The Potential of Market Coupling in India's Power Sector

The Potential of Market Coupling in India's Power Sector

Introduction:

India's power sector is undergoing a significant energy transition, with a rising share of renewable energy in the country's power generation. As the nation commits to decarbonization and net zero targets, industrial and commercial consumers are increasingly embracing renewable energy sources. Alongside this shift, the energy markets in India are evolving to facilitate greater adoption of renewables, with the emergence of innovative products such as the green term-ahead market (GTAM), the green day-ahead market (GDAM), the real-time market (RTM), and market-based ancillary services. These developments aim to encourage large-scale capacity addition of renewable energy while reducing integration costs.

The Role of Market Coupling:

Market coupling, by definition, has the potential to reduce market fragmentation, increase economic surplus, and lead to uniform price discovery. However, there are areas of ambiguity and potential risks associated with coupling power exchanges. Structural changes to mature and efficient market segments can be irreversible and disruptive. Therefore, before proceeding with market coupling, it is crucial to engage in more discussions and seek clarity on these issues. Until then, it is advisable to allow the exchanges to operate independently.

Increasing Liquidity in Short-Term Transactions:

While market coupling requires further deliberation, it is essential to deepen and broaden short-term transactions on power exchanges. Increasing liquidity in these transactions can enhance market efficiency and support the growth of renewable energy. To achieve this, the following actionable advice can be considered:

• 1. Encouraging Participation: Implement measures to encourage greater participation from market participants, including generators, consumers, and trading licensees. This can be achieved by simplifying regulatory procedures, reducing entry barriers, and providing incentives for renewable energy transactions.

• 2. Enhancing Transparency: Improve transparency in short-term transactions by implementing robust reporting mechanisms and standardized market protocols. This will instill confidence in market participants and facilitate fair price discovery.

• 3. Promoting Market Integration: Foster collaboration between power exchanges, trading licensees, and bilateral transactions between discoms. By promoting market integration, the overall liquidity in short-term transactions can be increased, supporting the growth of renewable energy and ensuring reliable power supply.

Recent Trends in India's Power Trading Sector:

Between 2017-18 and 2022-23, short-term trading volumes in India witnessed a compound annual growth rate (CAGR) of 8.8%, outpacing the CAGR of power generation at 1.7%. Power exchanges accounted for approximately 53% of the total transaction volume in the short-term market during 2022-23. The remaining portion comprised volumes transacted through trading licensees, deviation settlement mechanism transactions, and bilateral transactions between discoms.

Conclusion:

As India's power sector undergoes an energy transition towards renewable sources, market coupling holds the potential to reduce market fragmentation and enhance price discovery. However, before implementing market coupling, it is crucial to address the areas of ambiguity and potential risks associated with such structural changes. In the meantime, focusing on increasing liquidity in short-term transactions through encouraging participation, enhancing transparency, and promoting market integration can support the growth of renewable energy. By taking these actionable steps, India can continue its journey towards achieving decarbonization and net zero targets while ensuring a reliable and sustainable power supply for all.