Structure of power markets in India, OTC Markets, Power Exchange Markets, Trends in Electricity transactions, Risks in power trading, Trading margin

1. Power Market & Trading
Industry Information Insights 2014

2. Table of Contents
Introduction
Power Market Structure
OTC Market
Power Exchange Market
Electricity Transaction Trends
Risks in Power Trading
Trading Margin

3. Introduction
InIndiathescopeoftradingpowerishugeevenwithitscurrentpowershortagescenario. Thepowersectorhascomealongwayfrombeingabilateralcontractdrivenlong-termmarkettoonewhichisalsodrivenbyshort-termtrades.
Therehasbeenasteadygrowthinthenumberofshort-termpowertrades,withthenumberofparticipatingutilitiesinshort-termopenaccess(STOA)increasingsteadily.
Themostdistinguishingfeatureofelectricityasacommodityisthatithasnostoragevalue. Atatimewhenalargenumberofcaptiveandmerchantpowerplantsareexpectedtobeaddedinthecomingfuture,thereisaneedtoencouragethepeakingpowerplantsandbringthesurpluscaptivegenerationinthegrid.
Short-termtransactionsofelectricityreferstothecontractsoflessthanoneyearperiodthroughInter-StateTradingLicenseesanddirectlybytheDistributionLicensees,PowerExchanges(IndianEnergyExchangeLtd(IEX)andPowerExchangeIndiaLtd(PXIL)),andUnscheduledInterchange(UI).

4. Introduction
Presently,thereisanimbalanceddispositionofresourcesinIndia.Ontheonehand,theeasternregionisrichincoalsourcesandsoalotofpitheadbasedloadplantshavebeensetupthere.Thenortheasternregionalsoholdsalotofhydropowerpotential.Whereas,thewesternandnorthernregionsofthecountrysufferfromaheavydeficitofsuchpowerduetotheirimmenseindustrialandagriculturalload.
Powertradingisaneffectivewaytoprocureelectricityfromtheshort-termmarket.
Thegrowthinpowertradingisofsignificantinteresttoindependentpowerplantowners, merchantpowerplantowners,distributionutilities,openaccessconsumers,captive-plantowners,transmissioncompanies,electricitytradersandpowerexchanges.

5. Short Term Power Markets
Power Market (Short Term)
OTC Market
Direct between Buyer & Seller
Electricity Trader
Back to Back Deals
Deals with Open Position
Power Exchange
Intraday
Contingency
Day Ahead
Term Ahead
UI
Market Participants
Generation companies
Distribution Licensees
Open Access Consumers
Electricity Traders
Power Exchanges

6. Over the Counter (OTC) Market
OvertheCounterMarketistheinter-Statemarketwherebuyersandsellersdirectlytransactortransactthroughanelectricitytrader.
Thepriceandtermsofthecontractaredeterminedthroughnegotiationsasagreedbetweenthepartiesorthroughcompetitivebiddingprocessorthroughaelectricitytrader.Theriskincontractsexecutedinsuchmarketsismanagedbetweenthepartiesthemselvesorbytheelectricitytrader.
PowerExchangeMarket
PowerExchangeMarketisamarketwherebuyers,sellers,electricitytraders,membersofpowerexchangetransactonstandardizedcontracts.
ThePowerExchangeorClearingCorporationiscounterpartytocontracts.SchedulingisdonebyRegionalLoadDespatchCentreorNationalLoadDespatchCentreunlessactualdeliveryisdispensedwith.

7. OTC Market
OTC Contracts directly between Buyers and Sellers
Theinterstatetransactionsinwhichbuyersandsellersenterintoacontractanddecidepriceandothertermsofthecontracteitherthroughnegotiationorbasedoncompetitivebiddingprocesses.
OTCContractsthroughElectricityTraders
BacktoBackDeals:ElectricityTraderbuysaspecificquantityofpowerforaparticulardurationfromonepartyandsimultaneouslysellsittoanotherpartyonsametermsandconditions.Suchtransactiondoesnotexposethetradertoanypricerisk.Itmayexposethetradertocreditriskandoperationalrisk.
DealswithOpenPosition:ElectricityTradertakesapositioninapowerpurchaseorsalecontractbasedonpriceandotherfactorsinviewandadoptsastrategywhichhedeemsfit.

8. Power Exchange Market
Short term market means a market with contracts for a period not exceeding one year.
Term Ahead Market (TAM)
Marketwherephysicaldeliveryofelectricityoccursonadatemorethanoneday(T+2ormore)aheadfromthedateoftransaction(T)andthecontractsinsuchmarketcanbetransactedweekly,monthlyoryearlyormoreinadvanceandhaveadefineddeliveryperiodonexpiryofcontract.
Day Ahead Market (DAM)
Contractswheretransactionoccursonday(T)anddeliveryofpowerisonthenextday(T+1).
ContingencyMarket:IntradayContract
Contractswheretransactionoccursonday(T)aftertheclosureofdayaheadtransactionwindowandthedeliveryofpowerisonthesameday(T)ornextday(T+1).

9. Electricity Transaction Trends
Theshort-termpowermarket,whichcoverscontractsoflessthanayearthroughbilateralagreementsandpowerexchangesiswelldeveloped.
In2012-13,approximately11%ofthetotalelectricitymarketwastransactedthroughshort- termpowermarket.Thebalance89%percentofgenerationwasprocuredmainlybydistributioncompaniesthroughlong-termcontractsandshort-termintra-statetransactions.
Year
Short-Term Transactions
Electricity Generation
Percentage
2009-10
65.90
764.03
8.63%
2010-11
81.56
809.45
10.08%
2011-12
94.51
874.17
10.81%
2012-13
98.94
907.49
10.90%

10. Shareofelectricitytrading(inbillionunits)bytradinglicensee,powerexchange,distributioncompaniesandUI(UnscheduledInterchange)inshorttermelectricitytransactions.
Trading Licensee36%
Power Exchange24%
UI25%
Discoms15%
For 2012-13
Year
Trading License
Power Exchange
UI
DISCOMs
2009-10
26.72
7.19
25.81
6.19
2010-11
27.70
15.52
28.08
10.25
2011-12
35.84
15.54
27.76
15.37
2012-13
36.12
23.54
24.76
14.52

11. Risks in Power Trading
Credit Risk
Riskemanatinginacontractduetochangeinfinancialconditionofanyofthecontractingparties.
OperationalRisk
Riskemanatinginacontractduetosystems,processes,technologyerrororbreakdown,nonschedulingofpowerduetotechnicalreasons.
PriceRisk
Riskemanatinginacontractduetochangeinpriceofthecontractorassetduringtenureofthecontract.

12. Trading Margin
Whenpowertradingstartedin2004-05,thelicenseesvoluntarilycharged5paise/kwhorlessasthetradingmargin.However,itincreasedin2005andtheweightedaveragetradingmarginchargedbythelicenseeswentupto10paise/kwhduringApriltoSeptember2005period.
Then,theCERCdecidedtoregulatethemarginandfixedthetradingmarginat4paise/kwhvide"CERC(FixationofTradingMargin)Regulations"notificationdated26January,2006.
Basedonfeedbackandexperiencewith2006regulationsandconsideringvariousrisksassociatedwiththeelectricitytradingbusiness,CERCrevisedthetradingmarginin2010.
Thetradinglicenseecannotchargetradingmarginexceeding7paise/kWhincasethesalepriceisexceedingINR3/kWhand4paise/kWhwherethesalepriceislessthanorequaltoRupeesINR3/kWh.
Thismarginincludesallcharges,exceptthechargesforscheduledenergy,openaccessandtransmissionlosses.

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