1.1 The Central Electricity Regulatory Commission ("CERC") in exercise of its powers conferred under Section 66 read with Section 178 of the Electricity Act, 2003 ("Electricity Act") and under the National Electricity Policy, issued the draft CERC (Power Market) Regulations, 2020 ("Power Market Regulations") through a notification dated 18 July, 2020.
1.2 The applicability of the proposed Power Market Regulations extends to Power Exchanges1, Market Participants2 other than Power Exchanges, and Over the Counter ("OTC") Market3. These Power Market Regulations are also applicable to contracts transacted on the Power Exchange, contracts relating to renewable energy certificates, contracts relating to energy saving certificates, contracts in the OTC market, and any other contracts/products, as may be approved by the appropriate commission.
- KEY HIGHLIGHTS OF THE PROPOSED POWER MARKET REGULATIONS
The key features of the proposed Power Market Regulations have been discussed below:
2.1. Power Exchange
The Power Exchanges are established and operated with the objectives including inter alia, to design electricity contracts, facilitate transactions of such contracts and to facilitate extensive, quick and efficient price discovery and dissemination.
An applicant for establishing a Power Exchange is required to fulfil the following criteria at the time of making application for registration of a Power Exchange:
- The applicant is required to be a company limited by shares, incorporated or deemed to be incorporated under the provisions of the Companies Act, 2013 ("Companies Act");
- The applicant is required to be demutualised - which means that the ownership and management of the applicant should be segregated from the trading rights, in terms of the proposed Power Market Regulations;
- The main objects of the applicant company should be to establish and operate a Power Exchange;
- The applicant should have a net worth of minimum INR 50,00,00,000 (Rupees fifty crores) as per the audited special balance sheet, as on any date falling within 30 (thirty) days immediately preceding the date of filing the application for grant of registration;
- The directors of the applicant should satisfy the requirements relating to qualification of directors and should not be disqualified for appointment on the Board4 of Power Exchange, as stated in the proposed Power Market Regulations; and
- The applicant should satisfy the requirements relating to the ownership and governance structure, as specified in the proposed Power Market Regulations.
2.1.2 Ownership Structure of the Power Exchange
The shareholding pattern for equity holders in Power Exchange is required to be as follows:
- any shareholder other than a Member5 or a Client6, directly or indirectly, either individually or together with persons acting in concert, will not acquire or hold more than 25% (twenty five percent) of shareholding in the Power Exchange.
- A Member or a Client, directly or indirectly, either individually or together with persons acting in concert, will not acquire or hold more than 5% (five percent) of shareholding in the Power Exchange.
- A Power Exchange can have a maximum of 49% (forty nine percent) of its total shareholding owned by entities, which are Members or Clients, directly or indirectly, either individually or together with persons acting in concert.
The Power Exchanges which have been granted registration by the appropriate commission prior to the date of notification of the proposed Power Market Regulations, will be required to, within a period not exceeding 1 (one) year from the date of notification of proposed Power Market Regulations, ensure compliance with the conditions specified in (i) to (iii) above.
The Power Exchange will be required to disclose to the appropriate commission by 30th April each year, its category-wise shareholding pattern as on 31st March of that year, or when there is a significant change in the shareholding or as and when directed by the appropriate commission.
The Power Exchange will be required to maintain and preserve all the relevant documents and records relating to the issue or transfer of its shares for a period of not less than 8 (eight) years and make them available to the appropriate commission as and when directed.
2.1.3 Exit Scheme for Power Exchanges
The Power Exchanges are required to get their exit scheme (to cater for closure of the Power Exchange or revocation of registration of the Power Exchange) approved by the appropriate commission at the time of registration. The exit scheme is required to set out the manner in which: (i) the running contracts on the Power Exchange will be closed or the succession plan for all transacted contracts; and (ii) any claims pertaining to pending arbitration cases, arbitration awards, liabilities or claims of contingent nature and unresolved investors complaints or grievances lying with the Power Exchange would be settled by the Power Exchange.
