Electricity Trading on Power Exchange

(Dissertation Report)

COMMERCIAL
Knowledge Management System
Electricity Trading on Power Exchange

Key Words

Financial Market, Retail Market, Deregulation, Load

Management

Submitted by : Shri R.R.Bolisetty, Sr.Manager(OS), WRHQ, 9869223061,

brrao@ntpc.co.in

10/1/2007

Electricity Trading on Power Exchange

A Dissertation Proposal for

XVII National Management Programme

by

Ramachandra Rao Bolisetty

under the guidance of

Shri DK Gupta
DGM,
NVVN, NTPC

Dr. A Sahay
Chairman, NMP
MDI, Gurgaon

Management Development Institute

Gurgaon 122 001
October 25, 2005

Electricity Trading on Power Exchange

A dissertation submitted in partial fulfillment of the requirements
for the award of

Post-Graduate Diploma in Business Management

by

Ramachandra Rao Bolisetty

XVII National Management Programme

Management Development Institute

Gurgaon 122 001
October, 2005

Electricity Trading on Power Exchange

A dissertation submitted in partial fulfillment of the requirements

for the award of

Post-Graduate Diploma in Business Management

by

Ramachandra Rao Bolisetty

under the guidance of
Shri DK Gupta
DGM,
NVVN, NTPC

Dr. A Sahay
Chairman, NMP
MDI, Gurgaon

XVII National Management Programme

Management Development Institute

Gurgaon 122 001
October, 2005

Certificate of Approval
The following dissertation titled "Electricity Trading on Power Exchange" is hereby
approved as a certified study in management carried out and presented in a manner
satisfactory to warrant its acceptance as a prerequisite for the award of Post- Graduate
Diploma in Business Management for which it has been submitted. It is understood that by
this approval the undersigned do not necessarily endorse or approve any statement made,
opinion expressed or conclusion drawn therein but approve the dissertation only for the
purpose it is submitted.
Dissertation Examination Committee for evaluation of dissertation

Name

1. External Examiner

_______________________

Signature

___________________

2. Internal Examiner

_______________________

___________________

3. NMP Dissertation Coordinator _______________________ ___________________

Certificate from Dissertation Advisory Committee

This is to certify that Mr. Ramachandra Rao Bolisetty, a participant of the XVII National
Management Programme, has worked under our guidance and supervision. He is
submitting this dissertation titled Electricity Trading on Power Exchange in partial
fulfillment of the requirements for the award of the Post Graduate Diploma in Business
Management.
This dissertation has the requisite standard and to the best of our knowledge no part of it has
been reproduced from any other dissertation, monograph, report or book.

(DK Gupta)
Organisational Advisor
Deputy General Manager
NVVN Limited,
3rd Floor, Core 5,
Scope Complex,

(Dr. A Sahay)
Faculty Advisor
Chairman, NMP
Management Development Institute,
Gurgaon 122 101

Lodhi Road,
New Delhi 110 003

Abstract
Electricity Trading on Power Exchange
By
Ramachandra Rao Bolisetty
The Indian electricity industry is marred by inefficiencies. The state
electricity boards, which were supposed to cater to the needs of the
states, failed miserably in augmenting capacities. The widening of the
peak demand shortages and energy shortages compelled the
government of India to take appropriate steps towards correcting the
scenario.
Setting up of central sector generating stations, unbundling of state
electricity boards, securitisation of long pending dues, installation of
regulators at central as well as at state level and enactment of
electricity act 2003 are all the actions initiated in the direction of
bringing in accountability and ensuring that power to all by 2012 is
realised.
With the enactment of Electricity Act 2003, the electricity industry in
India is going through reforms and restructuring.
It has been
observed there are capacities unutilized in one part of the country
while there are shortages in the other part of the country. Open
access to the transmission network without any discrimination has
opened new vistas for trading such surplus energy.
The study is focused on possibility of setting up a power exchange and
trading of energy over the exchange. The major findings of the study
are:
1. At present around 2.5% of total energy generated in India is
being traded. The trading is being carried out through traders
approved by CERC. The trading is being done at a negotiated
price over the open access transmission corridor availability. It
is forecasted that around 8% of the total energy generated
would be available for trading. Hence, even with the present set
of trading arrangements, there is a huge scope for development
of the markets.
2. It has been found that there is energy that often is left
unutilized for the want of market mechanism, which could
facilitate trading of energy available over short notice without
the present day obligations of negotiations.

3. The setting up of power exchange would apart from facilitating

the trading of electricity would bring in competition in the shortterm electricity markets and realize the realistic price for
electricity.
4. The power exchange also would provide signals to the market
for the industry to take wise investment decisions.
For carrying out the study, various conceptual models of the power
trading and business models were studied. This part of the study is
mostly based on the study material and textbooks written in this field
of restructuring the electricity industry. Later for developing the
market model and Indian perspective various articles, documents of
ministry of power, Central Electricity Regulatory Commission and
various web sites are extensively studied.
The experience of markets around the world has given in sights into
the advantages and pit falls in such a market mechanisms.
The proposed model is developed in line with the developments
envisaged in the Electricity Act 2003 and our National Electricity
Policy. The views of experts in the field and their comments, obtained
during review are summarized and appropriately incorporated in the
model.

Acknowledgements
I am grateful to my guides - Dr. A. Sahay, Chairman NMP, MDI,
Gurgaon, who acted as my faculty guide and Shri DK Gupta, DGM,
NVVN, NTPC, Delhi, who acted as my internal guide - for their able
guidance, constant encouragement, constructive criticism which
inspired me to put in greater efforts into this project.
I would like to express my deeper gratitude to Prof. Srikrishna A
Khaparde, Professor, Electrical Engineering, IIT, Mumbai and
Member, Advisory Committee, MERC for his guidance in setting the
project on track and constant support and encouragement provided
during the entire tenure of this project. I also put it on record, my
sincere appreciation to Shri Abhijit R Abhyankar, Ph. D. Scholar, EE,
IIT, Mumbai for his constant help in understanding the subject, which
immensely helped in writing this dissertation project report. I would
like to express my special gratitude to Shri Prabodh Bajpai, Senior
Research Fellow, IIT, Kanpur who had provided me with the material
to begin with and introduced me to the IIT, Bombay team, without it
would have been impossible to complete the project within such short
interval.
A large number of my colleagues from within the organisation and
friends from across the industry have helped by offering their
opinions, the articles they have come across, which has helped in
broadening my horizon.
I also would like to put on record my sincere appreciation for all those
involved in the discussions during review of the proposed model.
These discussions helped me understand the areas my ignorance.
Last but not the least, I would like to place my sincere gratitude to the
members of my family - my wife, who have understood my obsession
with the studies and unconditionally supported me emotionally by
shouldering the responsibility of family front single handedly and
children, who at this tender age has shown immense maturity by
deferring their needs demanding my time.
Mumbai
October 25, 2005

Ramachandra Rao Bolisetty

Table of Contents
Chapter
Description
No.
1
. Market models in Electricity
1.1 Introduction
1.2 Historical Background
1.2.1 Regulation
1.2.2 Deregulation
1.2.3 Decentralization
1.2.4 Restructuring
1.2.5 Open Access
1.3 Industry Classification
1.3.1 Based on trading
a. Integrated model
b. Decentralized Model
i. Pool Model
ii. Wholesale competition
iii. Retail competition
1.3.2 Based on contractual model
a. Bilateral Agreements
b. Third Party Agreements
c. Power Exchange
1.3.3 Based on system operators
a. Transmission system operator
b. Independent system operator
1.3.4 Based on transmission ownership
1.3.5 Based on number of participants
a. Monopoly
b. Oligopoly
c. Perfect competition
2

. Markets in Transmission and system operation

2.1 Introduction
2.2 Transmission Pricing
2.2.1 Flat fee
2.2.2 Postage stamp method
2.2.3 Mile MW method
2.2.4 Contract path method
2.2.5 Point of Connection tariff
2.3 Imbalance management
2.4 Congestion Management
2.4.1 PAC Management
2.4.2 Counter trade
2.4.3 Pro-rata reduction
2.4.4 Bidding for residual tr.mission capacity
2.4.5 Nodal / Zonal pricing

Page
No.
1
2
2
3
4
6
10
11
12
12
12
13
14
16
17
19
20
20
20
24
25
25
26
27
27
28
28
29
29
30
30
30
31
31
32
33
34
34
35
35
36

2.5
2.6
2.7

2.8
2.9
2.10
2.11
2.12
3

2.4.6 ATC with constrained unit commitment

Ancillary services
Grid security
Hedging risks
2.7.1. Futures
2.7.2. Options
2.7.3. Forwards contracts
2.7.4. Swap contracts
2.7.5. Contract for Differences (CFDs)
Choice of system operator models
Choice of trading models
Choice of contracts
Choice of transmission ownership
Choice of transmission pricing models

. Electricity markets around the world

3.1 Introduction
3.1.1 Legal rationale
3.1.2 Economic rationale
3.1.3 Technological advances
3.1.4 Strategic aims
3.2 Developed Electricity Market Models
3.3 England and Wales
3.3.1 Introduction
3.3.2 Phase I of reforms
3.3.3 Pool system
3.3.4 Regulatory regime
3.3.5 Wholesale market
3.3.6 Retail market
3.3.7 Learning phase
3.4 Nordic Countries (Nord Pool)
3.4.1 Day Ahead market
3.4.2 Balancing market
3.4.3 Financial market
3.5 United States
3.6 California market
3.6.1 Day Ahead and Hour Ahead markets
3.6.2 Transmission congestion contracts
3.6.3 Comments
3.6.4 California Crisis
3.7 PJM Interconnection
3.8 New York Model
3.9 Developing Electricity Market Models
3.10 China Model
3.11 Japan Model

36
37
37
38
39
39
40
40
40
41
41
42
43
43
45
45
45
46
46
46
47
47
48
48
50
50
50
54
55
59
59
59
60
61
63
63
64
65
68
70
75
76
79

. Indian electricity industry

4.1 Introduction
4.2 History
4.3 Need for regulation / Government control
4.4 Evolution and present stage
4.5 Causes for deregulation
4.6 Critical issues in deregulation
4.7 Shifts from earlier electricity acts
4.8 Brief about Electricity Act 2003
4.9 Future directions of the industry
4.9.1 Restructuring
4.9.2 Capacity addition
4.9.3 Capacity utilisation
4.9.4 Load management
4.9.5 Loss management
4.9.6 Intrastate ABT
. Proposed model for India
5.1 Introduction
5.2 Present trading practices
5.3 Need for a Power Exchange
5.4 Why National Power Exchange?
5.5 Dispatching Mechanism
5.6 Electricity market
5.7 Basic electricity market
5.7.1 Day Ahead Market
5.7.2 Hour Ahead Market
5.8 Capacities on PX
5.9 Congestion management
5.10 Time line of Power Exchange
5.11 Transmission ownership
5.12 Transmission Pricing
5.13 System Operator
5.14 Settlement Mechanism
5.15 Financial Instruments
5.16 Management and participants of PX
5.17 Development of Real Time Market
5.17.1 Real time balances market
5.17.2 Real time congestion market
5.18 Ancillary services
5.18.1 Operating reserves
5.18.2 Voltage control
5.18.3 Primary response
5.18.4 Secondary response
5.18.5 Peaking power
5.18.6 Standby services
5.18.7 Load following

82
82
84
85
86
87
88
89
90
90
91
91
92
92
93
94
94
95
95
96
97
97
98
99
99
100
100
101
101
102
103
104
104
105
105
106
106
106
107
108
108
109
109
109

. Review of the Proposed model

6.1 Introduction
6.2 Views of Reviewers
6.3 Conclusions
Future directions of study
Points to make
Limitations of study
References
List of Abbreviations used
Annexure I: Details of Participation for review of
the model

110
110
114
116
117
117
118
120
123

List of tables
Chapter
Description
No.
1 . Market models in Electricity
1.1 Load flattening effect of TOD based pricing
3

. Electricity markets around the world

3.1 Bidding into Nord Pool

Page
No.
.

9
58

List of figures
Chapter
Description
No.
1
Market models in Electricity
.
1.1 Load flattening effect due to TOD based pricing
1.2 Vertically integrated monopoly business model
1.3 Decentralized business model
1.4 Pool business model
1.5 Wholesale competition business model
1.6 Retail competition business model
1.7 Double sided auction on power exchange
1.8 Single sided auction on power exchange
1.9 Merit order clearing of power requirement
1.10 Scenario under strategic bidding by a generator
3

Page
No.
10
13
14
16
17
19
21
22
22
23

Electricity markets around the world

.
3.1 England and Wales market model
3.2 NETA Electricity Market Major contractual
relationships
3.3 Structure of Nord Pool market
3.4 Price Area Congestion (PAC) management
3.5 Bidding into Nord Pool
3.6 Structure of California market
3.7 Market structure in PJM interconnection
3.8 Structure of New York Electricity Market
3.9 Current Power Supply System in Japan

51
53
56
57
58
62
69
73
80

List of abbreviations used

1.
2.
3.
4.
5.

ABT Availability Based Tariff

ACE Area Control Error
APDP Accelerated Power Development Programme
ASCI Administrative Staff College of India
ATC Available Transmission Capacity

6.

BETTABritish Electricity Trading & Transmission Agreement

7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.

BSES Bombay Suburban Electric Supply

CaISO California Independent System Operator
CalPX California Power Exchange
CCGT Combined Cycle Gas Turbine
CE Capacity Element
CEA Central Electricity Authority
CEGB Central Electricity Generating Board
CERC Central Electricity Regulatory Commission
CESC Calcutta Electric Supply Company
CFD Contract for Differences
CGS Central Generating Stations
CPSU Central Public Sector Undertaking
CTU Central Transmission Utility
DA Day Ahead
Discom/Disco Distribution Company
DSM Demand Side Management
EA 2003 - Electricity Act 2003
EPCos Electric Power Companies
ER Eastern Region
EHV Extra High Voltage
ERCOT Electric Reliability council of Texas
ESOP Employee Stock Option
FACTS Flexible AC Transmission System
FERC Federal Electricity Regulatory Commission
FY Financial Year
GEB Gujarat Electricity Board
Genco Generating Company
GUVNL Gujarat Urja Vikas Nigam Limited
GW Giga Watt
HT High Tension
Hz Hertz (unit of frequency)
IEGC Indian Electricity Grid Code
IIT Indian Institute of Technology
IOU Investor Owned Utility
IPP Independent Power Producer
ISO Independent System Operator
KV Kilo Volts
kWh kilo Watt hour
LDC Load Dispatch Centre
LMP- Locational Marginal Price
120

47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.

LOLP Loss of Load Probability

LSE Load Serving Entities
MCP Market Clearing Price
MCV - Market Clearing Volume
MISO - Midwest Independent System Operator
MOP Ministry of Power
MOU Memorandum of Understanding
MW Mega Watt
MWh Mega Watt hour
NETA New Electricity Trading Arrangements
NGC National Grid Company
NLDC National Load Dipsatch Centre
NR Northern Region
NTPC National Thermal Power Corporation Limited
NVVN NTPC Vidyut Vyapar Nigam Limited
NYISO New York Independent System Operator
NYPE New York Power Exchange
NYPP - New York Power Pool
OASIS Open Access Same time Information System
OPF Optimal Power Flow
PAC Price Area Congestion
PJM Pennsylvania-New Jersey-Maryland
PLF Plant Load Factor
POC Poitn of Connection
PPA Power Purchase Agreement
PPP Pool Purchase Price
PPS Power Producers and Suppliers
PSP Pool Sale Price
PTC Power Trading Corporation of India Limited
PX Power Exchange
R&M Renovation and Modernisation
REB Regional Electricity Board
REC Regional Electric Company
RLDC Regional Load Dispatch Centre
Rs. - Rupees
SC Scheduling Coordinators
SCUC Security Constrained Unit Commitment
SEB State Electricity Board
SERC State Electricity Regulatory Commission
SLDC State Load Dispatch Centre
SMP System Marginal Price
SO System Operator
SPC State Power Corporation
STU State Transmission Utility
T&D Transmission and Distribution
TCC Transmission Congestion Contracts
TP Transmission Provider
TPC Tata Power Company
TSC Transmission Service Charges
121

96.
97.
98.

TSO Transmission System Operator

UI Unscheduled Interchanges
UK United Kingdom

99.

UPSERCUttar Prdesh State Electricity Regulatory Commission

100.
101.
102.
103.

US - United States of America

VAR Volt Ampere
VOLL Value of Loss of Load
WRPC Western Regional Power Committee

Electricity Trading on Power Exchange

Chapter 1: Market models in electricity

1.1

Introduction
The

electricity

industry

is

technically

complex

and

institutionally complicated. For about more than 100 years, the

industry remained vertically integrated.

During that time,

engineers treated the management of this industry as a set of

optimisation challenges [13]. Making competition work in this
complex industry is to be carefully modeled.

Regulation is

considered a poor substitute for a competitive market and is

only adopted where, for reasons of natural monopoly or public
interest, competition is not feasible or performs poorly without
government controls.

