Revised Pricing in Case of Market Splitting

Revised Pricing in case of Market Splitting
based on Weighted Average Price in the Two

or More Sub Markets
Annexure I
Power Exchange India Limited
Revised Pricing in case of Market Splitting based on Weighted

Average Price in the Two or More Sub Markets
CONTENTS
CONTENTS .....................................................................................................................................................................1
LIST OF TABLES ..............................................................................................................................................................1
LIST OF FIGURES ............................................................................................................................................................2
1.0
Introduction ......................................................................................................................................................3
2.0 Fundamentals of Transmission Congestion ............................................................................................................. 4

2.1 Effects of Congestion...........................................................................................................................................4
2.2 Managing Congestion ..........................................................................................................................................5
3.0 CURRENT PRACTICE IN INDIAN MARKETS ...............................................................................................................6
3.1 Experience in the Nordic Market ........................................................................................................................7
3.2 Short Term Markets in India................................................................................................................................8
4.0 PROPOSED MARKET SPLITTING METHOD..............................................................................................................14
4.1 Examples on proposed market splitting method ..............................................................................................15
5.0 CONCLUDING REMARKS ........................................................................................................................................25
References: ..................................................................................................................................................................28
LIST OF TABLES
Table 1: Share of Indian Short Term Market .................................................................................................................9
Table 2: Percentage of Time Instances of Congestion Occurred at the Exchanges .......................................................9
Table 3: monthly deficit in energy ...............................................................................................................................13
Table 4: Price Bids for the Supply and Demand of Electricity ......................................................................................16
Table 5: Unconstrained inter regional Flows ...............................................................................................................17
Table 6: Case I Corridor between Zone 2 and Zone 3 constrained to 20 MWh...........................................................18
Table 7: Case 1 Inter regional Flows ............................................................................................................................19
Table 8: MCP-MCV for Different Regions ....................................................................................................................20
Table 9: Flow between different regions .....................................................................................................................21
Table 10: Congestion fund contribution ......................................................................................................................21
Table 11: MCP and new settlement price....................................................................................................................22
Table 12: Pay In and Pay out for sellers and buyers .................................................................................................... 23
Table 13: MCP & MCV values ......................................................................................................................................23
Table 14: Flow between different regions ...................................................................................................................23
Table 15: Congestion fund contribution ......................................................................................................................24
Table 16: MCP and new settlement price....................................................................................................................25

LIST OF FIGURES
Figure 1: Percentage of time congestion occurred during July 2009 ..........................................................................10
Figure 2: Quantum of Energy Curtailed as percentage of UMCV in July 2009 ............................................................10
Figure 3: Average Monthly Congestion Period, Average Difference price between two zones and Congestion
Revenue Paid ...............................................................................................................................................................11
Figure 4: MCP for the month of july 2009 in the deficit zone .....................................................................................12
Figure 5: MCP in the deficit zone for August 2009 ...................................................................................................... 12
Figure 6: price signal during periods of same monthly average congestion ...............................................................13
Figure 7: Definition of Zones and Flow Paths ..............................................................................................................16
Figure 8: Unconstrained Market Solution ...................................................................................................................17
Figure 9: Case 1 Sub Market 1 and 2, MCP & MCV......................................................................................................18
Figure 10: Flow Distribution ........................................................................................................................................21
Figure 11: Flow Distribution ........................................................................................................................................24

1.0 INTRODUCTION
One of the biggest challenges in efficient functioning of electricity markets is to handle transmission congestion.
Congestion arises when power flow to a region exceeds the transmission capacity available for that region. Time
differentiation is a well-known characteristic of electricity products owing to its non storability and congestion
adds a second dimension of spatial differentiation to it.
As the transmission infrastructure does not have infinite capacity, congestion is unavoidable. However, excessive
and regular congestion may have adverse impact on the electricity market. Central Electricity Regulatory
Commission (CERC) through petition 155/2006 (Suo Motu) in the matter of Development of a Common Platform
for Electricity Trading in India and guidelines for selling of power on Power Exchanges recognized the fact that
congestion management is a complex issue and needs to be addressed along multiple dimensions. However, there
were relatively few instances of transmission congestion. Therefore, Power Exchange India Limited (PXIL) adopted
classical market methodology for congestion management.
Prices in a competitive electricity market with price taking participants are at marginal cost. Energy pricing and
transmission congestion pricing are implicitly connected. Transmission congestion leads to increase in the price of
electricity for the congested region.
In currently mandated market splitting method at exchanges, the participants on the exchanges and the exchanges
are the ones, which are paying for the opportunity cost of congestion. The bilateral users (medium term and short
term), do not pay this opportunity cost for the transmission system. There exists a substantial bias in favor of
bilateral transactions and against the collective transactions through exchanges. It is a strong disincentive and
affects the bids put by the participants on the exchanges. The present congestion management regime is not
platform neutral, as any market mechanism ought to be and the participants on the exchange are at great
disadvantage in comparison to bilateral and OTC market. Power exchanges are superior to bilateral and OTC
markets in price discovery. The present congestion management regime is one of the reasons in hindering the shift
of trade from inefficient bilateral transactions to collective transactions through exchanges. Our proposed method
will somewhat neutralize this problem and will level the competition across all trading platforms in electricity
markets.