2.1.4 Risk Management by Power Exchanges
The Power Exchange will be required to develop and implement a prudent risk management framework by adopting best practices, which should be dynamic based on the changing risk profiles of the market. The Power Exchange will also be required constitute a Risk Assessment and Management Committee ("RAMC") headed by an independent director, and the RAMC will monitor adherence to the risk management framework.
The RAMC will also review the risk management framework on a six-monthly basis (i.e. in January and July each year). The six-monthly report of the RAMC is required to be submitted to the Board of Directors. The report of the RAMC (along with decision of the Board of Directors on the RAMC report) needs to be submitted to the appropriate commission not later than end of March and end of September each year respectively.
2.1.5 Clearing and Settlement
Power Exchanges will be required to enter into an agreement in writing for clearing and settlement of any transaction of electricity undertaken on the Power Exchange with an entity established in accordance with the provisions of the Payment and Settlement Systems Act, 2007 ("Payment and Settlement Systems Act").
However, Power Exchanges which have been granted registration by the appropriate commission prior to the date of notification of the proposed Power Market Regulations will be required to transfer clearing and settlement function to an entity established in accordance with the provisions of the Payment and Settlement Systems Act, within a period of 1 (one) year from the date of notification of the proposed Power Market Regulations or such other period as may be approved by the appropriate commission.
2.1.6 Contracts Transacted on Power Exchanges
Under the proposed Power Market Regulations, the types of contracts transacted on Power Exchanges include: (i) Day Ahead Contracts and Real-time Contracts, (ii) Intraday Contracts and Contingency Contracts, (iii) Term Ahead Contracts, (iv) Renewable-Energy Certificates, and (v) Energy Savings Certificates. The proposed Power Market Regulation discuss the bidding mechanism and price discovery mechanism under such contracts.
The categories covered under (i) to (iii) above cannot be annulled or curtailed except due to constraints in the transmission corridor or any other technical reasons in accordance with the CERC (Open Access in inter-State Transmission) Regulations, 2008 and the CERC (Indian Electricity Grid Code) Regulations, 2010.
2.1.7 Transaction Fee
The Power Market Regulations propose that no Power Exchange will charge transaction fee exceeding such fee as approved by the appropriate commission. The Power Exchanges, which have been granted registration by the appropriate commission prior to the date of notification of these regulations, will be required to obtain approval of the transaction fee to be charged by the Power Exchange within a period of 3 (three) months of the date of notification of the proposed Power Market Regulations.
2.2 OTC Market
As per the proposed Power Market Regulations, OTC Market is a market where OTC Contracts7 are transacted between the sellers and the buyers directly or through a Trading Licensee. The price and other terms of contract in the OTC Market will be determined either through mutual agreement between the buyer and the seller, through competitive bidding process, or will be determined by the appropriate commission.
2.2.1 The application for scheduling of contracts in the OTC Market will be required to be made in accordance with the provisions of the following regulations:
Requirements under CERC
(Open Access in inter-State Transmission) Regulations, 2008 for the
- Advance scheduling;
- Day-Ahead bilateral transaction; and
- Bilateral transactions in a contingency.
Requirements under CERC (Grant of Connectivity, Long-term Access
and Medium-term Open Access in inter-State Transmission and related
matters) Regulations, 2009 for the following:
- Long-term access; and
- Medium-term open access.
It is proposed that the settlement of contracts transacted in the OTC Market will be done only by physical delivery of electricity without netting. The OTC Platform8 will operate after obtaining registration under Power Market Regulations. The objectives of the OTC Platform will be:
- To provide an electronic platform with the information of potential buyers and sellers of electricity;
- To maintain a repository of data related to buyers and sellers and provide such historical data to Market Participants; and
- To provide such services as advanced data analysis tools to Market Participants.
2.2.2 Participants on OTC Platform
Following entities will be eligible for participation in the OTC Platform:
- grid connected entities such as generating companies, distribution licensees, open access consumers or any person acting on their behalf; and
- Trading Licensees.