The decade old world experience of

competition in electricity is good and not so good.

none

of

the

competition.

countries

have

gone

back

on

However,

introducing

This shows that competition in this industry is

feasible. Competition is what benefits consumers and benefiting

consumers should be what public policy is all about [1].
Whatever may be the market model adopted, it should be able to
deliver the consumers

Lower prices

Reliable services

Predictable bills and

Value added services

1.2. Historical Background

In the last century, when the electrical technology was in the
infancy, government was hesitant to invest huge public capital
in unproven technology.

Private investors like Westinghouse,

Edison etc., being confident of the technology, came forward for

investing.

So, the government provided them with local

monopoly and assured fair return through regulated price.

Thus regulation provided risk minimization for both sides. Both
regulation and deregulation make sense and one or other is
preferable under certain conditions [2].
With the advent of efficient combined cycle gas turbines, the
economies of scale condition in support of the vertically
integrated companies no longer existed.

Also, large-scale

computerisation and automation of the processes led to the

reduction of manpower requirement. The monolithic vertically
integrated firms by then were suffering from huge human
inventories, inefficiencies, and unaccountability. By now, as the
technology is proven, finances were readily available; the
condition for granting monopolies no more existed. Apart from
the above, the economists argued that competition would
encourage innovation, reduce costs, improve services and bring
in customer focus. All these and other political compulsions led
to deregulation of the electric industry.
There are many terms being used in different contexts of
making the electricity industry competitive, like regulation,
deregulation, restructuring etc, which are briefly introduced
next.

1.2.1 Regulation
The same company provided generation, transmission and
distribution in the area of its monopoly. The industry remained
vertically integrated for more than a century because of the
following reasons.

To keep the system stable, it was considered that

generation and transmission needed to be under
the command and control of single entity.

The natural monopoly aspects of economies of

scale,

site

requirements

for

the

transmission

corridor and network characteristics.

The natural monopoly aspects of economies of

scale, space requirements, aesthetics etc., which
make

the

competition

in

the

distribution

uneconomical.

The economies of scale of generation and integrated

development of generation and transmission.

To safeguard the interests of the consumers, it was felt

necessary by the government to control the industry through
regulation. The regulated industry grew in size over the years.
The

regulatory

disadvantages.

solutions

are

inefficient

and

have

some

The regulator looks at the scenario post-facto

and it may appear that there are efficient ways of managing the
business. Hence the regulator may disallow the expenditure of
the utilities. Thus the utilities carry the risk of good faith efforts
disallowed. Even though the regulatory solutions are inefficient,
they are successful in safe guarding the interests of the
customers.

1.2.2 Deregulation
It is to remove entry/exit barriers to the trade and industry and
to remove controls on prices. This would be disastrous to the
consumers if deregulation was done without putting necessary
safeguards in place. To introduce competition in the electricity
major changes are required such as

Time slab-wise metering of most of the consumption

(need not be most of the consumers) and pricing of
electricity during different time slabs are to be made
known from the market in real time on the web
page of the retailer/distributor so as to develop
customer response.

System operation should be separated from the

trading of electricity.

Transmission (and distribution, in case of retail

access) network should be separated from the
trading.

Remove entry and exit barriers for all the market

participants i.e. generators, distributors, retailers
and consumers.

Just declaring the industry is deregulated and providing open

access cannot produce competitive markets. The UK had made
a law permitting competitive entry and requiring open access
from 1984 onwards; but since it did not provide the trading
arrangements there were no takers until the industry was
totally restructured in 1990 [1].
While deregulating the industry, reliability is the paramount
important factor that needs to be taken care of - reliability in
terms of transient stability, adequate capacity additions in
generation

and

transmission

and

distribution

networks.

Competitive markets replace the regulatory control with that of

the market participants investment decisions. It will bring in
effective utilisation of the assets and at the same time may lead
to more congestion.
1.2.3 Decentralization
Unbundling of different functions of the vertically integrated
monopoly to make the utility more resilient is all about
decentralization. The decentralised model can work decently, if
it is designed properly. It is capable of delivering competition if
it includes market-based solutions. It certainly can be designed
poorly, as the California is a glaring example.
Electricity is a commodity so different from others, that it
remained logical to remain regulated for so long.
difference

between

regulation

and

The major

competition

is

the

responsibility of taking risks, which provides incentive to

improve. The main risks involved are

Market demand and prices

Technological developments or obsolescence

Credit risk and

Management decisions of investment, manning,

maintenance etc.

Under regulatory regime, customers take most of the risks and

rewards while under competition the owners are subjected to
risks and rewards.
During the last 10 to 15 years, electricity industry in many
countries is changing due to country specific reasons.

In

developed countries while the main reasons for change have

been lower tariff, better services and consumer choice, in

developing

countries

the

reasons

have

been

capacity

augmentation, building efficient systems, and reasonable tariff.

However, restructuring this industry is harder than most people
think, because electricity,

cannot be stored (storing in High Voltage batteries

and in pumped storage reservoirs entails high
costs).

is transported at the speed of the light over a fragile

and interactive transportation network requiring
short term and real time coordination.

traces the path of least resistance and defies the

planned transmission route allocation

follows unique set of laws of physics

normally has low price elasticity of demand

The common feature of the decentralized trading model is that

the system operator must take into account the origin and
destination of contracts for scheduling and dispatching.

The

system operator is not intended to facilitate spot market - she

simply schedules trades that have been arranged elsewhere,
whereas in the integrated model, the system operator makes the
trades automatically.

Introduction of competition poses some

really difficult problems.

Rational solutions depend upon

understanding these complexities and designing ways to

account for them [1].

Restructuring, Open access and

Deregulation are the tools used to introduce competition and

improve efficiency. The elements that need to be in place for the
markets to be competitive and work efficiently are

many buyers and sellers ensuring lack of market power

to any individual utility

price responsiveness of demand and supply

liquid and efficient markets

accurate and timely information to all

non-discriminatory

access

to

transmission

and

distribution networks
Even though the competition theory and the theory of market
power holds that market power will solve itself by the entry of
new competitors, who will drive down the prices back to the
competitive level.

In reality, it may not happen. A dominant

player can set the market price. If a competitor tries to enter

that territory, the dominant player can lower the prices, lower
than the competitor and scare him off. This will result in the
new incumbent falling flat due to lack of financial muscle or it
may lead to price wars.
If the competition is limited to the wholesale market and the
retail customers are charged at a price averaged over time, then
the retail customers where the actual load can be controlled will
not have any incentive to respond.

So, while designing

competition, it is necessary that the model should be so built

that there would be information available in real time to all the
actors in competition and there would be incentive for all of
them to respond to the changing scenario in the grid in real
time.

Advantage of competition is that the supply will be

reliable as lights go off only when the consumer wants them to,
given the price signal. The lack of customer response is what
worries about the reliability of supply.

Adequate attention to

demand response results in flattening of the load curves and

would remove the need for capacity addition.

This would

require metering with respect to the time of usage.

To illustrate the effect of load flattening refer to the following
example.

Electricity consumption per

month

Rate per kWh

Charges for the month

Charge

Hours

Contracted

Actual

Contracted

Spot

As per

(Credit)
for

Usage

Usage

Diff.

(kWh)

(kWh)

(kWh)

d=c-b

Price

Contract

difference

Price (Rs.)

(Rs.)

(Rs.)

(Rs.)

g=b*e

h=d*f

00-04

200

250

50

3.50

1.50

700.00

75.00

04-08

300

400

100

3.50

2.00

1050.00

200.00

08-12

450

650

200

3.50

3.50

1575.00

700.00

12-16

1000

750

-250

3.50

4.50

3500.00

-1125.00

16-20

1100

850

-250

3.50

4.00

3850.00

-1000.00

20-24

350

500

150

3.50

1.50

1225.00

225.00

3400

3400

11900.00

-925.00

Total

Bill as per the contract =

11900

Charges for the extra usage =

1200

Credit for the reduced usage =

-2125

Net charge / credit for

difference =
Total Bill =

-925
10975

Table 1.1: Load flattening effect of TOD based pricing

Figure 1.1: Load flattening effect of TOD based pricing

The basic difference with decentralized model when compared to
the integrated model is that in decentralized model it ends up
requiring not only private markets for regular Electricity, but
also markets for congestion management, imbalances, ancillary
services, provision for reserves etc, which are explained later.

1.2.4.

Restructuring

During 1980s, some economists started arguing that the

monopoly is to be removed to incentivise innovation, to operate
efficiently and to discourage unnecessary expenditures and
investments.

That would require the vertically integrated

companies to unbundled [13].

The aim is to remove the

monopolies and to bring in competition.

separating

some functions

of

vertically

This is done by
integrated

entity,

combining other functions and sometimes creating altogether

new companies.

This may lead to the loss of synergies and

economies of scale of the traditional monopolistic structure.

But, if efficiency gains could offset these losses then the
restructuring also known as unbundling will result in overall
gains.

While restructuring, it would be prudent to retain the

natural monopolies; like having a single transmission and

distribution network in a particular area instead of having
multiple networks, which would result in duplication of the
assets

without

any

apparent

benefits.

Therefore,

the

restructured industry would still retain the regulated natural

monopoly of transmission and distribution networks while
competition would be introduced in generation and retailing.

1.2.5 Open Access

Open access means that everyone gets the opportunity to use
the wires without any discrimination. But indiscriminate access
to the network poses new challenges. In a vertically integrated
electrical industry, coordination of generation and transmission
was easy as all the assets are under command and control of a
single entity.

In the competitive industry, new trading

arrangements have to be set up to ensure real-time coordination

[1]. This can be accomplished by complete separation of system
operations into an independent organisation.
In addition to the real-time coordination, open access requires
arrangements for long-tem control of the transmission.

In a

vertically integrated industry, utilities themselves planned and

implemented the transmission along with the generation and
distribution. However, in the deregulated environment there are
challenges of transmission expansion, pricing the transmission
rights,

providing

access

without

discrimination

coordination with different agencies involved.

and

The open access when extended to the retail markets is known

as customer choice, where customer can chose the supplier
and every supplier has access to the local distribution network.

1.3

Industry Classification
The industry can be differentiated in a number of ways and
different classifications can be used to identify the models.
There are different models in existence world over.

1.3.1 Classification based on trading model

This

classification

assumes

continued

monopoly

over

transmission and distribution network and system operation.

The differentiating characteristic is how the Electricity is traded
in the industry.
a.

Integrated model

This is the model, which prevailed for more than a century in

many of the markets and is still in practice in many nations. In
this model, the generation, its transmission, distribution and
sales are all integrated into a single monopoly, which is under
the control of single electricity entity.

The utility charges

average tariff from the customer and often would not segregate
individual costs involved in each function, which led to
unaccountability and inefficiencies.

The advantage of this

model is fairly stable and easy to understand electricity bills.

Figure 1.2: Vertically integrated monopoly business model

This model was in use many of the SEBs in India and is still in
vogue in some SEBs. All the functions of electricity generation,
transmission, distribution, sales and billing are integrated into
one entity. This model is losing its relevance in India with the
restructuring drive taken up in all the states.

b.

Decentralized Business Model

The following is a representative structure in the deregulated

market. There are so many other models to choose from. It is
up to the policy makers to decide on the choice of the model.

Monitory
Flow
Figure 1.3: Decentralized business model
In deciding the model, they have to understand the implications
of structural change, the need for institutionalizing new
arrangements and to address new set of complications. In the
wholesale competition model, the challenge is to address the
problems of the boundaries and devising contracts.

The

challenge in the retail competition model is to develop the new

settlement system and transaction costs.

However, retail

competition overcomes the shortcomings of the wholesale

competition model. Different models in decentralized model can
be pool model, competition at wholesale and retail level. These
are explained further.
i.

Pool model

This is the model first used in United States and in United

Kingdom. This is a model of monopsony where a single
buyer would purchase the Electricity required from the
generators.

In this model the independent generators

have no option but to generate and sell only to pool. The

existing utilities will draw from the pool, which has

complete monopoly over distribution companies and final
customers.

The prices at which the generators sell the

electricity to the pool would either be determined by the

market regulator or the utility signs a long-term life long
contract with the generators.

These bilateral contracts

can run in parallel to the pool operation.

The system operator would normally operate the pool.
This would follow a single auction formula.

All the

generators would bid into the pool and the system

operator after running an optimisation algorithm would
decided which generator to run. The buyer has no option
of choosing the supplier.

This is a limited form of

competition in the wholesale segment.

The market

structure is based on long-term contracts and most of the

risks are transferred to the customer through these longterm contracts. The challenge in this model is to decide
how to ensure profits to the generator. If the profits are
paid upfront, then the issue is to ensure to run the plant
when it is required. If the profits were paid with variable
charges, then the issue would be to stop the plant when it
is not needed.

Normally this model will have two-part

tariff where in fixed charges are paid when the plant puts
in certain minimum number of hours of service over the
period.

Variable charges would be paid based on the

electricity generated. A similar model was in existence in

India for its central sector power plants where SEBs have
share in these power plants. The states would pay fixed
charges for their share in each CGS and would pay
variable charges based on the electricity drawn from each
CGS.

The generators have no option but to sell their Electricity

at the regulated prices or at Market Clearing Price decided
by the Single Auction Model explained under head Power
Exchanges.

Genco

Genco

IPP

IPP

Power Pool

Disco

STU

Disco

Customer

Customer

Disco

Customer

Customer

Customer

Figure 1.4: Pool business model

The pool model is similar to unit commitment and
economic dispatch. In traditional unit commitment and
economic dispatch the actual cost of the electricity is
considered but in deregulated environment, the price
curves are considered and the actual cost curves are
hidden from the knowledge of general public.
ii.

Wholesale competition

In this model, the entire generation is deregulated and the

generators sell the electricity in competitive wholesale
market

to

discoms,

retailers

and

large

customers.

Allowing only large customers in the initial phase though

will thwart development of competition, will allow the

market to stabilize and test the waters before introduction

of competition in the retail market as well.

The

disadvantage with this model is that some of the large

customers may be too large and may thwart competition
from developing.

Genco

Genco

Disco

IPP

Disco

Customer

Customer

IPP

Disco

Customer

Customer

Customer

Figure 1.5: Wholesale competition business model

With restructuring of the Indian electricity industry, this
sort of model is evolving in all the states.

With the

unbundling of the state electricity utilities, the emerging

scenario is going to appear similar to this model. Some
states are ahead and some are trailing in adapting to this
model.

iii.

Retail competition

This is the ultimate model of competitiveness in the

electricity industry.

Countries like Norway, Sweden,

Spain, Australia, New Zealand, United Kingdom and many

states of United States are trying to put this model in

place. The greatest challenge in this model is education of

customers, who should be aware of the developments in
the markets and should be able to participate in the
market.

Also, this model requires that appropriate

metering (time of the day metering), billing and settlement

process are put in place. The advantages of this model
are that it gives all the customers choice to choose the
supplier; competition in the wholesale as well as retail
markets.

The disadvantage of this model is those

customers need to be metered on the time block wise, as

the price is volatile and keeps on changing on block-toblock basis. This would result in unpredictable electricity
bills.
As in the case of the telephone service providers, there
may be a plethora of switchings between the service
providers.

This model may lead to confusion in a less

educated society, as it will be difficult to decipher the

electricity bill.

The smaller customers may prefer

predictable

and

bills

value

added

services.

The

transmission and distribution networks will be given open

access.

Genco

IPP

Genco

IPP

Retailer

Customer

Retailer

Disco

Customer

Customer

Customer

Disco

Customer

Figure 1.6: Retail competition business model

It would require good amount of distribution automation
and sophisticated automation for dissemination of varying
prices of electricity over the period of time.

This model

would also require consumer education, as the success of

this model depends on the extent of consumer demand
response to the supply price signal.

With the exiting

infrastructure, it would be difficult to adapt retail

competition in the Indian market.

1.3.2 Classification based on contractual model

The market can be classified based on how the electricity is
contracted.

It can be through a term contracts or through

Power exchanges or through pool. The pool model is explained

above and the remaining two are dealt with now. It is worth
mentioning here that the models are not mutually exclusive.
Any or all of them could co-exist.
a.

Bilateral Agreements

In this model, individual buyer and seller would enter into an

agreement for exchange of electricity at agreed terms and
conditions without entering into pool arrangements. The terms
and conditions may be agreed through negotiations or through
competitive bidding. These contracts would then be informed to
the system operator for implementation. These contracts could
be Long term extending to the life of the plant or may be Short
term valid for a period typically of less than twelve months. At
times a combination of both in conjunction with pool purchase/
spot purchases are used which is known as Hybrid model. The
advantage of this model is flexibility. It is not mandatory to sign
bilateral contracts or to purchase through pool. Customers can
choose

the

mode

of

purchasing

power

based

on

their

convenience and requirement.

b.

Third Party Agreements

In this model, a third party (trader) would get the bids of power
from the suppliers and would offer the electricity to the needy
consumers at a negotiated price or on cost plus basis.

The

supplier and consumer would be relieved of the effort of

identifying the counter party.

