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Characteristics
• Product should be essentially uniform across producers
• Often used as inputs in production of other goods and services,
i.e. large scale utility
• To be traded on an Exchange, a commodity must meet specified
minimum standards, known as Basis Grade
Eg: Grains, Gold, Oil, Natural Gas, Foreign Currencies, Electricity etc.
Complete Market Products
Spot Derivatives
Immediate Delivery Risk Mgmt. tools for product/time/place
• Futures
+ • Options
• CfD
Forward
Delivery at some point in future
Electricity, a unique commodity
Pool or Exchange
Single or Multiple
Auction or Continuous
Uniform or Pay-as-bid
Implicit or Explicit
Consolidated Overview…
Nord Pool PJM AEMO IEX
Participation Voluntary for DAM Compulsory for Real Time Compulsory for DAM Voluntary
Double Sided
Closed, Open
Bidding Type Double Sided Double Sided Double Sided
Auction &
Continuous
Pricing Rule Zonal Pricing Nodal Pricing Zonal Pricing Zonal Pricing
PX + TR
DISCOM SUPPLIER
TRADING BROADCAST
Price
POWER EXCHANGE References
IEX Market Segments
Intraday Market & Day- • Intraday: For Delivery within the same day
Ahead Contingency • Day Ahead Contingency: Another window for next day
Round the clock since Jul’15 • Gate closure : 3 hours
ELECTRICITY REC
Market Share
(FY16-17) 95% 63%
State
Utilities
29 States I 5 UTs 17 States I 5 UTs
Open/Closed
Continuous Trading
Auction
Trade All Days; 1000- All days; All Days; All Days; Wed & Thurs;
Availability 1200 0030-2000 1500-2300 1200-1500 1200-1600
Financial Pay-In- D-1; Pay Pay in: T+1 Pay in: T+1 Pay-In: D-1 Pay Pay-In: D-1 Pay
Settlement Out – D+1 Pay out: T+1 Pay out: T+2 Out: D+1 Out: D+1
T = Trade
Key statistics: Electricity & REC Market
ELECTRICITY REC
Market Share
(FY17-18) 97% 57.6%
State
Utilities
29 States I 5 UTs 17 States I 5 UTs
PoC charges
• Inter-State Transmission charges payable by the open access consumer
Wheeling charges
• Charge to the Discom for conveyance of electricity through open access as determined by the SERCs
Others
• Additional Charges, if any
• NLDC application fee, scheduling and operating charges, SLDC Charges
• IEX transaction charges/Trading Margin
Open Access: What a consumer pays
Losses
• An open access consumer has to bear in kind the following losses as defined by the
relevant regulations
Wheeling loss
• Bidding
- Double sided Closed Auction
• Order Types:
– 15-min block or Portfolio Orders
• Min 15 Min
• Different Price-Quantity Pairs
• Partial Execution Possible
– Block Orders
• Relational Block Bid
• Any 15-min block or series of 15-min blocks during the same day
– Customized block bid allowed
• Order Characteristics
– SLDC Clearance should be ≥ 0.1 MW (Subject to state regulations issued by
concerned SLDC)
– Minimum Order quantity cannot be less than 0.1 MW
– Minimum volume step: 0.1 MW
– Minimum price step: Rs 1 per MWh ( 0.1p/kWh)
IEX - DAM Product Description [2/2]
Trading Availability
– Every Calendar Day
Delivery Point
– Periphery of Regional Transmission System in which the grid-connected entity,
is located
Features of Day Ahead Market
Bids for 15- MCP Corridor Final ACV and Collective Final Schedule
min each &MCV availability ACP transaction sent to RLDC
or block calculated and funds calculated. confirmation for
bids can be verified Market by NLDC incorporation
placed splitting if
congestion
Area Prices @ IEX
Different Prices due to Congestion
NR: Rs
3.38/KWh
ROI: Rs
2.47/KWh
MCP: Rs
2.49/KWh
Time Block: 08:45-09:00
for
Delivery Date: 16 Mar 2017
SR: Rs 3.51
KWh
Transmission Congestion
Single/Portfolio
Block Bid
Bid
Linked Block Bid
Single hour block bid:
Possibility to save single hour block bid.