2.0 FUNDAMENTALS OF TRANSMISSION CONGESTION
Electricity is transported from suppliers (generators) to consumers through transmission network. In case of
congestion; generation, transmission, and consumption need to be adjusted. Congestion places network
constraints on dispatch and it interferes with the markets merit dispatch objective of meeting demand at the
lowest possible cost. In the absence of congestion, generation units with the lowest cost supply electricity to meet
the demand of consumers, but when congestion arises, this may not be possible and higher cost generating units
have to be scheduled for dispatch. This introduces risk for the market, which consequently affects bidding,
dispatch pricing, and long-term investment decisions.
2.1 EFFECTS OF CONGESTION

Congestion affects everyone in the market .It affects generators by increasing their financial and physical risks. It
affects buyers by increasing their exposure to physical and financial risks. It increases level of uncertainty about
locational decisions and by increasing the price of electricity; it affects both wholesale and retail customers.
Congestion can introduce two types of risks that participants have to manage:
The physical or volume risk
The financial or price risk
The magnitude of these risks depends largely upon the pricing and settlement arrangement in the market and how
closely these rules are related to congestion management.
Both the above incentivize participants to engage in bidding which is not reflective of the marginal cost. The
bidders might bid as must run stations i.e. a very low bid or extremely high bid as they anticipate non dispatch
due to congestion. Both the bidding patterns would result in disorderly bidding and therefore, skewed-pricing
leading to inefficiency.
Skewed-pricing may distort the investment decisions for both supply and demand side. This includes decisions on
technology, location and timing. In long run, this can weaken the economic signals that support efficient locational
investment decisions by generators and large industrial and commercial users. Locational signals assume greater
importance in current Indian context of ambitious capacity augmentation plans.
In addition to affecting the behavior of the market participants, congestion affects the market as a whole. First, it
increases the overall cost of electricity supply and secondly it can potentially compromise the objective to promote
efficient investment in the sector. It also leads to progressive loss of confidence of the participants at exchange.

2.2 MANAGING CONGESTION
Eliminating transmission congestion would be neither cost effective nor efficient. It would lead to over investment
in transmission capacity. Therefore, an optimum level of congestion would exist and it needs to be managed.
A Congestion Management Regime comprises of rules and information for the following elements of an electricity
market:
Dispatch.
Wholesale market pricing and settlement arrangements.
Transmission access pricing, incentives and investment planning.
Risk Management instruments.
A suitable congestion management regime needs to be devised for physical and operational security of the power
systems. Moreover, Congestion Management Regime has important implication for spot prices and bidding
incentives for market participants. In the long run, the manner in which a market manages congestion affects the
investment decision of new generators and consumers etc.
Some of the common methods used for handling congestion in electricity markets are:
Redispatching.
Coordinated auction of generation and transmission capacity (Explicit Auction).
Nodal pricing or Locational Marginal Pricing.
Market Splitting.
Redispatching
In case of re-dispatch the system operator, issues suitable dispatch instructions to costly electricity suppliers
located in the area downstream of the congested corridor, to meet the demand in the area. This method has an
underlying assumption that on instructions surplus generation capacity is ready to be dispatched. In Indian context
is not always true, as generating stations and load distribution is skewed. Further, distribution licensees may prefer
load shedding to buying costly power in view of the financial constraints and non-obligated supply agreements
with customers. Therefore, re-dispatch is not suitable in Indian context.
Explicit Auction
Coordinated auction of transmission capacity with generation also involves fundamental changes in market design
and complex policy issues on whether transmission capacity (rights) need to be auctioned or allocated on basis
needs to be addressed. Hence, this method is also not appropriate in the current context of power market
operation.
5

Market Splitting
In market splitting, the market is divided into two or more submarkets with congested links acting as the
boundary. Clearing price for each sub market is determined separately taking into consideration the Aggregate
Supply and Aggregate Demand for each sub market accounting for limitations of flow over the congested corridor.
Nodal pricing or Locational Marginal Pricing

Nodal or LMP is a limiting case of market splitting where each node in itself becomes a separate market. Each
node of the power system therefore has a separate price depending upon the cost of energy, cost of transmission,
which includes congestion as well as losses.
3.0 CURRENT PRACTICE IN INDIAN MARKETS

Central Electricity Regulatory Commission (CERC), guided by the National Electricity Policy is working towards one
of its mandate to introduce competition in the electricity market. It approved the setting up of two power
exchanges in India namely the Indian Energy Exchange (IEX) and Power Exchange India Limited (PXIL). The trading
at these two exchanges at present occurs on a Day-ahead Spot (DAS) and Term-ahead products including weekly
and Day Ahead Contingency. The trading volume has picked up in day ahead spot segment but the market is yet to
generate enthusiasm for term ahead products.
The power market in India follows a distributed, portfolio-based concept. The market participants transact energy
on long-term or day-ahead basis on their total energy portfolio. The market structure requires that all market
participants have a balanced portfolio. This implies that for each participant own generation and procurement
must balance the sum of consumption and sales. The markets (Power Exchanges, bilateral contracts and
brokers/OTC services) provide the means for trading to achieve this balance. The Market Operator has no interest
or influence in the actual unit commitment and scheduling of individual assets it has been left to the market
participants to handle. Any real-time deviation or system operational issues are handled by the independent
system operator(s), who uses unscheduled interchange for real time load-generation balance in the absence of
separate markets for procuring balancing power, capacity reserves and other ancillary services.
Currently Congestion Management for DAS, is handled by market splitting mechanism in accordance with the
directions of National Load Dispatch Center (NLDC). Congestion occurs whenever the state of the transmission grid
is characterized by one or more violations of the physical, operational, or policy constraints against its normal state
or from one of the contingency from a set of specified contingencies. In an initial iteration, bids of market
participants from various bid zones are and an unconstrained market-clearing price (UMCP) is discovered. The
algorithm furthermore calculates the cleared schedules for all market participants based on the UMCP. In the next
6

iteration, the supply/demand balance within each zone is aggregated, and any zonal imbalance then represents
the amount of electricity from/to that zone. If this calculated transmission amount exceeds the permitted transfer
capability as decided by NLDC, it amounts to transmission congestion and accordingly, market splitting algorithm
is initiated. The congested zone is separated from the rest of the system, and the price is discovered for both the
zones as separate markets. The discovered price is adjusted to drive the supply/demand imbalance to a level to
match the permitted transfer capability.
As the market is shallow and the liquidity is low, the present market splitting results in aberrations in price
discovery in the region downstream of the congested corridor. The price of power in that region goes up
significantly compared to the region upstream of the congested corridor. This results in vast difference in area
prices between the regions downstream and upstream of the congested corridor leading to a Congestion Surplus.
3.1 EXPERIENCE IN THE NORDIC MARKET

