PXIL Enhancing price discovery and efficiency in multi-power exchange markets through market coupling

By Mr. Anil V Kale, AVP, Strategy & Regulatory, PXIL

Multi-Power Exchange model, such as that exists in India, results in differences in the prices discovered on three Power exchanges in Day Ahead Market (DAM) – comprising of Green-Day Ahead Market (G-DAM), Conventional Day Ahead Market, High Price-Day Ahead Market (HP-DAM) segments and the Real Time Market (RTM). Since these are closed bid auctions with uniform clearing prices, the participants are unaware of bid/offer submit by other participants during the auction and are stuck with prices discovered by the Power exchange.

The price discovery in both the markets happens independently and takes place after the trades have been consummated. Since the price discovery takes place independently at all three power exchanges, there are differences in prices, however minor that may be. For every difference in price, the buyer or the seller computes the notional gain/loss and has a reason to complain prices are not favorable to him. This causes either the buyer (if the price is higher) or the seller (if the price is lower) to place their trades in the other exchange in the next trading session resulting on liquidity gradually drying up on an exchange.

To overcome this behavioral approach of participants, Market Coupling is proposed by Central Electricity Regulatory Commission (CERC) in CERC (Power Market) Regulations, 2021 (‘PMR 2021’) issued on 15.02.2021. The PMR 2021 defines ‘Market Coupling’ as:

Regulation 2 (1) (af)

“Market Coupling” means the process whereby collected bids from all the Power Exchanges are matched, after considering all bid types, to discover the uniform market clearing price for the Day Ahead Market or Real-time Market or any other market as notified by the Commission, subject to market splitting;”

Further, Regulation 31 of PMR 2021 prescribes the objectives of Market Coupling as:

“37. Objectives of Market Coupling

1. Discovery of uniform market clearing price for the Day Ahead Market or Real-time Market or any other market as notified by the Commission;
2. Optimal use of transmission infrastructure;
3. Maximisation of economic surplus, after taking into account all bid types and thereby creating simultaneous buyer-seller surplus.”

Price discovery with-and-without Market Coupling

a. An illustration of Price discovery in existing mechanism where three Power exchanges operate is provided at figure-1 below:

b. An illustration of Price discovery under Market Coupling with three or more Power exchanges as proposed in PMR 2021 is provided at figure-2 below:

Benefits of Market Coupling

• Introduction of Market Coupling provides following benefits to market participants:
• A Single price discovered for Orders collected from both the Power exchanges
  avoids comparison of loss/gain.
• Leads to optimal utilization of transmission capacity as Power exchange
  wiseallocation will not be a necessity.
• Combining of Orders leads to deepening of markets and markets–wide
  socialwelfare maximization.
• Provides real choice to participants in using Power exchanges by focusing on
  service levels and efficiency standards.

In addition to the above, the Single Price under Market Coupling will facilitate implementation of Market Based Economic Dispatch (‘MBED’) and enable introduction of financial products in the Electricity markets as risk mitigation tool for benefit of market participants.

Ministry of Power (‘MOP’) letter addressed to Hon’ble CERC regarding implementation of Market Coupling

Recently, MOP vided letter ref no 14/01/2022-RCM-Part (1) dated 2nd June 2023 informed Hon’ble CERC to initiate suitable measures for expeditious implementation of Market Coupling mechanism in the context of multiple power exchanges. To conclude, Power Exchanges are a ‘Market Infrastructure Institution (MII)’ operating in electricity space since 2008, that have demonstrated their ability to provide a fair, neutral, efficient, and robust price discovery platform for transacting in electricity. Power Exchange India Limited (PXIL) and other power exchanges, operate under provisions of CERC (Power Market) Regulations, 2021 (‘PMR 2021’) that facilitates extensive and quick dissemination of transactions concluded in different standardized Contracts offered at respective platform.

Future development in power sector is dependent on increasing the scope of market-based electricity transaction in the country, in this regard Market Coupling can help create a more integrated and efficient Indian electricity market which support the growth of multiple power exchanges by increasing market liquidity, enhances competition and allows optimal utilization of transmission capacity, enabling power exchange platform to enlarge their MII role in electricity space.