Module-4: Electricity vis-à-vis Other Commodities

Distinguishing features of electricity as a commodity

Physical Characteristics
1. Non-Storability:
o Electricity must be consumed the instant it is generated, unlike other energy
commodities such as coal or oil.
o Energy audits focus on optimizing real-time usage to reduce waste.
2. Instantaneous Balance:
o Demand and supply must always be balanced; deviations can destabilize the
grid.
o Conservation measures often aim to smooth out demand spikes.
3. Invisible Nature:
o Electricity cannot be seen or measured directly, requiring metering and
monitoring systems for audits.
4. Losses in Transmission:
o Significant energy is lost during transmission and distribution.
o Audits target reducing these losses by upgrading infrastructure.
5. Dependence on Infrastructure:
o Requires a grid for distribution, unlike other fuels that can be transported and
stored.
o Conservation focuses on optimizing grid performance.
6. No Emission by Itself:
o Electricity usage doesn’t directly emit pollutants, but its generation can be
highly polluting.
o Energy audits emphasize reducing electricity demand to curb upstream
emissions.
Economic Characteristics
7. Time-Variable Pricing:
o The cost of electricity fluctuates based on demand and supply (e.g., peak vs.
off-peak hours).
 o Conservation measures focus on shifting demand to off-peak periods.
8. Low Elasticity of Demand:
o Consumers often have limited flexibility to reduce usage, even with rising
prices.
o Audits identify areas of inefficiency to help reduce non-essential consumption.
9. Shared Cost Burden:
o Network costs are shared among all users, impacting unit pricing.
o Conservation reduces strain on the network, benefiting all users.
10. Subsidized Nature:
 Electricity prices are often regulated and subsidized, masking its true cost.
 Audits promote awareness of hidden costs and encourage responsible usage.
Technical Characteristics
11. Energy Conversion Efficiency:
 Electricity is often converted into other forms (light, heat, motion) with
varying efficiency.
 Audits assess equipment performance to minimize conversion losses.
12. Power Quality Concerns:
 Voltage fluctuations and harmonics can reduce the efficiency of electrical
systems.
 Conservation includes improving power quality to enhance overall efficiency.
13. Diversity in Usage:
 Electricity powers everything from industrial machinery to household
appliances.
 Energy audits categorize and prioritize conservation efforts by sector.
14. Decentralized Generation:
 Increasing adoption of decentralized sources like solar panels requires careful
integration with the grid.
 Conservation includes maximizing local generation and minimizing imports.
15. Dependence on Renewable Energy:
 The shift to renewables impacts grid stability due to variability.
 Conservation strategies align with managing variable sources efficiently.
Operational Characteristics
16. Load Variability:
 Electricity demand varies by time of day, season, and sector.
 Conservation measures aim to flatten demand curves.
17. Critical Nature:
 Interruptions in supply can disrupt essential services like hospitals and
industries.
 Audits focus on ensuring reliable supply while optimizing consumption.
18. Real-Time Measurement Required:
 Continuous monitoring is essential to identify usage patterns and
inefficiencies.
 Energy audits rely on smart meters and data analytics for this purpose.
19. Dependency on Technology:
 Modern appliances and systems require electricity, increasing demand.
 Conservation emphasizes upgrading to energy-efficient technologies.
20. Grid Congestion and Constraints:
 Overloading of transmission lines increases costs and losses.
 Conservation includes demand-side management to reduce grid congestion.

Four Pillars of Market Design

The Four Pillars of Market Design are key elements for the efficient and reliable operation of
electricity markets. These pillars ensure that the market functions effectively, balancing
supply and demand while minimizing costs and maintaining system stability. The four pillars
are:

1. Imbalance Management
Imbalance refers to the deviation between scheduled and actual electricity generation or
consumption. It occurs when the supply or demand does not align as expected.
Key Features:
 Real-Time Adjustments: Imbalances are corrected in real-time by adjusting the
generation or consumption.
  Penalty and Incentive: Market participants (generators, distributors, or consumers)
who create imbalances can be penalized, while those who help correct imbalances
may be rewarded.
 Role in Market Design: Effective imbalance management encourages accurate
forecasting and adherence to schedules, promoting grid stability.
Market Design Impact:
 Imbalance mechanisms help avoid major grid disturbances and ensure that the cost of
deviations is clear and manageable.
 The system incentivizes market participants to forecast and schedule electricity use as
accurately as possible, reducing waste and inefficiencies.

