Energy Certificates (RECs), and Energy Saving Certificates (ES Certs). Incentivising market players for power market integration vis-à-vis the growth of sustainable tools such as the Green-Term Ahead Market (G-TAM)—a new trading platform to enable players to purchase renewable energy on a flexible short-term basis—is imperative.

India has, thus, focused on deepening power markets, bolstering transmission systems, optimising procurement costs for discoms (power distribution companies), augmenting cross-border electricity trade to tap into distant resources, optimising peak hours, and integrating renewable energy across a broader geography.

“Market coupling,” a process that matches bids from all the power exchanges to discover the uniform market clearing price, was introduced as a concept by the CERC’s Power Market Regulations 2021. CERC also released a staff paper in August 2023 evaluating the various aspects of market coupling and its impact on the country’s power exchanges.

The ASEAN and European experience with market coupling

The ASEAN Power Grid has grown from 7.7 GW to an expected 26–30 GW capacity, driven by the tripartite Energy Purchase and Wheeling Agreement between Lao PDR, Thailand, and Malaysia. While Singapore and the Philippines have competitive power markets, other ASEAN nations still use a single-buyer model.

ASEAN has shown that coupled market exchanges can contribute to physical grid integration and cross-border transmission line expansion. As long-term contracts involving public and private players contribute to most of the power generation, market integration is bound to happen with expansive discom operations.

ASEAN has shown that coupled market exchanges can contribute to physical grid integration and cross-border transmission line expansion.

Contrasting this, Europe's market coupling with Belgium, France, and the Netherlands has revolutionised cross-border capacity use since 2006. Europe boasts interconnected markets through the North-Western Europe Price Coupling, South-Western Europe Price Coupling and Price Coupling of Regions Initiative, guided by the Capacity Allocation and Congestion Management Regulation 2015. This regulation sets standards for transmission system operators, nominated electricity market operators, and regulatory authorities, fostering an integrated electricity market.

Market coupling balanced energy over vast areas, allowed geographic and technical diversity exploitation, and reduced aggregate imbalances across Europe. Integration of Europe’s electricity markets could potentially augment the region’s social welfare funds by 16 billion euros to 43 billion euros annually by 2030.

Implications for discoms

Participation in India’s power exchanges is voluntary, accounting for about 7 percent of India's total electricity generation. The share of long-term PPAs dominates the total transaction volume (87 percent), burdening discoms with unused capacity charges. Discoms engage in long-term capacity-building measures; however, they schedule their power distribution given short-term market dynamics and prices. Power exchanges offer discoms a chance to “correct” their positions by buying more if the demand rises or selling more than the contracted quantity if the demand drops.

Bilateral cross-border electricity trade dominates through medium- and long-term contracts in South Asia. The India-Bhutan and India-Bangladesh models focused on government-to-government hydropower project development through grants or concession lending and pricing. However, new concession agreements inculcate joint ventures and a competitive tendering process, where discoms have made their presence known.

Power exchanges offer discoms a chance to “correct” their positions by buying more if the demand rises or selling more than the contracted quantity if the demand drops.

India's electricity import/export guidelines enable trade via power exchanges and tripartite agreements. Bangladesh plans to import 500 MW from Nepal through India, while Bhutan's 1,125 MW Dorjilung project aims for exports to Bangladesh via India as a trilateral project.

Power exchanges linking with foreign markets offer discoms a chance to export power to South Asia. Initiatives like IEX's Cross Border Electricity Trade enable participation from Nepal, Bhutan, and Bangladesh in Indian markets, fostering an integrated South Asian Power Market.

Though this arrangement enables the participation of discoms and facilitates the expansion of India’s power market in South Asia, CERC’s proposed market coupling falls short of “coupling” the South Asian markets. Its staff paper focuses more on domestic regulatory matters, yielding little momentum for broader South Asian regulatory challenges.

Assessing India’s vision for market coupling

CERC projects market coupling with the objectives of: (1) Discovery of uniform market clearing price for power markets; (2) Optimal use of transmission infrastructure; (3) Maximising economic surplus by considering all bid types and creating simultaneous buyer-seller surplus.

CERC highlights that market coupling can offer increased liquidity, efficiency and competition among exchanges. While it can help prevent a significant price drop due to increased competition among generators bidding for the lowest price, it could also send the wrong signal to the market for future investments. On the other hand, it can provide risk mitigation mechanisms such as hedging opportunities and allow access to broader markets, benefiting generators and consumers. Unified price discovery mechanisms can pave the way for introducing financial products within the power market.

CERC highlights that market coupling can offer increased liquidity, efficiency and competition among exchanges.

However, besides the above, almost all the other advantages mentioned by CERC can face operational challenges.

The challenges

  • Contracts drive around 90 percent of transactions, with over 99 percent of power exchange trade centralised in IEX. Therefore, seeking optimisation through a common price discovery by a market coupling operator might bring little benefit. Introducing another player in the exchange chain could complicate operations and data flow.
  • A centralised algorithm may adapt poorly to diverse bid structures across different exchanges, limiting innovative product offerings and participation. The reduced role of power exchanges would also significantly affect their business and existing investments, keeping new entrants away.
  • Market coupling would fulfil its objectives only if India were to take the Market-Based Economic Despatch (MBED) route, where the country’s entire generation becomes market-driven. However, when the share of trade through market exchanges is a mere 7 percent of the total generation, market coupling could fall short of discovering a uniform market price.
  • Globally, market coupling has been introduced to integrate two or more electricity markets or geographies. The proposed market coupling in India is unlikely to yield any benefit as it would only be a coupling of power exchanges without adding new geographies. Further, the dominance of IEX over almost the entire market share in collective transactions wouldn’t change the price discovery or liquidity and have a negligible social welfare impact.

South-Asian power trade potential: An opportunity for India’s market coupling

Despite its abundant renewable energy potential of US$411 billion up to 2030, South Asia remains the least integrated region in Asia. South Asia has tapped only 18 percent of its 350 GW hydropower capacity, developed only 3.8 percent of its 939 GW of solar power potential, and 3 percent of its 1,289 GW of wind power potential.

Agreements like the BIMSTEC Grid Interconnection show promise, unlike the limited growth seen through the SAARC Framework Agreement on Energy Cooperation. Though challenges persist, global initiatives like One Sun, One World, One Grid aim to harness renewable energy through grid integration. Balancing idealistic goals with practical regional market designs, transmission pricing, and connectivity remains imperative to inch towards integrating power trade potential in South Asia driven by India. Broader market coupling could help India achieve its regional potential.


Dharmil Doshi is an intern at the Observer Research Foundation

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