How high can the power market be allowed to go?, Energy News, ET EnergyWorld

Markets, Prices and Regulation: How high can the power market be allowed to go?

The CERC has recently issued an order (dated 16th February 2023) introducing a new segment in the power exchange in India. In this segment power is allowed to be sold at a maximum price of Rs 50 per unit. This follows from the order dated 1 st April 2022 in which effectively a ceiling of Rs 12 per unit had been imposed. These two orders bring to the fore the important question of when should regulators and the Government intervene in an otherwise well functioning market.

The reason given in the order of 1 st April last year for intervention was the sudden spurt in prices in the exchange. While in most blocks it remained below the already existing ceiling of Rs 20 per unit in 31 blocks in the period 24.2.22 to 24.3.22 it was at the ceiling of Rs.20 per unit. The trend of higher prices in the exchange and the fact that less than 1% of the bids were more than Rs 12 per unit are the two factors that prompted the CERC to impose the limit of Rs 12 per unit. The problem with this ceiling is that some sellers were not able to participate in the market because their cost was more than the ceiling of Rs 12 per unit. This has led to the latest order creating an unprecedented two tier exchange – one with a ceiling of Rs 12 and the other with a ceiling of Rs 50 per unit.

The rationale for these two ceilings are purely driven by market developments. There is no complaint of any market manipulation or any other malpractice that has driven the intervention. Th obvious question is how high should the price reach for the regulator to step in and impose a ceiling.

The more difficult issue is that once a ceiling is imposed it means that there will be some demand that will go unfulfilled. Thus even though there were willing buyers the generators could not sell as the ceiling came in the way. What is the cost of this failure to meet the demand.? Obviously the effort must be to meet all the demand that exists at any point of time This prompts the question- are there other methods to address these issues which can ensure that the entire demand is met?

It is not clear from the orders whether some of these producers have PPAs with distribution companies. If so the better method for these generators is to approach the Regulators to seek approval for compensatory tariff under section 79 of the Electricity Act. The power of the Regulators to do this has been upheld by the Supreme Court following which compensatory tariff has been awarded to some generators. This method has the advantage that the formula in the PPA can simply be amended without creating any distortion in the exchange. Also that the demand can be fully met to the extent of generation capacity being available.

For those generators who do not have PPAs and have no option but to come to the exchange the best course is to let the markets function as long as there is no irregularity or manipulation. The purchasers can be trusted to withdraw from the market when the prices are excessive. Regulatory intervention should be for a very short period of time .

The other issue is the role of the Government. While they can certainly draw the attention of the regulators to a problem it is quite another for them to send a note with details of a proposed solution as has been done in this case. Finally the note had to come to the Regulator for approval. Considerable time could have been saved if the proposal had come direct to the Regulator instead of being routed through the Government.

The big question now will be how long should these price ceilings continue and the two part exchange be allowed to remain. Apart from the price level there are other conditions also like eligibility of buyers and sellers. It is entirely possible that some of these entities could be shut out from the market even though they may want to do business with each other – but are now without a platform because of the administrative orders. Once data from the new regime becomes available there should be a quick review and alternative methods found that do not intrude into the free functioning of the market. Also the long term solution of reducing dependence on imported sources of energy must not be lost sight of.

[This piece was written by Pramod Deo, former Chairperson CERC and Rakesh Kacker, former Secretary, GOI. Both were also members of the Expert Committee for revision of SBDs and MBDs : 2015-2019, Ministry of Power, GOI]