The trader would act as an

intermediary for such trades and she would secure the

payments for the electricity traded.

c.

Power Exchange

This is the model normally used to trade commodities, which

operates more or less similar to a stock exchange. The sellers
and buyers would inform the Power Exchange, the quantity and

the price at which they are willing to exchange electricity. This

is known as Double Auction Model. The point of intersection
of demand and supply would determine the Market Clearing
Volume (MCV) and Market Clearing Price (MCP).

Price
in Rs.
/kWh

Double-sided auction model

Supply

MCP
Demand

MCV

Volume in kWh

Figure 1.7: Double sided auction on Power Exchange

In other model, known as Single Auction Model, the sellers
may indicate the quantity and the price at which the electricity
that the generator would be willing to sell. The system operator
would arrange these bids in ascending order and the cut-off
point where the last unit of demand is met would determine the
MCP.

Price
in Rs.
/kWh

Single sided auction model

Supply

MCP

Volume in kWh

Anticipated Demand

Figure 1.8: Single sided auction on Power Exchange

In this model, there are chances of price rigging through
strategic bidding.

Merit Order

Figure 1.9: Merit order clearing of Power requirement

It is explained with help of the above diagram.

Gen15

Gen14

Gen13

Gen12

Gen11

Gen10

Gen9

Gen8

Gen7

Gen6

Gen5

Gen4

Gen3

Gen2

MCP = Rs.2.75/kWh

Gen1

Rs./k
Wh
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

To meet the demand, the system operator would schedule full

generation up to generator 11 and partial generation on
generator 12.
However, say a particular utility owns generators 2, 4, 5, 9, 11
and 15. It can strategically bid out one of its generators forcing
the system operator to acquire more costly power from say
generator 13. This would result in increased MCP and hence all
the generators that are scheduled will be benefited by the extra
contribution. Scenario under such situation is depicted in the
next drawing.

Strategic Bid

Gen11

Gen16

Gen15

Gen14

Gen13

Gen12

Gen10

Gen9

Gen8

Gen7

Gen6

Gen5

Gen4

Gen3

Gen2

MCP = Rs.2.95/kWh

Gen1

Rs./
kWh
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5

Figure 1.10: Scenario under strategic bidding by a generator

Generator 11 is bid out of merit order, yet benefiting the utility
as a whole.
The disadvantage in this model is that price rigging can be done
by shifting the low cost generator out of service. The slope of
the price curve is an important determinant of such behaviour.

The steeper it is, the more likely it is that economic withdrawal

is profitable [1].
In this model also, the supplier and consumer would not know
with whom they are dealing with.

The bids on the power

exchange can be submitted for Day Ahead market, in which

case the bids would be submitted at 10:00 hrs and the deal
would be finalised by evening to be implemented from 00:00 hrs
of the next day.

There can be bids for Intra day markets,

which will be submitted any time upto an hour in advance,

which will be used to make adjustments during the day of
operation. The markets can be a combination of the above two.

1.3.3 Classification based on system operators

Electricity needs short-term coordination (Day ahead, intra day
and real time coordination). The system operator has to ensure
system security and reliability and she has to respond within
seconds to get plants to change their output if an overload
threatens [1].

Open access to the transmission and non-

discriminatory system operations are the two important features

for competition.

These are the two major sources of dispute.

Another area of dispute is the responsibility of expanding the

transmission network to meet the future requirements.

The

system operator may need more transmission lines for better

stability and availability of requisite transmission capacity. On
the other hand, the transmission company may not be
interested in investing due to lack of adequate returns on the
investment.

As it would not be economically viable and environmentally

feasible to build new assets, it would be ideal to operate these
assets to their maximum limits.

a.

Transmission System Operator (TSO)

In this model, the system operator would own the transmission

assets.

This is the model adopted by most of the European

countries

in

conjunction

with

pool

operation.

All

the

transmission assets are at the command and control of the

system operator.
In such a model, the responsibility of providing open access to
all the participants and developing the network lies with the
TSO. During real time congestion, the system operator has to
reschedule the transactions to safeguard the security of the grid
and safety of her assets. The system operator may be reluctant
to reschedule too often.

So, she has incentives to calculate

available transmission capacity on a fairly conservative basis

[1].
The Nord Pool adopted TSO model where individual countries
have their independent transmission networks and manage
them. These networks are coordinated under Nordel.

b.

Independent System Operator (ISO)

This is the model adopted by many markets in United States,

Canada and Australia etc. In this model the system operation
and market operation are combined into one at Independent
System Operator (ISO).

The ISO will have no assets and will

have no commercial interest in the activities of the market

participants. However, the ISO would operate the imbalances
market and ancillary services market. She will have command
over all the market participants, empowered through legislation.
In a competitive world the system operator need to be
independent for discharging the following responsibilities.

To ensure equal opportunities to all the participants for

accessing the network.

To

ensure

integrated

operation

of

the

grid

and

maintaining grid security and stability at all points of

time.

Assess and monitor the demand supply situation and

acquire the differences from the balancing markets.

Acquire ancillary services as and when required.

Manage the network congestion.

1.3.4 Classification based on transmission ownership

The transmission assets can be developed by a monopoly
because of its characteristics as a natural monopoly. However,
this monopoly could be limited to a region, a state or a territory
or the monopoly can be extended to the whole of the country or
region of operation.

If the entire country is given a national

monopoly then it is called National Monopoly.

The country

may be divided into number of regions and Regional Monopoly

may also be granted.

The development of new transmission

capacity

the

would

be

transmission utility.

responsibility

of

the

national

In such a case, regulator or central

planners should oversee the investments in the transmission

sector to ensure that adequate transmission capacity is built to

meet the future transmission requirements and the stability

considerations.
To bring in competition in the transmission sector and to
encourage innovation and competition, transmission sector may
open to multiple players with open access. In such a case,
the capacity augmentation would be in the corridors where the
rate of return is attractive to the investors.

The system may

need augmentation of transmission capacity for the reasons of

system considerations.

Such investments would not be

forthcoming incase of competition in transmission.

1.3.5 Classification based on number of participants

This

type

of

classification is based on

the

number of

participants operating in the market, from the sellers side as

well as from buyers side. If there are many sellers and single
buyer as in the case of the pool, perfect competition may exist in
the sellers market while in the buyers market, it will be a
monopoly. Different models are briefly described here under.

a.

Monopoly

In this model, a single entity will have the control over the entire
market in the identified geographic territory/ jurisdiction.
Normally the monopolies will either lie with the government or
the government will have a supervisory control over the entity to
ensure that the end consumer interests are protected.

When

the monopoly situation is created in the buyers market it is also

known as monopsony.

b.

Oligopoly

In oligopoly, the competition is limited between few parties. The

oligopoly competition can exist either in sellers market or in
buyers market. In this market there are chances of price wars,
game plays or formation of cartel.

If there are only two

participants in competition then the market is known as

Duopoly.

c.

Perfect competition

In this type of competition there will be many number of market

participants each with a small share of the business that none
of the participants will have the market power. This is the ideal
market situation and it is very difficult to build a perfect
competition, as there will be some or other forms of market
imperfections.

Chapter 2: Factors influencing trading and competition

2.1

Introduction
Before competition is introduced into electricity markets, it is
essential that measures to support competition need to be
taken. The basic requirements of competition are providing
1. Adequate transmission capacity at appropriate price
without any discrimination,
2. Provision for imbalances management
3. Congestion Management
4. Providing ancillary services,
5. Ensuring the grid security and stability and
6. To hedge the risks involved in the business.
Transmission

pricing

and

system

operation

thus

finds

importance in bringing competition into play.

2.2

Transmission pricing
For

introducing

competition,

it

is

necessary

that

the

participants are aware of the commodity (electricity) price and

the infrastructure (transmission) price.

The knowledge about

the price and the charges involved in bringing the commodity to

the place of consumption will help in decision-making and will
produce better trading. Apart from the information about the
pricing, open access to the transmission network without any
discrimination is essential.
open

access

to

The critical elements in providing

transmission

system

are

charges

for

transmission in case of no congestion and charges for the

transmission

to

constraints.

There are several ways of achieving these

objectives.

mitigate

or

manage

the

transmission

The charges for congestion management are dealt

with under the heading congestion management.

Different

methods of transmission pricing are adopted to suit the local

conditions, which are delineated here under.

2.2.1.

Flat fee

This is the simplest possible transmission pricing.

It can be

easily understood and the fee would be stable over the period.
The total costs of fixed charges and operation and maintenance
charges are distributed amongst all the customers who use the
transmission system.
2.2.2.
This

Postage stamp method

is

also

fairly

simple

way

of

transmission

pricing.

Irrespective of the distance involved all the users would pay the
charges on the proportionate use of the transmission capacity.
In India, the postage stamp method of transmission pricing is in
use. The postage stamp pricing is used among the beneficiaries
of the region and the regional price of the transmission capacity
in Rs./MW would be worked out and billed according to the
contracted amount of electricity transmitted.

2.2.3.

Mile MW method

This is a little complicated but reasonable way of pricing the

transmission capacity as both the quantity and the distance
over which the electricity is transmitted is taken as basis for

calculating the transmission charges payable by the individual

customer.

The model cannot take into account actual circuit

miles of transmission line usage. Hence, notional distance of

power transmission is considered as the electricity would flow
based on the network configuration and system dynamics,
which cannot be accurately predicted.

2.2.4.

Contract path method

This method uses the assigned path of electricity transportation

as the basis for calculating the transmission pricing. However,
the electricity is such a commodity that it would be difficult to
assign a path of transmission of electricity.

The electricity

follows its own distinct and unique laws of physics traversing

the network following the path of least resistance.

2.2.5.

Point of Connection tariff

In this method the existing total transmission charges for the

region or a state where the tariff is being introduced is
accounted for.
transmission

Whatever may be the present method of

tariff,

the

present

level

transmission is assured in POC tariff.

of

revenue

from

In the new tariff, the

tariff per MW at the highest voltage level is calculated based on

the investments made and the amount of power transmitted.
Then the same at a lower voltage level it is calculated.

The

calculations are done for the entire network till the lowest
voltage level is reached. Now for every node in the network the
transmission tariff is fixed based on the layers of transmission
network used.

This will

transmission pricing.

be a transparent and stable

2.3

Imbalance Management
Whatever model is adopted, the notion that the transactions
should be physically scheduled so that buyers and sellers
should be matched is a fiction. There are bound to be difference
between the contracted amount of electricity and the actual
delivery/consumption. This imbalance between the contracted
quantity and the real time requirement need to be bridged to
ensure the stability and the security of the transmission
network and to ensure the quality of electric supply.
In an integrated model, the system operator owns resources
necessary to provide this service. In a decentralized model, the
system operator has to acquire these resources on commercial
basis. The balances can be acquired either at regulated prices
or at market-based prices.

In case of an integrated model,

arbitrary imbalance prices invite gaming.

Consumers may

prefer imbalances rather than contracting at more expensive

prices.
A similar trend is seen in the Indian market also.

Some

consumers prefer not to schedule their share of electricity and

instead rely on the UI power to meet their demand. It is better
to determine the imbalance price based on the market
requirements.

This sends the right signal to the contracts

market and for the long-term investments for the generation.

The imbalance market gives flexibility for the generator and
consumer to deviate from the contracted quantity of electricity
as the imbalances are appropriately priced instead of punitive
prices.

2.4

Congestion management
In the pool system all the consumers would pay a common
price, MCP as mentioned earlier. When the markets are thrown
open to competition, all the buyers would seek to benefit from
the cheaper sources of electricity. This may result in congestion
over transmission network. This may create market power for
some of the generators to exploit the opportunistic situation.
In vertically integrated utilities, the generation and demand are
fairly stable and generation and transmission facilities are
augmented in a coordinated way. Also, as the system will be
under control and command of a single entity, the assets are
controlled effectively and the possibility of congestion is
minimal. In a competitive environment, the supply and demand
could vary widely with the market forces and may lead to
congestion. The congestion is managed through different ways
listed under.

Price Area Congestion (PAC) management

Counter trade

Pro rata reduction in capacity allocation

Bidding for the residual capacity

Nodal / Zonal pricing

Constrained unit commitment model

However, during the phase of congestion management, the

system operator calls for additional generation in one area and
reduced generation in another area or reduced load in one area
and increased load in another area. While doing so, however,
no entity would like to lose on commercial front. As such, the
arrangement should be able to answer the issue.

2.4.1.

PAC Management

Whenever, congestion is apprehended, the system operator

declares that the system is split into different price areas across
the congestion area, with higher pool prices in the area
downstream of congestion and lower prices in the area
upstream of the congestion. This will relieve the congestion on
the transmission network.
The advantage of this method of splitting the market into
different price areas is that it gives a price signal to the
generating companies to add new capacities in the area of
higher

pool

prices

thus

increasing

the

competition

and

ultimately reducing the overall price in the long run.

2.4.2.

Counter Trade

This method is used incase of real time congestion on any

transmission corridor. The system operator will offer a counter
trade to the upstream of the congestion to the extent that the
transmission corridor is relieved of congestion.

The counter

trade is a notional trade, which will result in reduced generation

from the upstream of the congestion so that generation
elsewhere will be picked up to balance the system and relieve
the congestion simultaneously.

The charges towards this

counter trade will accrue towards the charges of system

charges.

2.4.3.

Pro-rata reduction

In case of congestion, all the participants drawing power on that

corridor will be given a pro-rata reduction of the schedules so
that the drawl on the corridor reduces to relieve the congestion.

2.4.4.

Bidding for Residual Transmission Capacity

At present this method is being used in India for usage of the

residual transmission capacity left out after catering to the longterm bilateral contracts. All the consumers would contest for
the remaining capacity available in transmission corridors of
their interest. In the absence of any congestion, as mentioned
earlier in transmission pricing, the corridor would be made
available to all the short term customers at 1/4th of the price for
the long term customers arrived at by postage stamp method.
For short-term customers, all the applications received upto
19th of every month would be bunched and access would be
allowed on first-come-first-served basis, subjected to the
availability of ATC [3].

However, in case congestion is

anticipated, then revised bids would be sought from all the

customers. These bids would be arranged in descending order
and the customers who are willing to pay higher charges would
be allowed access.

However, the highest bid is capped at 5

times the floor price in case of inter regional transmission

system and 2.5 times the floor price in case of intra regional
transmission system. In case the system operator notices the
congestion in real time, due to any constraints, she would
advise a revised transmission capacity allocation by reducing
the schedules in pro-rata basis.

2.4.5.

Nodal / Zonal pricing

In this method, the system operator would obtain the cost

functions of the generators and bids of consumers and would
run

an

optimisation

algorithm,

which

will

take

into

consideration number of constraints and derive at the optimum

solution to meet the demand.

In case of congestion, this

algorithm would divide the entire grid into nodes and would give
nodal prices. Or the system could be divided into number of
zones and would give the price in each zone.

The zone with

higher generation would be priced low and the zone with

shortage in generation would be priced higher. In case of no
congestion, the entire system will have a single price.

2.4.6.

ATC with Constrained unit commitment model

The system operator would schedule all the regular transactions

and then would indicate the available transmission capacity in
each transmission corridor for each time period of the day. This
information would be displayed on the web site of the system
operator.

A similar system namely OASIS (Open Access Same-

time Information System) is in vogue in PJM interconnection

and in some other US markets. Customers would access this
OASIS and find out whether any transmission capacity is
available for the transaction they are planning.

As the ATC

becomes scarce, the price of the ATC in that corridor goes high.
This would give the price signal to the market for investments in
that area.

Though a little complicated this would be a

transparent system of offering open access without any

discrimination.

The model is useful in centralised dispatch model like PJM

market, NYISO etc. The unconstrained unit commitment will be
derived based on the bids and offers.

If any congestion is

noticed then the constraints are introduced into the algorithm

to arrive at the economic dispatch with constraints known as
constrained unit commitment.

2.5. Ancillary Services

In a vertically integrated monopoly, all the services are bundled
in one and the charges are billed as transmission charges.
However, when the electricity is deregulated and open to
competition, all the services would be separated, called for
separately and charged. The ancillary services includes

VAR compensation

Balancing power

Primary response

Secondary response

Spinning reserve

Black start facility

Peaking power

Standby services

Load following etc.

2.6. Grid Security

The system operator should ensure that the grid is stable and
secure.

The system operator should exercise such command

and control over the system that she displays transparency and
non-discrimination in dealing with different customers.

The

system operator should be empowered to give instructions in

the interest of the grid.

2.7

Hedging risks
The markets are known for their volatility and electricity market
is no exception.

It has been observed that competition has

introduced uncertainty in the market and the price volatility has

increased tremendously in the absence of price caps.

Price

caps, however, are an inefficient way of managing the exchange.

Apart from price risks, there may be risk of supply, payment
default, market risk, congestion, inadequate information and
lack of experience.

In order to hedge against these risks,

transparent financial market needs to be developed where

products like futures, options, forward contracts etc., will be
available to hedge the risk.
The marketplace for electricity need to be liquid, where many
buyers and sellers could access each other easily and have the
access to market information.

