The Ministry of Power has constituted a new panel to examine “deepening of the power markets in India.” The panel comprises representatives from the Ministry of Power, CERC (India’s chief power regulator) and CEA (Central Electricity Authority). Its mandate is to examine the current power procurement model in India, heavily biased towards long-term PPAs, benchmark it against international norms and make recommendations to improve efficiency and competitiveness of the power market.
- Share of short-term traded power remains in single digits;
- Heavy reliance on long-term PPAs restricts competition, and distorts risk-reward equation between the power producers and consumers;
- Transition to a short-term market model would be challenging requiring incremental progress;
DISCOMs procure as much as 90% of their total power requirement through long-term PPAs. Only about 10% of the power is sourced from trading on the exchanges and other short-term procurement, a mix of bilateral trading with other DISCOMs and IPPs. This share has remained stubbornly low, despite launch of power trading on the exchanges more than ten years ago, as shown in the following chart.
Figure: Short-term power volume and share in India
There are many serious problems arising from the DISCOMs’ heavy reliance on long-term PPAs. Even where the PPAs are signed pursuant to an open competitive process, this process is highly inefficient and non-transparent. It is restricted to a few players willing and capable of developing greenfield projects. The procurement cycle is too long ranging between three years (solar, wind) to over 10 years (large hydro, nuclear). The risk-reward structure is byzantine leading to a high risk of default, insolvency and litigation. Overall, this model detracts from market principles, restricts customer choice and leads to wasteful capital allocation and poor risk management.
The role of short-term markets is much greater in most developed nations (UK: 52%, Denmark: over 90% and the USA: 40%). We need to look at these countries and learn from their experience.
Inevitably, the transition to a short-term market model will present its own challenges. For one, banks and investors would hesitate to fund new projects with high market risk. Two, the entire value chain including the DISCOMs would need to upgrade their data analysis and risk management systems. The transition would also necessitate reform of key input markets – fuel supply and transport, land, and transmission access. Progress would therefore be slow and incremental. The government should start by gradually reducing the PPA term and limiting the share of power benefitting from assured purchase commitment.
We believe that it is a much needed initiative by the Ministry of Power to modernise the power sector and make it ‘fit for purpose’ for a vibrant market-based economy. The Indian power sector has been held back by an outdated procurement model. Twenty-five year, fixed price PPAs need to go.