1. Market Design forTitle ( Arial, Font size 28 )
Presentation Ancillary Services
The Need for Regulatory & Policy Framework for Ancillary Services Arial, Font size 18 ) Options in
Date, Venue, etc..( & Alternative Energy
the Indian Power Sector
Amulya Charan
11th April 2013
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2. Overall Power Sector Scenario
 A sector in ‘caught’ in transition from Regulated to Competitive market –
• While Private Generation reacted, Discoms & Fuel Sector (Coal, Gas) have lagged
• Merchant Generation with expensive or no fuel and limited Discom paying capability
• One lesson is that entire Energy Sector needs to now progress hand-in-hand
 Indian Power Market – Diverse Modes of Transactions –
• Long Term - Capacity Addition (25 years or more)
 Competitive Bidding (on a hold!)
– Case I – fuel type & location unknown
– Case II – fuel type & location known
 MoU Route for Capacity Addition (for Hydro; environmental clearance a challenge)
 Merchant Financing (anyone still trying?)
• Intermediate Term - Tender Process
• Short Term - Merchant Market (typically less than a year)
 OTC Bilateral through Traders (Customized Contracts spanning Months)
 Multiple Exchanges (Spot Day Ahead Market)
 Unscheduled Interchanges (Balancing Market), Ancillary Services Market
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3. The Indian Power Market – Current Market Design
 Decentralized Market Model for scheduling & dispatch with separate
• Market Operator(s) ~ multiple
• System Operator ~ NLDC - RLDC - SLDC
 Transactions
• OTC Contracts - Customized Contracts - Typically Monthly, Seasonal strips
• Exchange Transactions – Day Ahead Spot, Evening Market, Weekly
 Physical Transmission Corridor Booking based on FCFS
 Real Time Balancing/Ancillary Market/Capacity Market yet to develop
 No Financially Traded Derivatives
 Is a complete re-think of the market model chosen needed (Centralized/Decentralized,
European/North American, Role of Traders vs Exchanges, Multiple/Single Exchange)?
• No – but doesn’t hurt to always be open to evaluate
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4. Market Design – Need for new Instruments
 Need to bring in new features providing more options to the end consumer to manage
procurement & enabling the generator plan in advance while improving grid reliability
 Real Time Market
- Provide an option for the market participants to procure power closer to real time to mitigate
load shedding due to unexpected events or deviations in the demand-supply scenario
 Ancillary Market (only Frequency Control discussed here but others needed too)
- Enable the System Operator to act commercially on behalf of the market to procure power in a
transparent market in case deviations of certain Utilities beyond their permissible band in order
to ensure security of supply and reliability of the grid
 Derivative Products
- Need to provide consumers with the ability to hedge and for generators to plan for their power
production upto a year in advance on basis of market signals for price of power
- For a Merchant Imported Coal generator, a power price signal for next six months is vital to
plan his import of coal
 Capacity Market
- Need to ensure tying up of most of the capacity by Discoms well ahead of the power flow date
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5. For Proper Implementation of Ancillary Services Market
many Governance Issues to be tackled
 Practical Issues that should be tackled by Regulators (& Policy Makers) –
• Load Shedding despite affordable Power available
• Discom Financial condition & accountability
• Benefit of State versus benefit of the country
 However, going forward, one has to plan Market Design assuming that some of
these positive measures would happen –
• Discom Privatization
• Improved performance – load shedding protocols, limitations
• Cost reflective Discom Tariffs
• Open Access (& reduction of Cross-subsidy)
• Improved Fuel Availability (commercial mining in domestic coal, increased
imported coal levels)
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6. Market Design Improvements - Incentive & Penalties
 There is a need to bring in new features providing more options to the end
consumer to manage procurement & enabling the generator plan in advance
 Real Time Balancing Market – by increasing the penalties for not procuring power
in Real Time beyond a 10% deviation of the scheduled power while incentivizing
the market to absorb low cost power in place of load shedding
 Ancillary Services Market – by allowing a higher rate for the power to be paid for
by Utilities deviating beyond the 10% norm of scheduled power which fail to
come back into the tolerable band even after the Real Time auction
 Capacity Markets – by mandating Discoms to procure capacity for at-least 80% of
their forecasted energy demand (either verified by the Regulator or by using a
formal study/using CEA estimate) in advance of one year & having a
comprehensive power procurement plan for at-least three years
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7. Market Design Improvements - Challenges
 Real Time Market
- Will this affect the liquidity of Day Ahead Spot (and how to avoid that)?
- Will it be effective considering the present lack of focus on this and the abuse of UI pool?
 Ancillary Market (only Frequency Control discussed here but others needed)
- May the Grid Operator act on behalf of all market participants as per the Act, is it desired?
- Is the System Operator assured of cost recovery from the deviating participants if permitted?
- Would Discoms start relying more on Grid Operator & losing grip on their power procurement?
- How can market be developed – does it need load shedding protocols to become active?
 Derivative Products
- Is liquidity & competition sufficient; is our Power Deficit in control enough?
- How to prevent Market Manipulation and exercise of Market Power for outsized returns?
- Could this leverage turn a threat to Grid Security?
- What safeguards, governance structures need to be in place?
- Only allow it for hedging within Capacity; how to enforce this?
 Capacity Market
- What structure would be best suited for this market and what mandatory capacity
procurement regulations need to be in place prior to this market being launched?
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8. Ancillary Service Market - Design
Closed Bidding Auction – same as done for day ahead market by Exchanges
By a fixed time in evening, generators to submit a bid –
Bid will reflect the capacity payment that the generator will receive if bid cleared, and generator
will be obligated to keep capacity available to produce energy within a fixed time period when
called by POSOCO to produce
Based on expected demand for T+1 day, POSOCO to declare required ancillary
capacity to be contracted.
Exchange to clear the ancillary market, based on the bid collected and capacity to be
contracted as declared by POSOCO.
If the generator is called to produce by POSOCO, energy charge in addition to
capacity charge will be payable in line with the real time UI charge.
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9. Checks and Balances
Receivables – Risk of non payment of dues by Discom’s to POSOCO needs to be
mitigated by requiring Discom’s to deposit margin money with POSOCO in advance.
Cost Sharing – State Discom’s with greater impact on unscheduled interchanges will
be allocated higher share of the ancillary payments by POSOCO.
Gaming – Regulator needs to have adequate market monitoring capability to prevent
abuse of market power by a single generator.
Participation criteria - Only Generators with certification from CERC to participate in
ancillary service market should be allowed.
Penalties - Strict penalties, both monetary and affecting future eligibility to be
imposed in case of non performance
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10. Any observations, comments ? We may have an open discussion
on what is needed and how to achieve the same jointly !
Website: www.tatapower.com
Email ID: amulya.charan@tatapower.com
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