Also, the market needs to be

efficient where participants ideally cannot predict which way the

prices will move.

The electricity market should be equipped

with proper risk hedging instruments, taking into consideration

the special requirements of the electricity business.

Even

though various derivatives are used in the electricity markets,

the following are the most widely used instruments. They are
explained in brief.

However, it is to mention here that the

derivatives markets are not intended for physical delivery of the

product. Normally less than 10% of the derivative instruments
will result in physical delivery of the product, while the rest are
used to hedge the risk through the difference of the derivative

price and spot market price.

The derivative instruments are

traded in the secondary market also, making them liquid assets.

2.7.1 Futures
The futures market is a type of forward market that takes place
on an organised exchange.

It is a standardized contract to

exchange the commodity at a predefined fixed future date for a

negotiated price.

The standard terms and conditions of the

futures contract make it easily tradable.

In an efficient and

transparent market the difference between the spot price and

the futures contract will always equal to the cost to carry. As
the maturity day approaches, the future and spot prices
converge [2].

2.7.2 Options
While the futures contracts are binding to exercise the right, the
options contract provides the holder of the contract the right,
but not the obligation, to buy or sell the commodity at an agreed
price known as strike price. The holder pays a fee / premium
upfront. Whether or not the option is not exercised, the fee paid
will not be returned. The holder will exercise the option, if the
spot price is favourable compared to the option price.

The

options are two types. If the option gives the right to purchase
the commodity, then it is called call option and if it gives the
right to sell the product, then it is called put option.

2.7.3 Forward contracts

This contract is similar to futures contract with the difference
that the forward contracts are tailor made unlike futures. These
tailor made contracts are between two parties and normally
culminate in physical delivery.

These are not traded on

exchanges and hence are not liquid.

These are short term in

nature and are used for managing the price risk where the
market prices are volatile and to off set the balancing
requirements in real time.
2.7.4 Swap contracts
The swap contracts are signed between two parties to hedge
against the volatility in the price. The swap would enable the
party to isolate itself from the volatility so that it can
concentrate more on the business while the swap provider who
is a financial expert in the business of providing the risk cover
will manage the swap contracts, by swapping the variable price
with a fixed price.
2.7.5 Contract for Differences (CFDs)
In pool system, generators and consumers may enter into long
term fixed price-hedging contracts also known as Contracts For
Differences (CFDs).

The generators want to hedge the risk of

pricing dipping too low lesser than the marginal cost of the
generators while on the other hand the consumers want to
hedge the risk of spot prices going through the roof. CFD would
hedge the risk for both the parties. If the spot price dipped low,
the consumer would pay the difference to the generator while if
the prices soared, the generator would refund the difference
between the strike price and spot price.

This way a single contract would hedge the price volatility for
both the generators and consumers.

2.8

Choice of System Operator models

To keep the system stable, it was considered that generation
and transmission needed to be under the command and control
of single entity.

However, with the introduction of the

competition, it became apparent that it is not required that the

system need to be vertically integrated.

In restructured

markets, the system operator can be a TSO or an ISO.

TSO

having the ownership of transmission assets under her control

will be at ease while controlling the grid.

However, due to

ownership of the transmission assets, she will be compelled to

load the transmission assets conservatively. Thus TSO model
will limit the optimum utilisation of the transmission assets.
On the other hand, ISO will try to optimise the system
operations and will try to load the transmission assets optimally
simultaneously ensuring the security of the grid.
Apart from the above, when there are multiple owners of
transmission, it will be prudent to have an independent system
operator so that there is level playing field for all the owners of
the transmission.

2.9

Choice of trading models

While it is agreed that the monopoly is not a competitive model,
if conditions in a country warrants continuing with the
monopoly due to reasons of social conditions, the monopoly may

also work well in the given circumstances.

However, the

challenge would be do ensure that a system is put in place to

make people accountable for their deeds and efficiencies are not
lost due to bureaucracy.
On the other front pool model suits those countries where there
is a need to bring competition in a limited way and continue
with the retail monopoly where the competition may not yield
better returns compared to the expenditure made in putting
competition to work in the retail market. The pool model also
helps in retaining the control over the market by regulating the
pool operator.
With the competition in wholesale market, the disadvantages of
monopsony could be eliminated in this model. Thus generators
are also not put to undue disadvantage as they have choice of
selecting their buyers.

Furthering competition will result in

competition in the retails market where customers have real

choice. However, it is to be ensured that the retail competition
doesnt bring into too many complications in the operation and
the gains of introducing retail competitions far outstrip the
costs involved.

2.10 Choice of contracts

The bilateral contracts provide advantage of price stability and
predictability for both the generators and consumers over long
periods of time. While major requirements of electricity can be
met through these bilateral contracts minor adjustments in the
electricity requirements can be met through short term trading
contracts. The final fine-tuning of the electricity requirements
at the real time can be done in hour ahead or spot markets

through power exchange.

The advantage of this model is

flexibility. It is not mandatory to sign bilateral contracts or to

purchase through pool.

Customers can chose the mode of

purchasing power based on their convenience and requirement.

2.11 Choice of transmission ownership

The national monopoly of transmission provides with the
advantage of planned development of the transmission network.
It will also help in avoidance of duplication of assets. However,
national monopoly may go against the very premise of bringing
competition and efficiencies into the system.
Similar will the case with the regional monopoly as well as state
level monopoly. We may continue with the state level monopoly
for development of intra state transmission network.

For

interstate and national transmission development, we may opt

for

private

transmission

discriminatory open access.

electricity policy.

licensees;

all

providing

non-

This is in line with the national

However, while adopting such a model, we

may have to have a central planning agency in the form of CEA

to plan approve the transmission interconnections for a
coordinated development of the network.

2.12 Choice of transmission pricing

The flat fee method is too primitive and the charges will not
reflect the usage of the transmission assets. On the other hand,
the contracted path method is a theoretical concept as it is wellestablished fact that electricity flow cannot be assigned a
particular transmission corridor.

The pricing of postage stamp

method though simple will not reflect the actual usage of the
transmission assets.

It would be better if the transmission

pricing were based on the utilisation of the transmission assets.

The Point of Connection transmission pricing would better
reflect the philosophy. As such it would be an efficient way of
allocation of transmission costs to the users of the transmission
network.

Chapter 3:

3.1

Electricity markets around the world

Introduction
The rationale for development of internal electricity markets
may be classified as legal, economic, technological and strategic
aims. The reasons may be different for different countries and
may be combination of several reasons.

3.1.1 Legal rationale

World over trade barriers are being removed. European court of
justice has held that electricity is a good within the meaning of
European treaty.
ensured.

Freedom of movement of goods is to be

However, due to public service value, electricity is

treated a bit delicately. Nevertheless, obligation to remove the

trade barriers is a matter of primary law.

3.1.2 Economic rationale

Global competitiveness depends on lower energy costs. The cost
differential results from the tax treatment (Danish government
imposes 142.5% tax on domestic sector while it is 8% in UK),
absence of competitive energy technologies used (Coal in
Germany to Nuclear in France), different pricing policies used
(France

subsidies

industrial

consumers

from

domestic

consumers while it is the opposite in Germany).

With liberalisation, management may concentrate on short-term
profits and ignore the long-term capacity additions and R&D.

Hence gains in productive efficiency may offset losses in

dynamic efficiency.

3.1.3 Technology Advances

Due to disruptive technological advances, monolithic production
facilities with high sunk cost are becoming uncompetitive with
advances in gas turbine technologies and fuel cells. EHV grids
may become obsolete and distributed generation with miniature
fuel cells may replace them.

3.1.4 Strategic Aims

Dependence on external sources of energy requirement has
shown its disastrous effects during oil shocks. Strategic aim is
to have a coordinated energy policy to reduce the impacts of
external energy markets. The ultimate aim may be to ensure
energy security or to utilise the energy sources optimally or to
achieve self-reliance for the energy requirements or to utilise the
natural resources like water resources for optimally for energy
requirements and irrigation purpose. The strategic aim differs
from country to country.

3.2

Developed Electricity Market Models

By the time deregulation started in developed countries, already
they have established a well functioning and quite efficient
electricity system. In developed countries, the driving force
behind deregulation has been to provide customers with
electricity at lower prices and offer them a greater choice of

choosing their supplier pressure from small players in the

business to reduce the control and power of large state-owned
utilities.

The most discussed deregulation has been the England and

Wales market, with growing interest in the Nordic countries
model and much attention have been paid to actions in the
United States, especially in California, New York and PJM
Interconnection. California has been considered as a model
market to which others made reference. But perceptions about
the California market are now completely changed after
California crisis. Now lessons learnt from California electricity
market have strong influence on future policy and on the
evolution of other electricity markets worldwide. Hence in this
report, some developed electricity markets have been discussed
like England & Wales electricity market of UK, Nord Pool of
Nordic electricity market, California, PJM and New York
electricity markets of US.

All these market models have

different characteristics and different trading arrangements.

3.3

England and Wales

3.3.1 Introduction
In United Kingdom (UK), the electricity industry was under
monopoly of Central Electricity Generating Board (CEGB),
generating and transmitting electricity. CEGB had to purchase
from British companies and couldnt seek better terms available
abroad. It produced, bought, sold and delivered electricity to 12
Area Boards.

The Area Board in turn had monopoly in their

respective territory.

3.3.2 Phase I of reforms

During 1980s, with the experience of privatizing telecom and
gas monopolies, Conservative government led by Margaret
Thatcher published government white paper on setting out the
new structure for electricity.
generation

was

separated

To create competition, CEGBs

from

its

transmission.

The

transmission is renamed as National Grid Company (NGC).

Generation is divided into three companies, National Electric
(now Innogy), Powergen and Nuclear Electric (later renamed
after privatisation as British Energy). The 12 Area Boards were
privatized and known as Regional Electric Companies (RECs).
The RECs have monopoly in one area while 2nd tier suppliers
can supply these areas bringing in competition.

RECs were

thus under substantial competitive pressure.

3.3.3 Pool system

Then pool system was introduced.
parties with sound financials.

Licenses were given to

Half an hourly price bids by

generators were introduced. Demand is estimated by the NGC

and Optimal Power Flow algorithm would decide the Market
Clearing Price (Single auction method). The Optimal Power Flow
algorithm would take into consideration other variables like
operating flexibility, fixed price, variable price, standby charges,
startup charges, governor response, price for primary response
and secondary response (operating margins) and price for
peaking generation and derive the Pool Purchase Price (PPP).
Pool Purchase Price (PPP) = System Marginal Price (SMP) + CE

Where,
Capacity Element (CE) = LOLP (VOLL-SMP),
Where,
LOLP = Loss of load probability
VOLL = Value of load loss
Pool Sale Price (PSP) = PPP + Scale-up margin
SMP takes into consideration fixed price, operating price and
start-up price. As LOLP increases, the CE gives a price signal to
the market to attract more investments in to the capacity
addition.
Inspite of the best efforts and estimates, the actual demand
differs. As PPP is based on the estimates of demand, the model
calls for additional payments based on actual like reserve
capacity,

capacity

held

due

to

transmission

constraints,

generation beyond schedules to meet the consumption.

In pool system, generators and consumers used to enter into
long term fixed price-hedging contracts also known as Contracts
For Differences (CFDs).

The CFD used to be the difference

between the strike price and PPP.

The pool system resulted in escalation of electricity prices while
the fuel prices dipped. Consumer surplus was encashed by the
shareholders and the management was rewarded by stock
options.

3.3.4 Regulatory Regime

To facilitate streamlining the industry, regulator is instituted by
enacting Electricity Act 1989.

The objectives of the regulator

had been to

Regulate electricity prices

Promote competition

Induce new capacities

Ensure health and safety of employees

Protect environment / society

Ensure stable power supply

3.3.5 Wholesale market

Due to technological improvements and the cheaper fuel prices,
many gas based Combined Cycle Gas Turbine (CCGT) plants
came up in UK.

Gas units operate most efficiently when

operated continuously (with cycle efficiency as high as 60%) and

hence would bid low to remain in operation. Peaks were met by
expensive coal power plants. So, often the SMP is set by the
coal power stations. Hence, oligopoly situation prevailed in the
electricity market.

3.3.6 Retail market

Retailing and distribution is in the hands of the monopolistic
RECs.

However, the second tier suppliers comprising of

generators and other RECs provided competition. This helped

in improving the service offered to the consumer and service
response time.

The market model of England and Wales power pool was as

depicted in the following diagram.

Competing Generators

Bid

Dispatch

Power Exchange

Sell

Ancillary Services

Forecast

Transmission Network

System Operator

Monitor

Control

Transmission Network

Figure 3.1: England and Wales power pool

Looking back, the pool system was a failure because of

Shareholders bias instead of consumers benefits, profits

to the companies and share prices boomed.

Managerial enrichment.

Managers were given huge

benefits through ESOPs

Loss of consumer welfare.

Prices rose beyond inflation

while fuel prices dipped

Market power of oligopolisic suppliers.

Few coal based

power stations declared the Market Clearing Prices (MCP)

named as System Marginal Prices (SMP)

Reintegration through mergers and acquisitions. The very

purpose of restructuring is defeated when the industry is
shifting towards consolidation.

Governments failure to implement strict environmental

protection norms.

Biased regulatory approach no open hearings especially

concerning pricing. This is because of the administrative
model of the regulatory functioning and

The most conspicuous flaw in bidding is only producers

were bidding. There was no demand side bidding. The
consumers were always price takers. As a result, demand
was fixed. It was inelastic to price changes in short run.

As the pool system was compulsory, outside trading was

prevented or discouraged.

The generators exploited pool.

To

manipulate, the generators would declare plants unavailable a

day ahead increasing the LOLP and hence CE/PPP. In real time
the same plants would be declared available in real time to get
the benefit of higher PPP. This called for generators to sign a
good conduct agreement before participating in the market.
With the experience, the UK market has changed the market
rules and implementing New Electricity Trading Arrangements
(NETA). This is a shift from the pool system where competition
is in supply side only to retail competitive environment, which
provides new rules for the UK electricity market. . Now, it has

transformed into British Electricity Trading and Transmission

Agreement (BETTA) with the integration of Scotland into
markets of England and Wales.

Marketers or
traders

Generators

Power exchanges
Spot market and
bilateral contracts

System operator NGC

Transmission functions and
balancing operations

Supply and distribution companies

(former RECs)

Consumers

Large
Consumers

Consumers

Figure 3.2: NETA electricity market- major contractual

relationships

NGC, the transmission company is appointed as the System

Operator for whole of Great Britain market who also looked after
the imbalance market and congestion management.

The

quantity of the imbalance electricity needed, ancillary services

required and the price at which these are obtained are under
the control of the system operator.
The objective was to introduce competitive markets to develp
further creating

A common set of trading rules for electricity trading

across Great Britain

A common set of rules for access to transmission

network

Single SO independent of generation and supply

interests

With the formation of BETTA, competition is introduced in the

Scotland generation market from April 1, 2005.

This has

resulted in greater competition and choice and seamless access

to wider markets across Great Britain. The immediate challenge
is to reinforce the transmission networks to accommodate
significant additional generation capacity from Scotland to
markets in England and Wales.

3.3.7 Learning phase

Even

when

the

competition

is

properly

developed

and

appropriate model is put in place, it may so happen that at

retail level, the demand may not respond to the price
indications.

For example, during festival season, during hot

summer noon, during a world cup match, etc., irrespective of

the price volatility, the demand remains inelastic.

The best

example of such customer unresponsiveness is witnessed in

January - February 1996 [1]. The spot prices shot up to around
540pounds/MWh
pounds/MWh.

from

the

base

price

of

around

20

Such a situation would call for distinguishing

the customers as uninterruptible customers who will pay extra

for the service and interruptible customers who will be charged
lower prices.

During such price surges, when there is no

response from the retail customers, the retailer would prefer to

switch off these customers and save on the demand.

3.4

Nordic Countries (Nord Pool)

Nord pool is the first successful transnational power exchange
in the world facilitating electricity trade across Nordic region
comprising Norway, Sweden, Denmark and Finland.

It has

hourly physical spot market into which the both generators and
consumers would submit their bids in each morning for the Day
Ahead market known as Elspot. By noon the exchange decides
the quantum and the price of the electricity traded for all the 24
hours of the next day. It also operates a 2-hour ahead physical
market known as Elbas, which will facilitate in bridging the gap
between the anticipated demand and supply nearer to the real
time operation. Nord pool also operates, the financial futures
market trading contracts from weekly financial contracts
extending upto 3 years into the future. It also provides clearing
services for the Nordic participants.
All the generators in Nordic countries operate through their
TSOs.

These TSOs are responsible for system reliability and

obtaining balance requirements. Nordel facilitates coordination

between these TSOs and in planning, transmission capacity
augmentation, operation and transmission pricing.
The structure of the Nord Pool market is illustrated in the
following diagram.

