NIILM-CMS

A Dissertation Report On A Study on the Practices of Power Trading and

Its Prospects for Future

Guided byMrs. HIMA BINDU KOTA (faculty guide)

Prepared bySaiyed Obedullah Roll no. 2011103

In Partial fulfillment for the award of the degree of PostGraduation Diploma in Management (PGDM)

NIILM-CMS

A Dissertation Report
On

A Study on the Practices of Power Trading and

Its Prospects for Future

Guided byMrs. HIMA BINDU faculty guide) Prepared bySAIYED OBEDULLAH Roll no. 2011103
2

In Partial fulfillment for the award of the degree of Post-Graduation Diploma in Management (PGDM)
DECLARATION

I hereby declare that the project report entitled A Study on the Practices of Power Trading and Its Prospects for Future carried out at NIILM-CMS, Under the guidance of Mrs. Hima Bindu Kota is my work submitted in partial fulfillment of the requirement for
Degree of POST GRADUATE DIPLOMA OF MANAGEMENT from NIILM CMS, GREATER NOIDA and not submitted for the award of any degree, diploma, fellowship or any similar titles or prizes.

Date: 5/2/2013

signature:

CERTIFICATE OF COMPLETION OF DISSERTATION

This is to certify that Dissertation Report on

A Study on the Practices of Power Trading and Its Prospects for Future prepared by SAIYED
OBEDULLAH Roll No. 2011103 of PGDBM 2011-13 batch is his genuine effort under my guidance and supervision.

Mrs. Hima Bindu Kota Faculty Guide NIILM-CMS

Signature: Date:

ACKNOWLEDGEMENT

This project proved as an excellent opportunity for me to apply the concepts learnt in the course of my program at the institute. I would like to express my sincere gratitude and thanks to My supervisor and mentor Mrs. Hima Bindu Kota for guiding and providing complete knowledge about of the subject. Finally, I would like to thank all those who were directly or indirectly related to this project.

CONTENT

1. 2.

Executive Summary....... 8 Introduction.. 11

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3. 4. 5.

Objectives of the Project...... 13 Scope of the Project.. 13 Existing Literature Review. 15 5.1 The Electricity Act, 2003 with amendments.... 15 5.2 The National Electricity Policy, 2005.. 19 5.3 Comparison between Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) Regulations, 2004 and Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) (With amendments) Regulations, 2008.21

6.

Salient Features of Central Electricity Regulatory Commission (Open Access in

Inter-state Transmission) (With amendments) Regulations, 2008.26 7. Power Trading Arrangement........34 7.1 7.2 7.3 8. 9. Bilateral Contract... 34 Through Intermediaries.......... 34 Power Exchange..... 35

Procedure for Scheduling of Short-Term Open Access(Bilateral Transaction). 41 Procedure for Scheduling of Short-Term Open Access(Collective Transaction).. 43

10. Operations in a Trading Company.. 45 10.1 10.2 10.3 10.4 10.5 Operations for inter-state bilateral transaction... 45 Operations for intra-state bilateral transaction... 55 Operations for collective transaction.. 57 Banking... 63 Submitting Reports to CERC as per the prescribed Formats..65

11. Power exchanges for collective transaction 65 11.1 11.2 11.3 11.4 11.5 Products offered by Power Exchanges..66 Benefits provided by power exchanges. 68 Concepts related to Power Exchanges. 68 Working of day-ahead market.. 70 Market Splitting 75
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11.6 11.7

Clearing and Settlement 75 Power Exchanges in India- the Road Ahead. 76

12. Instruments in Financial Markets 78 12.1 12.2 12.3 12.4 Forward Contract.. 79 Future Contract.. 80 Option.... 81 Contract for Differences.... 83

13. Prospective Future of Power Trading in India.. 83 13.1 13.2 Cross border Power trading... 83 Hedging and speculation in power market 85

14. Trading of Green Power .. 87 15. Conclusion . 90 16. Bibliography .. 91

EXECUTIVE SUMMARY
1. EXECUTIVE SUMMARY
One of the important aspects of Electricity Act03 is to bring about completion in Indian Power Market. Short term trading in electricity is an important step in this direction. While bilateral
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trading is in existence for quite some years, collective transaction through power exchange has become a reality only in 2008, with the commencement of Indian Power Exchange (IEX). The purpose of bringing competition in the regulated Indian market is manifold. In the regulated regimes many of the old, inefficient or obsolete plants may continue to function and recover investments while in the competitive regimes they may be out of the market. In regulated regimes, overcapacity causes prices to increase as consumers do pay for the stranded capacity, whereas, in a competitive environment, excess capacity causes prices to fall. In a nutshell, in a typical cost plus reasonable profit regulation regime, the incentives to cut cost are non-existent. Under competition, most of the risks are borne at least initially by owners they would be responsible for bad decisions as also for profits from sound decision and managements practices. Rules, regulations and procedures have been developed over the years for facilitating short term trading in electricity, with the clear objective of: a. b. c. Utilizing the surplus generation capacity Utilizing the surplus transmission capacity Benefiting the consumers, by giving them the right to choose the supplier of

power India has adopted a multiple power exchange approach for developing a competitive power market, with an aim of reduced prices because of competition between exchanges. Currently, two power exchanges are in operation in India, where the prices discovered are significantly higher than the prices for power contracted through long term PPAs. The most basic factors that influence the prices in any market are demand and supply. But in case of electricity, the prices are essentially influenced by demand and not supply. It is because the generating cost of the sellers in a power market either remains constant or varies over a narrow range. Cases are seen, where the prices have increased due to increase in demand, which in turn was increased due to other factors like weather, elections etc. Price quoted by the buyers depends not only on their own demand but also on the prices quoted by other buyers. Prices are also controlled by the dominant bidders in the market. The buyers may not always have to pay the price discovered in an exchange. The price for them may differ depending upon the congestion anticipated in the transmission corridor for transferring power to the regions where the buyers are situated. Therefore, prices also depend upon the transfer capability of the transmission corridors and the congestion anticipated, which are inversely proportional to each
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other. The UI rate serves as a reference for short term electricity prices, discovered in a power exchange. Buyers always make a trade-off between power procurement through UI and power procurement through short term trading, and in the process UI prices affect the short term electricity prices. The power exchange of India limited has experienced a good growth. The totals buy bids and sell bids in the month of May 2009 is 22.14MU and 95.85MU respectively. The market clearing volume till 31st may 2009 is 196.52MU. The total purchase bids and sell bids in the Indian energy exchange in the month of April 2009 is 832 MU and 487MU respectively. The volume of short term transactions of power is 7.09% of total generation. The PTC india ltd, LANCO electric utility ltd, NTPC Vidyut Vyapar Nigam ltd, TATA power trading company ltd, Reliance energy trading ltd are the top five trading licenses in India which in together account for 88.80% of share in total volume traded by licenses. Open access is an enabling environment for competition among generators and traders to choose their customers and vice versa. Cross border power trading is in constant evolution therefore players on the market need to keep up to date with the latest development in regional projects and within the regulation framework which will enable power plant operator to trade in more efficient way. As power trading has emerged as the biggest instrument in the India power market in facilitating competition, hence the future of power trading in India is very bright. The Indian power trading market is rapidly growing both in physical and financial, short and long term size and volume. The implementation of futures, options, forwards and contracts for differences in the process of hedging in the power market will make the power trading business as the most beneficial trading business for the companies involved in power trading business in Indian power market.

INTRODUCTION
Countries that have restructured the power system have similar goals. All of them seek to establish competition in the electricity market to achieve economic efficiency and higher quality services, as well as lower consumer prices for electricity. Yet, there are important differences in
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the immediate objectives of restructuring between developed and developing countries. In many developing countries, which have defective infrastructure and a chronic lack of funds, the process is many times governed by the desire to attract foreign capital to meet growing demand. Power exchanges or wholesale electricity markets, like all organized competitive markets, are primarily vehicles to facilitate transparent transactions in order to contribute to price formation, provide maximum incentives for efficient production and signal the investments needed in additional capacity. This does not exempt the market from the need for regulation, it simply alters the nature of regulation to enable it to cope with new problems such as market power, which is the capacity of one or more players to raise market prices and reap the ensuing the economic benefits. Producers are naturally tempted to wield market power since the objective of the company is to earn profits. Like any other product market, there is a market for trading electricity based on its demand and supply. But it differs from other products, unlike other products, it is not possible, under normal operating conditions, to keep it in stock, ration it or have customers queue for it. An electricity market is a system for effecting the purchase and sale of electricity using supply and demand to set the price. Transactions in electricity are typically cleared and settled by the grid operator or a special independent entity charged exclusively with that function. There are markets for electricity derivatives, such as electricity futures and options, which are actively traded. These markets developed as a result of the deregulation of electric power systems around the world. Electricity by its nature is difficult to store, so there is problem of meeting excess demand immediately, demand and supply vary continuously, for this there is a controlling agency, the transmission system operator, to coordinate the dispatch of generating units to meet the expected demand of the system across the transmission grid. If there is a mismatch between supply and demand the generator speed up or slow down causing the system frequency (either 50 or 60 hertz) to increase or decrease. If the frequency falls outside a predetermined range the system operator will act to add or remove either generation or load.

SCOPE & OBJECTIVE

2. SCOPE OF THE PROJECT
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Currently, there are two power exchanges in operation, the oldest being IEX, having commenced from 27th June 2008. Therefore, data on short term electricity prices discovered through an exchange for the past one year is available. The factors that influence the MCP and ACPs discovered in a PX are elaborated in this report. Through these determinants or factors that affect the prices, at least a range over which prices will fluctuate can be forecasted for the near term future, with reasonable accuracy. While summer and rainy seasons have one year periodicity, the elections generally have five year periodicity in general. A major festival would also have one year periodicity. So for forecasting the prices for the period of current year, prices for relevant period of the past year can be looked at and a reasonable approximation can be done. In other words, past data can act as a reference to the future prices. At this juncture, only short term forecasting is possible. For long term forecasting traditional forecasting tools are used (regression model, econometric model etc), which require data over a longer term, which is not available at this stage. Also through this project, the pattern of some of the DISCOMs power drawl during important situations like elections is also analyzed. This is bound to affect the behavior of other DISCOMs towards their consumers.

3. OBJECTIVES OF THE PROJECT

The objective of the project was to get the detailed knowledge of the practices and methods of power trading. To analyze the effect of demand/purchase bids on the prices and determine the influence of external factors that affect demand, which in turn increase or decrease prices and show the effect of dominant bids on MCP and MCV discovered in a PX The lessons and experiences of power trading business done by the trading licenses and power exchanges all over the world especially by the developed and the developing countries were studied. The future prospective of power trading in India was also analyzed in detail. With the present condition of huge cry for the reduction of emission and climate safety all over the globe, the trading of green power will materialize the demand for emission reduction and building of green environment by giving the opportunity for fostering and generating green power in large amount.
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LITERATURE REVIEW
4. LITERATURE REVIEW
The following acts and regulations were studied before going for the project. 1. THE Electricity Act, 2003 with amendments. 2. The National Electricity Policy, 2005. 3. Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) Regulations, 2004 4. Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) (With amendments) Regulations, 2008

5.1 THE Electricity Act, 2003 with amendmentsThe Act provides a comprehensive mechanism for development of electricity market in India by clearly defining the scope of electricity trading, stipulating the duties of different agencies involved in electricity trading business and formulating an overall platform for bilateral and collective transactions. The different sections related with electricity market development are elaborated below: According to Section 2(Definitions), sub-section 71 of the act: "Trading" means purchase of electricity for resale thereof and the expression "trade" shall be construed accordingly; According to Section 2(Definitions), sub-section 47 of the act:

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open access means the non-discriminatory provision for the use of transmission lines or distribution system or associated facilities with such lines or system by any licensee or consumer or a person engaged in generation in accordance with the regulations specified by the Appropriate Commission.