The Nordic market, consisting of Norway, Sweden, Finland and Denmark uses the classical market-splitting model
for congestion management. The underlying philosophy of congestion management regime is summarized as
under.
System operators understand the physical realties of the network whereas traders / market participants
understand the financial realities of their trades and the underlying physical realties of generation and demand.
Economically efficient congestion management is achieved only by combining this information.
Nordic market therefore use market splitting in the day ahead market combined with coordinated re-dispatching
in the operating phase.
The power exchange splits the bid with geographical bid areas with limited capacities of exchange (as the entire
transmission corridor is available to exchanges); a power pool price is set according to amounts of demand and
generation offered in the whole market area. The TSO then computes a load flow and identifies constrained lines.
It should be pointed out that the same later is used for evaluation of Net Transfer Capability (NTC). Geographical
bid areas are defined across both sides of the bottleneck a new price is defined for each area with flows limited to
the capacity of inter connected lines. Thus each area has its own pool price; area upstream of congestion corridor
having a lower pool price whereas area downstream of congestion corridor having a higher pool price. This price
demand effect results in releasing of congestion by decreased demands in high priced areas and price increases in
low priced areas. The generation side has opposite effect.
Thus, a spot market price is settled for the whole market and there are different price areas according to actual
congestion. Consumers downstream of the congestion will pay higher price, and generators upstream of the

congestion will be paid the lower price. The congestion charge is the difference between the prices in downstream
and upstream area. It is collected by the system operator and is used to take measures to progressively reduce
congestion.
In this method, congestion relief relies partly on the market forces, being based on the sale price and purchase
price curves. Trade will be maintained if the price of the area ensures profitability for the market actors. The
market splitting concept thus encourages trading as far as market participants receive ex-ante information about
the profitability of congestion in some areas. Apart from providing, a market signal to facilitate investments, this
method also ensures efficient utilization of transmission network in the longer run. However, this system does not
provide for any incentive to transmission system operator to reduce congestion.
The internal congestions are handled through counter trade or by reducing interconnector capacity at the bidding
area borders. Counter trade is mainly used on intra-day operation and to maintain firm capacity notified in day
ahead markets.
All the trading capacity over the inter connectors between bidding areas is left at the disposal of Nord Pool for the
day ahead trade (Initially, some transmission capacity was reserved for Long Term Contracts but was discontinued
from early 2000). There is no other capacity nomination like yearly or monthly contracts. Therefore, the trade has
to be done through Nord Pool. The intra-day market & with continuous trade, uses the balance on first come first
serve. The unused capacity is then used for the regulation market.
As is evident from above, Nordpool uses market splitting in conjunction with counter trade and balancing power
methods. Moreover, the system also causes no market participant to be assigned privileges on any bottleneck
(which is one of the important features of a liberalized market), as it could be abused by a commercial participant.
In the absence of any possibility to exchange KWh across the bottleneck in order to facilitate trading, market
participants, make a financial contract. The underlying principle is energy is always procurable and by entering into
a financial contract only price is procured (which is fixed). The financial contracts provide the necessary hedge to
price risk. Moreover, the bidding areas are consistent with the geographical areas of the various Transmission
System Operators. It is pertinent to mention here that Nordic market enjoys 72% of the total consumption.
However, this system needs to be used in conjunction with other methods and could potentially pose problems
when used at a larger scale
3.2 SHORT TERM MARKETS IN INDIA

The Indian Short term power market, which includes all the contracts of less than one year period stands about 8%
of total generation. The balance 92% of generation is tied up in long-term contracts. In terms of volumes, the total

market in 2009 was about 30.6 billion units (1units =1kWh). The share of exchanges in the total short-term trade
was about 18.92%. Out of the total generation of 750 billion units, the share of total short-term market (excluding
UI volume) is 4.08% and the share of exchanges is 0.77%.
Traded over exchanges as

percentage of
Short
term Total
market
Electricity
(Excluding UI)
Generated
Total Short Term Electricity Transacted (BU)
Bilateral
Exchange
24.81
Total Electricity
Generated (BU)
Total
5.79
30.6
750
18.92%
0.77%
TABLE 1: SHARE OF INDIAN SHORT TERM MARKET
It is evident from the above that the total quantum of power traded through exchange forms a very small
percentage of the overall generation. In addition, the instances of congestion are tabulated below, for the period
from July 09 to April10.
S. No.
Month
Average
Congestion (as
percentage of
time during the
month)
Jul-09
54%
NR
5,143
4,399
744
Aug-09
58%
NR
7,736
5,513
2,223
Sep-09
48%
NR
4,246
3,726
520
Oct-09
19%
NR
4,246
3,726
520
Nov-09
15%
NR
4,670
3,976
694
Dec-09
27%
NR
4,519
2,984
1,535
Zone
Average
Downstream
Price
(Rs./MWh)
Average
Upstream Price
(Rs./MWh)
Difference
(Rs./MWh)
Jan-10
24%
NR, S2
4,870
3,349
1,520
Feb-10
50%
SR
4,389
3,165
1,224
Mar-10
60%
SR
6,800
4,623
2,178
10
Apr-10
26%
SR
7,325
6,062
1,263
TABLE 2: PERCENTAGE OF TIME INSTANCES OF CONGESTION OCCURRED AT THE EXCHANGES
It can be seen from the table that the congestion is transitory in nature and moves from NR to SR. In addition, it is
also dynamic with quantum of congestion varying over the year. The occurrence of congestion not only leads to
curtailment on the volumes of electricity transacted through exchanges (in the year 2009, the curtailment led to
about 17% loss or about 0.99 Billion Units) reducing the liquidity and leads to price rise.
The periods of congestion and quantum of curtailment during the month of July 2009 at PXIL is shown in figure 3
and figure 4 below.

