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).

Key terms related to power exchange

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.