Section 12. (Authorized persons to transmit, supply, etc., electricity) of the Act stipulates that : No person shall (a) transmit electricity; or (b) distribute electricity; or (c) undertake trading in electricity, unless he is authorized to do so by a license issued under section 14, or is exempt under section 13. Section 14. (Grant of license) of the Act stipulates that: The Appropriate Commission may, on an application made to it under section 15, grant a license to any person (a) to transmit electricity as a transmission licensee; or (b) to distribute electricity as a distribution licensee; or (c) to undertake trading in electricity as an electricity trader, in any area as may be specified in the license. In this regard, CERC has given license to 43 no of entities till date for trading in electricity. Section 26. (National Load Dispatch Centre) of the Act stipulates that: --(1) The Central Government may establish a centre at the national level, to be known as the National Load Dispatch Centre for optimum scheduling and dispatch of electricity among the Regional Load Dispatch Centers.

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(2) The constitution and functions of the National Load Dispatch Centre shall be such as may be prescribed by the Central Government.

Provided that the National Load Dispatch Centre shall not engage in the business of trading in electricity.

Section 27. (Constitution of Regional Load Dispatch Centre) of the Act stipulates that: (1) The Central Government shall establish a centre for each region to be known as the

Regional Load Dispatch Centre having territorial jurisdiction as determined by the Central Government in accordance with section 25 for the purposes of exercising the powers and discharging the functions under this Part. (2) The Regional Load Dispatch Centre shall be operated by a Government company or any authority or corporation established or constituted by or under any Central Act, as may be notified by the Central Government. Provided that until a Government company or authority or corporation referred to in this sub-section is notified by the Central Government, the Central Transmission Utility shall operate the Regional Load Dispatch Centre.

Provided further that no Regional Load Dispatch Centre shall engage in the business of generation of electricity or trading in electricity.

Section 31. (Constitution of State Load Dispatch Centre) of the Act stipulates that: --(1) The State Government shall establish a Centre to be known as the State Load Dispatch Centre for the purposes of exercising the powers and discharging the functions under this Part. (2) The State Load Dispatch Centre shall be operated by a Government company or any authority or corporation established or constituted by or under any State Act, as may be notified by the State Government. Provided that until a Government company or any authority or corporation is notified by the State Government, the State Transmission Utility shall operate the State Load Dispatch Centre.
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Provided further that no State Load Dispatch Centre shall engaged in the business of trading in electricity.

Section 38. (Central Transmission Utility and functions) of the Act stipulates that: ---- (1) The Central Government may notify any Government company as the Central Transmission Utility.

Provided that the Central Transmission Utility shall not engage in the business of generation of electricity or trading in electricity.

One of the functions of Central Transmission Utility is to provide non-discriminatory open access to its transmission system for use by(i) (ii) any licensee or generating company on payment of the transmission charges; or any consumer as and when such open access is provided by the State Commission under sub-section (2) of section 42, on payment of the transmission charges and a surcharge thereon, as may be specified by the Central Commission.

Section 39. (State Transmission Utility and functions) of the Act stipulates that: (1)The State Government may notify the Board or a Government company as the State Transmission Utility.

Provided that the State Transmission Utility shall not engaged in the business of trading in electricity.

One of the functions of State Transmission Utility is to provide non-discriminatory open access to its transmission system for use by15

(i) any licensee or generating company on payment of the transmission charges ; or (ii) any consumer as and when such open access is provided by the State Commission under sub-section (2) of section 42, on payment of the transmission charges and a surcharge thereon, as may be specified by the State Commission.

The Load Dispatch Centers, transmission utilities are barred from trading n power in order to ensure non-discriminatory open access to all the generators/ consumers.

Section 52. (Provisions with respect to electricity traders) of the Act stipulates that: --- (1) Without prejudice to the provisions contained in clause (c) of section 12, the Appropriate Commission may, specify the technical requirement, capital adequacy requirement and credit worthiness for being an electricity trader. (2) Every electricity trader shall discharge such duties, in relation to supply and trading in electricity, as may be specified by the Appropriate Commission.

Accordingly, CERC has specified the net worth requirement for three different categories of trading license, vide Central Electricity Regulatory Commission (Procedure, Terms and Conditions for grant of trading license and other related matters) Regulations, 2009. The figures are shown in the table-4 below:

Sr. No. 1 2 3

Category license Category I Category II Category III

of trading Volume of electricity proposed to be traded No limit Not more than 500 Million Units Not more than 100 Million Units

Net Worth(Rs Crores) 50 25 5

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The Section 66. (Development of market) of the Act stipulates that: The Appropriate Commission shall endeavor to promote the development of a market (including trading) in power in such manner as may be specified and shall be guided by the National Electricity Policy referred to in section 3 in this regard.

5.2 The National Electricity Policy, 2005.

As per Section 3 of Electricity Act, 2003, the central government has notified The National Electricity Policy, 2005. The relevant section for development of electricity market is elaborated below: Section 5.7( COMPETITION AIMED AT CONSUMER BENEFITS) stipulates that-

To promote market development, a part of new generating capacities, say 15% may be sold outside long-term PPAs . As the power markets develop, it would be feasible to finance projects with competitive generation costs outside the long-term power purchase agreement framework. In the coming years, a significant portion of the installed capacity of new generating stations could participate in competitive power markets. This will increase the depth of the power markets and provide alternatives for both generators and licensees/consumers and in long run would lead to reduction in tariff.

For achieving this, the policy underscores the following:a.It is the function of the Central Electricity Regulatory Commission to issue license for interstate trading which would include authorization for trading throughout the country.

b.

The ABT regime introduced by CERC at the national level has had a positive impact. It

has also enabled a credible settlement mechanism for intra-day power transfers from licenses with
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surpluses to licenses experiencing deficits. SERCs are advised to introduce the ABT regime at the State level within one year.

c.Captive generating plants should be permitted to sell electricity to licensees and consumers when they are allowed open access by SERCs under section 42 of the Act .

d.

Development of power market would need to be undertaken by the Appropriate

Commission in consultation with all concerned.

e.The Central Commission and the State Commissions are empowered to make regulations under section 178 and section 181 of the Act respectively. These regulations will ensure implementation of various provisions of the Act regarding encouragement to competition and also consumer protection. The Regulatory Commissions are advised to notify various regulations expeditiously.

f. Enabling regulations for inter and intra State trading and also regulations on power exchange shall be notified by the appropriate Commissions within six months

5.3 Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) Regulations, 2004 Vs Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) (With amendments) Regulations, 2008
S. No Features OA Regulations,2004 OA Regulations,2008

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Definitions

Long Term Customer- The Long-term customer-A person granted persons availing or intending to long-term access for use of the interavail access to the interstate transmission more. Short-term customers- The transmission customers other than the long-term customers. The maximum duration for which the short-term access allowed at a time shall not exceed one year. system for a Medium-term customer-A person granted medium-term open access for use of the inter-State transmission system Short-term customer-A person who has availed or intends to avail short term open access. Short-term open access-Open access for a period up to one (1) month at one time. Bilateral transactions-The Regional Load period of twenty five years or State transmission system

Nodal Agency

Long-term access-The

Central Transmission Utility if Dispatch Centre of the region where it's system is used, otherwise point of drawl of electricity is situated the nodal agency shall be transmission licensee in whose system the point of drawl of electricity is situate Collective transactions-The nodal Short-term access-The agency shall be the National Load Regional Load Dispatch Centre Dispatch Centre of the region where point of drawl of electricity is situate.

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[Type here]

6. Salient Features of Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) (With amendments) Regulations, 2008

According to Regulation 2(Definitions),

Bilateral transaction means a transaction for exchange of energy (MWh) between a specified buyer and a specified seller, directly or through a trading licensee or discovered at power exchange through anonymous bidding, from a specified point of injection to a specified point of drawl for a fixed or varying quantum of power (MW) for any time period during a month.

Collective transaction means a set of transactions discovered in power exchange through anonymous, simultaneous competitive bidding by buyers and sellers.

Short-term open access means open access for a period up to one (1) month at one time. Shortterm customer means a person who has availed or intends to avail short term open access.

According to Regulation 5(Nodal Agency), The nodal agency for bilateral transactions shall be the Regional Load Dispatch Centre of the region where point of drawl of electricity is situated and in case of the collective transactions, the nodal agency shall be the National Load Dispatch Centre.

According to Regulation 8(Concurrence of State Load Dispatch Centre for bilateral and collective transactions), (1) Wherever the proposed bilateral transaction has a State utility or an intra-State entity as a buyer or a seller, concurrence of the State Load Dispatch Centre shall be obtained in advance and submitted along with the application to the nodal agency. (2) When a State utility or an intra-State entity proposes to participate in trading through a power exchange, it shall obtain a no objection or a prior standing clearance from the State Load
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Dispatch Centre , specifying the MW up to which the entity may submit a buy or sell bid in a power exchange. (3) (a) While processing the application for concurrence or no objection or prior standing clearance, as the case may be, the State Load Dispatch Centre shall verify the following, namely-

(i) existence of infrastructure necessary for time-block-wise energy metering and accounting in accordance with the provisions of the Grid Code in force, and (ii) availability of surplus transmission capacity in the State network.

(b) Where existence of necessary infrastructure and availability of surplus transmission capacity in the State network has been established, the State Load Dispatch Centre shall convey its concurrence or no objection or prior standing clearance, within three (3) working days of receipt of the application:

Provided that when short-term open access has been applied for the first time by any person, the buyer or the seller, the State Load Dispatch Centre shall convey to the applicant such concurrence or no objection or prior standing clearance, as the case may be, within seven (7) working days of receipt of the application.

(c) In case the State Load Dispatch Centre finds that the application for concurrence or no objection or prior standing clearance, as the case may be, is incomplete or defective in any respect, it shall communicate the deficiency or defect to the applicant, within two (2) working days of receipt of the application:

Provided that in cases where the State Load Dispatch Centre has communicated any deficiency or defect in the application, the date of receipt of application shall be the date on which the application has been received duly completed, after removing the deficiency or rectifying the defects, as the case may be.
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(4) In case the application has been found to be in order but the State Load Dispatch Centre refuses to give concurrence or no objection or prior standing clearance as the case may be, on the grounds of non-existence of necessary infrastructure or unavailability of surplus transmission capacity in the State network, such refusal shall be communicated to the applicant, within the period of three (3) working days along with reasons for such refusal:

Provided that where the State Load Dispatch Centre has not communicated any deficiency or defect in the application within two (2) days from the date of receipt of application or refusal or concurrence or no objection or prior standing clearance, as the case may be, within the specified period of three (3) working days, from the date of receipt of the application, concurrence or no objection or prior standing clearance, as the case may be, shall be deemed to have been granted:

Provided further that where concurrence or no objection or prior standing clearance, as the case may be, is deemed to have been granted by the State Load Dispatch Centre, the applicant while making application under clause (1) of regulation 9 shall submit to the nodal agency an affidavit (in the format provided in the detailed procedure), duly notarized, declaring that (a) the State Load Dispatch Centre has failed to convey any deficiency or defect in the application or its refusal or concurrence or no objection or prior standing clearance, as the case may be, within the specified time,

(b) necessary infrastructure for time-block-wise energy metering and accounting in accordance with the provisions of the Grid Code in force, is in place; and enclosing with the affidavit

(i)

a copy of the complete application after removal of deficiency or rectification of defects, if

any communicated, made to the State Load Dispatch Centre for seeking concurrence or no objection or prior standing clearance, as the case may be, and
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(ii) a copy of the acknowledgement, if any, given by the State Load Dispatch Centre, or any other evidence in support of delivery of the application to the State Load Dispatch Centre.

