IEX to transform electricity trade in India

Innovating is nothing new to MCX. So, a power exchange from its stable may not be an innovation but is a 'first' in India.

Indian Energy Exchange now joins world's leading power exchanges like Powernext (France), EEX (Germany, Northern Europe), PJM (USA), JEPX (Japan and Norway's Nordpool which is the largest power exchange in the world). IEX, India's first power exchange got its approval from CERC on August 31, 2007.

It is promoted by Financial Technologies (India) Ltd (FTIL) and PTC financial services, a wholly owned subsidiary of PTC India Ltd. Joseph Massey, Deputy Managing Director of MCX, is in charge of the exchange. He spoke to Commodity Market Associate Editor Anil Patil on the future of trading and power in India.

What is the Indian Energy Exchange all about?

IEX is purported to be India's demutualised, first-ever national, automated and online electricity trading platform. There is a clear in-built ring-fencing between promoters, management and participants, efficient financial clearing; besides market surveillance to check collusion, unfair practices and gaming.

IEX provides its participants, a day ahead, standard hourly contracts and block contracts. Hourly contracts provide considerable flexibility by allowing operators to fine-tune their needs over the delivery day.

For a layman can you explain what is energy trading and how can it be functional in India?

Power is the key to all economic activities especially manufacturing activities in the country. Power distribution losses on average have ranged from 15-20%.

Fluctuations in power supply have become endemic with peak hour shortage threatening to upset production schedules of a number of manufacturing companies. The regional demand/supply mismatches also add to transactions, costs apart from power losses.

In such a scenario it has become imperative to ensure a smooth power (electricity) supply. The FT group has received an approval to float the country's first PX that seeks to mitigate the volatility in power supply by bringing about equilibrium between demand and supply through the platform of IEX.

Currently 90% of electricity is sold through long-term, bilateral power purchase agreements between buyers and producers. Yet distributors rely on traders for short-term needs. The deals negotiated over telephone and other means often tend to be non-transparent and counterparty's are never sure whether they have got the best right price in the deal.

How will the energy exchange be different from the commodity exchange?

Basically, an energy exchange is a trading platform for electricity where electricity generators, distribution licenses, CPPs, IPPs and MPPs at the national level can trade for smaller quantities and smaller number of hours without additional overloads.

For payments security, the exchange will be the counterparty for all settlements. The power exchange will provide a tool to minimise price risks. The nature of product traded on IEX is electricity that cannot be stored unlike commodities that can be stored in warehouses.

IEX is a spot exchange where actual demand/supply of energy takes place and price of electricity determined on the basis of bids and offers during the transaction period.

India is a power deficit country? People generally believe the trading will help gain more megawatts of power to the common man? Is this a myth or reality?

Yes, very true. The latest data show that the country's peak-level demand for power works out at around 90,120MW as against demand met at around 80,630 MW. Trading will in a way certainly save a lot of energy and that is how people will gain more megawatts of power. Participants in the power exchange will be able to manage precisely their consumption and generation pattern.

The power exchange's efforts will be to facilitate the flow of power from the surplus region to the deficit ones. In the process a lot of energy will be saved and equilibrium in pricing as well as demand/supply will prevail with low transaction cost and efficiency gains.

Further, the price from power exchange and the trading mechanism will excite captive power generators to produce electricity in peak period. We expect more merchant capacity coming in the industry over a period of time as the short-term market grows.

Will trading in energy Futures bring in the same problems that some agri-commodities have brought since power is also a sensitive issue in India?

Not at all, as the nature of products differs sharply. There is little danger of storing electricity unlike in commodities and, therefore, it is not possible that inventory level could influence prices.

IEX will protect counterparty default risks by way of settlement guarantee. The flow of electricity from surplus regions to deficit region will be done on a real time basis.

With transparent transaction, there is little danger of trading in energy Futures giving rise to any problems. It is to be noted that the cost of transaction will be low. Eventually IEX is expected to launch a range of products to facilitate power markets in India.

In fact, IEX will stabilise demand/supply and cost of electricity. Power exchange will be a physical delivery spot exchange based on double sided closed auction model on day-ahead basis. It will take into account all special characteristics related to delivery of electricity.

You have said that the exchange has already received expression of interest of over 100 companies for membership? Can you brief who are eligible and what is the criterion?

Yes that is right. Only authorised members may be able to transact on the IEX, like inter-state generating stations (ISGSs), distribution licencees and state generating stations to be allowed to trade with others.

