Market Coupling | IEX may lose market share, power sector likely to gain

Market coupling is a model where the buying and selling of electricity from all power exchanges in the country are aggregated and matched to discover a uniform market clearing price.

India has taken a step towards introducing market coupling for power exchanges in the country, a move that may consolidate bids at all bourses for price discovery.

Market coupling may disrupt how electricity is traded at the country’s three power exchanges, although it’s still not clear how it will be implemented because the power ministry has only asked the regulator to initiate the process.

On the other hand, better services, discounts on trading margins, and zero price risks are among the likely benefits that will come with market coupling.

Shares of Indian Energy Exchange (IEX), which enjoys an almost 90 percent share of the trading volumes, took a hit on worries that it may lose market share. On June 9, the day the news broke about market coupling, shares of IEX hit a 52-week low of Rs 116 on the BSE. Since then, they have recovered a bit to Rs 125.90, still almost 8% lower than June 8.

The move to introduce market coupling is being seen as the government’s way to increase competition in the short-term market, especially on the three power exchanges, as volumes may increase and play a more important role in achieving the elusive aim of 24x7 power for all.

“This is being considered more for setting up the structural ecosystem that the government wants to create for handling significant increase in volumes if additional reforms happen,” said Hetal Gandhi, director - research at CRISIL Market Intelligence. “It may not have an impact immediately, but in the long term, when volumes go up substantially, all three exchanges will have to handle the increase in volumes.”

Volumes on the power exchanges have grown at a compounded annual growth rate of 14 percent in the five years to FY23. Gandhi said the interim growth was high due to the coal crisis and volumes are likely to grow 8-10 percent in the next five years.

But first, what is market coupling?

Market coupling is a model where the buying and selling of electricity from all power exchanges in the country are aggregated and matched to discover a uniform market clearing price (MCP). Generation companies sell electricity to distribution companies.

Implementing market coupling would mean there will be only one price for electricity traded at any point of time through the exchanges. Power exchanges may then act just as a platform where buy and sell bids will be received and power is dispatched to buyers.

India has three power exchanges – IEX, Power Exchange India Ltd. (PXIL) and Hindustan Power Exchange Ltd. (HPX). Currently, each of these exchanges collects buy bids and sell offers on their own and comes up with their own MCP. In simple terms, the price of electricity will vary on each power exchange, even if it is by a few paise.

Antique Stock Broking downgraded shares of IEX to ‘sell’ on expectations the exchange would lose its dominant position. The brokerage said in a report dated June 9 that spot market prices will be higher than bilateral prices – unlike in the past, which was favourable for exchanges. With market coupling, this volume would be distributed among the exchanges.

“Incentives by competitor exchanges like HPX and PXIL can eat into volume growth (of IEX),” Antique said.

Who gains?

With market coupling ensuring price uniformity, the exchanges will have to fight for volumes by offering better services and discounts on trading margins. This could be a win-win situation for generation companies that sell electricity and distribution companies or industrial consumers, which buy the power.

“We’ll be able to place bids in any of the exchanges without a price risk. Secondly, the issue of a bid not getting fructified due to lack of buy/sell bid in one exchange will also get eliminated as overall volumes will increase and there will be more flexibility with market coupling,” said a senior official of a distribution company.

The CMD of a generating company said market coupling is bound to improve the performance of the exchanges.

“Sometimes, when we place a bid, the session gets aborted due to some technical issues – that would get better with the competition now solely being on better services. The exchanges can also provide better analytical reports as additional bonus products,” the CMD said, requesting anonymity.

An official from another distribution company told Moneycontrol that with a uniform MCP, the three exchanges may be compelled to even offer discounts on their trading margins, currently a maximum of 2 paise per unit.

Too soon to predict?

Gandhi of CRISIL said the government is yet to finalise the process and experts may have jumped the gun with their interpretation of the likely impact of market coupling.

“There are two ways market coupling can happen. First, it can work in a way that the price is discovered on the basis of volumes of bids submitted on all exchanges, but the transaction takes place only on the respective exchanges,” she said. “Second, is that you also allow inter-exchange transactions, which means a party which puts a buy bid on one exchange can be matched with someone with a sell bid on another exchange. In that case, the volumes can see some realignment between exchanges. If they opt for the first model, there will be no major impact on volumes. But there is no clarity on that right now.”

IEX faces heat

IEX, which has led this space, may have to gear up to protect its market share.

Satyanarayan Goel, chairman and managing director of IEX, said market coupling in the electricity sector should be implemented only once the share of power exchanges in energy transactions touches 15 percent or more.

“The government should first let the volumes in the power exchanges increase, at least. Volumes are decreasing in power exchanges. In FY 23, volumes were lower than the preceding year. Supply-side constraints are there. So, we should first focus on bringing more liquidity in the market. Let the market size increase to 15-25 percent of the total generation and then we can take up things like market coupling,” Goel told Moneycontrol.

He added that with only a 7 percent share in power generation transactions, one cannot claim a monopoly in the sector. Besides, it is a voluntary market. Also, contrary to what consumers and other exchanges have said, the IEX chief said market coupling would “kill” innovation as it could be replicated by exchanges in no time.

Other bourses in focus

Experts attributed IEX’s dominance to its technology-heavy strategy, among other things. When market coupling is introduced, the other two exchanges will have to pull up their socks, they said.

Ambrish Khare, vice president (business development) at PXIL, told Moneycontrol that market coupling is needed if the government intends to bring market-based economic dispatch (MBED) of electricity in the future. The MBED mechanism envisages centralised scheduling for dispatching the entire yearly consumption of electricity.

Apart from that, Khare said market coupling would lead to higher liquidity and optimal utilisation of power generation sources.

"MBED is not possible without market coupling. So, this is the right time to bring in the system and try and test it thoroughly. Through MBED we can also expect a reduction in power tariffs because there will be optimisation in the power purchase costs, which currently are bogged down by long-term PPA (power purchase agreements) obligations," he said.

Naveen Singh, vice president (business development) at HPX, said with market coupling, states, generation companies and discoms will be free of making at least one decision – which exchange to go to.

“Now, they will go to a particular exchange only on the basis of the benefits that the entity is able to offer. We are upbeat about it,” he said.

Singh explained how exchanges could offer extra services such as an application programming interface (API) that would collect information or bids from all stations of a generator or a discom located across the country which pushes them to choose the exchange.

Brokerage UBS suggested that implementing market coupling in inter-regional transmission or green energy can help improve the management of transmission capabilities.