2.2.3 Eligibility Criteria
The eligibility criteria for registration of OTC Platform shall be as follows:
- The registering company should be incorporated under the Companies Act; and
- The minimum net worth of the applicant company should be INR 50,00,000 (Rupees fifty lakhs) as on any date falling within 30 (thirty) days immediately preceding the date of filing the application for grant of registration.
A Power Exchange or Trading Licensee or any of their associates or grid connected entities are proposed, not to be permitted to set up, operate, or have any shareholding in an OTC Platform. The OTC Platform will not engage in the negotiation, execution, clearance or settlement of the contracts and maintain neutrality without influencing the decision making of the Market Participants in any manner.
2.3 Market Coupling
The Power Market Regulations propose the introduction of the process of Market Coupling, under which collected bids from all the Power Exchanges will be matched, after taking into account 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 appropriate commission, subject to Market Splitting9.
2.3.1 The objectives of Market Coupling include:
- Discovery of uniform market clearing price for the Day Ahead Market10 or Real-time Market11 or any other market as notified by the appropriate commission;
- Optimal use of transmission infrastructure;
- Maximisation of economic surplus, after taking into account all bid types and thereby creating simultaneous buyer-seller surplus.
2.3.2 Designation of Market Coupling Operator
Subject to provisions of the Power Market Regulations, it is proposed that the appropriate commission will designate a Market Coupling Operator, who will be responsible for operation and management of Market Coupling.
2.3.3 Functions of the Market Coupling Operator
- The Market Coupling Operator, with the approval of the appropriate commission, will be required to issue a detailed procedure for implementing Market Coupling including management of congestion in transmission corridor, the timelines for operating process, information sharing mechanism with the Power Exchanges and any other relevant matters.
- The algorithm for enabling Market Coupling will be developed and managed by the Market Coupling Operator and implemented with the approval of the appropriate commission.
- Market Coupling Operator will be required to create and maintain a document on its website providing detailed description of the algorithm used for price discovery. The description should essentially include bid types, details of how the algorithm results in maximization of economic surplus taking into account various bid types and congestion in transmission corridor, which will be updated with every new version of the price discovery algorithm.
- The Market Coupling Operator will use the algorithm to match the collected bids from all the Power Exchanges, after taking into account all bid types, to discover the uniform market clearing price, subject to Market Splitting.
- The Market Coupling Operator will communicate the results of the auction to the Power Exchanges in a transparent manner. The Power Exchanges will inform the participating bidders about the results of the auction as communicated by the Market Coupling Operator.
2.4 Market Oversight
The objectives of market oversight will be:
- To detect and prevent market manipulation, insider trading, cartelisation and abuse of dominant position by any Market Participant;
- To ensure that Market Participants have confidence in the integrity and fairness of power markets; and
- To ensure that the prices are discovered in a transparent and competitive manner.
2.4.1 The market oversight will include, but not limited to, the following:
- procedure for registration of Market Participants;
- mechanism for collecting data from Market Participants;
- details of Market Participants or any other entities who shall furnish information;
- details of information to be furnished by the entities specified in (iii) above;
- periodicity and formats for reporting of information;
- measures to prevent any misuse of or unauthorised access to the information furnished by Market Participants;
- conducting analytics and market surveillance based on the data furnished by the Market Participants; and
- any other information as may be required by the appropriate commission.
The appropriate commission may, on being satisfied, that any of the following circumstances exist, order inquiry or investigation in accordance with the provisions of the Electricity Act:
- Non-compliance of the statutory obligations by Market Participants: and
- Involvement of Market Participants in
any of the activities, including but not limited to the following:
- Market manipulation;
- Any form of cartelization;
- Insider trading; and
- Abuse of dominant position by any Market Participant.