2. Scheduling and Dispatch

Scheduling refers to the planning of electricity generation and consumption over a specific
time period, and dispatch is the real-time execution of this plan to match supply with demand.
Key Features:
 Advance Scheduling: Market participants schedule generation and consumption in
advance, typically on an hourly or day-ahead basis.
 Real-Time Dispatch: Operators dispatch generation to meet demand as it arises,
adjusting generation as needed to maintain balance and stability.
 Economic Dispatch: Generators are dispatched based on their costs, with cheaper
generators prioritized to minimize the overall cost of electricity production.
Market Design Impact:
 Scheduling and dispatch mechanisms ensure that generation is optimized to meet
demand at the lowest possible cost, and deviations from these schedules are managed
to maintain system stability.

3. Congestion Management
Congestion management addresses the limitations of the transmission grid. When demand
exceeds the capacity of transmission lines in certain areas, the grid becomes congested.
Key Features:
 Transmission Constraints: Transmission lines can only carry a limited amount of
electricity. If demand exceeds supply capacity in a region, congestion occurs.
 Congestion Pricing: Markets use locational marginal pricing (LMP) to reflect the cost
of delivering electricity at different locations, based on the transmission congestion.
 Market Signals: Prices are higher in congested areas to reflect the increased cost of
transmitting electricity through constrained areas.
Market Design Impact:
 Efficient congestion management ensures that electricity is delivered from the least-
cost generation to where it is needed, while accounting for transmission limitations.
This helps reduce inefficiencies and ensure that resources are utilized optimally.
4. Ancillary Services
Ancillary services are essential services that support the reliability of the electricity grid.
They include services like frequency regulation, voltage support, and reserves, which are
needed to maintain system stability.
Key Features:
 Frequency Regulation: Ensures that the grid's frequency remains within the required
limits (e.g., 50 Hz in India or 60 Hz in many parts of the U.S.).
 Reserve Services: These are backup services that ensure there is extra capacity
available in case of generation failures or sudden changes in demand.
 Voltage Support: Ensures that voltage levels stay within acceptable ranges to avoid
equipment damage and operational instability.
Market Design Impact:
 Ancillary services are crucial for maintaining grid stability and reliability. The market
design must allow these services to be procured efficiently to avoid system
disruptions, and market participants can be compensated for providing these essential
services.

Summary of the Four Pillars of Market Design

 Imbalance Management ensures real-time balance between generation and
consumption, with financial incentives or penalties.
 Scheduling and Dispatch optimize electricity generation and consumption through
advance planning and real-time dispatch to meet demand at minimal cost.
 Congestion Management addresses transmission constraints through pricing and
efficient use of available transmission capacity.
 Ancillary Services support grid stability by ensuring frequency control, reserve
power, and voltage regulation.
Together, these pillars ensure that electricity markets operate efficiently, maintain reliability,
and offer incentives for conservation and efficient use of energy resources.
Framework of Indian power sector
The Indian Power Sector is a large, multi-layered network that includes electricity generation,
transmission, distribution, regulation, and market operations. It plays a critical role in
powering the economy and meeting the growing demand for electricity in the country. The
sector is transitioning towards sustainability with a strong focus on renewable energy, energy
efficiency, and grid modernization. Here's a detailed framework of the Indian power sector:

1. Generation Sector
The generation sector is responsible for producing electricity. India’s generation capacity is
diverse, with contributions from various sources, including conventional and renewable
energy.
Key Components:
 Thermal Power:
o The dominant source of electricity generation, especially coal-based power
plants. Other sources include gas and oil.
o Coal remains the most significant contributor to India's power generation,
though its share is decreasing with increasing renewable adoption.
 Renewable Energy:
o India has set ambitious renewable energy targets, aiming for 500 GW of
renewable capacity by 2030.
o Solar and wind power are the primary contributors to India’s renewable
capacity.
o Hydropower, both large and small, contributes to the generation mix, although
it faces challenges such as environmental concerns.
 Nuclear Power:
o A smaller part of the energy mix, though it is being expanded as a clean
energy source.
o India has several nuclear power plants in operation, with more under
development.
Key Players:
 Public Sector:
o NTPC Limited, NHPC, and Power Grid Corporation of India Limited
(PGCIL) are key public sector players.
  Private Sector:
o Companies like Tata Power, Adani Power, and Reliance Power are leading
private-sector players in thermal and renewable power generation.
2. Transmission Sector
The transmission sector is responsible for transporting electricity from power generation
plants to distribution networks, ensuring that it reaches consumers.
Key Features:
 Interstate and Intrastate Transmission:
o Transmission of electricity is managed by Central Transmission Utilities
(CTUs) for interstate and State Transmission Utilities (STUs) for intra-state
transmission.
o Power Grid Corporation of India Limited (PGCIL) manages interstate
transmission.
 High Voltage Lines:
o Transmission is carried out using high-voltage transmission lines to minimize
losses. Voltage levels are reduced as electricity moves closer to the
consumption points.
 Transmission Expansion:
o Ongoing expansion and modernization of the transmission network to support
growing demand and the integration of renewable energy sources.