Generating Companies of Nordic Countries

TSOs (Nordel)

Power Exchange
(Nord Pool)

Discoms

Retailers

Looking back

Consumers

Electricity

Coordination

Figure 3.3: Structure of Nord Pool market

In this model, there is one market operator (Nord pool), five

system

operators

regulators.

overseen

by

Norwegian

and

Swedish

The system operators in coordination with the

transmission owners, its users evaluate and arrive at the

transmission tariff to be valid for the next year.

The system

operators establish the so-called price areas for the total supply

area based on the congestion possibilities in the transmission.

The generators and consumers will bid into the pool, where each
bid is related to one price area. In case of no congestion, the
entire system will operate as single price area.

In case of

congestion, the system will be divided into different price areas

with the price is increased in deficit area and reduced in
surplus area, until the flows on congested paths are reduced to
their capacity limits.

P2
Ps

P1

Without Congestion

Surplus Area

Deficit Area

during congestion period

Figure 3.4: Price Area Congestion Management
Also, the system operator runs a separate market for ancillary
services and balancing markets.

The system operator buys

these services from the market and charges the market

participants as a capacity fee on a pro-rata basis. In Sweden,
the system operator also uses counter trades to mitigate the
congestion.

The advantage of the Nord Pool structure is that it promotes the

choice for all the participants as trading in the market is
optional.

In addition, the responsibility of dispatching and

managing generation remains with the owners.

Every

participant bidding into the pool should indicate the area, date,
price, time and quantity of electricity as illustrated in the
following diagram.

Price

200
Purchase on the spot market

Sale on the spot market

100

MW
-60

-40 -20

20

40

100

Figure 3.5: Bidding into Nord Pool

Price
MW

50

51

100

101

125

126

150

151

175

176

800

100

100

40

40

20

20

-20

-40

-60

-60

Table 3.1: Bidding into Nord Pool

In addition to bilateral contracts, Nord Pool operates a spot
market and a balancing market for physical delivery and a
financial futures market to hedge against price volatility.

3.4.1 Day Ahead Market

Nord Pool Power Exchange operates this market.

Generators

and consumers submit their offers and bids to be delivered on

the following day. The pool determines the price of the market
equilibrium, the balance price for the aggregated supply curve
and aggregated demand curve.

This price is called System

Price. In case of no congestion the entire system will have a

single system price. However, in case of congestion, the system
will be deemed to be split into price areas. Different prices in
different

areas

signal

for

future

system

planning

and

development.

3.4.2 Balancing market

This market is operated by the system operator, which is used
for short-term adjustments. The imbalances between the traded
volumes and actual deliveries will be settled in this market. If
the gross demand exceeds the total contracted volume, then the
imbalances market price will be set equal to the highest
accepted offer on the spot market. If the gross demand is less
than the traded volume, the price in imbalance market is set
equal to the lowest accepted bid to buy.

3.4.3 Financial market

The futures traded are purely financial commitments.

This

market doesnt have any physical delivery obligations. It is an

over the counter forward trade in electricity which acts as a
hedging tool to tide over the price volatility.

3.5

United States
The US market is huge with around 25% of the installed
capacity in the world. But today the industry is so fragmented
that the efficiency is suffering.

More than 200 private

companies are in competition. Around 3000 entities operate in

an uncoordinated way in the federal, state and municipal level.
Over 200 companies own transmission and there are around
140 local system operators.

Each state has its own plan to

deregulate. Federal Electricity Regulatory Commission (FERC)

has much more responsibility of introducing competition, but it
has no authority to implement. Key parts of the industry are
under divided jurisdiction; key players like municipal utilities
and cooperatives are outside FERCs control [1].
US lacks the following measures to bring in competition.

Adopt a coherent national policy, standard trading

arrangements

and

checklist

of

requirements

for

competition.

Revise the jurisdiction between federal and state so that

regional decisions could be taken so that wholesale
trading arrangements could be established.

The major market models in United States includes California

market,

Pennsylvania

New

Jersey

Maryland

(PJM)

interconnection, New York ISO, Electric Reliability Council of

Texas (ERCOT), New England ISO, Midwest ISO (MISO).
shall

discuss

about

the

important

and

biggest

interconnection and about the Californias failed model.

We
PJM

3.6

California market
California is the first state in United States to offer large-scale
retail choice and a competitive generation market.

The

California ISO, a non-profit association was created in 1996

with the objective of creating a competitive electricity market in
California and to ensure grid security.

The control of the

transmission network is vested with the ISO.

The California market structure consists of ISO who provided
the access to the transmission network and a Power Exchange
(PX), which created a spot market for the electricity and settles
trades in the market.

There is a third component in the

California model, known as Scheduling Coordinators (SCs),

whose responsibility is to submit the balanced schedules to the
ISO.
It is mandatory for the generators in California model to bid
their generation through Power Exchange, for its Day Ahead
market, Hour Ahead market and real time (balancing) spot
market. The real time market is operated by ISO. However, it is
the responsibility of the Scheduling Coordinators to resolve the
congestion through adjustment bids.

Except in case of

emergency, ISO is not allowed to adjust individual schedules of

SCs.
The structure of the California power exchange is as depicted in
the following diagram.

Competing Generators

Bid

SCs

Ancillary Services

Dispatch

California ISO

Power Exchange

Sell

Forecast

System Operators

Transmission Network
Monitor

Control

Transmission Network

Figure 3.6: Structure of the California market

The Power Exchange is a non-profit making entity, which
provides for competitive auction and short-term pool facilities.
Based on the double-sided auction model, Power Exchange
determines the MCP.
Coordinator

submits

Power Exchange as a Scheduling

the

balanced

demand

schedules for successful bidders to the ISO [14].

and

supply

If the MCP of Power Exchange is less than the cost of producing

by the power, a seller can buy power through Power Exchange
and resell it to its customers at contracted price. Similarly if a
buyer has contracted more power than his load, she can sell the
excess power in the Power Exchange at MCP.

3.6.1 Day Ahead and Hour Ahead markets

Market participants would bid supply and demand into Day
Ahead markets for the next 24:00 hrs.

The market starts at

06:00 hrs and closes at 13:00 hrs. The bids initially submitted
are portfolio bids. These bids once accepted by the ISO will be
split into unit generation schedules and SCs will submit the
unit specific supply bids and location specific demand bids.
ISO will check for congestion and use the adjustment bids to
relieve the congestion and submit the adjusted schedules to
SCs.

The SCs can revise their schedules or can accept the

revised schedules suggested by the ISO.

The Hour Ahead market starts two hours before the hour of
operation. The market provides means to buy and sell so as to
adjust their Day Ahead commitments based on the information
closer to the transaction hour schedules for minimizing the real
time imbalances.

Once the market is closed the Power

Exchange would declare the price and quantity of traded

electricity.

3.6.2 Transmission Congestion Contracts (TCCs)

To encourage expansion of transmission capacity, Transmission
Congestion Contracts (TCCs) were proposed to deal with the

congestion. When congestion occurs, the differential generation

prices at both ends would be defined as congestion rentals. The
TCC holder would get the power specified in the TCC contract at
a price at which power would have been sold in the absence of
congestion.

As congestion increases the TCCs would become

more valuable and TCC can be traded to new investors for

expansion of transmission capacity.

3.6.3 Comments
California market has offered some advantages such as
1. The California market has more than one choice between
power exchange and bilateral contracts.
2. Prices for electricity, transmission and ancillary services
are competitively set by the market.
3. TCCs offered price signals for transmission augmentation.
In addition to the difficulties in operation, the market has some
drawbacks such as
1. The cost of setting of the system is higher
2. It was difficult to demarcate the zones as the network is
meshed.
3. A conflict with the unit commitment schedules could
occur as the ISO adjusts the schedules to mitigate the
congestion.
4. The CalPX must accept the expensive power from the
Californias investor owned utilities.

3.6.4 California Crisis

California has been considered as a model market to which
others made reference and worldwide developments towards
similar competitive electricity markets were in progress. But
perceptions about the California market are now completely
changed after California crisis. Hence now lessons learnt from
California electricity markets will have strong influence on
future policy and on the evolution of other electricity markets
worldwide.

Prior to restructuring, regional utility companies had provided

electricity in their local areas and had owned assets, including
generation, high voltage transmission, and the distribution and
supply systems.

They served consumers in their franchise

areas, in effect providing monopoly electricity supply and

services. As a result of restructuring, Californias largest
investor owned utilities (IOUs) lost control of most of their
generation assets, were required to operate with newly created
independent system operator (ISO) and to allow third party
wires access and choice of supplier for consumers.

A power exchange (Cal-PX) was formed in March 1998. Most of

the electricity trading through Cal-PX was on an hourly block,
day-ahead basis; long-term bilateral contracts used in other
markets were offered latter in the market evolution, but shortterm day and hour ahead trading taking significant volume was
the initial intention. The market took off smoothly, and the
prices were seemingly just and reasonable until May 2000,
when the first sign of market crisis emerged. This marked the
beginning of California power crisis that continued until May
2001.

The crisis had its origin in the unintentional mistakes and

miscalculations adopted, at the time when electricity sector was
restructured in California.

Two mistakes stand out as

important.

California required utilities to make nearly all their

electricity purchases on a volatile spot basis, divest a
substantial portion of their generation without allowing
them to enter into long-term contracts to ensure stable
and reasonable prices during the transition period
following

the

deregulation.

The

lack

of

demand

responsiveness to hourly prices were partly due to

technical

capability

limitation

for

responsiveness,

ambiguous

acquisition

reasonably-priced

of

real

accountability
power

time
for
for

price
the
retail

consumers and lack of adequate forward contracting for

energy.

California froze retail rates at low levels and banked on

low wholesale prices to support a profit margin high
enough to enable the utilities to pay off. Although frozen
at 10% below 1996 levels the rates were supposedly high
at the time compared to what a competitive market would
presumably have produced.

The fixed retail level price

discouraged end-users from undertaking normal market

responses: to conserve and/or to take advantage of the
allowed customer choice and opt for an alternative retail
supplier.

Those responses would have helped restrain

prices.
The California market was operating on extreme physical
margin of available capacity, which was coupled with inability of

the utility suppliers to recover costs from consumers. The peak

load was within 1.5%-3% of available capacity during summer
2000 creating power scarcity. The crisis in California electricity
market resulted from a combination of factors:

Exceptionally high summer temperatures.

Lack of sufficient generating capacity in California and

throughout U.S. Western region.

An increase in gas prices for power generation compared

with previous years.

Drought conditions that resulted in limited hydropower

import availability.

Weakness and flaws in the design of the electricity market

including fixed consumer prices, but variable wholesale
electricity prices.

Inadequate demand responsiveness or lack of price

demand elasticity.

Exercise of market power by generators and other market

players.

Growing economy that fueled demand for power.

These anomalies, among others culminated into a perfect

storm and consequently lead to the significant market power
abuse in California. The problem was further compounded by
the potential financial insolvency of the investor-owned utilities
(IOU).

The increasing deterioration of financial solvency of

Californias three IOUs further shattered the deregulated

electricity market.

Now

the

Ca-ISO

is

addressing

these

flaws

through

comprehensive redesign effort known as Market Design 2002

(MD 02). It allows the Ca-ISO to match buyers and sellers

through a transparent Day Ahead market that reduce reliance

on the more volatile Hour Ahead and Real Time markets. Key
challenges are to develop proper planning and operating
standards and execute them in a manner that will assure
continued reliability of the power supply system.

3.7

PJM Interconnection
Another

important

market

in

the

United

States

is

the

Pennsylvania New Jersey Maryland (PJM) interconnection,

which is the second biggest market in the world.

The

responsibilities of the PJM ISO are system security and

reliability of supply, managing the electricity spot market and
real time balancing market, billing and settlement.
The transmission network is owned by many entities but is
operated by the PJM ISO. In this model, there are two markets:
Day

Ahead

market

and

Real

time

(Balancing)

market.

Electricity bids are submitted by generators and marketers

while load bids are submitted by the retailers.

The system

operator calculates the Locational Marginal Prices (LMPs) for all

the buses for congestion management. If there is no congestion,
there will be one marginal price for the entire system.
Also, the data of bilateral contracts is provided to the system
operator, which may include transactions outside the PJM area.
The operations include three distinct areas: pre scheduling
operation, scheduling operation and dispatching.
The pre scheduling operation, would take place thirty days in
advance leading upto the operating day. In order to maintain
the system, PJM ISO would maintain data regarding the

anticipated demand, available capacity, unit outage requests,

and performance studies on operational reserves etc.
The scheduling and dispatching operations would include the
Day Ahead and Hour Ahead process.

The Day Ahead

scheduling would be done on the day prior to the operating day

while the Hour Ahead scheduling would be done 60 minutes
ahead of the operating hour. The ISO would manage the hourly
electricity and reserve requirements.

A security constrained

economic dispatch is used for the purpose.

The electricity bids are submitted in three different ways into
PJM market.

Bilateral contracts, self-scheduling by the

members, and bids into spot markets.

Off PX

Capacity Market

Fixed Tr. Rights

Bilaterals

DA Market

Day Ahead LMPs

Bilaterals

Balancing Market

Real Time LMPs

Figure 3.7: Market structure in PJM interconnection

The bilateral contracts can be internal or external. The member

may adjust the self-scheduling of its resources upto 60 minutes
in advance on an hour-to-hour basis, within its control area.
The members should submit their bids to the spot market
before 12:00 noon, which can be withdrawn upto 16:00 hrs by
which time the ISO would notify the acceptance for the next
day.

After 16:00 hrs the members are obliged to pay non-

delivery charges.

3.8

New York Model

Most retail electric service in New York State was provided by a
group of six investor owned utilities (IOUs), the Long Island
Power Authority and the Power Authority of the State of New
York, collectively referred to as the New York Power Pool (NYPP).
NYPP was composed of the eight major electric transmission
and distribution companies in New York State.

Each of the

IOUs was exclusive provider of retail electric service of all kinds

within its franchise area as provider of last resort. Each of them
remains dominant retail seller of electric energy and the
exclusive retail distribution company in its territory. In addition
to being regulated with respect to retail electric services, safety,
reliability and security, the IOUs have been regulated at the
wholesale level by the FERC. Generally, the FERCs jurisdiction
extends to the wholesale sale and transmission of electric
energy in interstate commerce. The IOUs right to be the sole
provider

of

retail

electric

service

within

their

respective

geographic areas, together with vertical integration of their

generation, transmission, distribution and billing operations
created opportunities for the IOUs to protect their capital
investment in generation facilities by closing their transmission

and distribution systems to alternative suppliers of electricity.

Recognizing the potential for competition in electric industry
and the burden that even regulated monopoly places upon the
general

economy,

the

FERC

has

moved

aggressively

to

restructure the electric industry since the early 1990s.

The most significant aspects of the restructuring in New York
include

The breakup of monopoly control of generating capacity

and energy through mandatory divestment by the IOUs of
their generation facilities;

The requirement, under FERC Order No. 888 in April

1994, that the IOUs provide open access to their
transmission systems;

The creation of spot markets in which generators and end

users will be able to sell and purchase competitively
priced bulk electricity, capacity and ancillary services.

FERC has insisted that an independent body be formed to be

the system operator to assure fully open and nondiscriminatory
access to the bulk transmission system. NYPP decided to break
down the pool and proposed to form a substitute represented by
an Independent System Operator (ISO) and other institutions
such as the PX to comply with FERC rules, maintain reliability
in a competitive environment and facilitate a competitive
wholesale electricity market. NYISO, a non-profit organization
was formed in 1999 as part of the restructuring of New York
States electric power industry The NYISO, as an independent
entity of any market participant have responsibility.

To assure open and non discriminatory access to all eligible

market participants desiring to use New York States bulk
electric transmission system

To administer markets for electric capacity, energy and

ancillary

services

in

nondiscriminatory

economically

efficient manner

To assure reliability, security and safety of New York State

bulk electric transmission system

To administer and maintain Internet based bulletin board

OASIS, for on-line transmission related information and
services

Starting in 1999, the NYISO designed one of the first wholesale

web-based power markets in the nation, offering a fair and
competitive energy market based on an entirely new concept.
The NYISO system matches load and supply bids for energy via
the Internet from a variety of market participants including
utilities, load serving entities, public and private power
providers, and power marketers and brokers. The market
structure in New York is voluntary with a centralized unit
commitment

and

economic

dispatch.

Major

contractual

relationships of NYISO with other entities are shown in the

following figure. It is voluntary in the sense that participants in
this market either trade through centralized competitive market
(PX) or schedule transactions in a bilateral form.

The bids

submitted to PX are unit based adjustable bids, which include

physical constraints like ramp rates, minimum up and down
time along with start up costs and energy bid prices. New York
Power Exchange (NYPE) is a non-profit PX to facilitate majority
of commercial transactions. Trades in NYPE include energy,
capacity and ancillary services. Market participants may
establish other PX with the approval of and consistent with
protocols of the ISO and the regulators.

Most of the

transactions in Day Ahead and Real Time markets are

scheduled through NYPE to minimize the ISOs role in
commercial transactions.

