Market coupling sparks debate on efficiency and dominance

By Abhishek Tripathi and Rahul Bangia, Sarthak Advocates
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Market coupling in power exchanges is expected to be the most significant move in the power sector seen recently. When the Central Electricity Regulatory Commission (CERC) introduced the Central Electricity Regulatory Commission (Power Market) Regulations, 2021 (PMR 2021), its aim was to establish a comprehensive market structure, facilitating seamless transactions, execution and contracting of diverse products within the power market. Three power exchanges, the Indian Energy Exchange (IEX), the Power Exchange of India and the Hindustan Power Exchange (HPX) now operate in India.

Abhishek Tripathi, Sarthak Advocates
Abhishek Tripathi
Managing Partner
Sarthak Advocates

Power exchanges have come a long way since their inception in 2008. While exchange transaction volumes have grown significantly, the multi-exchange model has had mixed success. The IEX seems to have a near monopoly with an almost 90% market share. Another unintended consequence of the multi-exchange model has been disparate price discovery in different power exchanges. To address this, the PMR 2021 provided for market coupling to achieve uniform price discovery. However, such provisions have yet to be implemented. PMR 2021 defines market coupling as the process of matching bids from all power exchanges to discover a uniform market clearing price, subject to market splitting. The objectives of the rules include discovering a uniform market clearing price, the optimal use of transmission infrastructure and maximising economic surplus. A designated market coupling operator, appointed by the CERC, would be responsible for the operation and management of market coupling.

The CERC examined the success of market coupling in the European power market. It observed that it has resulted in a more secure, coordinated, and efficient energy landscape. This encourages economic resource allocation and coordinated resource adequacy, balancing energy efficiency and integrating renewable energy.

Rahul Bangia, Sarthak Advocates
Rahul Bangia
Associate
Sarthak Advocates

Throughout the world, market coupling integrates different electricity markets, but in India, it tries to discover a uniform market clearing price, optimise transmission infrastructure and maximise economic surplus. In addition to such benefits, market coupling improves liquidity and prices, thereby attracting new market participants.

Despite the possible benefits, concerns surround the diminished role of power exchanges. These include a reduction of innovation and technology investments, reduced competition and doubts about improving transmission usage. Centralisation of bid matching platforms may limit the ability of power exchanges to innovate and adapt to evolving market needs.

Nevertheless, the regulator and the government believed that market coupling could develop the power market overall. The 2023 report of the Group on Development of Electricity Market in India, commissioned by the Ministry of Power (MoP) emphasised the ability of the CERC and the MoP to evaluate price coupling. This is crucial to ensuring uniform price discovery for implementing reforms such as market-based economic dispatch.

The CERC issued a staff paper on market coupling in August 2023. This was intended to start discussions with market participants and stakeholders about the issues and challenges involved in implementing coupling between power exchanges. After receiving feedback, the CERC accepted the need for more evidence-based research on the benefits of coupling for market participants and the whole power system.

The staff of the CERC conducted extensive simulations using bid data from power exchanges, examining the impact of market coupling on volumes, prices and economic surplus in alignment with the PMR 2021. Analysis of real-time markets, real-time markets with security-constrained economic dispatch and day-ahead markets showed marginal benefits in coupling the three markets. Taking a cautious approach, the CERC decided to launch a shadow pilot to assess its operational, market and regulatory impact. It directed Grid India to carry out a four-month shadow pilot and this will happen once the necessary software has been developed.

Market coupling in power exchanges can streamline market processes, improve price discovery and attract new participants. However, the CERC must proceed carefully to ensure a balance between encouraging innovation and competition, thus achieving the desired market efficiency.

Abhishek Tripathi is the managing partner and Rahul Bangia is an associate at Sarthak Advocates

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