(5) Unless specified otherwise by the State Commission concerned, the State Load Dispatch Centre may charge a fee of Rupee five thousand (Rs 5000/-) for processing applications for concurrence or no objection or prior standing clearance.

According to Regulation 9(Procedure for Advance Scheduling for bilateral transactions), (1) An application for advance scheduling for a bilateral transaction may be submitted to the nodal agency up to the fourth month, the month in which an application is made being the first month:

Provided that separate application shall be made for each month, and for each transaction.

(2) (a) An application for inter-State scheduling during the fourth month shall be made up to the last day of the first month. (b) All applications received shall be taken up together for consideration. (c) The nodal agency shall convey its acceptance or otherwise to the applicant latest by the fifth day of the second month.

(3) (a) An application for inter-State scheduling during the third month shall be made up to five (5) days prior to the close of the first month. (b) All applications received shall be taken up together for consideration. (c) The nodal agency shall convey its acceptance or otherwise to the applicant latest by the close of the first month: Provided that while accepting the application, open access granted to any person prior thereto shall not be withdrawn.

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(4) (a) An application for inter-State scheduling in the second month shall be made with the nodal agency up to ten (10) days prior to the close of the first month. (b) All applications shall be taken up together for consideration. (c) The nodal agency shall convey its acceptance or otherwise to the applicant five days prior to the last day of the first month: Provided that while accepting the application, open access granted to any person prior thereto shall not be withdrawn.

(5) Wherever the nodal agency rejects an application, it shall convey its reasons to the applicant in writing.

According to Regulation 11(Procedure for scheduling of bilateral transactions on first-comefirstserved basis),

(1) The applications for grant of open access for the second month, received after the date specified in clause (4) of Regulation 9 and the applications for grant of open access during the first month shall be considered on first-come-first-served basis, and such transactions shall be scheduled subject to availability of the required transmission capacity: Provided that such applications shall reach the nodal agency at least four (4) days in advance of the date of the bilateral transaction:

Provided further that separate application shall be made for each transaction. (2) All these applications shall be processed and decided within three (3) days of their receipt. According to Regulation 12(Procedure for scheduling for day-ahead transactions),

All applications for bilateral transactions received within three days prior to the date of scheduling and up to 1500 hrs of the day immediately preceding the date of scheduling shall be
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clubbed and treated at par, and shall be processed after processing of the applications for collective transactions received till 1500 hrs.

According to Regulation 13(Procedure for Scheduling a Transaction in a Contingency)

In the event of a contingency, the buyer or on its behalf, a trader may locate, and the power exchange may offer its platform to locate, a source of power to meet short term contingency requirements even after the cut-off time of 1500 hrs of the preceding day and apply to the nodal agency for short-term open access and scheduling and in that event, the nodal agency shall endeavor to accommodate the request as soon as may be and to the extent practically feasible, in accordance with the detailed procedure.

The above timelines can be shown in the form of a figure-3 as shown below:

The different scheduling on a particular day are done in the following order

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According to Regulation 14(Revision of Schedule),

(1) The short-term open access schedules accepted by the nodal agency in advance or on firstcome-first-served basis may be cancelled or revised downwards on an application to that effect made to the nodal agency by the short-term customer:

Provided that such cancellation or downward revision of the short-term open access schedules shall not be effective before expiry of a minimum period of two (2) days:

Provided further that the day on which notice for cancellation or downward revision of schedule is served on the nodal agency and the day from which such cancellation or downward revision is to be implemented, shall be excluded for computing the period of two (2) days.

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(2) The person seeking cancellation or downward revision of short-term open access schedule shall pay the transmission charges for the first two (2) days of the period for which the cancellation or downward revision of schedule, as the case may be, has been sought, in accordance with the schedule originally approved by the nodal agency, and thereafter in accordance with the revised schedule prepared by the nodal agency during the period of such cancellation or downward revision.

(3) In case of cancellation, operating charges specified under regulation 17 shall be payable for two (2) days or the period of cancellation in days, whichever is less.

According to Regulation 15(Curtailment of transmission),

(1) The Regional Load Dispatch Centre may curtail power flow on any transmission corridor by cancelling or re-scheduling any transaction, if in its opinion cancellation or curtailment of any such transaction is likely to relieve the transmission constraint on the corridor or to improve grid security:

Provided that subject to provisions of the Grid Code, while cancellation or curtailment of any transaction, among short-term, medium-term and long-term transactions, short-term transactions shall be cancelled or curtailed first, followed by medium -term and thereafter long term transactions:

Provided further that while cancelling or curtailing any short-term transaction, bilateral transactions shall be cancelled or curtailed first followed by collective transactions.

7. POWER TRADING ARRANGEMENTS

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Power trading arrangements can be done in following different three types of existing Formats

7.1 Bilateral Contracts

Bilateral contract is an agreement in which each of the parties to the contract makes a promise or promises to the other party. It is an agreement in which the parties exchange promises for each to do something in the future. It refers to the mutual contracts where buyer and seller negotiate. A sales contract is a bilateral contract, since the seller promises to convey a property and the buyer agree to pay a specified sum, given certain conditions. Long term power purchase agreement between C.G.S (Central Generating Station) in India is an example of bilateral contracts. Main disadvantage of bilateral contracts are that there is a huge search costs, asymmetric information, and lack of transparency.

7.2 Through Intermediaries

As Power Market is expanding rapidly, more intermediaries are emerging out as a licensed trader. The benefit which the trader gets through intermediaries is that the search costs are reduced.
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They had not to spend money in finding customers; intermediaries match buyer and seller and act as a facilitator in concluding trading arrangements. Both types of arrangement serve as a symbol of mutual bargaining process where the actual price is not disclosed.

7.3 Power Exchange

Power Exchange (PX) facilitates equitable, transparent and efficient trading of power. It bridges the demand and supply mismatch by bringing larger players together for buying and selling. Power Exchange overcomes all the constraints which other two arrangements have, viz, search costs, asymmetric information, transaction costs, and counter-party risk. The development of electricity trading and the creation of electricity power exchanges are one of the most visible results of the liberalization of the electricity industry. Market players (generators, traders and suppliers) come to a market place to trade electricity and make contracts. Market players have needs and obligations to generate or consume a specific amount of electricity at a specific time in the future. These needs and obligations are covered by contracts with committing partners. Contract negotiations will determine the contract conditions like time, place, volume and price.

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7.4 MAJOR POWER EXCHANGES

India has two power exchanges. Power exchange India limited and Indian energy exchange.

INDIAN ENERGY EXCHANGE (IEX) is Indias first-ever, nationwide, automated, and online electricity trading platform. It has been conceived to catalyse the modernization of electricity trade in the country by ushering in a transparent and neutral market through a technology-enabled electronic trading platform.

CENTRAL ELECTRICITY REGULATORY COMMISSION (CERC) accorded approval on 9th June 2008, to IEX to commence its operations. IEX is a demutualised exchange that will enable efficient price discovery and price risk management in the electricity market.

On 6th February 2007, the CERC issued guidelines for grant of permission to set up power exchanges in India. Financial Technologies (India) Ltd responded by proposing then tentatively named 'Indian Power Exchange Ltd' and applied for permission to set it up and operate it within the parameters defined by CERC and other relevant authorities. Based on the oral hearing on July 10, the CERC accorded its approval vide its order dated 31st August, 2007. IEX thus moved from the conceptual level to firmer grounds. On 9th June 2008 CERC accorded approval to IEX to commence its operations and 27th June 2008 marked its presence in the history of Indian Power Sector as Indian Energy Exchange Ltd (IEX). IEX's technical infrastructure, systems and processes have materialised from a synergisation of the knowledge, expertise, and experience of the companies behind it. As a promoter of IEX, Financial Technologies has leveraged its technical expertise with the commodity exchange domain knowledge and experience of its subsidiary, Multi Commodity Exchange of India Ltd (MCX), as well as the industry grasp of co-promoter PTC India Ltd and of key partners / investors including IDFC, Adani Enterprises, Reliance Energy, Lanco Infratech, Rural Electrification Corporation (REC), and Tata Power Company.

30

Power Exchange India Limited (PXIL) is a fully electronic, nation-wide exchange for trading of electricity. It has been promoted by two of India's leading Exchanges, National Stock Exchange of India Ltd (NSE) & National Commodities & Derivatives Exchange Ltd (NCDEX).

Power Finance Corporation, Gujarat Urja Vikas Nigam, JSW Energy, GMR Energy, Jindal Steel & Power have taken equity stakes in this venture.

NSE is the largest stock Exchange in India and amongst the top 4 Stock Exchanges in the world in terms of number of transactions. The standards set by NSE in terms of market practices, products, technology & service standards have become industry benchmarks and are being replicated by other market participants. NCDEX is the only commodity exchange in the country promoted by national level institutions. The institutional promoters and shareholders of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills.

PXIL, like its promoters, will not just be building a Power Exchange, but would also be seeking to play a thought leadership role in shaping Indian power markets in the years to come. PXIL aims to provide transparent and fair price discovery mechanism which can signal massive potential investments into the Indian Power Sector.

The initial products offered for trading are electricity contracts offered on a day-ahead basis with voluntary participation. New products will be introduced after taking feedback from the market & obtaining approval from CERC. PXIL has an independent Board of Directors and professionals who manage the day-to-day operations. The Company is run on commercial principles as an individual business entity, separated from the business of its shareholders.

PXIL received regulatory approval from Central Electricity Regulatory Authority (CERC) on 30th September 2008 to begin operations. After receiving the final nod from the National

31

Load Despatch Centre, the apex body of the country grid operator, PXIL has successfully started its operations on 22nd October 2008. 7.5 Major power exchanges in the world

NORDIC POWER EXCHANGE Brief overview: Nord Pool ASA, the Nordic Power Exchange, is the worlds first multinational exchange for trade in electric power contracts. It is considered as the most successful market model. Nordel is a cooperative body made up of the transmission system operators (TSOs) in the Nordic countries (Denmark, Finland, Norway, and Sweden). The objective of the organization is to create the conditions for, and to develop further, an efficient and harmonized Nordic electricity mark.

32

PJM Brief overview: The PJM Interconnection is a multi-state market on the East Coast of the USA. The market is run by the member utilities although the members of the governing board are independent of industry interests. The market and system operators are a single entity. The PJM dispatch software uses a sophisticated linear programming algorithm that allows it to take account of all transmission constraints and, if necessary, calculate a separate marginal price at each of around 2000 grid access points. This system is known as Locational Marginal Pricing (LMP). Participants whom the dispatch algorithm deems to have transported power between differently priced nodes are subject to a transmission charge dependent on the price differential between the nodes and the amount of power transmitted. It is possible to hedge against these charges by buying a Fixed Transmission Right (FTR) for some or all of the capacity of the link between the nodes. Owners of FTRs receive the revenue from transmission charges from a link in proportion to the percentage of the link capacity rights that they own.

TRANSITION TO THE AUSTRALIAN ENERGY MARKET OPERATOR (AEMO) The Australian Energy Market Operator (AEMO) commences operations on 1 July 2009. In the lead up to its commencement, AEMO (Transitional) Ltd has been formed. The Australian Energy Market Operator will, for the first time, deliver gas and electricity market, operations and planning functions within the one organisation. It combines the skills and expertise of the existing market operators: AEMO (Australian Energy Market Operator) will incorporate all functions currently carried out by its six founding organizations NEMMCO, VEN Corp, ESIPC, REMCO, GMC and GRMO and, in addition, will take on the new responsibility of electricity transmission planning.
33

NEMMCO is responsible for the administration and operation of the National Electricity Market (NEM), and is recognized as one of the worlds leading power system and electricity market operators. The NEM operates 24 hours a day, every day of the year, and is a wholesale market with more than 100+registered participants who trade up to 180,000 giga watt hours of electrical energy each year. Up to $10 billion is traded annually in the NEM in servicing the needs of almost eight million electricity end-users in five Eastern Australian states and the Australian Capital Territory.