IOUs

OASIS

ISO

PX

Unit Commitment, Balancing, congestion management

Power marketers

LSEs

Retail
Customers

Figure 3.8: Structure of the New York electricity market

FERC order 889, mandated transmission providers (TPs), to

create an Open Access Same-Time Information System (OASIS).
OASIS is an electronic Internet based communication system for
nondiscriminatory

and

same-time

access

to

transmission

related information. Major types information posted on OASIS

include ATC, transmission service prices, transmission service

requests

and

responses,

transmission

service

schedules,

ancillary service offerings and prices and transmission-related

communications.

Load Serving Entities (LSEs) are wholesale

buyers responsible for supplying to retail consumers

The centralized market has two time frames: Day-Ahead and
Real-Time. In the DA market all LSEs pass to the ISO a load
forecast. LSEs have two options for committing units: either
commit bilaterally or ask the ISO to commit the resource on
their behalf.

If the ISO option is selected, the ISO uses

generator bids in DA market which include start up costs, ramp

rate, minimum loading requirements and energy bid prices and
LSEs would be responsible for the start-up and minimum load
costs associated with those units. A Real-Time (balancing)
market is operated by the ISO using a centralized five-minute
security constrained optimal dispatch, where buyer and seller
can participate up to 90 minutes ahead with flexible bids or
submit bilateral schedules for energy as well as some ancillary
services. Energy imbalances relative to DA schedule are settled
based on actual locational energy prices in this market. Thus
there are two sets of locational prices in Day Ahead and Real
Time markets.
NYISO uses Security Constrained Unit Commitment (SCUC)
software for scheduling in DA and Hour Ahead markets to
dispatch energy, load and reserves taking into account network
constraints and scheduled outages. The same software is used
to calculate Locational Marginal Prices (LMPs) and ancillary
service prices. LMPs are used to calculate the price of supplying
loads in different regions of the system, to settle energy markets
and to calculate congestion costs paid by transacted bilateral
contracts. The ISO uses the submitted bids to calculate LMPs
while

taking

into

considerati/n

the

maximum

limits

of

transmission components. All suppliers (sellers) in the energy

market will be paid the applicable LMP for the energy sold and
purchasers pay the applicable LMP.
Customers have access to entire transmission grid for wheeling
through or out by paying transmission service charges (TSC).
TSC, which is collected by ISO or directly by TPs, is based on
TPs revenue requirements. To hedge fluctuations in price of
transmission, TCCs are used as financial instruments. TCCs
could stabilize transmission charges and are considered as
buying financial equivalent of a firm transmission right in
advance. The monetary congestion charges between any two
locations would be equal to the difference between LMPs
multiplied by transaction MWh. A participant can purchase a
TCC

for

MW

quantity

corresponding

to

its

intended

transaction either from a primary sale of TCCs or in secondary

markets, where TCCs are sold periodically. The revenues of
selling TCCs are collected and paid to owners of transmission
assets to be credited against the TSC of TPs.

3.9

Developing Electricity Market Models

Market oriented restructuring of electricity supply industry in
developed countries led to a realization of the need for reform
and competition in developing countries as well.

The aim of

electricity sector reform in developing countries is basically

different from that in developed countries.

In developing

countries the attraction of investment for expansion are main

concerns since they are in situation of supply shortage resulting
from high demand growth.

Inefficient system management

coupled with irrational tariff policies and other issues have

awfully affected the availability of financial resources to support
investment

in

augmenting

generation

and

transmission

capacities.

In such circumstances many developing countries

were forced to restructure their power sectors under pressure

from international funding agencies like World Bank and Asian
Development Bank.
Case studies of two major developing countries in Asia, China
and Japan have been discussed. China and Japan both are in
process to reform their electricity industry from last one decade.
China being the largest potential market for electricity in world
has changed its vertically integrated structure into regional
power markets, with a target of national interconnected network
by 2010.

Japan has also adopted partial liberalization, while

maintaining its vertically integrated structure of regional

investor-owned utilities to reduce electricity tariff, which is
highest in the world.

3.10 China Model

The Chinese electricity industry has been growing at a rapid
pace for the past two decades in order to fuel the countrys rapid
economy expansion due to increased industrialization and
economic reforms. Total installed capacity grew from a mere 65
GW in 1980 to 391 GW in 2003.

The Chinese electricity

industry now has become the second largest in the world behind
the United States in terms of installed capacity. It consists of
74.2% thermal, 24% hydro and 1.6 % nuclear.
As in many countries, Chinas electricity industry was started
out as a collection of government-run utilities and till 1985, it
was vertically integrated government owned and operated
enterprise.

Realizing the constraints that power shortages

placed on nations economic and social development, the

Chinese government was ready for industry reforms mainly in

raising the much needed capital for capacity expansion.

In

1985, for the first time regional governments, local companies

and foreign investors were allowed to invest in power sector.
This reform was successful in terms of huge investment from
both local and foreign investors. The State Power Corporation
(SPC) was formed in 1997 as autonomous operator of power
sector and Ministry of Power was dissolved.
Unfortunately, wholesale prices did not drop down after
reforms, moreover prices seems to tending upward due to
monopoly of SPC and guaranteed profit return to investors with
electricity shortages in several parts of China during summer of
2003. Hence the government took measures to lower the power
prices and to attract new power investment include regulatory
and structural reforms along with breakup of State monopoly on
generation and separation of generation from transmission.
The State Power Corporation (SPC) was broken up in late 2002
as the government tried to end the monopoly in the countrys
generation market since SPC was controlling half of the nations
power plants. The State Power Corporation was divided into five
generation companies (Huaneneg Group, Huadian Group,
Guodian Power, Datang Power Group, and China Power
Investment Company) and two power grid operators (State
Power Grid Company and South China Power Grid Company).
Each one of the generation Companies controls less than 20% of
Chinas power market. The government hopes that newly formed
generation companies will compete against each other and drive
down prices. Transmission and distribution continues to be
regulated monopoly with seven regional grids.

Chinese government is experimenting with yet another phase of

reform for its power sector by revamping the industry structure
to increase competition with ultimate aim of creating marketbased electricity industry.

To ensure success in its quest to

create a competitive electricity market, State Electric Regulatory

Commission (SERC) was established in March 2003 to oversee
the power industry and to issue licenses to environmentally
qualified operators.

Further SERC launched Chinas first

regional electricity trading center in North Eastern provinces in

January 2004.

Major highlights of this trading center are as

follows.

North-East Power Network has power surplus, extensive

transmission network and experience of number of
experiments by the government in past years.

About 20% of the power initially to be procured through

the bidding process.

More than 20 generating companies will compete each

other to supply electricity to local grid in North-East
China.

Generating companies having capacity more than 100

MW will participate in bidding.

The government currently guarantees electricity sales for

almost every power plant and ensuring profits for power
companies.

For the last 50 years, Chinas power sector has gone through
numerous phases of change. However, China still has a huge
task ahead of it in reforming its power sector. The transition to
a competitive market is likely to take a long time, spanning
perhaps

decade

or

more.

Nevertheless,

the

Chinese

Government is serious in its reform efforts and has taken

several significant steps in the right direction.

3.11 Japan Model

Regulatory reforms of the Japanese electricity industry are
currently taking place following the experiences in many other
countries. The Japanese electricity market now has become the
third largest in the world behind the United States and China in
terms of electricity generation in FY 2003.

The present

installed capacity is 162 GW with a mix of 64.4% thermal, 11%

hydro and 25 % nuclear. Japan has per capita annual
consumption of 8095 kWh despite of having highest domestic
and industrial tariff in the world. Japan electric power grid
comprises both 50 Hz (in Eastern Japan) and 60 Hz (in Western
Japan) systems. Two frequency converter stations link these
systems with each other.

High electricity prices motivated deregulation of electricity

industry in Japan and Japan adopted a scheme of phased
liberalization.

In 1951, Japans electric power industry was

corporatized and divided into nine regional electric utilities.

Regional utilities are still integrated.

Before the current

privatization, there was one government owned generation and

transmission company with regional distribution companies. In
the first phase of reform in 1996 competitive bidding system in
the wholesale electric power sector was introduced. New
generating companies (IPPs) are selected through a competitive
bidding system implemented by each integrated utility to supply
long-term bilateral contracts.

In second phase of reform in March 2000, again with the goal to

reduce the electricity price to an internationally comparable
level, the retail supply market was deregulated for customers
with electric power supplied at 20kV or above and a contracted

supply of 2MW or above and the transmission lines owned by

integrated utilities were also made available for use by new
suppliers through wheeling system.

Presently Japans electric power industry comprises of five types

of entities; integrated utilities, referred to as Electric Power
Companies

(EPCos),

wholesale

electric

utilities,

wholesale

suppliers (IPPs), special electric utilities and electric suppliers of

specified scale known as power producers and suppliers (PPS).

Integrated Utility
EPCo
Power Plants

Wholesale Bidding

IPPs

Wholesale
Electric
Utility

PPS

Wholesale Contract
Special
Electric
Utility

EPCo Transmission Lines

EPCo Distribution lines

Delivery
Points

Customers in
Regulated market

Customers in
liberalized market

Figure 3.9: Current Power Supply System in Japan

After a review of performance of partial deregulation in the end

of 2002, governments advisory committee decided to further
liberalize the industry and revise the industrys institutional

system with the proposal of two new organizations: Neutral

Organization and Wholesale Power Exchange (PX).

To achieve fairness and transparency in activities of T&D sector,

the

Government

panel

proposed

establishment

of

an

intermediate corporation, i.e., a Neutral Organization to make

rules on construction of T&D facilities, system operation,
information disclosure and conflict management. The neutral
organization should provide information on ATC, perform
central dispatching liaison functions, carry out survey and
studies regarding power system.

Also a Nationwide Wholesale Power Exchange (PX) is proposed

to enhance risk management abilities of electricity firms
through reference index price that is useful in assessing
investment risk.

PX will introduce DA spot market based on

uniform price single auction system and Forward market

involving trades up to one year ahead. Japans first wholesale
electric power exchange Chukan hojin is on track to start
trading in April 2005.

Chapter 4:

4.1

Indian electricity industry

Introduction
The electricity as a product is complex and as an industry or an
institution is complicated.

The physical functions of the

electricity industry are generation, transmission, distribution

and systems operation. The merchant functions of the industry
are wholesaling, retailing and customer service.

4.2

History
The process of electrification commenced in India almost
concurrently with developed world in 1880s, with establishment
of a small hydroelectric power station in Darjeeling. However,
commercial production and distribution started in 1889 in
Calcutta (now Kolkata), some 17 years after New York and 11
years after London.

Legal provisions to support and regulate

the sector were put in place through the Indian Electricity Act,
1910 [7].

The objective of the legislation was licensing of

electricity, regulation of price and protection to the investor.

This budding period is marked by the principles of equal
preference to all the consumers, tariffs based on the electricity
consumed. The law advocates differentiating the tariffs with the
hours at which the electricity is required by the consumer,
paving way for the time of the day tariff. [11]
When India became independent in 1947, the country had a
power generating capacity of 1,362 MW. Primarily private utility
companies such as Calcutta Electric Supply Company (CESC),
BSES, BEST, Tata Power Company, Ahmedabad Electric

Company, etc carried out generation and distribution of

electrical power.

Power was available only in a few urban

centers; rural areas and villages did not have electricity [7].
Shortly after independence, a second Act - The Electricity
(Supply) Act, 1948 was formulated, paving the way for
establishing Electricity Boards in the states of the Union. The
objectives set were industrial development, establishment of
state wise grids and electrification of urban and semi urban
areas [11].

. All new power generation, transmission and

distribution came under the purview of State government

agencies and their planning coordinated development came
under the purview of Central government agencies. State
Electricity Boards (SEBs) were formed in all the states.
In 1960s and 70s, enormous impetus was given for expansion of
distribution of electricity in rural areas. It was thought by policy
makers that as the private players were small and did not have
required resources for the massive expansion drive, the
production of power was reserved for the public sector in the
Industrial Policy Resolution of 1956. Since then, almost all new
investment (barring those by existing 'Licensees') in power
generation, transmission and distribution has been made in the
public sector. State Electricity Boards bought out most of the
private players.
From the installed capacity of only 1,362 MW in 1947, has
increased to 121419.89 MW as on July 31, 2005 [8]. India has
become sixth largest producer and consumer of electricity in the
world equaling the capacities of UK and France combined. The
number of consumers connected to the Indian power network
exceeds is 75 million.

India's power system today with its

extensive regional grids maturing in to an integrated national

grid has millions of kilometers of T & D lines crisscrossing

diverse topography of the country [7].

Around 90% of the

villages are electrified from a negligible figure in 1947 and has

played a vital role in the green revolution by energizing around
63% of pump sets.
However, the achievements of India's power sector growth looks
phony on the face of huge gaps in supply and demand on one
side and primitive generation and distribution system on the
verge

of

collapse

mismanagement,

having

political

plagued

interference

by
and

inefficiencies,
corruption

for

decades, on the other.

Indian power sector is at the cross road today. A paradigm shift
is inescapable [7].

4.3

Need for regulation / Government control

Exclusives features of the electricity (viewed as a commodity):
The competition in the electricity industry generally means
competition only in production (generation) and the commercial
functions of sales. The transportation function of transmission
and distribution network is treated as a natural monopoly as it
wont make economic (environmental or aesthetic) sense to build
multiple sets of competing transmission systems.

Instead

everyone use the same set of transportation wires (known as

open access).
The main challenge in the deregulated (liberalized) electric
industry is the coordination between the vertically integrated
elements of the industry, which was working well before
deregulation may be lost because of the competitive interests of
the fragmented utilities.

4.4

Evolution and the present stage

SEBs lost the objective of their incorporation. They were never
autonomous. They lost important sources of income and tariff
formulations

were

considerations.

arbitrary
They

often

became

influenced

cash

by

starved

political

and

their

infrastructure became fragile for want of maintenance. At one

point of time, when almost all the SEBs were unable to build
additional

capacities

to

meet

the

growing

demand,

the

government had to intervene and amend the laws in 1975 and

1983 facilitating incorporation of corporations in the central
sector which would take up the task of setting up of power
plants and associated transmission network.

Then the new

challenge was how to build the tariff plan for the central
generating stations (CGS). Ministry of power came out with a
comprehensive tariff plan where in all the charges would be
recovered at a PLF of 57.08% and beyond that there would be
additional income for the generator.
CGS started operating beyond 57.08% due to better operating
practices.

SEBs objected to over recovery of charges and the

ministry of power has instituted a committee to look into the

anomalies and propose a tariff plan.

KP Rao committee

proposed a two-part tariff where in all the fixed charges would

be recovered by CGS at a deemed PLF of 62.79 % and an
incentive at a rate of 1 paise/kWh/ % increase in PLF above
68.49%. This scheme was very apt for that time and served well
in the times of power shortages where there is incentive to
generate more and more.
With changing times, this policy also needed changes, as there
was surplus power in certain regions during certain periods of
time.

Due to the incentive to generate, all generators

irrespective of their merit order, used to generate more

irrespective the demand profile. This led to a condition where
central companies were being required to back down during offpeak hours, before the state utilities load centre plants (with a
higher variable cost) were backed down, against the basic
principles of economic dispatch [9]. This led to the introduction
of Electricity Regulatory Commissions Act 1998 and subsequent
introduction of Availability Based Tariff (ABT). ABT addressed
this problem in a limited way as competition was created only
between CGS.
Apart from the stringent norms, the basic difference between KP
Raos two part tariff and ABT is the introduction of a third
element of tariff component called Unscheduled Interchange (UI)
charges.

This charge linked with the frequency is used as an

economic signal to all the market participants to introduce

discipline in the grid. The UI charges vary from 0 paise per kWh
at and above 50.5 Hz to Rs. 2.10 at 49.8 Hz @ 6 Paise per 0.02
Hz increase in the frequency and there after to Rs. 5.70 at and
below 49.0 Hz @ 9 Paise per 0.02 Hz.

This component has

greatly influenced in bringing the grid discipline even in the

present era of huge demand supply gap.
Under such scenario of severe shortages, to mitigate the risk of
market power, it is essential that either government or regulator
oversee the industry so as to protect the interests of the end
consumer.

4.5

Causes for deregulation

Out dated policies, instead of helping the system, become
impediments for the development of the industry. As such, it

becomes important to remove those bottlenecks and help the

industry grow. In the days to come, the industry is slated to
grow at a much faster pace.

The electricity industry has to

replicate in the next 10 years what it has done for the last 55
years. In such a fast growing environment, it is ideal to bring in
competition, as many private participants also will be willing to
invest in a growing area.

Apart from the better technologies

available, the financing of such technologies has become much

easier and cheaper. Now, the political thinking is also aligned
with change.

Government has now realised that it has more

important areas like providing policy to support the industry,

providing basic needs like education, health, sanitation etc, to
look into. The growing concern for the environment is also one
of the key factors for the government to think in terms of private
investment / management. In the changed scenario, hence it
makes

sense

to

deregulate

the

industry

and

introduce

competition.
Also, over the period of operations, the sector developed technocommercial inefficiencies. Deregulation and restructuring was
therefore felt necessary. Accordingly, the power generation was
opened up in 1991 followed by transmission in 1998 [10].