Period (percentage of time

during 24 hour period)
Congestion July 2009

100%
80%
60%
40%
20%
Congestion July 2009
0%
0
10
20
30
Day of the Month

FIGURE 1: PERCENTAGE OF TIME CONGESTION OCCURRED DURING JULY 2009
Pernetage of Volume Curtailed
Curtailed Volumes as %age of UMCV

100%
80%
Curtailed Volumes
as %age of UMCV
60%
40%
20%
0%
0
10
15
20
25
30
Day of the Month

FIGURE 2: QUANTUM OF ENERGY CURTAILED AS PERCENTAGE OF UMCV IN JULY 2009
The periods of higher congestion coincided with periods of higher prices owing to higher market demand, which
further worsened the situation. This result in the quantum of congestion revenues increasing very rapidly based on
both the price difference as well as the number of instances. Figure 5 depicts the monthly average price difference
in the two zones after market splitting, average monthly percentage of time congestion occurred and congestion
revenue paid for the month.
10

Congestion Revnue
Price
4,500
4,000
Average difference in two zones
3,500
Congestion Revenue
3,000
Average Monthly Congestion
70%
60%
50%
2,500
40%
2,000
30%
1,500
20%
1,000
10%
500
0
May-09
0%
Jul-09
Aug-09
Oct-09 Dec-09 Jan-10

Month of the Year
Mar-10 May-10
FIGURE 3: AVERAGE MONTHLY CONGESTION PERIOD, AVERAGE DIFFERENCE PRICE BETWEEN TWO ZONES AND CONGESTION REVENUE PAID
From the above figures and table, following can be concluded:
Owing to continuous congestion during the first half of the month, the total liquidity in the market
decreased, indicating the lack of confidence amongst participants about their ability to buy power
through exchanges. This is also evident from the reduced percentage curtailment during the latter half of
the month.
The average price difference decreased during initial period. Participants take it into their stride by
increasing the prices, which manifested as a subsequent increase in the price difference during the
balance period of the month.
The congestion revenue follows not only the duration of congestion but also the price difference between
the two areas. Once the bidders resort to disorderly bidding, the congestion revenue increases
irrespective of the market liquidity. Moreover, the congestion rents become higher even when the
congestion decreases.
In order to analyze the price signal emanating from the market, the intraday market cleared price for the month of
July 2009 & August 2009 is shown in figure below.
11

Market Clearing Price in July 2009 in Deficit Zone
Price Rs./MWh
10000
8000
10-Jul-09
6000
11-Jul-09
4000
13-Jul-09
2000
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour of the Day
FIGURE 4: MCP FOR THE MONTH OF JULY 2009 IN THE DEFICIT ZONE
Market CLearing Price in August 2009 in Deficit Zone
Price Rs./MWh
15000
6-Aug-09
10000
10-Aug-09
11-Aug-09
5000
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Hour of the Day
FIGURE 5: MCP IN THE DEFICIT ZONE FOR AUGUST 2009
From the above chart, it can be concluded that:
There exists no particular pattern in the emanating price signal and the behavior has a large random
component
The only reason in day-to-day variation in price could be disorderly bidding by participants in
anticipation of expected congestion & priority in allocation.
12

The market-cleared price (MCP) for five months having almost same monthly average congestion is plotted in the
figure below.
Erratic Price Signal During Periods of Similar Congestion

16000
Price of Deficit Market, Rupees/MWh
14000
Jul-09
12000
Aug-09
10000
8000
6000
4000
2000
0
0
50
100
150
200
250
300
350
400
Periods of Congestion
FIGURE 6: PRICE SIGNAL DURING PERIODS OF SAME MONTHLY AVERAGE CONGESTION
As outlined above there exists no particular pattern in the cleared prices. The regional deficits for the above
periods are tabulated below:
Mar 2010
Feb 2010
July 2009
Aug 2009
Sep 2009
NR (%)
WR (%)
SR (%)
ER (%)
NER (%)
-11.4
-9.3
-11.0
-14.7
-13.0
-16.4
-16.8
-8.8
-12.6
-11.6
-9.4
-6.2
-5.8
-6.3
-5.2
-6.3
-2.9
-4
-5.2
-4.0
-10.8
-8.8
-12.9
-13.8
-12.5
All India
(%)
-11.9
-10.2
-8.3
-10.9
-9.6
TABLE 3: MONTHLY DEFICIT IN ENERGY
From the above, it is apparent that there exists a weak correlation between the price signal and the actual deficit
in power supply position or the congestion in the physical infrastructure. Moreover, the price signal is also not an
indicator of the nature of the deficit in the system. With the government promoting investments in generation of
electricity across India to cater to regional imbalances and also planning to increase inter- regional capacity for
flow of power in the national grid, the current price signal cannot be relied upon to assist investment planning in
13

terms of capacity, location and the type of technology to be used .Moreover, the current regime is only applicable
to exchanges which creates a distortion in favor of OTC markets and against the exchanges. Further, the prices
from the exchange are very visible leading to increased prices in the entire market.
From the above it is amply evident that the current congestion management regime is not particularly suited to
the Indian context and needs revision.
The Honorable CERC mandated at Para 31 (IV) of the Power Market Regulations 2009,
The Power Exchanges shall carry out Congestion Management using Market Splitting Mechanism in Day Ahead
Market. The Power Exchange can develop its own Market Splitting Mechanism.
In line with the above and to suit the contextual requirements, PXIL proposes a variant of present Market Splitting
Method, which brings in improvements over the present method. The proposed method is congestion revenue
neutral, brings down the average price of power by still maintaining the locational price signals.
4.0 PROPOSED MARKET SPLITTING METHOD

The proposed market splitting method the price to be paid by buyers will be the weighted average price of the
sellers calculated as follows:
Let the number of surplus markets is m
Let the number of deficit markets is n
The index for surplus markets is j. Therefore, number of surplus markets will go from 1, 2, 3j.m.
The index for deficit markets is k. Therefore, number of deficit markets will go from 1, 2, 3k.n.
During Congestion, the power can flow from multiple surplus markets to multiple deficit markets. It is not necessary that power
will flow from each surplus market to each deficit market.
Settlement price for sellers in surplus market j = P (Settlement for Seller, Surplus (j)) =

+
+ . !