Role of the Power Exchanges

The Power Exchanges play an essential role in the new structure of the electricity industry. All these Power Exchanges share the same goals. They aim to facilitate electricity trade, foster competition, ensure transparency and become recognized as a marketplace. Finally, each Power Exchange aims to develop liquidity and credibility of its price index .Power Exchanges are considered marketplaces. The word marketplace is a third party which facilitates transactions between sellers and buyers, they are ruled by its own trading rules and they guarantee the payment. Facilitate trading: Power Exchanges make easy the short term trading because it gathers all the stakeholders of the wholesale market in one single market. Foster competition: By letting submit bids to generators, distributors, suppliers and eligible consumers. Every participant specifies the desire quantity and the price they are willing to pay/received. Ensure transparency: The bids are anonymously, the driver for the price is based on matching the supply and demand curves. The market clearing prices are public. Price index: Price in the Power Exchange is published on a daily basis and represent a useful tool for benchmark the bilateral transactions. Reduce credit risk: The counterpart for the transactions is the exchanges clearing house. The role of the clearing house is to guarantee the financial regularity of the parties.

34

8.Procedure for Scheduling of Short-Term Open Access(Bilateral Transaction)- The Central Transmission Utility(PGCIL) has notified the Procedure for Scheduling of Short-Term Open Access (Bilateral Transaction) in accordance with the Central Electricity Regulatory commission

35

(Open Access in Inter-state Transmission) (With amendments) Regulations, 2008. It is represented in the form of a diagram(fig 5) below:

36

37

9.Procedure for Scheduling of Short-Term Open Access(Collective Transaction)

The Central Transmission Utility(PGCIL) has notified the Procedure for Scheduling of ShortTerm Open Access (Collective Transaction) in accordance with the Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) (With amendments)

38

10.OPERATIONS IN A TRADING COMPANY

10.1 The operations for inter-state bilateral transaction can be shown in the form of a diagram

STEP

Finding Seller having surplus generating capacity and buyer having requirement for short term
STEP -2

-1

Power Purchase Agreements with Buyer and Seller for mutually agreed terms and conditions

STEP

-3

Concurrence from Buyer and Seller for transaction during pre-decided

STEP -4

Concurrence from SLDC as per Licensee on behalf of

FORMAT-II(Bilateral) by Buyer/Seller or by Trading Buyer/Seller

STEP -5

Application to Nodal RLDC as per FORMAT-I(Bilateral) for Acceptance of Schedule and reservation of Transmission Corridor
39

Acceptance by Nodal RLDC and

STEP -6

issue of Open Access Charges as VI(Bilateral)

per

FORMAT-

Physical flow of power through the

STEP-7

reserved transmission corridor. Payment of Open Access Charges to Nodal RLDC within 3 days of Schedule and issuing open access bills of apportioned amount to issuance of Acceptance

of

Buyer and Seller

STEP -8

Provisional Billing by Trading

Licensee based on implemented schedules issued by Nodal RLDC. Bills issued to Buyer by adding Trading Margin to the

Final Settlement of bill by incorporating the

STEP-9

actual energy flow based on Regional Energy Account (REA) issued by Regional Power Committees(RPC)

STEP 1 -

Finding Buyer and Seller

The function of Marketing Department is to find a seller having surplus generating capacity and buyer having requirement for short term power. Then Trading Licensee signs Power Purchase Agreements (PPA) with Buyer and Seller for a mutually agreed period such as 5-15 years. The
40

transaction of energy depends the availability of power(surplus generation) from the seller side and requirement of the short term power by the buyer side for various purposes. The seller can be 1. ISGS(Inter-state Generating station) 2. Intra state Generating Station 3. CPP(Captive Power Plant) 4. IPP(Independent Power Plant) 5. MPP(Merchant Power Plant) 6. DISCOM having surplus power during off-peak Hrs/lean seasons

The buyer can be 1. DISCOM for meeting peaking loads 2. Any Industry 3. Consumer groups.

The Electricity Act03 mandates that Open access be allowed to every consumer having demand equal to or greater than 1 MW.

The purpose of short term power purchase can be: 1. To meet the increased demand due to variation of load 2. To meet the seasonal loads, which increase with rise or fall of temperature. 3. To meet the additional requirement of power for increased production by Industry. 4. To get cheaper, reliable, better quality power on mutually agreed terms. 5. To utilize the excess capacity of the power plants.

STEP-2

Signing Power Purchase Agreements/contracts

Power Purchase Agreements/contracts contain the various terms and conditions which are mutually agreed between the Trading Licensee and the Seller or between the Trading Licensee
41

and the Buyer. The terms and conditions between the Trading Licensee and the Seller are made keeping in view the terms and conditions between the Trading Licensee and the Buyer so that the interests of the Trading Licensee are protected. The various features included in PPA are: 1. Quantum of Power to be sold/purchased: in MW(Min 1 MW) This indicates the quantum of power intended to be sold/purchased. The minimum quantum should be 1 MW for any hour. 2. Supply/Take-off timings: from .. Hrs to .. Hrs This indicates the period for which transaction is intended. 3. Type of Transaction: Firm/Day Ahead If Power flow is on firm basis, then the transaction is intended for guaranteed supply/off-take of power. This arrangement is made when the seller is certain to generate power and buyer wants guaranteed power. On the other hand, if transaction is on day ahead basis, the power flow is not guaranteed and it depends upon availability of power from the seller side. 4. Source/ Destination It indicates the source of power or the destination of use. 5. Delivery Point

A delivery point is the point up to which the seller has to bear the transmission charges. This point refers to the node in the transmission corridor which is contracted for scheduled flow. For example, if the transaction is scheduled between a seller in Karnataka and a buyer in Delhi then the contact path would be:( Fig 8)

Seller

KPTC

SR Grid

WR Grid

NR Grid

DTL

Buyer

42

KPTCL Entry KPTCL exit NR Entry

NR Exit

DTL Entry

Seller

WR Entry WR Exit

Buyer

KPTCL SR Grid SR Exit SR Entry WR Grid DTL Exit

DTL NR Grid

Diagrammatically it can be shown as follows:

Here transmission charges of 5 regions are to be borne between Seller and Buyer. These 5 regions are b) SR c) WR d) NR e) DTL(Delhi Transco Ltd) So if the delivery point is SR Exit/ WR Entry, then transmission charges for KPTCL and SR Grid are to be borne by the Seller and transmission charges for WR grid, NR Grid and DTL are to be borne by the Buyer. The different delivery points possible in this case are shown below a) KPTCL(Karnataka Power Transmission corporation Ltd)

43

Sl. No.

Delivery Point

Transmission Transmission charges to be borne charges to be by Seller borne by Buyer

Operating charges to be borne by Seller NIL

Operating charges to be borne by Buyer

Ex-Bus/ KPTCL Entry KPTCL Exit/ SR Entry

NIL

All

All

KPTCL

SR, WR, NR, DTL

Karnataka SLDC

SRLDC, WRLDC, NRLDC, Delhi SLDC

SR Exit/ WR Entry

KPTCL, SR

WR, NR, DTL

Karnataka SLDC, SRLDC

WRLDC, NRLDC, Delhi SLDC

WR Exit/ NR Entry

KPTCL, SR, WR

NR, DTL

Karnataka SLDC, SRLDC, WRLDC

NRLDC, Delhi SLDC

NR Exit/ DTL Entry

KPTCL, SR, WR, NR

DTL

Karnataka SLDC, SRLDC, WRLDC, NRLDC

Delhi SLDC

DTL Exit 6. Corridor

All

NIL

All

NIL

This indicates the transmission route through which power flow will take place. In this case the corridor will be:
44

SR WR NR 7. Rates/Prices A suitable rate is mutually agreed between seller/buyer and trading licensee. The rate quoted in the agreement between trading licensee and buyer usually includes the trading margin of trading licensee. In case of inter-state trading the margin can be a max of 4 paisa/unit. Rates can also be the MCP discovered in a power exchange for the day of transaction. 8. Taxes/Duties This clause indicates that whether the price quoted is inclusive or exclusive of any taxes or duties. 9. Billing Cycle Billing cycle can be daily, weekly, monthly or yearly as mutually agreed between parties. Generally weekly cycle is followed. The entire month is generally divided to four periods for weekly billing cycles. They are shown in table

Sl. No. 1 2 3 4

Week/Period 01st -8th day of the month 09th -15h day of the month 16th -23th day of the month 24th -last day of the month

Billing is on 9th day of the month 16th day of the month 24th day of the month 1st day of next month

This bill is the provisional bill is based on implemented schedules issued by Nodal RLDC. Bills issued to Buyer by adding Trading Margin to the price(Rs/unit) to be paid to Seller. Then final settlement of bill is done by incorporating the actual energy flow based on Regional Energy Account (REA) issued by Regional Power Committees(RPC). 10. Payment terms This clause indicates the no of days within which the purchaser has to make payment after receipt of the bill.
45

11. Rebate clause This clause indicates the percentage of rebate the purchaser is entitled to get if payment is made within a certain no of days. 12. Surcharge for delayed payment This indicates the surcharge the purchaser is liable to pay in case of delayed payment. 13. Conditions for Open Access Charges It is the clause under which it is specified that up to the delivery point the open access charges are to be borne by the seller and beyond it, charges are to be borne by buyer. 14. Force Measure Conditions Any situation beyond the control of either party, which results in non-implementation of scheduled power flow is called a Force Measure Condition. Under this clause such conditions are enumerated and under these conditions, clause 16 would remain void. 15. SLDC/STU concurrence terms Under this clause it is mentioned, whether the concurrence would be obtained by the trading licensee or the buyer/seller itself. 16. Compensation for short supply/off take Under this clause, compensation rates to buyer in case the seller fails to supply contracted quantum and compensation rates to seller in case the buyer fails to off take contracted quantum is mentioned. Note: This clause is not present in the PPA if the power is to be sold on day-ahead basis.

STEP-3 Concurrence from Buyer/Seller for short term transaction As and when the buyer wants power to purchase, the trading licensee enquires about the availability of power from sellers. Similarly as and when a seller submits proposal to sell power, trading licensee intimates about the availability to buyers. Concurrence from both sides is generally obtained before application is filed for scheduling. STEP-4 Concurrence from SLDC

46

Concurrence is obtained from each of the SLDCs concerned as per FORMAT-II(Bilateral) and Procedure for Bilateral Transaction, laid down by CTU, mentioning a. Name of Applicant b. Application No and Date c. Buyer/Seller Details d. Quantum in MW(Hour-wise) e. Period of transaction Concurrence is accorded by SLDC either in full or in part(with reasons given in writing). SLDCs may charge Rs 5000 for giving concurrence.

STEP-5

Application to Nodal RLDC

Application for scheduling and reservation of Transmission corridor is made to the nodal RLDC( the RLDC of the region where the point of drawl is situate) as per FORMAT-1(Bilateral) and Procedure for Bilateral Transaction, laid down by CTU, mentioning

a. Name of Applicant b. Application No and Date c. Buyer/Seller Details d. Quantum in MW(Hour-wise) e. Period of transaction f. Applied route (from injection point to drawl point) g. Rerouting in case of congestion STEP-6 Acceptance by Nodal RLDC and issue of Open Access Charges as per FORMATVI (Bilateral) Nodal RLDC issues schedule of acceptance as per FORMAT-VI(Bilateral) and Procedure for
47

Bilateral Transaction, laid down by CTU, mentioning the quantum of power flow

scheduled(hour-wise) and the period of transaction. Scheduling is accepted either in full or in part (with reasons given in writing). Nodal RLDC also issues the open access charges to the trading licensee/applicant. Open access charges comprise of a. Transmission charges b. Operating charges c. Application fees

Transmission charges for CTU network are notified vide Central shown below.