4.6

Critical issues in deregulation

In a vertically integrated electrical industry, coordination of
generation and transmission was easy as all the assets were
under the command and control of a single entity. To keep the
system stable, it was considered that the generation and
transmission had to be developed in a coordinated manner
under single entity. However, the world experience shows that
these two functions can be developed independently. However,

it is necessary that planning be given its due importance for a

coordinated development of generation and transmission. Also,
institutions need to be put in place to address the problems
associated with,
System command and control
Economic dispatch of electricity
Risk mitigation
Transmission access and pricing
Ancillary services
In a monopoly market, same utility used to have control over
generation, transmission and distribution. It used to provide all
the services like frequency control, standby power, voltage
control,

stability

control,

reserves

protection and security of supply.

etc.,

ensuring

proper

In competitive market

structure all the functions are separate and are priced.

The

institutions should be able to ensure that all the services are

made available in a cost effective manner and without any
discrimination.

4.7

Shifts from earlier electricity acts (1910, 1946 and 1998)

The basic aim of enacting Electricity Act 2003 (EA2003) is to
make a comprehensive law that would promote competition and
improve efficiency. The act replaces all the earlier laws so as to
avoid contradictions and complications in interpreting the laws.
The major difference between the earlier laws and EA 2003 is
that while the earlier laws provided framework for development
of electricity industry within the control of the government, the
new law provides opportunities for participation of private
investors and to promote market based competition.

The new act has emphasized the focus on customer. It talks

about rational tariff structures, its direction on reduction /
elimination of subsidies by the electricity entity.

If any

government would like to support any section of the society by

way of subsidies, the act clearly provides for realization of the
subsidy from such government.
The act provides for promoting non-conventional and renewable
energy sources.

It also focuses on electrification of all the

households and emphasizes on rural electrification.

4.8

Brief about Electricity Act 2003

The first important difference is that licensing has been done
away with for setting up power plant, subjected to the
connectivity conditions laid down as per Indian Electricity Grid
Code (IEGC). However, clearances would be needed for setting
up reservoir based hydro electric power plants from the
concerned state

government

and

CEA

to

ensure

safety,

environmental stability, social aspects and optimum utilisation

of the scarce water resource.
Open access is introduced to the transmission and will be
allowed in distribution networks.

The regulator decides the

transmission charges for long term as well as short-term access.

Provision for private transmission licensees has been made in
this act.
The act also provides the ministry to declare its national
electricity

policy,

tariff

policy

and

the

central

electricity

authority to come out with national electricity plan with due

approval of the central government.
The act provides for setting up an appellate tribunal for speedy
redressal of disputes.
The act briefly mentions about developing spot markets for
electricity either by the government or by the industry.
The act speaks of its endeavor to electrify all the villages and
hamlets and comes heavily on power theft.

4.9

Future directions of the industry

The power sector has adopted a multi pronged strategy to bring
in changes so as to ensure power for all by 2012. Some of the
initiatives are discussed in brief.

4.9.1 Restructuring
Power sector reforms are the essential ingredient for financial
viability of the SEBs. As per EA 2003, open access to eligible
retail consumers should be provided by 2009.

Power sector

reforms are promoted by central government and multi lateral

funding agencies through APDP and soft loans. Already some of
the states have benefited from the reforms process and started
generating surplus for sustenance and growth. The disturbing
fact is that some states like Andhra Pradesh have gone
backwards and promised free power, which otherwise is to be
prohibited.

As per the Electricity Act 2003, the state

government has to pay the subsidy to the State electric utility

for the free / subsidized power it has promised.

4.9.2 Capacity Addition

During 2002-2012, a capacity of 100,000 MW is to be added,
41110MW during the 10th plan period (2002-2007), of which
11,499MW is already commissioned as on June 30, 2005.
Around 59,000MW is to be added during the 11th plan period
(2007-2012). There is emphasis on distributed generation also
to electrify the rural areas where it would be uneconomical to
connect these inaccessible areas with the existing electrical
network.

4.9.3 Capacity Utilisation

The Ministry is signing MOU in terms of generation, efficiency,
productivity and capacity addition etc. and making the targets
progressively higher. With a view to achieving excellent ratings,
the CPSUs are striving harder resulting in gains to the sector.
R&M action plan is being formulated. Annual additional
generation benefit of about 90 billion units (20% of existing
annual generation) is expected through R&M measures. Under
the Accelerated Power Development Programme (APDP) funds
would be provided for Renovation and Modernization schemes.
CEA has been entrusted with preparation of a manual on
international best practices and benchmarks in the power
sector. It shall be circulated to the SEBs and other concerned
agencies

for

implementation

to

derive

benefits

benchmarking and following the best practices [16].

from

4.9.4 Load management

In addition to augmenting the capacity, the thrust is also on
energy efficiency so as to utilise the available power diligently.
Efforts are also on to flatten the load curve by load diversity and
demand side management (DSM).

There is an estimated

potential of 20, 000 MW through energy efficiency and Demand

Side Management (DSM).
The potential benefits to be derived by promoting end-use
efficiency are:
i.

Possibility of availability of nearly 15,000 MW through

end-use energy efficiency.

ii.

Saving potential of 25-35% by retrofitting with efficient

equipment / pump sets.

4.9.5 Loss management

Although reported total energy losses in T&D are 24 per cent on
an all India average basis, a closer examination reveals that
actual losses including theft and wrong classification could be
in the range of 40-45 per cent.

T&D losses are pegged at

around 10 per cent in better managed power systems in the

developed countries. In order to reduce the T&D losses, Static
meters on all 11 KV out-going feeders and HT consumers have
been installed in most of the States. Stringent accounting and
theft monitoring are being taken up.
PREVENTION OF THEFT ALONE CAN LEAD TO M

OBILISATION OF OVER RS. 20,000 CRORES ANNUALLY

4.9.6 Intrastate ABT

National electricity Policy published on February 12, 2005,
speaks of intra state ABT. Already many states are moving in
the direction of implementing intra state ABT.
being worked out.

Modalities are

Systems are being put in place to be

approved by the respective SERCs inline with the directions

given by CERC.
The Trasncos which are handling the trading activities on behalf
of the erstwhile SEBs are being unbundled into wires company
and trading company.

Though the intra state ABT is to be

implemented within 12 months from the order of CERC, many

of the SEBs has already approached the commission for
extension of time. However, very soon the intra state ABT will
become a reality, which will help in creating competition among
all the generating companies.

Chapter 5:

5.1

Proposed model for India

Introduction
Indian grid though divided into five regions is actually operating
as three distinct grids with the synchronous operation of
western, eastern and northeastern grid as a central grid. With
the commissioning of transmission links connecting NR and ER
under Tala project to be commissioned by December 2005, the
northern grid also would join central grid to form one northern
grid and one southern grid [17].

With the commissioning of

Munirabad Mapusa and Raichur Parli links the entire grid is

expected to be operated as a national grid, which is expected to
be the reality soon.

5.2

Present trading practices

At present, bulk of the electricity traded is on long-term bilateral
agreements. In short term, inter state trading is taking place
over the transmission open access provided as per the open
access regulations of CERC. The real time balancing energy is
exchanged from the grid as per the UI mechanism of ABT.
At present, the price for the long term trading of electricity is
determined based on regulation and for short term trading it is
either through single sided auctions or negotiations.

Also, as

there are no standard contracts there are chances of disputes

and there are no effective tools to mitigate counter party risks.
The buyers or sellers dont have much choice, as there is no
platform for them to interact with each other. In the absence of

common platform, the capacities either remains unutilized or

utilized sub-optimally.

5.3

Need for a Power Exchange

The Electricity Act 2003 recognized trading as a licensed
activity. It provides the basic framework for developing a
transparent and easily accessible Multi Buyer Multi Seller
market structure, where all the participants can participate. All
the utilities and eligible consumers have open access to the
transmission network and have freedom to buy/sell the
electricity. It is made mandatory that all the consumers with
demand in excess of 1 MW will have open access at retail level
by 2009.

Hence, there is a need to develop a market

mechanism for enabling these provisions of legislation.

Power Exchange shall act as an enabler in the changing
environment

towards

developing

competitive

electricity

market. The price on the PX acts as a benchmark for bilateral

trade and as a transparent indicator for future investments in
the sector.

Establishing PX will optimize the utilization of

capacities of all the participants. It would also provide an easy

and accessible platform to the bottled up capacities with IPPs
and CPPs, meeting the shortages thus alleviating the need for
investments in new capacities.

5.4

Why National Power Exchange?

There are many power exchanges working worldwide.

The

experience from these deregulated markets shows that Power

Exchange helps aggregation of loads and generation. This will

result is narrowed gap between supply and demand. Also it will

provide a transparent reference price, which could be used as a
benchmarking price for off-exchange bilateral trading as well as
derivatives trading.
Interstate trading which amounts to major trading activity is a
market at national level. One national power exchange instead
of many regional power exchanges would necessarily cut the
costs and bring in the requisite volumes to the market. Also,
with the present Internet and computing facilities, any one
across the entire country and even across the boarders can
access the power exchange and transact.
Institution of regional exchanges may lead to unnecessary
conflicts during sharing of transmission capacity between the
regional exchanges and decision-making involving disputes
between the two regional exchanges. Also, the exchanges may
give conflicting price signals to the market, thus confusing the
market participants. In view of all these, it is proposed to have
a national power exchange.

5.5

Dispatching mechanism
With national power exchange, it is possible that we may adopt
a centralised dispatching model or a decentralized dispatching
model.
The centralised dispatching model, in all likelihood will be an
efficient and economic way of dispatching. However, there is no
guarantee that it will result in cheaper power to the consumer,
because it calls for complete overhaul of the present electricity
market mechanisms, which may prove costly.

All the state

utilities and generators will lose their control over the selfscheduling, which is being practiced now.
setting

up

complex

infrastructure

to

It also calls for

enable

centralised

dispatching which will be much costly.

Decentralised dispatching, on the other hand gels well with our
present structure of hierarchical load dispatching.

This goes

well with the state utilities also, as they had opted for option C
of decentralised dispatching while implementing the ABT. The
decentralised dispatching will result in minimum impact on the
current practices.

This model being a non-intruding step

towards market development is better suited for our country.

5.6

Electricity markets
Different electricity market models are being used in the world.
At times a combination of electricity markets like bilateral
contracts, Day Ahead market and Hour Ahead market are used.
For the management of imbalances the present system of UI
may be continued. However, when the surplus capacities are
built, the system operator would call for the real time balancing
services and congestion management services from the market,
as and when required. Such a real time market is invariably
operated by the SO.

5.7

Basic electricity market

At present in the Indian system, bilateral long-term contracts
form the major part of electricity contracts. Apart from them,
some part of the electricity is contracted on third party
agreements through wholesale traders. The price in the above

two contracts are either regulated or negotiated or through

competitive bidding, which is being promoted. This system may
be continued as it offers the stability to the industry in this
period of transition.
Apart from the above contracts, the electricity can be obtained
either from Day Ahead market or Hour Ahead market.

The

trades on PX will be voluntary and will go hand in hand with

bilateral trades in place now. To begin with, it is proposed to
start trading on Power Exchange at the wholesale level. It will
be an alternate trading arrangement for trading of short-term
surplus.

For introducing competition in the retail level, the

consumers are to be educated and informed so that requisite

consumer response will drive the prices towards optimum level.

5.7.1.

Day Ahead Market

Day Ahead requirements can be acquired on this market for

physical delivery. To curb the possibility of market power, it is
suggested that the transactions on power exchange are modeled
on double-sided auction.
The NLDC would obtain the ATC for the next day from the
RLDCs.

Participants may submit their offers and bids to the

PX before gate closure. The PX would determine the MCV and

MCP ensuring that there are no possibilities of congestion and
inform the participants about the outcome. Then, participants
prepare

the

DA

schedules

and

inform

the

RLDCs

for

implementation. The financial clearing can be done once in a

week.

There wont be any unit commitment on PX.

would be portfolio bids.

The PX trades

In addition to the spot bids the PX

would also allow block bids for a particular duration of the day.
5.7.2.

Hour Ahead Market

While continuing with the present set up of bilateral trade, there

are capacities which remain unutilized and demands unmet
because the present set up would require a minimum of two to
three days for striking a deal. The institution of power exchange
with a real time information system similar to OASIS should be
put in place, which will help in bridge this gap.
CGS may be allowed to be trade its un-requisitioned power in
the market on the Hour Ahead spot market, so that as and
when required by the beneficiary, it can be scheduled back.
The available generating capacity and the demand would be
settled at the matching prices subjected to the availability of the
transmission corridor without necessitating negotiations and
bureaucratic transactions. This will reduce the time needed to
strike a deal and result in filling the demand supply gaps
noticed in the last hour of the real time operation.

5.8

Capacities on PX
The success of the power exchange depends upon the volume of
the trade and the price at which it is being traded. At present
there is not much surplus power to trade it on power
exchanges.

The National Electricity Policy advocates that

around 15% of the capacity of the new power stations to be built

be sold out side the long term PPAs. In line with that, the 15%

unallocated power of CGS also is made available to the

generator so that the volumes on the power exchange could be
increased quickly to hasten the learning curve. Similarly, the
surplus power available with CPPs is to be made available for
offering it to the required utility through power exchange for
Day Ahead and long-term market
The increased volumes on the PX would help in discovery of the
reference price of electricity. This would help in assessing the
attractiveness for investment in the industry even without PPAs
on merchant plant route.

5.9

Congestion management
On daily basis, the SO will indicate the available transmission
capacity to the PX. While finalizing the trades on Day Ahead
market, if the market operator foresees congestion across the
allocated transmission corridor, the market would be split into
different price areas across congestion. The price in the deficit
zone would be increased and the price in the surplus zone
would be reduced to the extent that the flow is within the
allocated transmission capacity.

5.10 Time line for PX

It is better to finalize the time line for operation of PX before it is
put in place and it should be finalized based on the discussions
with the present SOs so as to arrive at the realistic time
required to finalize and schedule the Day Ahead requirements.
However, the following time line is proposed which can act as a
start line for discussions with the concerned parties.

10:30 hrs - Day Ahead transmission capacity availability is to

be informed to PX by RLDCs
11: 00 hrs - Announcement of Bid areas
11-12 hrs - Submission of bids and offers by the participants
12:00 hrs - Gate closure.
13:00 hrs - Declaration of MCV & MCP to the participants
15:00 hrs - Participants to inform schedules to RLDC
These contracts will be binding for delivery. If not, they should
be financially compensated.

5.11 Transmission ownership

The Indian electricity Act 2003, gives direction to bring in
competition in the transmission sector also by allowing private
participation in development of transmission sector. However,
to avoid duplication of transmission assets, it would be prudent
to have approval of a central planner (CEA) while developing the
transmission capacity and to have the regulator to approve the
development of transmission system.

This would allow

coordinated development of the transmission network. Else, the

un-remunerative, yet critically important transmission corridors
may never be built.

5.12 Transmission pricing

At present, the postage stamp method of transmission is being
used for long term transmission access. For short term access
guidelines are issued by CERC.
way to bill the expenditure.

This is definitely the easiest

However, the present system

ignores the location of the end customers.

The consumers

using only part of the network are also equally charged

compared to the consumer using larger transmission assets.
For long term contracts transmission tariff need to be reviewed
to reflect the usage of transmission assets.
For PX, interregional transmission capacity is to be allocated
before hand and all the unused transmission capacities need to
be driven to PX.

The volumes on the PX will depend upon the

transmission capacities made available to PX. The tariff for this

access should be readily available at the point of connection for
developing the short term market.
It would be prudent to calculate the cost of transmission
network on Point of Connection basis and bill as per the
quantum of electricity transported over the network.

This

pricing system will take care of actual utilization of the

transmission assets and hence would be equitable to all the
concerned as per their usage of the transmission assets.

5.13 System Operator

Due to ownership of the transmission assets, the Transmission
System

Operator

(TSO)

will

be

compelled

to

load

the

transmission assets conservatively. Thus TSO model will limit

the optimum utilization of the transmission assets.

On the

other hand, ISO will try to optimize the system operations and
will try to load the transmission assets optimally simultaneously
ensuring the security of the grid.
The

separation

of

transmission

assets

will

force

the

transmission company to utilize the assets to the optimum level

by building new technologies for optimum utilization of the

assets.

The

new

technologies

like

FACTS,

capacitor

installations will result in better usage of the transmission

assets and improved revenue to the owner. At the same time,
as

it

would

result

in

avoidance

of

building

additional

transmission capacities, it would become cost effective for the

user as well.
With the EA 2003 allowing private participation in the
transmission sector, it is foreseen that there would be number
of owners in the transmission sector.

As such, it would be

prudent to handle all the assets by an independent SO, so that

there would be equal opportunity, level playing field and
transparency in grid operations.

5.14 Settlement Mechanism

With a large number of buyers and sellers in the market, it is
most efficient for this function to be performed locally. The right
price for the settlement is the spot price.