2.4.2 Intervention by the appropriate commission
It is proposed that on receipt of any information or report under the provision of the Power Market Regulations, the appropriate commission may, after giving such opportunity to the concerned Market Participant, to make a representation in connection with the report and after considering representation, if made, by order:
- require the concerned Market Participant to take such action in respect of any matter arising out of the report as the appropriate commission may deem fit; or
- impose penalty in accordance with the provisions of the Electricity Act;
- debar the relevant Market Participant from participating in any of the contracts regulated by the Power Market Regulations for a period as may be specified by the appropriate commission;
- direct the Power Exchange to cancel membership of a Member; or
- suspend or cancel the registration of the Power Exchange.
2.4.3 Other circumstances requiring intervention
It is also proposed that in the event the appropriate commission is satisfied that a situation of abnormal increase or decrease in prices or volume of electricity in the Power Exchange exists or is likely to occur in the market, it may give such directions, as may be considered necessary, through an order.
In particular, the appropriate commission through the order may undertake the following actions:
- impose floor and cap on prices of electricity in the Power Exchange;
- suspend transaction activities on the Power Exchange for a cooling off period, in case of increased volatility;
- suspend transaction of any specific contract on Power Exchange; and
- regulate the transaction fee charged by the Power Exchange.
2.4.4 Power to issue interim orders
In a situation, where during an investigation or intervention, the appropriate commission is satisfied that an act in contravention of Power Market Regulations has been committed and/or continues to be committed or that such act is about to be committed, the appropriate commission may, by order, temporarily restrain any person from carrying on such act until the conclusion of such investigation or intervention or until further orders, after giving notice to such person.
2.4.5 Power of inspection
The Power Market Regulations empower the appropriate commission to undertake inspection, conduct inquiries or audit of any Power Exchange, either through its officers or through a third-party agency, in accordance with the provisions of the Electricity Act, at any point in time.
1. "Power Exchange" is defined to mean an electronic platform for the purpose of facilitating transactions in delivery based electricity contracts or transactions in any other contracts as permitted by the appropriate commission;
2. "Market Participants" will mean to include: (1) grid connected entities; (2) Power Exchanges; (3) Members of Power Exchanges; (4) Trading Licensees; (5) Market Coupling Operator; (6) OTC Platform; (7) Any other entity as notified by the Commission
3. "Over the Counter Market" is defined to mean a market where OTC Contracts are transacted between the sellers and the buyers directly or through a Trading Licensee.
4. "Board" is defined to mean Board of Directors of the Power Exchange.
5. "Member of Power Exchange" is defined to mean a person who has been admitted as such by a Power Exchange in accordance with the Power Market Regulations and in accordance with byelaws, rules and business rules of the concerned Power Exchange.
6. "Client" is defined to means a person who has executed an agreement with a Member of a Power Exchange for dealing with or clearing through such Member.
7. "Over the Counter Contracts" is defined to mean the contracts transacted outside the Power Exchanges.
8. "Over the Counter Platform" is defined to mean an electronic platform for exchange of information amongst the buyers and sellers of electricity.
9. "Market Splitting" is defined to mean the mechanism adopted by the Power Exchange or Market Coupling Operator, as the case may be, for discovering price of electricity in various bidding areas or zones facing congestion in transmission corridor, whereby these bidding areas or zones are split into independent markets and the flow of electricity between these independent markets is permitted to the extent of available transmission corridor under safe grid operating conditions.
10. "Day Ahead Market" is defined to mean a market where Day Ahead Contracts are transacted on the Power Exchange(s), and "Day Ahead Contract" is defined to mean a contract wherein Collective Transactions occur on day (T) and delivery of electricity is on the next day (T+1).
11. "Real-time Market" is defined to mean a market where Real-time Contracts are transacted on the Power Exchange(s), and "Real-time Contract" is defined to means a contract other than Day Ahead Contract or Intraday Contract or Contingency Contract, wherein Collective Transactions occur on day (T) or day (T-1) and delivery of electricity is on day (T) for a specified delivery period.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.