Electricity

Regulatory

Commission (Open Access in Inter-state Transmission) (amendments) Regulations, 2009 and are

Sl. No. 1 2 3

Type of Transaction Rate Intra-regional Rs 80/Mwh Rs 160/Mwh Rs 240/Mwh

Between adjacent regions

Wheeling through one or more intervening regions

Transmission charges for STU networks are notified in RLDC websites, as shown below:

48

Operating charges are notified vide Central Electricity Regulatory Commission (Open Access in Inter-state Transmission) (amendments) Regulations, 2009 and are shown(Table-10) below:

RLDC SLDC

Rs 2000/ day or part of day for each bilateral transaction Rs 2000/ day or part of day for each bilateral transaction

Application Fee of Rs 5000 is charged by Nodal RLDC for processing of application.

STEP-7 Payment of Open Access Charges to Nodal RLDC Payment of Open Access Charges is made to Nodal RLDC within 3 days of issuance of Acceptance of Schedule. Power flow takes place as per this schedule. The implemented schedules are displayed in RLDC website. Then Trading Licensee issues open access bills of apportioned amount to Buyer and Seller to recover the payment made to Nodal RLDC.

STEP-8 Provisional Billing by Trading Licensee Provisional Billing is based on implemented schedules issued by Seller RLDC(displayed on its website). The schedules displayed show the quantum of power flow (15 minute time-blocks wise). Based on this quantum provisional Bills are issued to Buyer as per rates agreed in PPA and by adding trading margin to it. Similarly, the seller issues provisional bills to the trading licensee as per the quantum shown in implemented schedules.

STEP-9 Final Settlement of bill Final settlement of bill is done by incorporating the actual energy flow based on Regional Energy Account (REA) issued by Regional Power Committees (RPC). REA for the past month is issued by RPCs in current month. The deviations from schedule or the actual injection and drawl of energy are known from REA.

49

10.2 Intra-state bilateral transaction

STEP-1

Finding Seller having surplus generating capacity and buyer having requirement for short term power

STEP-2

Power Purchas e Agreements/ contracts with Buyer an d Seller for mutually agreed terms an d conditions

STEP-3

Concurrence fr om Buyer and Seller for transaction duri decided period ng pre-

Application to concerned SLDC for scheduling. SL DC grants acceptance of scheduling and issues open access bill

Physical flow o f power through the reserved tr ansmission corridor. Payment of o pen access charges to

50

In

addition

to SLDC.

interstate transactions, trading intra-state transactions where are located in the same state. intra-state bilateral transaction form of a diagram (Figure 14).

licensees also facilitate the buyer and seller The operations for Provisional Billing by Trading Licensee based on schedules issued by can be shown in the

SLDC. Final Billing is done after incorporating any deviation as seen from the settlement account issued by SLDC.

STEP-5

STEP-6

STEP 1 & 2 Finding Buyer and Seller & Signing Power Purchase Agreements/Contracts
51

The function of Marketing Department is to find a seller having surplus generating capacity and buyer having requirement for short term power. Then Trading Licensee signs Power Purchase Agreements (PPA) with Buyer and Seller for a mutually agreed period such as 5-15 years. The transaction of energy depends the availability of power (surplus generation) from the seller side and requirement of the short term power by the buyer side for various purposes. PPAs are signed with buyers and sellers separately.

STEP-3 Concurrence from Buyer/Seller for short term transaction As and when the buyer wants power to purchase, the trading licensee enquires about the availability of power from sellers. Similarly as and when a seller submits proposal to sell power, trading licensee intimates about the availability to buyers. Generally, concurrence from both sides is obtained before application is filed for scheduling.

STEP-4

Application for scheduling

Application is filed by the trading licensee for scheduling to the SLDC as per the Open Access Regulations of different states issues by SERCs. Here no RLDC is involved. SLDC grants acceptance for scheduling after checking for congestion. It also issues the open access bill to the trading licensee. The open access bill comprises of transmission charges, operating charges and application fee (if any). Transmission charges up to the delivery point borne by the seller and beyond that is bone by the buyer(Fig 15). Usually, the delivery point (as mentioned in PPA) is the state grid entry, i.e. all the charges are usually borne by the buyer. However, it may vary, depending upon the terms of agreement.

52

State Grid Entry Seller

Buyer State Grid State Grid Exit

STEP-5

Payment of Open Access Charges to SLDC and exchange of schedules

Payment is made to SLDC within the no of days stipulated in the respective Open Access Regulations of the state. The above charges are recovered from buyer/seller as per the agreement signed. Power flow occurs as per schedule. The schedules are exchanged between trading licensee, SLDC, buyer and seller through electronic means (unlike inter-state transactions, where schedules are displayed on the website of RLDCs and there is no need of exchange of schedules)

STEP-6

Billing

Provisional billing is done as per the terms of agreement (weekly/monthly) on the quantum of scheduled power flow. Some states issue energy settlement account (like REA issued by RPCs) for the last month . For example, Maharashtra issues a settlement account, called IBSM (Intrastate balancing and settlement mechanism). It reflects the actual injected energy by the seller and the actual energy drawn by the buyer. Final billing is done on the deviations from scheduled energy. In some cases billing is done on the monthly meter reading statements issued by STUs (as mentioned in the billing clause in the PPA). In that case, no provisional billing is done. The final bill is issued to the buyer (including the trading margin) on the quantum of energy shown by meter reading statements.

10.3 Collective Transaction-

53

Collective transactions are the transactions of power discovered in a power exchange. Trading licensees facilitate the participation of members in collective transactions. The operations for collective transaction can be shown in the form of a diagram

Finding Buyer/Seller having requirement for short term power/ surplus power to sell

Agreements w Buyer/Seller, incorporating as

it h them

members in p ower exchange, obtaining port folio number for members

Obtaining con sent from SLDC as per FORMA T-PX-1 by Buyer /Seller or by tr a ding licensee on behalf of B uyer/Seller

54

Submitting bid s (Buy/Sell) on behalf of Buye r /Seller on the Trading Platfor m of Power Exchange bet ween 10:00 Hrs and 12:00 Hrs

Power Exchan ges issue STEP-3 Provisional Re sult at 13:00 Hrs. Trading Li censee forwards the Provisional Result to the participants

Power Exchan ges issue Final STEP-4 Result at 15:0 0 Hrs. Trading Licensee forw ards the Provisional Re sult to the participants. Power Exchanges issue daily Obligation report to trading licensee. Trading Licensee issues adjustment bill and credit note to the parties.

STEP-5

STEP-6

STEP-7 55

STEP-1

Finding Buyer/Seller

The function of Marketing Dept. is to find Buyer/Seller having requirement for short term power/ surplus power to sell to participate as a member in power exchanges. In collective transaction, the transaction of power is discovered in the trading platform of the power exchange. The seller does not get to know the buyer of his power and the buyer does not get to know whose power has been bought by him.

STEP-2

Agreements with Buyer/Seller

Agreements are made with Buyer/Seller for mutually agreed period. The buyer/seller is incorporated as a participant/member of a power exchange. The power exchange in turn provides a portfolio no to the participant.

STEP-3

No-Objection/Standing Clearance from SLDC

No-Objection/Standing Clearance is to be obtained from the SLDC of the state in which the participant is situated, as per FORMAT-PX-1, either by the market participant or by trading licensee on behalf of participant. SLDC grants No-Objection/Standing Clearance by stating a. the quantum of power to be injected or drawn by the participant b. the period of transaction c. the point of connection, where the participant would inject or draw power to/from the grid d. the percentage of transmission losses to be applicable(both for regional grid and state grid) e. the transmission charges applicable(both for regional grid and state grid)
56

STEP-4

Submitting bids on the Trading Platform of Power Exchange

Buy/Sell bids are submitted on the trading platform of power exchange by trading licensee on behalf of the participants between 10:00 Hrs and 12:00 Hrs of the day. A typical sale bid (hourwise) and a purchase bid (hour-wise). These bids are submitted for delivery on the next day.

The quantum of sale or purchase submitted on the trading platform are the quantum arrived after incorporating the regional and state transmission losses. The seller has to bear the transmission losses up to the regional periphery. Similarly buyer has to bear the transmission losses from the regional periphery up to the state grid entry for the buyer. The % of transmission losses are to be effected are mentioned in the No-Objection/Standing Clearance issued by SLDC(Fig 17). These figures are also displayed in the website of RLDC.

57

State Grid losses are mentioned here along with whether that will be applicable or not to the quantum of power mentioned in Sl. No. 6 & 7

If the seller is located in one state of northern region having losses of 2% and 3% for STU and NR Grid respectively and the buyer is located in another state of western region having losses of 4% and 1% for WR Grid and STU respectively, then the seller would inject more power(105.2 MW) equivalent to the losses of state grid and NR grid. Similarly, the buyer would draw less power(95.04MW), bearing the losses of state grid and WR grid(Figure 18).

Delivery point for Seller: NR Periphery

Delivery point for Buyer: WR Periphery

Therefore, Buyers drawl

= Contracted power Losses

Sellers injection = Contracted power + Losses

58

STEP-5

Provisional Result

The power exchange matches the supply bids with the purchase bids for each hour. The market clearing volume(MCV) is determined at the point where the cumulative supply bids match the cumulative purchase bids. The price corresponding to this point is called the market clearing price(MCP). This corresponds to the provisional result. It is sent to NLDC as well as the trading licensee at 13:00 hrs as per Procedure for Collective Transaction, issued by CTU. The trading licensee forwards the corresponding result for each participant to the participants.

STEP-6

Final Result

The provisional result is submitted by power exchange to NLDC. NLDC checks for congestion. If congestion is found, NLDC informs the exchange by 14:00 Hrs about the period of congestion and the available limit for scheduling of collective transaction on respective transmission system interfaces. Then power exchange curtails the quantum of power discovered in provisional result by market splitting. After market splitting, prices in the deficit region rises and in the surplus region falls. The prices corresponding to each area are called area clearing price (ACP). Thus the final schedule is made. The power exchange submits the same to NLDC and trading licensee at 15:00 hrs. The trading licensee in turn forwards the corresponding final result for each participant to the participants.

STEP-7

Billing

The power exchange issues daily obligation report to the trading licensee, containing the amount to be paid by the participant, if he is a buyer and containing the amount to be received by the participant, if he is a seller. A margin of one paisa/unit is charged by the power exchange to the quantum of cleared volume. In addition, it also issues the open access charges to be paid by the participant. The open access charges comprise of
59

a. NLDC application fee, b. Transmission charges for CTU and STUs. c. And operating charges for NLDC and SLDCs.

The NLDC application fee = Rs 5000/(No of successful portfolios)

The CTU transmission charges are as per rates given in table-8 and is reproduced below: Sl. No. 1 2 3 Type of Transaction Rate intra-regional Rs 80/Mwh Rs 160/Mwh Rs 240/Mwh

between adjacent regions

wheeling through one or more intervening regions

NLDC scheduling and operating charges = Rs 5000 *(Regional Entity Buyers + Regional Entity Sellers)/ (No of successful portfolios)( No of Entities)

STU transmission charges are as per rates given in standing clearance and also displayed in websites of RLDCs.