3. Distribution Sector
The distribution sector is responsible for delivering electricity from the transmission network
to end users (residential, industrial, commercial, etc.).
Key Features:
 State Distribution Companies (Discoms):
o Discoms are primarily responsible for the distribution of electricity to end
consumers. These can be state-owned or privatized companies.
 AT&C Losses:
o One of the major challenges facing the distribution sector is Aggregate
Technical and Commercial (AT&C) losses, which includes both technical
losses (due to poor infrastructure) and commercial losses (due to theft or
inefficiencies).
 Reforms:
 o The UDAY Scheme (Ujwal DISCOM Assurance Yojana) was launched to
improve the financial health of Discoms and reduce losses.
o Smart Metering and smart grid technologies are being adopted to improve
efficiency and reduce losses.
 Tariff Regulation:
o Electricity tariffs are regulated by the State Electricity Regulatory
Commissions (SERCs), which set the prices consumers pay based on input
costs and investment requirements of Discoms.

4. Regulatory Framework
The regulatory framework in India consists of several bodies and policies to ensure the
efficient and transparent functioning of the power sector.
Key Regulatory Bodies:
 Central Electricity Regulatory Commission (CERC):
o Regulates interstate electricity transmission, tariff for central power plants, and
market operations.
 State Electricity Regulatory Commissions (SERCs):
o Regulate tariffs, distribution, and supply within states. They also oversee the
performance of state-owned distribution companies.
 Electricity Act, 2003:
o Provides the legal foundation for the Indian electricity market, allowing for the
creation of independent regulators and setting out rules for generation,
transmission, and distribution.
 National Electricity Policy (NEP):
o Provides guidelines for the development of the electricity sector, including
sustainability goals, grid reliability, and equitable distribution of power.
 National Renewable Energy Policy:
o Aimed at accelerating the growth of renewable energy sources and addressing
energy security.

5. Power Market and Trading

The power market enables the buying and selling of electricity through exchanges, ensuring
price discovery and efficient allocation of resources.
Key Features:
  Power Exchanges:
o Indian Energy Exchange (IEX) and Power Exchange India Ltd (PXIL) are the
two main platforms for trading electricity.
o They provide a platform for day-ahead markets, real-time markets, and
forward contracts, among others.
 Open Access:
o Large consumers and generators can buy and sell electricity through open
access arrangements, bypassing traditional distribution systems to reduce
costs.
 Renewable Energy Certificate (REC) Mechanism:
o A market-based instrument that promotes renewable energy by allowing
entities to meet their renewable purchase obligations (RPOs).

6. Key Policies and Initiatives

The Indian government has launched several policies and schemes to ensure the sustainable
and efficient functioning of the power sector.
Key Policies:
 National Action Plan on Climate Change (NAPCC):
o Focuses on enhancing energy efficiency and increasing the share of renewable
energy in the overall energy mix.
 Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME):
o Encourages the use of electric vehicles (EVs) to reduce fuel consumption and
emissions.
 Pradhan Mantri Sahaj Bijli Har Ghar Yojana (Saubhagya Scheme):
o Aims to provide electricity access to all households in the country.
 Solar and Wind Energy Policies:
o India has set ambitious renewable energy targets (175 GW by 2022, 500 GW
by 2030), with policies focused on large-scale solar and wind power
installations.

7. Challenges and Future Outlook

The Indian power sector faces several challenges, including:
 Transmission and Distribution Losses: High AT&C losses and network
inefficiencies.
  Financial Stress in Discoms: Many state-owned Discoms face financial difficulties
due to inefficiencies and inability to recover costs.
 Renewable Energy Integration: Integrating renewable sources like wind and solar
into the grid, given their intermittent nature.
 Grid Modernization: Upgrading the grid infrastructure to handle growing demand,
smart grids, and renewable energy integration.

However, there are significant opportunities, including:

 Renewable Energy Expansion: India is becoming a leader in renewable energy,
particularly solar and wind.
 Technological Innovations: The rise of smart meters, demand-side management,
and energy storage solutions will help improve grid stability and reduce
consumption.
 Electric Vehicles (EVs): The adoption of electric vehicles will reduce dependence on
fossil fuels and help reduce electricity demand peaks.

The Indian power sector is vast and dynamic, with substantial growth opportunities as well as
significant challenges. It is undergoing a transition towards a more sustainable and efficient
energy system with increasing reliance on renewable sources, grid modernization, and energy
efficiency measures. The regulatory framework and policy initiatives are crucial for guiding
this transition, while the focus on reducing transmission and distribution losses and
improving the financial health of Discoms will be central to the sector’s long-term
sustainability.

