Long-term power purchase agreements to be of 12-15 years only: Govt

India is going to revamp its electricity market.

Power purchase agreements (PPAs) that will be contracted for the long-term in India are going to be for 12-15 years from now onwards instead of 25 years, as has been the norm so far, senior power ministry officials said on May 15.

The decision is going to be among a slew of other changes that are going to be introduced to revamp India's electricity market, which currently has a meagre share of about 7 percent in the country's overall power sources. The government wants to increase the share of the electricity market in India, senior officials told Moneycontrol.

This comes after a group constituted by the government to prepare recommendations for "development of electricity market in India" submitted its report last week. The group was chaired by Alok Kumar, secretary of the power ministry, with representation from the power and renewable energy ministries, Central Electricity Authority, Central Electricity Regulatory Commission (CERC), Grid Controller of India (Grid-India) along with state governments of Maharashtra, Madhya Pradesh and Tamil Nadu.

"We need to find our own solutions instead of depending on the practices being followed in other countries. India has been in the forefront of taking timely interventions and was able to keep electricity prices in check during the energy crisis in last one year whereas electricity prices shot up many times in electricity markets of many developed countries,” Union minister for power and renewable energy, RK Singh said .

"Procurement of most efficient power generation capacity while designing the capacity contracts must be ensured. We also agree with the recommendations of the group on having long-term PPAs of 12-15 years duration now onwards," he said.

Shortening the duration of long-term PPAs has been in talks for a while now, but it was not implemented. The government will now soon come out with a detailed regulation to notify this change.

The Union minister also directed to immediately undertake development of new renewable energy (RE) capacity based on Contract for Difference (CfD) methodology in order to ensure competition and transparency. He directed that the power exchange clearing engine may be validated by CERC.

The power ministry-constituted panel has suggested a roadmap outlining the interventions for the near, medium, and long term for the development of the electricity market. The interventions suggested by the panel include setting up a mechanism to monitor whether adequacy of supply is being maintained by the state utilities, enhancing the efficacy of the Day-ahead Market (DAM), introducing a market-based mechanism for secondary reserves, and implementing 5-minutes based metering, scheduling, dispatch, and settlement.

"The proposed reforms are crucial to meeting India's renewable energy targets, and will also create a conducive environment for investment in RE. The changes will enable better grid integration of renewable energy and pave the way for a cleaner, greener future. India’s energy transition towards renewable energy has further highlighted the need for enabling operational and electricity market developments to operate under a new energy order," Singh said.

The proposed changes also include demand response and aggregation, which could reduce reserve requirements and lower electricity costs. There will be strengthening of market monitoring and surveillance activities to keep track of participation and prevent price volatility. A regional level balancing framework for deviation management will be implemented which would result in reduction in deviation penalties for the States at the inter-state transmission system (ISTS) level and consequently lower the reserve requirements, the government said in a statement on May 14.

The key issues that have been addressed by the panel in its report include the dominance of inflexible long-term contracts, harnessing the inherent diversity of a large and synchronous grid and the need for resource adequacy planning in Centre and States. It also talks about reduction in system inefficiencies through lesser reliance on self-scheduling, increasing share of renewables in the overall energy mix, encouraging market participation for renewables, and firmness in procurement of ancillary services through well-developed ancillary services market.

"The solutions are aimed at creating an efficient, optimal, and reliable market framework to enable the energy transition and integration of renewable energy into the grid," read the government statement.

According to the latest data for 2022-23, the total traded volume in the Indian electricity market was 1,02,276 million units (MU), which represents only a small portion of the energy generated from all sources (including RE) of 16,24,465 MU. The peak demand for electricity in 2022-23 was 215.8 GW, and it is expected to increase to 335 GW by the year 2029-30.