Energy Transition and its Impact on Indian Power Market

Abstract

Indian electricity sector is undergoing a transition phase, where a massive quantum of 500GW of non-conventional energy is going to be integrated into the existing resources of conventional energy by 2030. However, these renewable sources like solar and wind are highly fluctuating in nature. Managing this renewable rich grid will be a challenge to the system operators. Also, as the predictability of the renewable energy is highly volatile in nature, existing energy pricing mechanism will need to be reviewed. Energy storage systems like batteries and pump storage are some promising technologies which will definitely help managing grid more efficiently. Presently maximum of energy need in our country is being sourced through conventional resources, majority from fossil fuels. Almost 89% of energy generated being transacted though long-term power purchase agreements between discoms/consumers and generators. Only about 11% of power is being transacted through energy exchanges. The trading volume through exchange is expected to be increased as Discoms are not showing less interest to go into long term PPA due to their financial burden. With the integration of highly variable renewable energy with grid in massive quantum, price volatility will be increased. A suitable change in energy pricing is required so that both the Discoms and generators can hedge their risk in renewable-rich volatile power market. Discoms/consumers with their power optimization tools can also participate in derivatives markets and hedge their risk. This will help Discoms to lower their power purchasing costs and prevent them from being saddled with the inflexibility of long-term PPAs as electricity demand profiles change. Discoms will have the flexibility to buy power based on demand. Under the proposed structure, long-term contracts in the physical (spot) market will be traded on power exchanges under the jurisdiction of the Central Electricity Regulatory Commission (CERC), while in the financial (derivatives) market contracts are set to be traded on commodity exchanges regulated by the Securities and Exchange Board of India (SEBI). CERC will help in designing electricity contracts and facilitate transactions of energy contracts. Physical and financial electricity markets will complement each other. This paper will analyse the possible impact of energy transition and introduction of electricity derivatives in India Power Market.