SLDC scheduling and operating charges = Rs 2000 per day. Based on the obligation report, the trading licensee issues adjustment bill and credit note to parties. While issuing adjustment bill, the trading margin is charged to the quantum of cleared volume of both seller and buyer. The open access charges are added to the energy charges for buyer. In case of seller, the open access charges are deducted from the energy charges to be paid to the seller.
60

So, Amount received by seller

= (Quantum of cleared volume)(ACP) - exchange margin trading margin open access charges

So, Amount paid by buyer

= (Quantum of cleared volume)(ACP) + exchange margin + tradingmargin + open access charges

The flow of funds in case of collective transaction is shown below:

From Trading Licensee to Power Ex on T th Day In case of Purchase

From Power ex to Trading Licensee on

(T+1)th

Day

In case of Sale

T Trading day

10.4 Banking-

Banking is the process of supplying a given quantum of energy to another party for a particular period and drawing the same quantum of energy in a future period from the same party. It is a kind of arrangement where, an entity having surplus power supplies power to another entity having requirement for short term power in a particular period of a year and draws the same quantum of energy, when required from the same entity during another period of the year. Usually, this is done between entities having similar conditions of surplus power during some season of the year and deficit during other season of the year.

Advantages of Banking

61

An entity may have surplus power in any period of the year, but selling it may not fetch the entity a good price, because prices of electricity in market may be down at that time. On the other hand, the prices of electricity may become high in market may become high at the time, when the entity is facing power deficit and will have to purchase short term power. In order to hedge against such

100 MW RTC power flow in the month of April Entity A Entity B In one period

100MW/105MW/95MW RTC power flow in the month of Jun e

Entity A

Entity B

In another period

price fluctuations, the entities usually go for banking. Under this arrangement, one entity having surplus power supplies power to another entity having requirement for short term power in a particular period of a year and draws the same quantum of power, when required from the same entity during another period of the year. Supplying energy in this case does not involve any financial transaction, except that the trading margin is charged by the trading licensee to the buyer.

Banking arrangement can be shown in the form of a diagram(Figure 19):

In some cases, agreement is made between two parties, in such a way that Entity A supplies 100% of the power to Entity B, and in future gets back 105% or 95% of the quantum of power supplied. This figure depends upon mutual agreement between two parties.

The procedure for arranging transaction from A to B and again from B to A, is same as that of bilateral transaction.
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10.5 Submitting Reports to CERC as per the prescribed FormatsReports are sent to CERC by every Trading Licensee as per prescribed formats (Format III and Format- IV) every quarter.

11. Power exchanges for collective transaction

Exchange is a platform on which buyers and sellers gather to trade in a commodity. The buyer does not come to know who the seller is and the seller does not come to know who the buyer is. In this way, an exchange functions as a facilitator to the participants or a host to the market.

A power exchange is an exchange dedicated to electricity trading, where electricity is considered as a commodity. So power exchange provides a platform on which power is traded. i.e. bought and sold, either at spot or as derivatives, where the underlying asset is power. An exchange represents a market-driven economy where prices of electricity are decided by the forces of demand and supply. These forces are contradictory: e.g., the seller wants high prices while the buyer wants low prices. These conflicting forces act against each other, which leads to a point of equilibrium. This equilibrium point determines the correct price of electricity at a given time. These conflicting forces are represented by bids, i.e. Sale bids and purchase bids. While in a sale bid the seller shows his intention to produce and sell more as the price of electricity increases, the buyer in a purchase bid wants to purchase more at lower prices and less at higher prices. The buyers and sellers remain anonymous to each other, so that the bigger players will not be in a position to influence the smaller players. In this a there will a level playing field for all the participants.

In India, there are two power exchanges in operation, namely Indian Energy Exchange (IEX) and Power Exchange of India (PXI).

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Currently, the exchanges function in accordance with the Central Electricity Regulatory Commission (Open Access in inter-State Transmission) Regulations, 2008, dated 25.01.2008, the Central Electricity Regulatory Commission (Open Access in inter-State Transmission) (amendments) Regulations, 2009, dated 20.05.2009, Procedure for scheduling of collective transaction issued by the Central Transmission Utility (PGCIL) and the Bye-Laws, Rules and Business Rules of the Exchange.

Currently Indian power exchanges offer a day-ahead market, where the delivery is made on the next day of scheduling. It is a kind of spot market, where the scheduling for the next day is done on the basis of matched bids and delivery (physical power flow from seller to buyer) is done on the next day based on schedules. The power exchange does not own any transmission infrastructure. It is the place where the successful buyers and sellers (who get the opportunity to buy or sell, based on their bid) are discovered. Physical power flow takes place through the transmission infrastructure of STUs and CTU. The NLDC and SLDCs schedule the flow, based on the transactions discovered in the electronic trading platform of the power exchange.

11.1 Products offered by Power ExchangesWorldwide, the power exchanges offer a variety of products in addition to day-ahead market. These are: a. real-time balancing market (hour-ahead) market b. week-ahead market c. month-ahead market d. quarter-ahead market e. capacity market f. ancillary market In addition, there are financial derivative markets being offered in the form of forward and future contracts, options and contracts of difference.

In a balancing market, the deviations (actual from schedules) in the day-ahead market are adjusted and settled between participants. Typically, real time balancing market should exist with
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a day-ahead market (In NORDPOOL, the day-ahead market is called ELSPOT, and the balancing market is called ELBAS). In India, there is no balancing market and the deviations are settled through UI.

In term-ahead (weekly, monthly and quarterly) markets, contracts are offered for the terms in advance. The process of finding MCV and MCP in day-ahead market and term-ahead markets is same.

A capacity market is the market in which generation capacities can be acquired by the participants. PJM (Pennsylvania, New Jersey, and Maryland ) of US offers a capacity market. In PJM, an LSE (Load Serving Entity) has the obligation to own or acquire capacity resources greater than or equal to the peak load that it serves plus a reserve margin of about 18% [5]. LSEs have the flexibility to acquire capacity in a variety of ways. Capacity can be obtained by building units, by entering into bilateral arrangements or by participating in the capacity credit markets operated by PJM.

Ancillary services are defined as all those required for the reliable delivery of electricity. In electricity industry, these services are complimentary services that compliment the production of energy. Specifically, ancillary services are those functions performed by power systems with regards to generation, transmission and distribution of electricity to facilitate technical and commercial transactions. These services are provided by the same equipment that generate and transmit electricity. In power markets, the availability of sufficient ancillary services makes power systems reliable and transactions deliverable. In the power market PJM, the system operator procures the losses from the ancillary market and the buyer is charged for the same. In India, an ancillary market is not developed yet. The transmission losses are paid by the participants in kind.

Derivative contracts are used for price hedging and risk management in electricity trading. NORDPOOL offers derivative instruments in the form of standardized forward and future
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contracts. The forward contracts are short term contracts (days, weeks) whereas the future contracts are for longer term (months, quarters and years). Unlike futures in options buyer does not have any obligation to exercise the contract. Options can also be used to hedge the risk of price fluctuations. The only difference being that an upfront payment of premium has to be made in case of an option whereas a trader does not need any upfront payment in case of futures.

11.2 Benefits provided by power exchanges: 1. No need to search for buyers and sellers, thus eliminates search cost. 2. No need to book the transmission corridor as well as to deal with the system operators like NLDC, RLDCs, SLDCs in India. 3. Sell / Buy all across the nation. 4. No need to negotiate for the prices unlike in Bilateral Contracts. 5. Power exchanges act as counterparty, thus a participant need not to assess the risk profile of the other participant.

11.3 Concepts related to Power Exchanges- Double side bidding Vs only Supply side bidding -

In some electricity markets, only supply side bidding is permitted. In Supply side bidding, only suppliers submit their offer to supply various quantities of electricity with corresponding prices. This type of design is usually adopted where centralized dispatch is in vogue. The central dispatcher or the integrated system operator (ISO) matches the forecasted demand with the sale bids starting from the lowest sale price.

On the other hand, in case of Double side bidding, buyers also submit their demand at various prices. This means that in double side bidding, buyer's demand is sensitive to prices. Double side bidding is more suited for markets where decentralized dispatch (like in India) is in vogue.
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Ex-ante Vs Ex-post price SettlementIn Ex-ante price Settlement, the price settlement is done before delivery, on the basis of the market/area clearing price and cleared volume discovered in exchange. But in Ex-post price Settlement, settlement is done after the delivery of power. Deviations from schedule are settled again using different mechanisms. In India, it is done through UI price mechanism, where the deviations are charged according to the frequency based UI charge at the time of power flow. But advanced electricity markets have real time balancing market or ancillary markets for this purpose.

Zonal Pricing Vs Nodal PricingIn zonal pricing, the entire market is divided into a no of zones and all participants(buyers/sellers) belonging to a single zone pay or receive a uniform price, irrespective of the congestion occurring in the transmission line inside the zone. Zonal prices differ from one zone to another depending on congestion in transmission lines between the zones. On the other hand, in nodal prices, the participants pay or receive a price, which depends on the node or the point of connection in the transmission grid, through which the participant injects or draws power. Price at each node depends on congestion in the transmission lines. In India, zonal pricing system is followed and the entire country is divided into 10 zones or areas.

Time block for contractsMost of the electricity exchanges offer hourly contract, i.e. there will be 24 contracts in one day. Each contract specifies the amount of power to be traded (either to be sold or to be purchased by the participant), and the price for each hourly contract is discovered in the trading platform. In India, hourly contract system is followed. Time block can be of half-hour duration (as offered in NEMMCO- Australia) or of more than one hour duration (as offered in EEEX-Germany).

Congestion Management-

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When the schedule of power flow in a particular transmission corridor discovered in power exchange is more than the transfer capacity of that corridor, then congestion is said to occur. The entire power scheduled cannot flow in the line, as it would endanger the entire transmission system. In order handle congestion, the quantum of power flow is reduced by using suitable mechanism in different electricity markets. One of the methods is called, market splitting, which is used in India. Auction TypeMost of the power exchanges across the world work on the principle of uniform pricing. In this method, the clearing price and clearing volume of electricity corresponds to the point of intersection of the Aggregate Demand curve and Aggregate Supply curve. All the suppliers are paid based on the clearing price, irrespective of their offer. This means that price is set by the last accepted offer of supply. In the alternative approach, referred as discriminatory pricing or "payasbid" method, each supplier is paid as per its bid. Each buyer pays a price, which is the weighted average of the price for all suppliers cleared by the PX (as used by BETTA, UK). OMEL (Spain) uses a different kind of pricing mechanism in which the buyer of the highest bid gets the electricity at the second highest bid price (Vickery auction).

11.4 Working of day-ahead marketThe scheduling of power flow starts with bidding (sale or purchase). Typical sale and purchase bids were shown in. Bids are allowed to be submitted in Indian Power Exchanges between 10:00 Hrs to 12:00 hrs of the day(as per Procedure for Scheduling of Short-Term Open Access(Collective Transaction) issued by CTU,

In the sale bid, the seller can ensure that no quantum out of 10 MW power will be cleared for sale as soon as the price falls below Rs 2000/MWh between 00:00 hrs to 06:00 hrs. Similarly, no quantum out of 15 MW power will be cleared as soon as the price falls below Rs 5000/MWh between 06:00 hrs to 12:00 hrs.

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In the same way, in purchase bid, the seller can ensure that no quantum of power will be cleared for purchase as soon as the price rises above Rs 2000/MWh between 00:00 hrs to 06:00 hrs. Similarly, no quantum of power will be cleared as soon as the price rises above Rs 5000/MWh between 06:00 hrs to 12:00 hrs.

All the sale bids of a particular hour are aggregated, i.e. are arranged in the increasing order of price. This forms the aggregated supply curve( between price on Y-axis and quantity on X-axis) which is a typically upward sloping curve(which means that suppliers are generally willing to supply higher quantities at higher prices). Similarly, all the purchase bids of a particular hour are aggregated, i.e. are arranged in the decreasing order of price. This forms the aggregated demand curve (between price on Y-axis and quantity on X-axis) which is a typically downward sloping curve (which means that purchasers are inclined to buy more power at lower prices).