Settlement price for buyers in deficit market k = P (Settlement for Buyer, Deficit (k)) =

"

"
+
+ . !

14

MCP (Surplus (j)) = Market Clearing Price for surplus market j.
MCV (Surplus (j)) = Market Clearing Volume for surplus market j.
MCP (Deficit (k)) = Market Clearing Price for deficit market k.
MCV (Deficit (k)) = Market Clearing Volume for deficit market k.
$%& = Flow from surplus market j to deficit market k.

Values for many $%&
will be zero if there is no flow between these two regions.
= 0 (If no flow between surplus region j and deficit region k)
4.1 EXAMPLES ON PROPOSED MARKET SPLITTING METHOD

The proposed market splitting method is discussed through the following example.
Assumptions:
Zone 1 with Generator G1 and loads A & E

Zone 2 with Generator G2 and load B
Zone 3 with Generator G3 and load C
Zone 4 with Generator G4 and load D
Inter regional Flow Paths:
Zone 1 to Zone 2
Zone 2 to Zone 3
Zone 2 to Zone 4
Zone 3 to Zone 4
Zone 4 to Zone 1
15

Generator
Generator
G1
Loads
Loads A & E
Generator
G2
Load B
Zone
1
Zone
2
Zone
4
Zone
3
Generator
Generator
G4
Load D
Generator
G3
Load C
FIGURE 7: DEFINITION OF ZONES AND FLOW PATHS
The price bids for the different generators

nerators (supply) and loads (Demand) for a particular period are shown below.
Supply
Demand
Price
Aggregated
Demand,
MWh
G1
G2
G3
Aggregated
Supply,
MWh
G4
1.4
200
230
220
200
150
1000
1.6
200
230
220
200
150
1000
1.8
200
230
220
180
150
980
200
200
175
192
220
170
150
907
213
75
200
488
2.2
149
153
163
150
100
715
227
200
75
213
715
2.4
141
115
147
150
100
653
240
218
75
225
758
2.6
129
77
110
100
100
516
253
237
75
235
800
2.8
119
38
73
80
50
360
267
255
150
250
922
111
37
60
50
258
280
273
150
250
953
3.2
103
40
50
193
280
292
150
250
972
3.4
20
50
70
280
310
150
250
990
3.6
50
50
280
310
150
250
990
3.8
50
50
280
310
150
250
990
TABLE 4: PRICE BIDS FOR THE SSUPPLY AND DEMAND OF ELECTRICITY
The colors on the bids indicate the geographical zone. The Market Cleared Volume (MCV) and Market Cleared
Price (MCP) for the uncongested case are worked out as per the figure below.
16

FIGURE 8: UNCONSTRAINED MARKET SOLUTION
The MCP and MCV for the unconstrained market are 715 M
MWh
h and Rs. 2.2 respectively. The schedules and flows
are as indicated below.
Zone 1, G1 = 227 MWh, A = 149 MWh and E = 100 MWh. Net inter regional inflow of 22 MWh
Zone 2, G2 = 200 MWh, B = 153 MWh. Net inter regional outflow of 47 MWh
Zone 3, G3 = 75 MWh, C = 163 MWh. Net inflow of 88 MWh
Zone 4, G4 = 213 MWh, D = 150 MWh. Net outflow of 63 MWh

MWh.
Inter regional flows are as under:

Prioritized Distribution
Flow To
From
Zone 1
Zone 2
Zone 3
Zone 4
Zone 1
22
Zone 2
-47
Zone 3
47
41
-22
-41
Zone 4
TABLE 5: UNCONSTRAINED INTER REGIONAL FLOWS
The flow scheduling has been done on PQT priority basis wherein the priority is decided based on Price.
Price
Case I: Let us assume that there is congestion on the corridor between Zone 3 to Zone 2 and only 20MWh can flow
on it. Between Zone 4 and Zone 3, no flow is allowed
allowed.
17

The market therefore splits between Sub Market 1 and Sub Market 2. Sub Market 1 comprises of Zone 1, Zone 2 &
Zone 4 whereas Zone 3 is considered as Sub Market 2. The Aggr
Aggregate
te Demand and Supply position for the two
markets are plotted with revised configu
configuration of C & G3 and is as shown in table 6.
Aggregated Aggregated
Demand 1, Demand 2,
MWh
MWh G1
Demand
Price
Aggregated Aggregated
Supply 1, Supply 2,
MWh
MWh,
Supply
G2
G3
G4
0.01
200
230
220
200
150
800
220
20
20
1.4
200
230
220
200
150
800
220
20
1.6
200
230
220
200
150
800
220
20
1.8
200
230
220
180
150
780
220
200
200
20
175
192
220
170
150
707
220
213
75
200
413
95
2.2
149
153
220
150
100
572
220
227
200
75
213
640
95
2.4
141
115
200
150
100
526
200
240
218
75
225
683
95
2.6
129
77
180
100
100
426
180
253
237
75
235
725
95
2.8
119
38
180
80
50
307
180
267
255
140
250
772
160
111
180
60
50
241
180
280
273
140
250
803
160
3.2
103
160
40
50
213
160
280
292
140
250
822
160
3.4
100
20
50
90
100
280
310
140
250
840
160
3.6
100
50
70
100
280
310
140
250
840
160
3.8
100
50
70
100
280
310
140
250
840
160
20
20
280
310
140
250
840
160
TABLE 6:: CASE I CORRIDOR BE