The PX being an

independent nodal agency should take the onus of settlement of

all the trades on the PX through a system of collaterals.
However, the clearing services can be outsourced from an
agency, which is having the capability and experience in
clearing services.
Centralized

clearing

services

apart

from

mitigating

the

transactional risks, also eliminates the requirement of having

the individual credit rating while dealing with the counter
parties on PX. This avoids unnecessary following up for clearing
the transaction settlements thus reducing the transaction costs
which ultimately reflect in reduced costs to the consumer.

5.15 Financial Instruments

As majority of electricity is arranged through bilateral contracts
at predictable prices, the price volatility is likely to be low in the
Indian market.

Hence, we may start with basic financial

instruments like forward contracts, futures and options. These

instruments should provide the cover for price volatility.
However, with gaining experience more derivatives tailor made
to suit our requirement can be introduced in future. However,
it is important to note that introduction of financial instruments
require development of a reference price which can be provided
by a liquid PX.

5.16 Management and Participants of PX

The power exchange may be set up either with the help of
industry and / or government.

However, over the period of

time, it should be left in the hands of autonomous governing

board with supervisory and advisory control of regulator.
As regards to the participants, the present traders and
participants may be given license to begin with.

They

participate in the power exchange by registering themselves on

PX after paying the license fee and transaction fee.

The PX

should ensure creditworthiness of the participants and shoulder

the responsibility of ensuring settlement of trades settled on
power exchange.

5.17 Development of Real Time Markets

The EA 2003 as per clauses 26(2), 27(2) and 31(2) prohibits all
the LDCs from engaging in the business of electricity trading.
The act either needs to clarify that the sale and purchase of
energy for the balancing and congestion relieving in the interest
of system security and integrity wont amount to trading of
electricity or specifically allow the SOs to conduct the trading to
that extent. The system operator is best equipped to decide the
quantum and source to relieve the system constraints.

5.17.1

Real Time Balances market

In the present deficit scenario, UI has worked well in

disciplining the grid as a balancing mechanism. However, this
cannot be compared with the imbalances market, because the
very premise on which the imbalance markets are designed to
keep the generation load balance at the rated frequency is
violated.
There were instances, where the commercial signals of ABT and
grid security requirements conflict. Due to low variable charges
of ER power, the power is dumped on WR even at 50 Hz. WR
had to shed the load to boost the frequency to more than 50.1
Hz so as to make the generators in ER to act and reduce their
generation to relieve the dumping of power over WR and
overloading of its network [17].
To develop the spot markets for imbalance markets that will give
the price signal for long term planning of capacity addition,
transmission augmentation, the flexible frequency regime need
to go.

With new capacities added, the UI may be done away

with

simultaneously

introducing

the

spot

markets

for

imbalances, which will help in realising the targeted frequency

of 50 Hz. Such a market will be operated by SO.
5.17.2

Real Time Congestion market

The system operator will provide the information about the

available capacity and the charges for utilizing the corridor. To
mitigate the real time congestion, the SO should be authorized
to procure from the spot market the required energy to relieve
the congestion. It should also be authorized to offer the counter
trades to the exporting area so as to relieve the congestion. The
expenditure or the revenue accrued to the SO during the
congestion management would be ploughed back for the
reduction of transmission charges.

5.18 Ancillary Service

Normally all ancillary services costs will be in the order of 1% to
3% of the total costs. The simple way to distribute these costs
is to divide the costs among all the participants in the system.
A more efficient way is to allocate some of the costs to the one
who created the need.

Along with the real time balancing

market and congestion market, SO can gradually develop

Ancillary Services market to provide the following services.

5.18.1

Operating reserves

In the present scenario, where there are huge shortages, it

would be ridiculous to keep the operating reserves. Instead, it
would be in the interest of the end consumer, to bring out all

the capacities available so that the society is benefited. But at

the same time, system security cannot be put to risk. In view of
the above, it would be beneficial to invite bids that can supply
the required operating reserve and pay for the service. When a
generator provides operating reserves, she would incur cost for
running the equipment at sub-optimal level and also for extra
wear and tear from having to modify the operations suddenly.
Additionally the generator incurs opportunity cost equal to the
profit forgone for providing the reserve.
The reserves are not a separate service they are options to buy
the electricity if required. This option can be priced through a
combination of an option fee (for standing by) and a strike price
(for delivery) if the option is called.

5.18.2

Voltage control

Any service, which is made mandatory, needs lot of surveillance

for monitoring. This adds to lot of cost or ineffective monitoring
will result in ineffective implementation. The voltage control is
also one such area in Indian power system.
It is well established and understood fact that the electrical
system should not be loaded with VARs for effective utilisation
of electrical assets and the VAR compensation need to be
provided locally. Till such variable VAR compensation is built
all along the network, VAR exchanges are priced whenever
voltages are beyond 97% and 103% of the rated voltage.
However, this VAR charges are levied / paid only to the
transmission owners.

The generators are supposed to supply

the VARs as per their capability subjected to the operating

limits. This service being not paid for, there is likelihood that

generators would not like to supply VAR sacrificing the active

power. Also, there may be operating limitations at the generator
end due to higher ambient temperature or higher core
temperature or core saturation limits or any other limits, which
the system operator will not be able to monitor and appreciate.
This will also, result in higher monitoring costs. To avoid the
complications, it would be better that the VAR charges are made
applicable to all the utilities so that the commercial signal will
make

all

the

market

participants

to

provide

the

VAR

compensation to the extent feasible.

5.18.3

Primary response

Most of the plants are operating at their full capacity and there
is hardly any juice left to meet the mandatory obligation of
picking up generation upto 105% of capacity and sustaining it
for 5 minutes.

The approach is too theoretical.

Instead, the

system operator can buy primary response from the generators

capable of supplying the quantum and pay for the service. This
service can be obtained from the partly loaded generators and
also from the generators who has margins of peaking capability.

5.18.4

Secondary response

Similar to primary response, the secondary response also can be

bought from the ancillary services market.

All these service

charges would be levied on all the customers for providing the

system stability.

5.18.5

Peaking power

There are utilities, which can supply peaking power on call by

firing additional fuel, like oil firing in coal station and duct firing
in CCGT plants to increase the output from the generator. This
would

provide

the

additional

power

whenever

required.

However, as this would stress the machine to provide such a

service a suitable compensation may be devised.

5.18.6

Standby services

Some of the generators may be kept as standby to call them in

case of emergency. The reservoir based hydro generators or gas
based power units, which can be started at a short notice, can
be used for such a service.

5.18.7

Load following

Some machines are better operated as base load units and some
will be capable of providing varying generation.

Such service

results in additional wear and tear and increased maintenance

of

the

machines.

compensated.

These

machines

are

to

be

suitably

Chapter 6:
6.1

Review of the proposed model

Introduction
To eliminate the risk of personal bias, the model is subjected to
review by the eminent personalities from the academia and also
from the industry. The review participants are chosen based on
their expertise and knowledge in the field.

The organisations

from which these participants are drawn are carefully chosen so

as to represent the entire spectrum of the electrical industry.
The model was reviewed by regulators (CERC and UPSERC),
academicians (IIT, ASCI), system operators (WRLDC and SLDC,
GEB),

central

government

planner

(WRPC,

CEA,

MOP),

government owned generator (NTPC Kawas), private owned

generator (TPC), consumer (GUVNL) and traders (NVVN and
PTC).
The review was conducted by presenting the proposed model
and discussing the issues and obtaining the views on all the
aspects of the proposed model. The details of participation in
review are placed at Annexure I.
6.2

Views of reviewers
During the review, there is agreement on many issues while
there is disagreement on some issues. The opinions on issues
where there is no consensus are summarized here under.
1. UI mechanism Some opined that UI mechanism is doing
well to discipline the grid and there would be no requirement
of going in for an imbalances market.

It is alleviating the

requirement of fresh investments to meet the peak shortages.

While others opined that UI has lived its life and to take the
industry forward, the imbalances market need to be
promoted in place of UI stating that balancing market on PX

will be a much better alternative as it will provide price signal

to the market, without necessitating a change in the system
frequency.
2. Congestion Management Some expressed that the open
access regulations are sufficient to take care of the
congestion management.

Others contradicted that open

access regulations are unable to control the congestion as

capacity need to be reserved to take care of the unforeseen
congestion.
3. As regards to the market for the ancillary services, some
opined that as there is no additional investment required for
delivering these services and hence they should remain
mandatory and not be priced.
4. Some opined that the industry is moving in the right
direction by thinking of establishing a Power Exchange, while
others

contended

that

if

the

price

reduction

is

not

guaranteed and the cost of PX will add to the transactions

there would be no need to set up a PX with no financial
benefits.
5. Some expressed their concern on allowing open access too
soon on retail level (before 2009) without testing waters while
others favoured immediate open access at the retail level
favouring parallel licensing in distribution.
6. On the above account, for realizing the retail competition, the
distribution wires business needs to be separated from the
retailing

of

electricity.

The

implementation

of

retail

competition is to be hastened because it is where the actual

customer can be approached. The emphasis is on providing

open access to the retail customer, which will provide him

with the choice of choosing the supplier. The wires owner
should provide the customer services to the consumer.
7. Many opined that PX managed by an independent agency to
provide a unbiased level playing platform to all the market
participants, while few expressed that the PX should be
managed by a participative forum.

The reason being,

independent body doesnt have any direct interest in the

operation of the PX.

While, the participants interests are

locked in the well being of the PX. Hence, it is likely that the
owners manage the PX in a better fashion, owing to their own
interest.
8. With multiple transmission owners entering the transmission
sector in the near future, many thought that it would be
prudent

to

separate

the

transmission ownership.

system

operations

from

the

Some quoted that ISO would

ensure transparency in operations and to over come from the

burden of corporate commitments over and above system
operation requirements.
9. While many favoured the nodal / zonal transmission pricing
or POC tariff, few favoured Mile MW model.
10.

Many felt that at present we should concentrate on the

wholesale market and with the success in this market we

may open retail market, while few felt that we should open
both the markets simultaneously.
11.

Many expressed that the PX trades should be given the

status of short-term contracts and they should be liable to be

disrupted whenever there is congestion or contingency in the

grid.
12.

Many accepted that SO should have the ultimate say in

the real time decisions with the congestion management and

should obtain the services from the market, while few
expressed that the legislation comes in the way of managing
the congestion markets.

13.

While many preferred decentralized dispatching, few felt

that it would be better to adopt centralized dispatching

model, as it is most optimal way of dispatching the
generation.
14.

Many

expressed

their

opinion

that

even

though

competition is brought in, it is prudent to have double-sided

auction and regulator oversight in order to avoid hockey stick
pricing. While all agreed to the double sided auction, few are
concerned with regulator over-ruling the real time decisions.
Post facto, many a times it would appear that better
decisions could have made and real time decisions taken in
good faith may be disallowed by the regulator.
15.

Many opined that along with the physical trading of

power, financial market also need to be introduced at least

with simple

derivatives like

Futures, options,

forward

contracts and caps, while few viewed it otherwise.

16.

They have expressed that in case of congestion, whenever

there is curtailment either by the system operator or selfcurtailment,

the

consumer

needs

to

be

financially

compensated for the service provided in the interest of the

grid.

6.3

Conclusions
The PX being a voluntary participative forum and for the
reasons of transparency and providing level playing field, an
independently managed PX with regulatory oversight would be
ideal.
Establishment of the PX is need of the day. It would optimize
the utilization of the transmission capacities and help meeting
the short-term demand from the unutilized capacities.

A national power exchange would serve the purpose instead of

multiple regional power exchanges, the inter-state electricity
trading being a national level electricity market.
Though the trades are subjected to transmission tariff, the
methodology needs a change.

It surfaced that Point of

Connection tariff is better suited.

The trades will be portfolio based and there wont be any unit
commitments from the PX.

This will result in simple to

understand trades on PX.

The contracts on PX are binding for physical delivery. Else, they
need to be financially compensated.

The settlements of trades done on PX will be done centrally at

PX through a system of collaterals thus ensuring counter party
risk mitigation.
The present industry scenario indicates that decentralized
dispatch suits better.

It complies with our hierarchical

structure and will have minimum impact on the current

practices.

Also, it will be cheaper to implement such an

initiative.
The PX provides a transparent and realistic price signal for
benchmarking all off the exchange trades and derivatives. This
signal acts as an indicator for the industry attractiveness. Thus
project evaluation and financing of power plants without
binding PPAs becomes easier.
PX provides platform for balancing the power requirements in
short-term.
The UI definitely has helped in disciplining the erratic grid. It
would definitely serve the balancing function in the present
deficit scenario where no real time market is available to the SO.
When the surplus capacities are augmented, a balancing
market can be developed for the system operator to operate
which will be able to give the price signals to market without
resorting to fluctuating frequency thus endangering the grid.
For real time congestion management a simple counter trade
can be used.
As for the ancillary services, it is well established fact that in
spite of making it mandatory long ago the services are not
coming forward. But within short time of introducing pricing on
VAR injections beyond 97% to 103% of the rated voltages, the

voltage profile of the grid has improved.

This speaks volumes

about the market responsiveness to the correct price signals. In

view of the above, the ancillary services need to be priced to
reflect the market reality.
To enter into retail competition, deregulating the retail tariffs is
to be done as a prerequisite.
Future directions of study
The subject has potential for future study in the following
important areas

Derivatives market for price hedging

Merchant power plants and their viability on the

changed scenario

Challenges

in

augmenting

the

adequate

transmission

Short term pricing of available transmission

Hardware

and

software

requirements

implementation of Power Exchange

for

the

Point to make

Working in an equal opportunity employment environment, I

have used she/her whenever referring to a person. However, it
is to clarify that the person in the context can be of any gender.
The views expressed by reviewers are their personal opinions
and not necessarily represent the views of the organizations
they are representing.
The contents of the report are as per my understanding of the
subject and my guides are no way responsible for any
conflicting ideas.
Limitations of the study
1. As the subject is in the conceptual stage with regard to
the Indian industry, there was no data available for
primary study.
2. Though every effort is made to cover the entire spectrum
of the industry while reviewing the model, more number of
organisations across the country would yield better
results, which could not be done due to resource
limitations.
3. It will be difficult to gauge the success of such model as
there is no data available to ensure the likely volumes on
Power Exchange.
4. As the Indian system is reeling under deficit regime, the
likely volumes would be low on Power Exchange, which is
an important criteria to rate the success of such an
initiative.

References
[1]

Sally Hunt, making competition work in electricity, John

Wiley & Sons, Inc., 2002

[2]

S.A. Khaparde, Reforms and restructuring in Power Sector,

Two day CEP at TCS, Kolkata, April 2004

[3]

Open access amendments order by CERC dated

February 21, 2005.

[4]

Electricity Act 2003

[5]

Indian Electricity Grid Code (IEGC)

[6]

National Electricity Policy announced by Ministry of Power

[7]

http://www.energywatch.org.in/background.shtm

[8]

http://cea.nic.in/exe_summ/july/8.pdf

[9]

Bhanu Bhushan, Anjan Roy, P. Pentayya, The Indian

Medicine

(Availability

Based

Tariff),

in

Proc.

Power

Engineering Society General Meeting, IEEE, pp.23372340, 2004

[10]

PK Kukde, DA Sathe, SV Kulkarni, Accelerated Power

Development and Reform Programme in India, April 2004

[11]

http://www.energywatch.org.in

[12]

Mel Marquis, Introducing free markets & competition to the

electricity sector in Europe, 2001

[13]

Daniel Kirschen, Goran Strbac, Fundamentals of Power

System Economics, John Wiley & Sons, Ltd, 2004

[14]

Mohammad
Restructured

Shahidehpour,
Electrical

Power

Muwaffaq
Systems

Alomoush,

Operation,

trading, and Volatility, Marcel Dekker, Inc. 2001

[15]

Loi Lei Lai, Power System Restructuring and Deregulation

Trading, Performance and Information Technology, John
Wiley & Sons, Ltd, 2001

[16]

www.powermin.nic.in

[17]

Anjan Roy, SA Kaprade, etal Operating Experience of

Regional Interconnections in India. IEEE, 2004

Annexure I
Details of Participation for review of the model
Sl.

Name of the

Number of

Venue of

No.

Organisation

Participants

review

CERC

IIT, Bombay

UPSERC

NTPC, WRHQ,
Mumbai

IIT, Bombay

ASCI, Hyderabad

20
1

IIT, Bombay
NTPC, WRHQ,
Mumbai

WRLDC, Mumbai

WRLDC,
Mumbai

SLDC, GEB, Gotri

SLDC,

GEB,

Gotri
7

WRPC, MOP, Mumbai

WRPC,

MOP,

Mumbai
8

NTPC, Kawas

45

NTPC, Kawas

TPC, Trombay

TPC, Trombay

10

GUVNL, Vadodara

GUVNL,
Vadodara

11

PTC, New Delhi

PTC, New Delhi

12

NVVN, New Delhi

NVVN,

New

Delhi
13

NTPC, WRHQ, Mumbai

30

NTPC, WRHQ,
Mumbai

Total

127

122