These curves will appear in the form as shown below(Figure 20)

MCP

MCV

The intersection of the two curves shows the market clearing price (MCP), i.e. the price at which buyers and sellers will purchase and sell electricity and the market clearing volume (MCV), i.e.
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the total volume of transaction discovered.

All the sale bids with quoted price less than or equal to the MCP will be cleared for sale. These bidders will be called the successful bidders. Similarly all the purchase bids with quoted price greater than or equal to the MCP will be cleared for purchase. Corresponding bidders will be called the successful bidders. In this way, both the sides pay or receive a uniform price which is equal to or better than their bid price.

This can be explained in the following figure

10 MW at Rs 10,000 40 MW at Rs 9,000 50 MW at Rs 8,000

25 MW at Rs 8,000

50 MW at Rs 10,000 MCP-Rs 8000 50 MW at Rs 9,000

50 MW at Rs 8000 50 MW at Rs 6000 40 MW at Rs 7,000 25 MW at Rs 7000 MCV-125 MW 50 MW at Rs 5,500 50 MW at Rs 5,500

10 MW at Rs 6,000

Purchase Bid
Sale Bid

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Quantity(MWh)

The sellers and sale bids are(Table 14): Sl No 1 2 3 4 5 6 Seller S1 S2 S3 S4 S5 S6 Sale Bid 50 MW at Rs 5,500 10 MW at Rs 6,000 40 MW at Rs 7,000 50 MW at Rs 8000 50 MW at Rs 9,000 50 MW at Rs 10,000

The buyers and buy bids are Sl No 1 2 3 4 5 6 7 Buyer B1 B2 B3 B4 B5 B6 B7 Purchase Bid 10 MW at Rs 10,000 40 MW at Rs 9,000 50 MW at Rs 8,000 25 MW at Rs 8,000 25 MW at Rs 7000 50 MW at Rs 6000 50 MW at Rs 5,500

The MCP discovered here is Rs 8000 and the MCV discovered here is 125 MW.

The successful sale bids:

Sl No 1 2

Seller S1 S2

Cleared quantum 50 MW at Rs 8,000 10 MW at Rs 8,000

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3 4

S3 S4

40 MW at Rs 8,000 25 MW at Rs 8,000

The successful purchase bids are(Table 17):

Sl No 1 2 3 4

Buyer B1 B2 B3 B4

Cleared quantum 10 MW at Rs 8,000 40 MW at Rs 8,000 50 MW at Rs 8,000 25 MW at Rs 8,000

Here the successful buyers are required to pay Rs 8,000/MWh, which is better than or equal to the prices (more than or equal to Rs 8,000) quoted by them. Similarly the successful sellers receive Rs 8,000/MWh, which is better than or equal to the prices (less than or equal to Rs 8,000) quoted by them. The MCPs(hour-wise) and MCVs(hour-wise) of a particular day of India Energy Exchange are shown below(Figure 22):

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Source-IEX.

11.5 Market SplittingAt this stage, MCP and MCV are discovered without taking the system constraints (transfer capacity of transmission lines through which power is intended to flow) into consideration, i.e. in unconstrained situation. The respective cleared quantum for sale or purchase is sent to NLDC and
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the trading licensees/participants at 13:00 hrs of the day(as per Procedure for Scheduling of Short-Term Open Access(Collective Transaction) issued by CTU, Refer Fig 4).

The anticipated congestion (in a transmission corridor-hour wise), if any, is intimated by NLDC to power exchanges by 14:00 Hrs(as per Procedure for Scheduling of Short-Term Open Access(Collective Transaction) issued by CTU, Refer Fig 4).

The power exchanges then curtail the total power flow in the congested corridor, by a method called market splitting. It is an implicit auction mechanism, wherein transmission capacity and energy are auctioned and traded simultaneously, ensuring that transmission capacity is allocated according to buy or sale bids. Here, the entire market is divided into two areas, one the net deficit area(downstream area of the congested corridor) and second the net surplus area(upstream area of the congested corridor). The area clearing prices(ACP) of these areas are determined separately, unlike the MCP where the price for the whole market is determined. The ACPs are adjusted in such a way that the flow across the congested corridor is same as the available transfer capacity. This is done by curtailing the volume of relatively expensive sellers in surplus(upstream) area and by curtailing the volume of relatively cheaper buyers in deficit(Downstream) area.

11.6 Clearing and Settlement- Clearing is the process of determining financial as well as physical obligations. Settlement is the process of discharging obligations through transfer of funds between various accounts and meeting the obligation of delivery.

Two key terms involved in the process of clearing and settlement are: Pay-in: funds paid by the buyer for buying power Pay-out: funds paid to the seller for selling of power Every power exchange will have a clearing house for clearing and settlement of the contracts that are traded on the exchange. The clearing house effects pay-in and pay-out and monitors clearing and settlement process. Based on the cleared volumes and the ACPs, clearing houses issue daily
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obligation report to the trading licensee/participants. The obligation report contains the energy charges(to be paid by the buyer-pay in/to be received by the seller-payout) as well as the open access charges. Amount received by seller = (Quantum of cleared volume)(ACP) - exchange margin Open access charges

So, Amount paid by buyer = (Quantum of cleared volume)(ACP) + exchange margin + Open access charges

An exchange member opens a settlement account with a clearing bank, approved by the power exchange. The exchange reserves the right to withdraw funds from the account by debit instruction to the bank. All pay-ins, charges, margins payable to the exchange are debited from the settlement account of the participant by issuing debit instructions to the bank. Similarly, the exchange credits the pay-out, refund of margins(if any) to the account directly.

The flow of funds between buyers, sellers and power exchanges is shown below:
From Power Ex to seller on - Day (T+1)th T Trading day From Buyer to Power Ex on - Day T th

10.7 Power Exchanges in India- the Road Ahead:

At present, power exchanges in India offer hourly contracts in Day-ahead contracts. In future, hourly contracts in Term-ahead contracts can be offered. A Term Ahead Market provides the platform to trade in contracts with various underlying such as Weeks, Months, Quarters, Intraday etc. Here hourly bids are invited for the term in which power is to be scheduled and demandsupply matching is done like in the case of day-ahead market. IEX is currently in the process of
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offering the term-ahead contracts to the market participants. The trading dates for the week and month-ahead contracts offered by IEX are given below(Table 18):

Trading Dates L-15 of Month 1 L-10 of Month 1 L-5 of Month 1

Delivery Underlying (Month and Weeks) Month 2 Month 3 Month 4 L= Last date of Month 1, Source-IEX.

The bid matching process offered for day-ahead market is called the closed-auction method, because matching is done after the bids have been submitted. The time-line for bid submission for day-ahead market is 10:00 Hrs to 12:00 Hrs. However, another type of bid matching is through continuous trading. Continuous trading is based on Price-Time priority, i.e. the best buy bid and the best sale bid are matched first. The best buy bid is the bid with highest buy price. Similarly, the best sale bid is the bid with lowest sale price. The bids are matched on a continuous basis and in real time basis. If the prices are same then priority is given to the time of the order received. The time lines for closed-auction trading and continuous trading offered by IEX are(Table 19):

Trading Type Closed-auction trading Continuous trading

Time lines-Delivery Underlying (Month and Weeks) 03:00 PM-04:00 PM of the trading day 04:05 PM- 05:00 PM of the trading day Source-IEX.

The above contracts offered as discussed above come under collective transaction. Power
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exchanges can also offer contracts under bilateral transaction. As per CERC Order dated 20th May, 09 on Open Access in inter-State Transmission (Amendment) Regulations: 2.(b) bilateral transaction means a transaction for exchange of energy (MWh) between a specified buyer and a specified seller, directly or through a trading licensee or discovered at power exchange through anonymous bidding, from a specified point. IEX offers regional contracts under bilateral transaction. The timelines for week and monthahead contracts offered by IEX are given below(Table 20):

Trading Dates

Application Scheduling

For

Delivery Underlying (Month and Weeks)

L-15 of Month 1 L-10 of Month 1 L-5 of Month 1

L-10 of Month 1 L-5 of Month 1 L of Month 1

Month 2 Month 3 Month 4 L= Last day of Month 1, Source-IEX.

The delivery point in case of regional contracts shall be the state/regional entities periphery to which the seller belongs. In case the Seller is a Regional Entity, delivery point shall be the regional periphery of that region. Therefore, the delivery point here is fixed unlike bilateral transaction (direct or through trader), where delivery point can vary from one contact to another, depending upon the agreement between parties. Suitable C & S mechanism has also been developed by IEX, for physical flow of power and financial settlement.

12. Instruments in Financial Markets

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In the financial markets, there will be various derivative products based on electricity supply contracts. Similar to the normal commodity markets the duration can be 7 days to 1 year. Similarly, the expiry date can also be fixed for some particular day e.g., last Thursday of the month. In all the instruments the traders will have the option of cash settlement only. There will be no delivery settlement option for the participants. For the participants who want the delivery of electricity, they can deal in the forward market. The lot size of the contracts should be decided by keeping in mind the liquidity constraints and operational ease of trading for the participants.

Two tools will be available for participants to hedge against price fluctuations. These are as follows: 1. Forward Contract 2. Contract for Differences Financial electricity contracts to be traded at the Power Exchange are standardized products that are financially settled. There is no physical delivery of electric power. Settlement is conducted between Clearings service and individual members. All financial power contracts are cash-settled. Generators, retailers and end-users that use the products as risk management tools. Traders who profit from volatility in the power market, and contribute to high liquidity and trade activity.

12.1 Forward Contract It is a tool which is used to hedge against system price. This can be better understood by taking an example:
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In the example, an Exchange Member/Clearing Member has purchased a forward at a price of Rs 260/MWh. At the due date, the value has increased to Rs 285/MWh. During final settlement for the hour specified in the figure, the member receives Rs (288-260)/MWh =Rs 28/MWh. This amount is the total of the accumulated value Rs (285-260)/MWh from the trading period (the pending settlement) and Rs (288-285)/MWh from the Spot Reference Cash Settlement. The pending settlement will be realized in the delivery period. Purchasing the contracts volume in the spot market costs Rs288/MWh. The total cost of hedging the power purchase through a forward contract followed by a spot market purchase is equal to the hedging price, Rs 260/MWh. In the trading period prior to the due date, there is no mark-to-market settlement. The mark tomarket amount is accumulated as daily loss or profit, but not realized, throughout the trading period. So from buyers point of view, whatever the system price in there, or how the price is fluctuating he doesnt have to bother. For him, the system price will be the price at which he has made contract.

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And from sellers point of view, whatever the system price in there, or how the price is fluctuating he doesnt have to bother. For him also, the system price will be the price at which he has made contract. 12.2 Futures Contract Future contact in the power exchange would mean that the participant can hedge their risk in the fluctuation of electricity prices for longer terms. For example, a generating company expecting a decrease in the electricity prices can sell the futures now to be able to ensure higher prices at the time of delivery in future. Various kinds of contracts under this type of instrument can be of varying time horizon starting from 7 days to 1 year. These contracts can be for different spot market products for various durations like one day, one week, one month, three months, etc. e.g. a future contract for Round the clock electricity supply from Jan 1 to next 30 days OR a future contract for Evening Peak electricity supply from 25th Feb to next 7 days.