BETWEEN ZONE 2 AND ZONE 3 CONSTRAINED TO 20 MWH
FIGURE 9: CASE 1 SUB MARKET 1 AND 2, MCP & MCV
18

The MCP/MCV for sub market 1 and sub market 2 are Rs 2.2/572 MWh and Rs. 3.11/160 MWh respectively. Sub
Market 1 is surplus and Sub Market 2 is deficit. The price signals also manifest the same. The revised flows are
depicted in table 7.
Flow To
From
Zone 1
Zone 2
Zone 1
Zone 2
Zone 3
Zone 4
Zone 3
Zone 4
20
-20
TABLE 7: CASE 1 INTER REGIONAL FLOWS
In case of the classical market splitting method, the congestion revenue would have been calculated as per
following equation.
'(
' )* = ', ', ' - ('. '/' - ' - ,' ".
However, in the proposed method, all the buyers in the region would pay the weighted average cost of power for
the region. Therefore the buyers would pay,
0123 31 456782 =
140 3.11 + 20 2.2

= ?2. 2.996/BC
160
The sellers would be paid as per the MCP of their respective markets. For the scheduling part, it would be
prioritized with priority of price being the highest followed by quantity. However, equitable and equal methods of
scheduling can also be used.
It is evident from the above case that the locational price signal is intact but the cost of power purchase has been
brought down.
Though the above methods brings down the price of the power in the deficit region keeping the locational signal
intact, it might lead to very high bidding by participants for prioritized scheduling, resulting into price increase.
Moreover, only one of the affected participants is being benefitted. In order to overcome this disadvantage and be
non-partisan to the participants, alternative 2 is proposed.
Alternative 2
In this case, the sellers as well as the buyers would be obligated with the weighted average charges. The power
flow on the congested corridor would be charged at the midpoint of the two MCPs. Therefore,
0123 31 456782 EF G7HEIE3 JK8B73 =
140 3.11 + 20 (2.2 + 3.11)/2

= ?2. 3.053/BC
160
M8EI7 31 27NN782 EF 258ON52 JK8B73 =
552 2.2 + 20 (2.2 + 3.11)/2

= ?2. 2.216/BC
572
19

Congestion fund (in thousands) =
20 3.11 2.2 = Rs. 18.2
Total amount paid by the buyers (in thousands) =
572 20 2.2 + 160 3.11 = ?2. 1712
Total amount paid to the sellers (in thousands) =
572 2.2 + 160 20 3.11 = ?2. 1693.8
According to new price, total amount paid by the buyers (in thousands) =
572 20 2.2 + 160 3.053 = ?2. 1702.88
According to new price, total amount paid to the sellers (in thousands) =
572 2.216 + 160 20 3.11 = ?2. 1702.95
We can see that after rounding, congestion fund is distributed evenly between buyers and sellers in surplus and
deficit markets.
Thus, in this case as the MCPs of the two market price has a bearing on the price which participants would be
obligated with, the incentive to disorderly bidding is inherently reduced. Moreover, the method is nondiscriminatory to all the participants at the exchange.
Example 2
This example is for multiple surplus and multiple deficit regions.
Number of surplus regions = 2
Number of deficit regions = 3
This is the price volume data for all regions.
SR1
SR2
DR1
DR2
DR3
MCP(Rs.)
MCV(MW)
250
360
70
105
55
TABLE 8: MCP-MCV for Different Regions
20

To/from
SR1
SR2
DR1
20
10
DR2
30
25
DR3
25
TABLE 9: Flow between different regions
Total Flow = 50 MW
Total Flow = 60 MW
Surplus Region 2
Surplus Region 1
20MW
10MW
25MW
25 MW
30MW
Total congestion Fund
Deficit Region 1
Deficit Region 2
Deficit Region 3
FIGURE 10: FLOW DISTRIBUTION

20 7 3 + 30 8 3 + 10 7 5 + 25 8 5 + 25 9 4 = Rs. 425
Congestion rent for flow between SR1 and DR1
80
150
20
75
100
Total Congestion(Rs. in thousands)
425
TABLE 10: Congestion fund contribution

70 7 + 105 8 + 55 9 + 250 20 30 3 + 360 10 25 25 5 = ?2. 3925
21

70 20 10 7 + 105 30 25 8 + 55 25 9 + 250 3 + 360 5 = ?2. 3500
M8EI7 31 U7 OKEG 31 27NN782 EF V58ON52 JK8B73 1 =
(W! X W) X + X
W!
(X + Y)
(Z + X)
+ W
W
W
= X. [\

(! + Z)
(! + Y)
(! + ])
+ W!
+ W!
(X\ W! W!) ! +
W
W
W
= !. WZ
X\
0123 31 U56782 EF ^7HEIE3 JK8B73 1 =
Z W Z +
Z
! + Z
Z + X
+ W
W
W
= \. W]
0123 31 U56782 EF ^7HEIE3 JK8B73 2 =

(! X W!) Y + X
!
(X + Y)
(! + Y)
+ W!
W
W
= \. ]X
0123 31 U56782 EF ^7HEIE3 JK8B73 3 =

!! W! ] + W!
!!
! + ]
W
= Y. ]
SR1
SR2
DR1
DR2
DR3
New P(in Rs)
3.46
5.27
6.29
6.93
8.09
MCP(in Rs)
TABLE 11: MCP and new settlement price

250 20 30 3 + 360 10 25 25 5 + 6.29 70 + 6.93 105 + 8.09 55 = ?2. 3712.5
250 3.46 + 360 5.27 + 70 20 10 7 + 105 30 25 8 + 55 25 9 = ?2. 3712.5
22

SR1
SR2
DR1
DR2
DR3
Rs(in thousands)
Buyer
600
1500
440
727.5
445
3712.5
Seller
865
1897.5
280
400
270
3712.5
TABLE 12: Pay In and Pay out for sellers and buyers
We can see that the buyers and sellers have equal share from the congestion fund.
Example 3
This example is for multiple surplus and multiple deficit regions.
Number of surplus regions = 1
Number of deficit regions = 3
This is the price volume data for all regions.
SR1
DR1
DR2
DR3
MCP(Rs.)
4.5
MCV(MW)
475
65
80
125
TABLE 13: MCP & MCV VALUES
To/from
SR1
DR1
10
DR2
40
DR3
25
TABLE 14: Flow between different regions
23