Introduction to the availability-based tariff (ABT)

The Availability Based Tariff (ABT) is a pricing mechanism designed to ensure the reliability
and efficient operation of the electricity grid, particularly in the Indian context. It aims to
establish a fair and transparent method for compensating power generators, balancing supply
and demand, and ensuring grid stability.
ABT was introduced in India to address challenges in the operation of the electricity market
and the grid. It was first implemented in 1999 by the Central Electricity Regulatory
Commission (CERC), and its primary purpose is to ensure that electricity is supplied in a way
that maintains the stability of the grid. The ABT mechanism aligns financial incentives with
the operational objectives of grid balancing, generation scheduling, and resource
optimization.
The Availability Based Tariff (ABT) is a critical part of the Indian power sector's market
design, aimed at promoting grid stability, optimizing generation, and ensuring efficient
operation. By linking financial incentives to availability, energy supplied, and grid frequency,
ABT encourages better coordination and financial discipline among market participants. It
supports the goal of achieving a reliable, efficient, and transparent electricity market,
contributing to the overall stability and growth of India's power sector.

Key Features of ABT

1. Availability-Based Charge:
o Availability refers to the power generation capacity that a generator makes
available for the grid during a given period. ABT incentivizes generators to
make their power available as scheduled, even if it's not always fully
dispatched.
o The availability charge is paid to the generators for maintaining this
availability, irrespective of whether their electricity is actually used by the
grid.
2. Energy Charge:
o The energy charge is based on the actual energy supplied to the grid. This is
calculated as the energy delivered by the generator during a particular time
block, usually on an hourly basis.
3. Penalty and Incentive Mechanism:
o Under ABT, if the generation deviates from the scheduled availability or
supply (either over or under), penalties or incentives are applied.
o Generators are penalized for providing less than the scheduled generation and
are rewarded for providing more than their scheduled generation.
4. Frequency-Linked Charges:
o ABT operates on the principle of frequency regulation. The frequency of the
grid is an important indicator of system stability. If the grid frequency deviates
from the normal value (usually 50 Hz), penalties are imposed on the
generators for contributing to frequency instability.
o Generators who supply electricity when the grid frequency is low (indicating a
demand-supply imbalance) are compensated, while those who contribute to
frequency instability through excessive generation are penalized.
5. Scheduling and Dispatch:
o ABT works in conjunction with the scheduling and dispatch of electricity.
Generators are required to submit day-ahead schedules of power generation to
the system operator (e.g., Power System Operator in India).
o The scheduled generation is then dispatched by the system operator based on
real-time demand and grid stability requirements.

Objectives of ABT
 1. Grid Reliability and Stability: By linking financial incentives to the frequency and
generation availability, ABT encourages power producers to contribute to maintaining
grid stability and reliability.
2. Demand-Supply Balancing: ABT provides an incentive for generators to adjust their
supply based on demand and grid requirements, ensuring a more efficient balancing
of supply and demand.
3. Optimization of Generation: The mechanism encourages optimal use of generating
resources by providing economic signals to generators regarding how and when to
generate electricity based on grid conditions.
4. Financial Discipline: By imposing penalties for non-compliance with scheduled
generation and availability, ABT ensures financial discipline among generators,
reducing the occurrence of grid disturbances.
5. Encouraging Forecasting and Planning: The availability charge motivates
generators to forecast and schedule their generation accurately, contributing to better
planning and coordination between the various entities in the power sector.

Components of ABT
1. Availability Charges: These charges are paid for the availability of generating
capacity to the grid, irrespective of the actual generation. It encourages generators to
stay committed to their scheduled generation capacity.
2. Energy Charges: This is the charge paid for the actual electricity delivered to the
grid, calculated based on the amount of energy generated and supplied.
3. Frequency Charges: These charges are linked to the grid frequency. If the frequency
deviates from the desired range (50 Hz), the generators are penalized or rewarded
based on their contribution to grid frequency stability.
4. Deviation Charges: Deviations from scheduled generation (either over or under-
generation) are penalized to discourage inaccurate forecasting and operational errors.
If a generator supplies less than the scheduled amount, they may face a penalty;
conversely, if they provide more than required, they may receive an incentive.

Benefits of ABT
1. Improved Grid Stability: By linking charges to frequency and balancing, ABT
encourages generators to support grid stability.
2. Efficient Resource Utilization: The mechanism helps in better utilization of
available resources by promoting optimal generation, as generators are financially
incentivized to meet the demand accurately.
3. Incentivizing Accurate Forecasting: It motivates generators to forecast demand and
adjust their schedules more accurately, reducing imbalances and enhancing grid
performance.
4. Financial Discipline: ABT establishes a clear and transparent framework for paying
and penalizing generators, ensuring financial discipline within the system.
5. Support for Renewable Energy: ABT provides a flexible framework that allows for
the integration of variable renewable energy (such as wind and solar), helping to
balance intermittent generation with demand.