Further, IPPs connected on ISTS, CPPs, allowed by the respective SERCs and with means to settle deviations and allowed by Discom, STU and SLDC, open access customers allowed by their respective SERCs and with means to settle deviation by Discom, STU and SLDc as well as existing and new generation electricity traders/marketers will also trade.

All Futures trading in commodities are under FMC. Now this exchange will be handled by Central Electricity Regulatory Commission. CERC is not equipped to deal with new scenarios emerging from the trading and will you find it tough to deal with them? What are your plans in place for a general awareness?

CERC has been at the forefront in bringing about in phases positive changes to power sector. It would be very improper to say that the sector cannot deal with the emerging scenario.

In fact, this path has been very carefully carved out by CERC with due public deliverables to ensure that all stakeholders' views are incorporated in the power exchange policy. Since we deal with spot market, it will be regulated by CERC.

The power sector has come a long way from being a bilateral contract driven long-term market to one which is also driven by short-term trades. There has been a steady growth in the number of short-term power trades, with the number of participating utilities in short-term open access (STOA) increasing steadily.

Moreover, the Electricity Act, 2003, paved the way for open access, power exchange. We will see a dynamic change in the way power is traded that would emulate the established electricity markets globally. IEX has initiated organising roadshows and seminars. It participates and sponsors Power sector Conferences to create general awareness.

You also believe that stakeholders in power sector will benefit from the price and distribution efficiency. How can trading in Futures improve them?

This is because the exchange provides non-discriminatory market place, national-level access to all buyers and sellers, transparent method of price discovery, day-ahead market provides an alternative to volatile UI rates, counter-party guarantee for all trades, payments security undertaken by power exchange promotes competition among and short-term signals.

Trading in Futures will make sure that the participants and stakeholders lock in steady supply at reasonable prices. Thus the stakeholders can ensure against volatility in prices and supply and thus make certain that their production plans do not get upset on account of uncertainty of power supply.

It is also worth remembering that the PX shall also launch new and innovative range of products such as week-ahead and other products to suit market requirements. All that will benefit stakeholders in the long run.

You are the first in India. Do you see possibilities of more entering? Already NTPC, the country's top power generating firm, is mulling to float a joint venture firm with NCDEX, PFC and others to set up a power exchange.

Yes, we are the first exchange in the country and as such get the first-mover advantages. We have been working on electricity trading for over 2 years now. Since we have all operational modalities in place, we are ready to offer all the products needed by power industry.

We always believe in fair and healthy competition because only a healthy competition brings out the best and gives maximum return to stakeholders. However, to the best of my knowledge there is no proposal currently by anyone on power exchange.

It is said that such an exchange creates level-playing field for sellers and buyers as it ensures anonymous trading. You mean the present system is not the way it should be?

A level-playing field benefits all by way of competitive and efficient prices of the products. All we can say at this juncture is that our proposed exchange will design and develop products suitable for Indian power markets.

Since we are associated with Power Trading Corporation (PTC) that has a 26% stake in the proposed IEX, this first and foremost power trading company has a pool of expertise and understands nuances of power trading in India that will benefit all. The new exchange will co-exist with and compliment the existing system.

Will this be a delivery-based system? In that case how do you plan to put in place distribution? CERC has barred PowerGrid Corporation from being a part of any power exchange, as it is a transmission utility.

Yes, this will be a delivery-based exchange and Power Grid Corporation will manage the transmission and scheduling of power.

How will you fix the charges and who are your potential traders?

During the bid call period i.e. from 10 am to 12 noon, bids and offers from prospective buyers and sellers will be submitted for each hour of the next day (hourly contracts) to IEX, and the same will be displayed on the screens of the IEX trading work stations (TWS).

Trades matched by the exchange mechanism will be settled at a uniform market clearing price (MCP), and flow of electricity will be arranged through the inter-state transmission system (regional grids). Our potential traders are CPPs, IPPs, inter-state generating stations (ISGSs), distribution licensees, electricity traders etc.

How will you fix the anomaly between anticipated electricity Futures and spot price?

An established spot exchange is a prerequisite for a Futures market that uses signals from spot market to determine its trend. Rather than an anomaly, we believe that the spot market and Futures market will work in cohesion and the spot market will set the trend and send out signals that will in turn become the benchmark for the short-term power trades in the country which will in turn facilitate Futures trading in power.

How will you differentiate between renewable energy, which comes at a higher production cost?

IEX will treat all sources of energy/power at par. But we could put green power segment as separate product.