The Central Electricity Regulatory Commission (CERC) recently approved Power Exchange India’s (PXIL) proposal to introduce delivery-based monthly contracts, which can be traded on one month, two-month, and three-month ahead basis in conventional and renewable energy segments of the term-ahead market.

It directed PXIL to make changes in its software before the commencement of the delivery-based month-ahead contracts and to align its business rules per the procedure for scheduling bilateral transactions.

The Commission also directed the Power System Operation Corporation (POSOCO) to submit a report within three months from the introduction of the contracts after seeking feedback from the power exchanges.

PXIL had filed a petition seeking approval to introduce month-ahead contracts at the exchange.

Background

Currently, the exchange offers day-ahead contracts, intraday contracts, day-ahead contingency contracts, real-time contracts, and term ahead contracts for trading in electricity. It also offers the exchange of renewable energy certificates (RECs) and energy-saving certificates.

In its submission, PXIL noted that participants enter into bilateral contracts that do not provide end-to-end service for the period extending beyond 11 days. These contracts vary significantly in structure and do not necessarily have an equitable risk-sharing mechanism.

In some cases, even if the market platform is available and auctions are undertaken, it may not necessarily transform into actual transactions, thereby raising the overall transaction cost. So, introducing these contracts at the power exchanges for a duration beyond 11 days would be helpful.

The power exchange proposed to introduce delivery-based monthly contracts which can be traded on one month, two-month, and three-month ahead basis both in conventional and renewable energy segments of the term-ahead market.

The stakeholders affirmed that introducing these contracts would provide more avenues for market participants to trade power beyond 11 days.

Some stakeholders suggested that a more extended duration contract (up to one year) may also be introduced to have better planning both from the procurer and seller’s point of view.

Commission’s analysis

The Commission observed that the issue of longer duration contracts (beyond T+11 days) and financial derivatives were sub-judice since 2011. In 2018, the Ministry of Power constituted a committee to examine the technical, operational, and legal framework for futures/forward and derivative contracts in electricity and to give recommendations in this regard.

The Commission noted that the power exchange had sought approval to introduce the proposed contracts both in the term-ahead and green term-ahead markets. Considering that conventional and renewable energy have their own significance, the Commission approved the contracts to be introduced in both the term-ahead and green term-ahead markets.

The central regulator observed that any new segment in a market should be introduced gradually. The petitioner had proposed multiple contracts to be introduced on its exchange platform.

Considering this market may have low liquidity initially, the petitioner’s proposed contracts may have overlapping effects, impacting the volume per contract. It approved the exchange’s proposal to introduce monthly contracts, any-day, and weekly contracts with modified timelines for pre-specified time blocks.

The Commission also approved using a uniform price auction as a matching methodology for price discovery in daily, weekly, and monthly contracts and renamed it ‘Uniform Price Step Auction.’

It noted that the reverse auction should be used as a price matching methodology for any day single-sided contract.

The central regulator said that PXIL should commence the physical delivery of electricity on a day more than one day ahead (T + 2 or more) of the last day of bidding.

It also approved delivery duration for these contracts as T+2 to T+90 days for daily contracts, TW+1 to TW+12 for weekly contracts, TM+1 to TM+3 months for monthly contracts, and T+2 to T+90 days for any day single-sided contracts, wherein T denotes the zero-day of trading, TW denotes the zero-week of trading and TM denotes the zero-month of trading.

The Commission directed PXIL to submit the compliance report within two weeks.

Last October, CERC approved the introduction of the green day-ahead contract at the Indian Energy Exchange (IEX) and the Power Exchange India (PXIL) in the integrated day-ahead market in a restricted manner.

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