MC Explains: What is market coupling and why is it in the news?

Market coupling aggregates bids from power exchanges for uniform MCP

The term “market coupling” is back in vogue with the Central Electricity Regulatory Commission (CERC) issuing a suo motu order directing Grid Controller of India Limited (Grid-India) to implement it in India's power exchanges on a shadow pilot basis.

The development resulted in the shares of Indian Energy Exchange (IEX), a bourse for electricity trade, crashing by 23 percent in just two days, with the IEX stock falling 4.8 percent intraday on February 7 to trade at Rs 145.45 intraday and at 11.07am.

Moneycontrol gives you a lowdown on this development.

What is market coupling?

India has three power exchanges—IEX, Power Exchange India Limited (PXIL) and Hindustan Power Exchange Limited (HPX). These are voluntary markets and each of them collect buy and sell bids on their own and, thus, come up with their own market clearing prices (MCPs). In simple terms, currently, each power exchange has a different cost of electricity, even though it usually differs from each other only by a few paisa.

Aldo read: One Nation, One Grid, One Price | India plans market coupling in power trade

Market coupling is a model where buy bids and sell bids from all power exchanges in the country will be aggregated and matched to discover a uniform MCP. It means there will be only one price for the electricity that is to be traded at any point of time through these exchanges. If implemented, power exchanges will be rendered as a platform where only buy and sell bids will be received and power dispatched to the buyer.

Why is it in the news now?

As per the CERC’s February 6 order, Grid-India will develop the necessary software for running the shadow pilot within two months. The shadow pilot is then to be implemented for four months. It also directed India's three power exchanges to share necessary data and other information required by Grid-India for running the shadow pilot.

In August, 2023, the CERC floated a staff paper on market coupling and sought comments from stakeholders on it by September 30. This came after the Union Ministry of Power, on June 2, asked the CERC to initiate the process of market coupling across the country's power exchanges.

Is market coupling going to be implemented immediately?

No. The CERC in its order has made it clear that results of the shadow pilot run should not have any effect on the price and volume discovery in the actual real-time market (RTM) and day-ahead market (DAM) of the bourses. It also stated that the trial run will not impact the final schedule and settlement for any entity during the trial period.

"Based on the insights gained while running the shadow pilot, the Commission shall further decide upon the need for creating the necessary regulatory framework for market coupling," the CERC said in its order.

The process will also entail a lot of technology upgrades and bringing in new systems, which will take time.

Will it impact the end consumer?

Market coupling, upon its implementation, is not going to have any immediate impact on the end consumer of electricity (household, industry or commercial). However, in the long run, power ministry officials and a section of stakeholders say it will lead to an overall reduction in power tariffs.

Why does the government want market coupling?

Apart from the point of uniform price discovery across exchanges mentioned above, the government wants market coupling also because it wants to significantly increase the share of power exchanges in the trade of electricity. The government wants to reduce prevalence of the current format of long-term power purchase agreements (PPAs), which run for as long as 25 years.

It will also help improve the overall allocation of transmission corridors among the power exchanges. At present, usage of transmission corridors is not optimal due to the skewed market share of various power exchanges.

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

Besides, government officials said it is also required for efficient integration of renewable energy, which is going to constitute 500 GW in India's installed capacity by 2030.

Also, to shift to a market-based electricity trading system, the government needs to implement the market-based economic dispatch (MBED) mechanism in India, which is not possible without market coupling. MBED envisages a centralised scheduling for dispatching electricity across the country at the interstate as well as intrastate level. At present, electricity dispatch happens at multiple levels—state as well as central—for which modes of trade are also multiple PPAs, exchanges and power banking.

Currently, power exchanges account for only 7 percent of India's electricity trade and the rest is mostly through long-term PPAs which restrict fluidity and liquidity in the sector. For example, if a generating company (genco) has a higher price of power, the distribution company will still have to procure electricity from it due to the PPA signed with it, despite other gencos offering lower power prices.

If MBED is implemented, it will render flexibility to both buyers and sellers. This is how, through MBED, power tariffs also will come down in the long run.

Why did IEX shares tumble?

Of all the electricity that is traded in the Indian power exchanges, IEX has a share of about 90 percent. Power exchanges offer different products such as DAM, RTM, term-ahead market, green-dam and so on. DAM and RTM contribute 75-80 percent of the country's total exchange volumes, of which IEX holds nearly 100 percent market share.

Market coupling, once implemented, is likely to reduce the dominance of IEX in terms of market share, which was the primary reason for its share prices to hit Rs 145.15 at 2:35 PM on February 7, down 5.04 percent.

Who aggregates and discovers the price in market coupling?

There are two ways market coupling can work. One, where an external agency termed the market coupling operator (MCO) will collect the bids and discover the MCP, while also being the custodians of registrations, deposits, payment securities, settlement of financial dues and so on. In India’s case, it could be Grid-India, if the MCO model is used.

The second option is a roster system, where the power exchanges take turns in aggregating the bids and discovering the uniform MCP.