*Vide CERC Order dated: 30 Mar’17 which is presently under stay by Supreme Court Order dated 08.05.2017
Trading at IEX
6) Planned afforestation
7) Abatement of pollution
Target 6.6 Mtoe for1st cycle, allocated on SEC basis for each plant
35
Missing Blocks (1/2)
• Ancillary Services
Ancillary Services for frequency control are a necessity for the huge Indian
power system.
Market based Mechanisms for Frequency Control Ancillary Services help to
procure ancillary services at optimum cost, maximizing the global welfare.
Proposed Ancillary Mechanism 2015 largely involves URS, to start with
• Demand Response
Demand-side response may prove as a appreciation to power management
in supply deficit situation like ours
• Derivative Products:
Electricity Derivative (hedge) products allow managing the risk associated
with purchasing electricity off the spot (wholesale) market. Hedge contracts
can shield your expected electricity costs from unpredictable shifts in the
spot market.
Why Derivatives:- Issues in Present Indian Wholesale Market Design
– Spot prices in DAM have dropped to the lowest due to over supply, as against OTC Short
Term and Long term contracts, over the past one year. But Prices in a spot market tend to
change quickly due to demand, supply situations and transmission constrained.
– In spite of low prices in DAM, share of Long Term market remained unchanged from
periods of shortage i.e. FY 2010
– Buyers, especially Discoms are under severe financial stress, are tied up in Long Term
Forward Contracts (PPAs) with inability to exit the costly physical contracts to avail cheap
power
– Arbitrage between ‘Forward’ market and ‘Spot’ market is nonexistent
– Forward markets are not liquid, owing to segregated auctions with limited participation
– Discoms have no liquid alternative market, forcing them to rely on 25 year Long Term PPAs
for resource adequacy. Coupled with this is the impossibility to forecast demand for 25
years ahead and payment rigidity of capacity charges
Common Derivatives
1) Futures
• Exchange traded
• Essentially financial
2) Forwards
• Over the counter (OTC)
• Physicals
3) Swaps
• OTC
• Financials
4) Options
• Exchange traded or OTC
• Physical or financial
1) Forwards (OTC Contracts)
Electricity forwards are custom tailored supply contracts between a buyer and a seller,
– Buyer is obligated to take power and Seller is obligated to supply
Credit risk exposure is defined as the sum of the settlement and the replacement risk.
2) Futures
• Pros
Market consensus; Price transparency
Trading liquidity; Reduced transaction and monitoring costs
• Cons
Only Standardized Contracts tradable, no customization possible.
Hedging with Futures
1
Gain/Loss
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6
High Profit Zone
Spot Price
-1
-2
-3
When Spot Price is low then Futures seems profitable since it hedges price risk but
at higher spot price the seller is getting same price. There is no prospect for greater profit.
Solution is Option Contracts!!
The Seller through a put option—is provided a way to have higher profits at high spot prices
while still being protected against low prices by paying an insurance premium.
Options
Not new!
Optionality needed to react to fluctuations in consumption, transmission
interruption or plant outages
Power plants or gas storage provided flexibility to balance system
Now; optimise profit against market prices
Many options on daily or hourly basis can be seen as type of power plant
– Virtual power plant
Option works like Insurance contract
Buyer has the right but not the obligation to buy or sell the asset at the
previously agreed price.
Seller has the obligation to deliver or take.
Similar to insurance
– buyer pays premium every year
– insurance pays any damages
Call: gives the option holder the right to buy at a predetermined price
Put: gives the holder the right to sell at a predetermined price
3
Hedged Seller
2 Spot Market
Gain/Loss 1
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6
High Profit Zone
-1
-2
-3
When Spot Price is low then Options are profitable since it hedges price risk and even
at higher spot price the seller is getting spot price-premium. There is prospect for greater
profit but at cost of premium.
Application: Example-1
• Purchase Futures contract say @ Rs 2500/MWh and lock the price of electricity
w.r.t spot market (Alternatively, Swap contract would fulfill the requirement) .
Bidding in DAM could be placed with upper threshold of Rs 12000/MWh
Application: Example-2
Participant: Generator
Power portfolio: 1000 MW capacity, with technical minimum of 500 MW. FC is
Rs 1500/MWh @ Technical Minimum (50% PLF) and VC is Rs 1800/MWh (Rs
4500/MWh below technical minimum).