An open, competitive market for electricity is critical to sustaining growth in India.

ENERGY IS CRUCIAL to any country, especially a rapidly developing one such as India. Regulatory change has led to the creation of the Indian Energy Exchange (IEX), a vibrant, transparent power market on which buyers and sellers can trade electricity contracts and meet the diverse needs of their consumers nationwide.

The Asian Development Bank forecasts that India’s economy will grow by 5% in 2009-2010, down from 7.1% in 2008-2009, but still healthy given current economic conditions.

THE ECONOMY is growing, and India depends on energy to fuel industrialization and transformation. According to a recent KPMG report on the Indian electricity market, the Indian electricity sector has grown 8-10% for the last five years and is expected to grow 10-12% annually in the next decade.

Some years ago, the government concluded that by increasing competition, consumers would have access to better quality and more reliable service. In 2003, it passed the Electricity Act, which provided for open access to the electricity marketplace. Out of this legislation came the IEX, the country’s first nationwide, automated and online electricity trading platform. IEX was conceived to catalyze and modernize the electricity sector in India by introducing a transparent and neutral market through a technology-enabled electronic trading platform.

BEFORE THE ELECTRICITY ACT, India had a vertical electricity industry, controlled by the monopolistic state electricity boards. Because of these monopolies and a regulated pricing system, it was difficult to improve efficiency in the electricity sector.

In India a disparity in the power demands of different states and regions, results in seasonal surpluses in some areas, and deficits in others. This demand and supply mismatch can be alleviated by the introduction of a bidding platform that brings power industry participants together to buy and sell electricity in an auction-based system.

Kjell Asserlind, Head of International Energy Sales at NASDAQ OMX, describes the deregulation of India’s electricity sector as a paradigm shift. “Participants in the Indian electricity market were not used to trading electricity at market prices,” he says. “It is a huge difference for many companies, and it takes time to adjust. This was perhaps one of the main challenges India faced.”

However, this inconsistency meant many Indians endured power blackouts because there was insufficient power to support the demand. A competitive energy market is ideal for such situations, because the surplus can be directed where it is needed and prices tend to be lower.

Electricity is a socially and politically sensitive commodity, which makes establishing an electricity exchange a daunting task. Moreover, electricity is known for its price volatility. In setting up the exchange for India, the Central Regulatory Commission (CERC) suggested an auction-based model, where energy and transmission capacity are paired, and exchanges were invited to propose their solutions.

IEX is promoted by Financial Technologies (India) Ltd. and PTC Financial Services and counts other major power producers, financial institutions and distributor trading companies as shareholders. Opting for the suggested auction-based model, IEX was the first to propose and launch an exchange and today controls about 95% of the market.

The exchange chose technology from NASDAQ OMX for trading and clearing. NASDAQ OMX had been following the Indian energy market since deregulation and had interacted with regulators and stakeholders. In addition, the Nord Pool (Nordic Power Market) model came closest to meeting the Indian market requirements.

The Nordic market was the first to establish a regional power market based on the implicit auction of transmission capacity between regions, and trading volumes have grown steadily over the years. The day ahead spot auction solution used by IEX is based on Sapri, a proven and unique system that powers several energy markets in Europe and Africa.

The IEX exchange solution also includes CONDICO® for continuous trading, and all power markets are cleared and settled through the CONDICO clearing engine. The delivery to IEX was done in cooperation with Nord Pool.

Most observers expected that one of the state electricity utilities would be the first to market with an exchange, but IEX was proactive and leveraged the expertise of Financial Technologies to launch first. Time to market was critical, and it was important to implement proven technology.

NASDAQ OMX signed a contract with Financial Technologies at the end of September 2007, and the system was implemented in Mumbai in December of that year. Training and regulatory approvals followed, with live operations of the exchange beginning in June 2008.

“IEX was aware of the long-term prospect of competition in the electricity trading market, so we felt it was important to have first-mover advantage,” says Mr. Jayant Deo, Managing Director, IEX. “We never intended to reinvent the wheel by building our own technology. Speed to market meant procuring technology, rather than building it ourselves. Markets are necessary for attracting additional capacity to mitigate power shortages.”

SO FAR THE IEX has been successful. The investment community is interested, and buyers and sellers are moving away from long-term contracts to partial long- and short-term contract models – the exchange’s most important achievement to date. It has enabled generators to retain some of their capacity for short-term power trading and smooth out the peaks and troughs in supply in the country. Trading for shorter durations has also helped participants reduce their working capital requirements.

IEX has already attracted 110 participants to its platform. IEX’s future goal is to introduce risk management tools such as nontransferable delivery based forward contracts ranging from a few days to a few months. The exchange is also investigating the possibility of introducing an intra-day market so it can trade closer to the actual delivery of the electricity.

Power demand in India

With a predominantly agrarian economy, India’s power demand is seasonal and weather sensitive. Demand varies significantly depending on the time of day; each region has a distinct climate, requiring unique loads on the electricity supply.

For example, power demand during the rainy seasons is low in the states of Karnataka and Andhra Pradesh and high in Delhi and Punjab. Many of the states face high demand during evening peak hours, while cities like Mumbai face high demand during office hours. The Eastern Region has a significant surplus around the clock, and even normally power-deficit states with very low agricultural loads like Delhi have surpluses at night. This diverse demand creates an ideal situation for the trading of power, improving utilization of existing capacities and reducing the average cost to the power utilities and consumers.

 by Heather McKenzie Photo Sanjit Das