Total Flow = 75MW
Surplus Region 1
10MW
Deficit Region 1
40MW
25MW
Deficit Region 2
Deficit Region 3
FIGURE 11: FLOW DISTRIBUTION

10 5 4 + 40 6 4 + 25 4.5 4 = Rs. 102.5
10
80
12.5
Total Congestion(Rs. in thousands)
102.5
TABLE 15: Congestion fund contribution

65 5 + 80 6 + 125 4.5 + 475 10 40 25 4 = ?2. 2967.5
65 10 5 + 80 40 6 + 125 25 4.5 + 475 4 = ?2. 2865
([ + !)
([ + \)
([. ! + [)
([Z! [ W!) [ +
+ [
+ W!
W
W
W
= [. Y
[Z!
0123 31 U56782 EF ^7HEIE3 JK8B73 1 =
\! ! +
\!
! + [
W
= [. ]WX
0123 31 U56782 EF ^7HEIE3 JK8B73 2 =

(Y [) \ + [
Y
(\ + [)
W
= !. !
24

0123 31 U56782 EF ^7HEIE3 JK8B73 3 =
W! W! [. ! + W!
W!
[. ! + [
W
= [. [!
SR1
DR1
DR2
DR3
New P(in Rs)
4.108
4.923
5.5
4.45
MCP(in Rs)
4.5
TABLE 16: MCP and new settlement price

475 10 40 25 4 + 4.923 65 + 5.5 80 + 4.45 125 = ?2. 2916.24
475 4.108 + 65 10 5 + 80 40 6 + 125 25 4.5 = ?2.2916.30
We can see that after rounding the buyers and sellers have equal share from the congestion fund.
5.0 CONCLUDING REMARKS

In the preceding analysis, the following key issues have been brought out with respect to the current classical
market splitting method mandated by CERC and being followed by exchanges.
Applicability:
This method has been adopted in Nordic market in conjunction with re-dispatch during operational phase.
Moreover, counter trade provide means for hedging the price risk arising out of congestion in the Nordic
market. It is also assumed that surplus supply is available to be dispatched at a higher cost
Prior to establishment of Nordpool, trading of electricity between the countries was enabled through Nordel,
an organization set up in the 1960s to promote cooperation amongst the largest electricity producers in each
country. Nordel was based on the principle that each country would build enough generating capacity to be
self-sufficient. Trading was meant to achieve optimal dispatch of a larger system and investment in
interconnection was generally based on net exports but on expected savings from pooling available
generation capacity. The countries exchanged information about their marginal cost of production. When
there was a difference, trading took place, at a price, which would ideally be average of the two marginal
costs. The cost plus approach led to over investment and poor return on equity but prior to introduction of
competition, the operating efficiencies of the utilities were high.
25

Norway started reforms and a power market was opened in 1992. Owing to almost 100% hydro capacity, the
prices in the spot market were very volatile owing to uncertainty in the hydrological flows. In Sweden, the two
largest companies enjoyed 75% of the generating capacity and market would have been difficult to manage. A
combined Norwegian, Swedish market would address the problem of both the countries. A decision was
therefore made to establish a joint electricity trading exchange. The Smooth transition can be attributed to
the long tradition of cross border bilateral energy trade, cooperation and the existence of cross- border
transmission.
In Indian context, the spatial differentiation of supply as well as the load along with none of the region being
self sufficient (except NER) necessitated regional integration leading to formation of national grid. The deficit
in different zones was dynamic as well as transitory. Therefore, the basic premise of power trading in Indian
case is different from Nord pool.
The classical method of market splitting has its limitation when applied on a larger scale
Owing to uneven spatial distribution of load centers and generation plants in large zones, there exists a
requirement of energy transport across large distances and therefore, exists a possibility of multiple price
levels. Secondly, there exists a diverse generation mix in terms of technology and storage capabilities (Hydro
Power) that cause time and price dependent energy flows. A priori declaration of the zones in case of
congestion forces one-price signal for the zone. Therefore, in order to have a better correlation between price
signal and congestion, the number of zones needs to be increased leading to higher complexities.
Historically, planning in Indian case was done at regional basis. Currently, we operate in five regional grids
spread over 28 States & 6 Union Territories leading to multiple layers of losses. Owing to heterogeneity across
different regions and sub-regions (due to multiple states), the impact of less number of bid areas gets
pronounced. Currently, we have ten bid zones, which need to be increased to fall in line with the geographical
boundaries of STUs. Even further, for some of the larger states there could be multiple bidding areas.
Nordic market enjoys 72% of the market share
The total short-term market in India is roughly 8% of the total generation. Even out of total short term market,
the Day Ahead Market through exchanges contributes only about 19%.
The entire inter regional capacity lies with the Nordic market. Even the reservations for the long term
players have been taken back since early 2000
We follow allocation of transmission corridors and the prioritization is for long-term users, followed by
medium term users and finally short-term users. Even for short-term users, the capacity left after short-term
26