12.3 Options Unlike futures in options buyer does not have any obligation to exercise the contract. Options can also be used to hedge the risk of price fluctuations. The only difference being that an upfront payment of premium has to be made in case of an option whereas a trader does not need any upfront payment in case of futures. Fundamental option positions Calls and puts There are two basic types of options: buy (call) options and sell (put) options. A call option entitles, but does not obligate, the holder to purchase the underlying product at a price that has been agreed to in advance (the exercise price) -- no later than at the agreed-to date (the exercise date).
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A put option entitles the holder to sell the underlying product on corresponding terms. The decision to invest in a call or put option is made according to the investor's expectations about the price movement of the underlying instrument. 12.4 Contract for Differences Actual physical-delivery purchase costs are determined by actual area prices. An area price differs from the System Price when there are constraints in the transmission grid; CfDs allow participants to hedge against this area price risk. So this helps to provide a perfect hedge. A CfD is a forward contract with reference to the difference between the Area Price and the System Price. The market price of a CfD during the trading period reflects the markets prediction of the price difference during the delivery period. To create a perfect hedge that includes the basis risk when area prices are not equal to the System Price, a three-step process using CfDs must be followed: 1. Hedge the required volume using forward contracts. 2. Hedge any price difference for the same period and volume through CfDs. 3. Accomplish physical procurement by trade in the spot market area of the members location. The market price of a CfD can be positive or negative or zero. CfDs trade at positive prices when the market expects a specific area price to be higher than the System Price, (that is, the selected market area is in a net import situation). CfDs will trade at negative prices if the market anticipates an area price below the System Price (the market area is in a net export situation). It can be better understood by taking an example: Here, the Exchange Member has carried out the two steps required to make a perfect hedge of area prices. He has purchased a forward contract (at a cost of Rs 260/MWh) to hedge the Nordic Power Exchange spot market price, and a CfD (at a cost of Rs 10/MWh) to hedge any area price differential. Total hedging costs are Rs 270/MWh.
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In the chart above, the area price for the selected hour is Rs 290/MWh. The System Price is Rs 285/MWh. In the forward settlement during the delivery period, the member receives Rs 15/MWh, and in the CfD settlement, Rs 5/MWh. Net procurement cost is Rs 270, which equals the initial hedging costs of the forward, plus the CfD. In this way, if a buyer has done a forward contract & Cfd , he doesnt have to bother what the system price and the area price is. He can get the power at a price equal to his total hedging cost. Similarly, if a generator has done a forward contract & Cfd , he doesnt have to bother w hat the system price and the area price is. He will get the price equal to his total hedged cost.

13. Prospective future of power trading in India

13.1 Cross border power trading
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Cross border power trading sector is in constant evolution therefore players on the market need to keep up-to-date with the latest development in regional projects and within the regulation framework which will enable power plant operator to trade in a more efficient way. As the market develops and new business opportunities arise, trading across borders is becoming a key interest to more and more companies. Trading across different borders still implies trading with different rules and regulations. Cross border trade and investment are both the end and the means by which South Asia can achieve energy security. Through investment and cooperation, South Asia will be able to both close its burgeoning supply/demand gap and stimulate further reform, which will in turn open markets for further investment. It will now be possible for Indian companies to import power from across the border and sell it in the domestic market. The Central Electricity Regulatory Commission (CERC) announced significant changes in the powertrading policy, including a regulatory framework for cross-border trading of power. The regulator has made a change in the definition of inter-state trading that will enable trade of power between India and its neighbouring countries like Nepal and Bhutan. Cross-border trading forms a part of inter-state trading. There have been very few instances of power import from across the border in the recent past. One of them is the Tala transmission project, which brings power from Bhutan to Delhi. This is being developed by Tata Power for Power Grid Corporation of India Ltd (PGCIL), the country's largest power transmission company. Tata Power has also recently signed a Power Purchase Agreement (PPA) for trading of power through the Dagachu power project in Bhutan. This had to be accommodated through policy changes.

Cross border power trading by PTC Bhutan Long term agreements in place for purchase of power from Bhutan Chukha: 336 MW Kurichhu: 60 MW and
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Tala: 1,020 MW From the above mentioned three active projects in Bhutan, PTC purchased 5,228 MUs in FY 2008 5,579 MUs for 9 month period ended Dec 31, 2008 Nepal Long term agreement initialled for purchase of entire power from 750 MW West Seti hydroelectric power project in Nepal. The purchase of power has not started as yet. Active engagement in the development of Indo Nepal transmission interconnection for enhancement of power trade.PTC is also a member of Indo-Nepal Power Exchange Committee. With the recent development, PTC is focusing on cross-border power trading and looking at opportunities mainly in the power-surplus Nepal, Bhutan and Bangladesh.

13.2 Hedging and speculation in power market. Price volatility introduces new risks for generators, consumers, and marketers. In a competitive environment, some generators will sell their power in potentially volatile spot markets and will be at risk if spot prices are insufficient to cover generation costs. Consumers will face greater seasonal, daily, and hourly price variability and, for commercial businesses, this uncertainty could make it more difficult to assess their long-term financial position. Power marketers sell electricity to both wholesale and retail consumers, often at fixed prices. Marketers who buy on the spot market face the risk that the spot market price could substantially exceed fixed prices specified in contracts. Electricity futures and other electric rate derivatives help electricity generators, consumers, and marketers manage, or hedge, price risks in a competitive electricity market the futures contract is closed by buying or selling a futures contract on or near the delivery date. Other electric rate derivatives include options, price swaps, basis swaps, and forward contracts. Futures and options are traded on an exchange where participants are required to post margins to cover potential losses. Other hedging instruments are traded bilaterally in the over-the-counter (OTC) market. Futures are not the only way to hedge electricity price risk electricity options contracts also. Futures and derivatives should not be regulated simply because they can produce losses. Not using futures in volatile commodity markets can also produce losses
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A short hedger sells futures to hedge a long position in the underlying commodity (electricity), while a long hedger buys futures to hedge a short position in the underlying commodity. A generator is long in electric power and will use a short hedge. A marketer who has sold power to a utility is short that power because he cannot produce it. A marketer will buy futures to hedge its short position in the power market. There is, however, no reason that the amount of short hedging will necessarily equal the amount of long hedging. For this reason, speculators are useful. If there is an imbalance of hedgers, then speculators can make money by shouldering the risk of hedgers. A price swap is a negotiated agreement between two parties to exchange or swap specific price risk exposures over a predetermined period of time.

A basis swap allows an individual to lock in a fixed price at a location other than the delivery point of the futures contract.

13.2.1 Options

An option can be defined as a right to buy or sell a commodity at a fixed price before or on a future date. An option is an "asymmetric risk" contract; that is, different conditions apply to each party to the contract. An investor, who trades in options, purchases or sells the right to an underlying instrument (for example, a forward contract). As is the case with Financial Market (futures and forward contracts), the parties make the trade and set the price of the trade simultaneously. Settlement and delivery also take place at a fixed time in the future, according to the terms of the product specification. There is a key distinction between forward and futures contracts for electric power and options: in options trading, one of the parties -- the buyer -obtains the right to decide whether to use (exercise) the option and complete the transaction. The buyer (holder) of the option pays the seller (writer) an option premium for this right. The option writer's obligation is to complete the transaction if the holder so demands (exercises the option). The option writer has received a premium for taking on the obligation. If the option holder fails to exercise this right and the option lapses, the option writer's profit is the premium payment, and the holder's loss is limited to the premium.
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There are two types of options: a put option and a call option. The buyer of an electricity put option (also called floors) pays a premium for the right, but not the obligation, to sell electricity at a specified price, the strike or exercise price, at a specified point in time. End users use call options (also called caps) to place a maximum ceiling price (relative to an indexed price) that they will pay for the commodity at a specified point in time. Generators and end users can use combinations of calls and puts to ensure a particular price range.

13.2.2 Future

A future is a standardized contract where all terms associated with the transaction have been defined in advance, leaving price as the only remaining point of negotiation. Standardization helps make the price transparent because no correction for quality is needed to compare different contracts. willing to buy (the bid price) or sell (the offer price) of a particular months contract By far, the most common form of liquidation occurs when a party with a long position (someone who previously bought a futures contract) decides to sell, and a party with a short position (someone who previously sold a futures contract) decides to buy a futures contract. More than 98% of all futures positions are closed prior to delivery. The holder of a short position must deliver the commodity while the holder of a long position must receive the quantity. The futures price converges at the time of maturity to the spot price of the underlying commodity. A futures contract can be settled either by delivery of the physical commodity or by a cash settlement. In either case, the settlement price should be identical to the spot market price for the same product at the same place.

13.2.3 Forward Contracts

Under a forward contract, one party is obligated to buy and the other to sell, a specified quantity of a specified commodity at a fixed price on a given date in the future. At the maturity of a forward contract, the seller will deliver the commodity and the buyer will pay the purchase
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price If, at that time, the market price of the commodity is higher than the price specified in the contract, then the buyer will make a profit. Conversely, if the market price is lower than the contract price, then the buyer will suffer a loss. The difference between a forward and a futures contract is that the terms and conditions of forward contracts are not standardized. Rather, they are negotiated to meet the particular business, financial or risk management needs of the parties to the contract.

14. Trading of Green Power

Electricity generated from renewable energy sources is called renewable electricity or green power. Renewable energy resources are naturally occurring, non-depletable sources of energy, such as solar, wind, biomass and hydro. Green power is becoming a readily tradable commodity worldwide. Market research shows that most consumers dont know where their power comes from and think that electricity generation is cleaner than it actually is. However, when consumers are informed and educated about the environmental differences among generation sources, they are willing to pay more for cleaner energy sources. Business customers also value clean energy choices and will be willing to make green power purchases either as a competitive business advantage or as a way of reinforcing the companys own environmental ethic. Using renewable energy can be an attractive emissions reduction strategy for corporate facilities regulated under mandatory CO2 cap-and-trade systems.

For the green power market to be successful, consumers must understand that electricity generation has important environmental consequences and that, through their power purchase decisions, they can make positive changes in the generation resource mix, which today is heavily weighted toward fossil fuels and nuclear. It is also important to assure customers who choose to purchase green power that their purchases will lead to the use of cleaner energy sources. The availability of green power products empowers consumers to purchase electricity generated

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from renewable energy sources that are less damaging to the environment. Typically, consumers must pay a premium on their electric bills to receive green power. APX operates a week ahead, hourly market that matches buyers and sellers of 100% renewable power at any time based on the brown-market price of power plus a green premium that is determined by supply and demand in the green power market. The virtues of the APX Green Power Market include a diversified portfolio of sellers and buyers, ease of use without complicated auction rules, and prices that reflect market valuation of renewable. The market moving to a wholesale green ticket system in which green power is split into two components energy delivered in real-time and a green ticket representing the actual greenness of the power.

This will allow the green premium to be traded over longer periods than hourly and provide additional opportunities for generators of intermittent renewable power supplies.

For the green power market to be successful, consumers must understand that electricity generation has important environmental consequences and that, through their power purchase decisions, they can make positive changes in the generation resource mix, which today is heavily weighted toward fossil fuels and nuclear. It is also important to assure customers who choose to purchase green power that their purchases will lead to the use of cleaner energy sources.

CONCLUSION
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15. Conclusion
The Indian power sector is in the path of reaching its adolescence state. When the developed countries have undergone various modern and up-to-date systems to operate and function power sector along with various instruments and products of power trading, India follows them and trying to be one of the leaders in the power market operation. The journey of Indian power sector is definitely a credit worth. The Indian power sector now is growing in the same pace as was the development of the information technology sector in India.

Power trading is the biggest instrument of Indian power sector which will unveil the growth opportunity of the power sector and optimize the natural resources of that lies in India. The growth of Indian power trading will invite many players to come into the operation of power trading and increase the competition in power market thereby achieving the economic efficiency, higher quality services as well as lower consumer prices for electricity

16. BIBLIOGRAPHY
www.powermin.nic.in www.cercind.gov.in www.cea.nic.in www.iexindia.com 89

www.powerexindia.com www.ptcindia.com www.infraline.com www.nldc.in www.erldc.com www.nerldc.com www.srldc.com www.nrldc.com www.wrldc.com www.powergridindia.com www.jindalpower.com/power-trading.html www.google.com

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