Market Coupling – the need of the hour

Can Market Coupling make multiplePower Exchanges competitive? Anil V Kalethrows light on the issue.

The Power market structureenvisages the presence of multiple Power exchanges (PXs) in the country. TwoPXs have been in existence from 2008 and a third PX that received approval fromCentral Electricity Regulatory Commission (CERC) started functioning from July 2022.

The PXs have been conceivedas independent, voluntary, and competitive market platforms to efficientlyserve all participants without concentration of market power and transactionsin only one.

Market coupling means theprocess where the collected Orders from all the Power exchanges are aggregatedtogether and then matched to discover a uniform market clearing price. In thisprocess, the market coupling operator takes the Order books from all the powerexchanges, how many ever there might be, and combines these buy and sell Ordersto develop one set of prices for the entire country.

Through this process, thetransmission allocation can happen after accounting for all power flows nettedwithin each bidding zone thereby leading to the most efficient allocation oftransmission.

Devoid of market coupling,transmission allocation taking place separately on each exchange createssuboptimal outcomes because in one exchange, you might have required a powerflow from one bidding zone to another, whereas another exchange might haveasked for an opposite flow based on their order book, and, in the thirdexchange, it might be completely different. An absolute addition ofrequirements emanating separately from the exchanges would lead to far morerequirements than if these were netted within the bidding zones by combiningthe order books of all the exchanges.

In essence, by aggregatingindividual requirement, a situation arises wherein new requirements fortransmission capacity get created when there was no such requirement, if it wasnetted in each zone.

The enabling regulation inthis regard has already been brought in through the Power Market Regulations,2021. The implementation of this is yet to be done though. Most marketparticipants have, at various forums, voiced the need to implement market coupling,considering the significant beneficial impact on the entire power market.

With multiple segments inthe Day Ahead Market (DAM) in the form of Green DAM and Conventional DAM and recentlyapproved High Price-DAM segment, and with three power exchanges operating, foreach day, potentially 864 different prices can be discovered, leading tosubstantial fragmentation and confusion in the market. It is, therefore,imperative now that Market Coupling is implemented at the earliest for thebenefits of the market, its participants, and for optimal utilization ofnational infrastructure.

PXIL is keen that steps areinitiated to introduce market coupling in Collective transactions, i.e., G-DAM,DAM, recently introduced HP-DAM, and RTM.

International precedence

In the EU region, themarket coupling mechanism has demonstrated greater efficiency in transmissionallocation as well as in fostering a competitive and efficient power market inall the countries. It has led to uniform price across several participatingcountries in Europe – as of December 2022, nearly 27 countries are part of thecoupled market, leading to significant beneficial outcomes for theend-consumers, e.g., increase the overall efficiency of trading by promotingeffective competition, increasing liquidity, and enabling a more efficientutilisation of the generation resources across EU region. In countries whereonly one PX was working earlier, they now have multiple PXs operatingsuccessfully.

Ancillary Services Regulation 2022 – Precursor to introductionof Market Coupling

We wish to inform thatinitial steps towards market coupling is being implemented by Hon’ble CERC,while introducing Ancillary Services Market wherein from 1st May2023, the Tertiary Reserve Ancillary Services (TRAS) in Day Ahead AncillaryServices Contract and Real Time Ancillary Services Contract will require thePower exchanges to collect bids for TRAS participants and share the same withNational Load Despatch Centre (NLDC). NLDC shall then collect Orders receivedfrom multiple PXs, discover price, and despatch such Ancillary services to meetgrid requirement.

Further, in TRAS, theprocess of combining Orders received from multiple PXs will provide impetus tomaintain adequate reserves in the grid, provide adequate safety and security tothe grid, and enable NLDC to deploy such capacities/Reserve services for smoothoperation of the power system.

Implementation of TRASContracts on power exchange platform with responsibility of clearance, despatch,and settlement being handled by NLDC, would provide valuable insights onconstructing and implementing the concept of ‘market coupling’ that has becomea necessity for shaping power markets to grow in a transparent and competitivemanner without any distortions.

To conclude, marketcoupling can support multiple power exchanges in several ways:

Increase Market Liquidity: By connecting different power markets, market coupling increases thenumber of buyers and sellers, which increases market liquidity. This makes iteasier for power exchanges to match supply and demand and reduces the risk ofmarket manipulation.

Promote Price Convergence: Market coupling helps to ensure that electricity prices across differentmarkets are more closely aligned. This can lead to a more efficient allocationof resources, as producers will be incentivized to sell their electricity tothe market where prices are highest.

Enhance Competition: Market coupling promotes competition between exchanges. This can lead tolower transaction costs and greater efficiency in the electricity market.

Reduce Congestion: Market coupling can help to reduce congestion in the power grid byallowing electricity to flow from regions with excess supply to regions withhigh demand. This can help to ensure that electricity is delivered where it isneeded most and reduce the risk of power outages or blackouts.

Overall, market couplingcan help to create a more integrated and efficient Indian electricity marketand support the growth of multiple power exchanges by increasing marketliquidity, promoting price convergence, enhancing competition, and optimalutilisation of transmission capacity.

Market Coupling canhelp to create a more integrated and efficient Indian electricity market andsupport the growth of multiple power exchanges by increasing market liquidity, promotingprice convergence, enhancing competition, and optimal utilisation oftransmission capacity.”

-        Anil V Kale,

AVP,Strategy and Regulatory at Power Exchange India Limited.

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