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Power markets in India and their working

  • Context (IE): To meet peak power demand, the government has allowed the trading of surplus electricity generated from “linkage coal” in the country’s power markets.

What is Coal linkage?

  • Coal linkages are agreements that ensure a steady supply of coal from mines to consumers like power plants, steel, and cement industries.
  • Types of coal:
    • Long-term linkages: Agreements lasting several years, offering stability and predictability.
    • Short-term linkages: Shorter duration agreements that are adjustable based on immediate needs and market conditions.

Power markets

  • Power markets are systems through which electricity is bought and sold.
  • They facilitate the trade of electric power and help in balancing supply and demand.

How do Power markets work?

  • In India, generation units traditionally use long-term Power Purchase Agreements (PPAs) spanning 25 years. However, PPAs are losing favour due to their inflexibility and capacity lock-in.
  • Power markets allow generators to sell surplus power at market prices to address short-term fluctuations.
  • This benefits renewable energy generators, who can trade excess power instead of curtailing it.

Power exchanges (PEs) in India

  • PEs facilitate the trading of electricity, enabling buyers and sellers to transact efficiently.
  • India has Three major PE regulated by the Central Electricity Regulatory Commission (CERC).
  • The Indian Energy Exchange Ltd (IEX) dominates with more than 90% market share, followed by Power Exchange India Limited (PXIL) and Hindustan Power Exchange Ltd (HPX).

Evolution of Power exchanges

  • Power exchanges were first introduced in Europe in 1990-91. They now operate in about 50 countries worldwide. The spot market was introduced in 2020 in India.
  • The Electricity Act of 2003 established the framework for exchange operations in India, and exchanges commenced in 2008.

Market coupling

  • It is a process that matches bids from all power exchanges to discover a uniform market clearing price.
  • The concept was first introduced in CERC’s Power Market Regulations, 2021.
  • Advantages: It could lead to more efficient price discovery, reduced price disparities across regions, and increased market stability.

Capacity markets

  • Capacity Market (CM) is designed to provide long-term stability and security in the power system by preventing a deficit of generation capacities.
  • Hence, it almost completely eliminates electricity price volatility.
  • Only a few countries, including UK, parts of Australia, and South Korea, have developed capacity markets.
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