open access customers is available to exchange. This introduces an arbitrage between different segments of
short-term consumers. On top of it, the balancing mechanism gives flexibility on quantum of usage.
In general, the geographical areas have been defined in line with TSO areas
The geographical division of the bid areas has been done based on the operating regime of the grid. Each of
the five regional grids has been divided into two bid zones. Therefore, currently we have multiple transmission
operators in each bid areas.
Assumptions:
As per the CERC Staff Paper on Developing a Common Platform for trading, it was assumed that there
are practically nil instances of congestion. However, the instances of congestion are transitory, dynamic
and overlap with the periods of high demand. The assumption, therefore, does hold in the current
context.
Part adoption of principles i.e. market splitting along ten bidding zones which are not in sync with the lines of
control boundaries of system operation and short term market constituting a very small fraction of the market,
clubbed with some of the assumptions not holding good in the current scenario, has led to the following effects:
Introduces price risk as well as quantity risk for the participants at exchanges
Incentivizes the participants at the exchange towards disorderly bidding, thereby increasing the price of
electricity
The congestion revenue is not only a function of instances of congestion but also of the discovered price
Progressive loss of confidence of the participants at the exchanges to buy short term power
In the long run, present mechanism might not provide the right investment signals with respect to the
location as well as type of generation.
Buyers as well as sellers at the exchanges are not content owing to sellers being paid less and buyers
being charged high
In view of the above, we propose to adopt a new congestion management regime to better suit the current
context. We propose to adopt the Alternative 2, for which the applicability and advantages are mentioned
below.
In the proposed modified market splitting method, wherein the sellers as well as the buyers would be
paid/charged based on the weighted average cost of electricity. The following issues have been brought out
in the preceding sections.
27

Applicability:
Currently, participants at exchange constitute only 0.77% of the total generation in India.
In the absence of ex ante information about the probability of congestion, participants are not in a
position to plan their bids.
There exists an arbitrage between the corridor allocations amongst the short-term players, medium and
long-term players.
There are no long-term products available to plug the arbitrage between the short-term markets.
Advantages:
Would reduce the cost of procurement of power for buyers, thereby reducing their financial burden. The
purchase cost of electricity being passed through in tariff would lead to some reduction in retail cost of
electricity
Reduce the disorderly bidding and therefore, reduce inefficiencies in price discovery
Retains locational commercial signals for investment planning
Capable of splitting the markets into n sub markets. Moreover, with development of electricity markets,
the sub market splitting would be required to match the SLDC boundaries
Is non partisan and non discriminatory to all participants
References:
1.
CERC, Development of a Common Platform for Electricity Trading in India,2006
2.
CERC, Annual Report of the Market Monitoring Cell 2009
3.
CERC, Power Market Regulation 2010
4.
Power Exchange Implementation in India and Congestion Management in Multi Exchange Scenario S K
Soonee & others 2009
5.
Nordpool Spot Annual Report 2009
6.
Congestion Management in Liberalized Electricity Markets Theoretical Concepts & International

Applications Thilo Krause
7.
ETSO Development and Implementation of a Coordinated Model for Regional and Inter Regional
Congestion Management
8.
Report of the Working Group on the Development of Nordpool and Exchange Operations
9.
Congestion Management Guidelines NordREG
10. Congestion Management in Nordic Market Evaluation of different market Models, Final Report
28

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Revised Pricing in case of Market Splitting

based on Weighted Average Price in the Two

Power Exchange India Limited

Revised Pricing in case of Market Splitting based on Weighted

2.0 Fundamentals of Transmission Congestion ............................................................................................................. 4

Revised Pricing in case of Market Splitting based on Weighted

Revised Pricing in case of Market Splitting based on Weighted

Revised Pricing in case of Market Splitting based on Weighted

2.1 EFFECTS OF CONGESTION

The physical or volume risk

The financial or price risk

Revised Pricing in case of Market Splitting based on Weighted

Wholesale market pricing and settlement arrangements.

Transmission access pricing, incentives and investment planning.

Risk Management instruments.

Coordinated auction of generation and transmission capacity (Explicit Auction).

Nodal pricing or Locational Marginal Pricing.

Revised Pricing in case of Market Splitting based on Weighted

Nodal pricing or Locational Marginal Pricing

3.0 CURRENT PRACTICE IN INDIAN MARKETS

Revised Pricing in case of Market Splitting based on Weighted

3.1 EXPERIENCE IN THE NORDIC MARKET

Revised Pricing in case of Market Splitting based on Weighted

3.2 SHORT TERM MARKETS IN INDIA

Revised Pricing in case of Market Splitting based on Weighted

Traded over exchanges as

Total Short Term Electricity Transacted (BU)

TABLE 1: SHARE OF INDIAN SHORT TERM MARKET

TABLE 2: PERCENTAGE OF TIME INSTANCES OF CONGESTION OCCURRED AT THE EXCHANGES

Revised Pricing in case of Market Splitting based on Weighted

Period (percentage of time

Congestion July 2009

Congestion July 2009

Day of the Month

Pernetage of Volume Curtailed

Curtailed Volumes as %age of UMCV

Day of the Month

Revised Pricing in case of Market Splitting based on Weighted

Average difference in two zones

Average Monthly Congestion

Oct-09 Dec-09 Jan-10

From the above figures and table, following can be concluded:

Revised Pricing in case of Market Splitting based on Weighted

Market CLearing Price in August 2009 in Deficit Zone

From the above chart, it can be concluded that:

Revised Pricing in case of Market Splitting based on Weighted

Erratic Price Signal During Periods of Similar Congestion

Price of Deficit Market, Rupees/MWh

TABLE 3: MONTHLY DEFICIT IN ENERGY

Revised Pricing in case of Market Splitting based on Weighted

4.0 PROPOSED MARKET SPLITTING METHOD

Revised Pricing in case of Market Splitting based on Weighted

$%& = Flow from surplus market j to deficit market k.

will be zero if there is no flow between these two regions.

 = 0 (If no flow between surplus region j and deficit region k)

4.1 EXAMPLES ON PROPOSED MARKET SPLITTING METHOD

Zone 1 with Generator G1 and loads A & E

Inter regional Flow Paths:

Revised Pricing in case of Market Splitting based on Weighted

FIGURE 7: DEFINITION OF ZONES AND FLOW PATHS

The price bids for the different generators

TABLE 4: PRICE BIDS FOR THE SSUPPLY AND DEMAND OF ELECTRICITY

Revised Pricing in case of Market Splitting based on Weighted

FIGURE 8: UNCONSTRAINED MARKET SOLUTION

= 0 (If no flow between surplus region j and deficit region k)