CEA And CERC’s Collaborative Effort To Reshape India’s Power Exchange Market For Enhanced Liquidity And Competition

The CERC draft order dated 04.10.2024 outlines various directions to power exchanges, proposing changes in the Term Ahead Market (TAM), Any Day Single Side Double Auction (ADSS), Intraday, and Day Ahead Contingency segments. The proposed changes include standardizing contract slots for TAM, including Base/RTC, Peak, Off-Peak, and Night slots, with power exchanges submitting pre-specified slots for approval.

For ADSS contracts, the proposal includes the following specific timelines for different stages bid submission, IPO auction, reverse auction, and bid acceptance. In light of low liquidity in Intraday contracts, the draft suggests their withdrawal from power exchanges. It also proposes modifying the price discovery mechanism in the Contingency market to a Uniform Price Step Auction instead of the existing Continuous Matching mechanism.

The draft also includes directions for power exchanges on contingency contracts, where they are instructed to implement software changes so that all parties can see buy and sell offers for ten minutes before bids are transferred to the order book. Power exchanges are further directed to display the number and volume of bids received on their websites. The CEA reviewed bid data from March to May 2024 for TAM and DAC segments across all three exchanges and found issues like low liquidity, fragmentation of the market, and the presence of non-standardized products, particularly hourly contracts, which reduce competition.

CEA also noted that the Term Ahead Market has infrequent trading, with many transactions involving only one buyer and one seller. The data revealed that bids tend to arrive late in the auction process, creating unhealthy bidding practices and possibly raising suspicions of collusion. CEA highlighted that last-minute bids, especially those using non-standardized hourly products, hurt competition. To improve market liquidity and competition, CEA recommended introducing a time extension mechanism for last-minute bids and limiting the number of trading days for monthly and weekly contracts. For daily contracts, they suggested restricting the delivery period to a maximum of six days per trading session and limiting trading to delivery periods from T+2 to T+8.

In terms of Day Ahead Contingency markets, the analysis showed that there is a low level of competition, especially in the 15-minute and 1-hour time blocks. It was found that the majority of transactions occurred in the 15-minute products, and the market depth is shallow with low bid volumes. This low participation further hampers liquidity and price discovery, signaling a need for improvements in market mechanisms to foster competition and efficiency in these segments.

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