BasicsofPowerMarket& RegulatoryInitiatives

December 23, 2011

Agenda

Indian Power Sector snapshot Evolution of competitive power market Power Market Operations

PowerExchangeIndiaLimited
PROMOTERS
NationalStockExchange (NSE) NationalCommodityandDerivativesExchange (NCDEX)

ThelargestexchangesinIndiawithdeepexperienceincreatingvibrantmarkets

EQUITYPARTNERS
CentralGovernment Entities PowerFinance Corporation Limited StateGovernmentEntities GUVNL MPPTCL WBSEDCL PrivateSectorEntities JSWEnergyLimited TataPower GMREnergy gyLimited

TheforemostpowersectororganizationsinIndia,partneringforavibrantpowermarket

PXILleverageson: experience p ofPromotersinrunning gexchanges g experienceofStategovernmententitiesand themostactiveprivateplayersinthecountry

IndianPowerSector snapshot

CurrentStatus

Energydeficitof7.6%andpeakdemanddeficit of11.1%* Predominanceonfossilfuels, fuels especiallycoal ImpetustoincludeRenewableEnergyin mainstream Enormousloadgrowthbutambitiouscapacity additiontargets

Targetedtoreach3GWby2017and8GWby 2032

InvestmentrequirementofoverUSD1Billion overnext5years Operatingoncompetitiveregime

Emergenceofnewmarketmechanismsinrenewable energyandenergyefficiency
Source:CEA,*DeficitnumbersforJan2011

InstalledCapacity&GrowthProjections
InstalledCapacity(MW),June2011 Nuclear Hydro RenewableEnergy Coal Gas Diesel Total

Growthprojections

4560 37053 19500 95000 19600 1200 176914

1200 1000

GenerationmixdominatedbyCoal Hydrolessthan25% RenewableEnergyrecordedrapid growthinlastdecade

800 G 600 W 400 200 0 XIPlan 220 233 67 78

8%GrowthRate CummulativeCapacity@8%Growthrate 9%GrowthRate CummulativeCapacity@9%Growthrate 685 575 488 425 306 337 86 104 119 151 150 197

960 778

203

275

XIIPlan

XIIIPlan

XIVPlan

XVPlan

CommercialStructure
GenerationCapacity 18% 50%

Types ofTransactions
4.43% 3.56% 1.32%

90.69% LongTermPPAs B l Balancing i BilateralShortTerm PX PXs

States

CentralSector

PrivateSector

Ownershipstructure
BothCentralandStateGovts havecontrol SinglebuyermodelinmostStates Supplydeficithasledto19,509MWofCaptives PoorcreditqualityofUtilitiesdueto HeavyCrossSubsidyburden Huge H Technical T h i land dCommercial C i lLosses L RestrictivepoliciesofStategovernmentsingiving OpenAccess

TransactionStructure
LargelytiedupthroughPPAs Shorttermbilateralmarketdominatedbyfewplayers accountingforover85%volume Lowliquidityinshorttermmarketdueto Insufficientpowerleftforshorttermtrade Nonstandardizationofelectricitytradingproducts PXsneedtocompetewithOTCaswellasthepeculiar balancingmechanism

So ource: CERC

Source: CEA

32%

CreationofNationalGrid
March2003 Westsynchronized WithEast&Northeast NEWGrid October1991 EastandNortheast synchronized C Central l G Grid id South Grid

North

August2006,North synchronized WithCentralGrid East

West South Northeast

FiveRegionalGrids FiveFrequencies

Developmentofcompetitivepowermarket

AdventofElectricityAct2003
EA2003inbrief

Delicensingofgeneration Developmentofamultibuyermultiseller frameworkinpower IntroducedTrading&CompetitiveBiddingfor procurementofelectricity Provisionofnondiscriminatoryopenaccessatboth bulkandretaillevel Thrusttocompleteruralelectrification SettingupStateElectricityRegulatoryCommission (SERC)mademandatory DevelopmentofNationalElectricitypolicyand NationalTariffPolicy

Consolidated laws relating to generation, transmission, distribution, tradi ng and use of electricity Introduced measures conducive to development of electricity industry, y, p promoting g competition p therein, , Emphasised on protection of consumer interest Promotion of efficiency and clean energy Constituted of Central Electricity Authority, Regulatory Commissions and establishment of Appellate Tribunal and for matters connected therewith or incidental thereto.

MajorProvisions

DevelopmentProcess
NationalElectricityPolicy,2005 OpenAccessRegulations,2008 N ti National lA Action ti Pl PlanonCli Climate t Change, Ch 2008 PowerMarketRegulations,2010 RenewableEnergyCertificateRegulations,2010

Introductionof policies&regulations

Policymakersatnationallevel Planningwingtoassistindevelopmentprocess

Developmentofkey functionalentities

Independentsystemoperators IndependentRegulatorsatnational&statelevel DevelopmentofPowerExchanges

EvolvedStructure
PolicyMaking Regulations SystemOperators Generation Transmission Markets
CentralGovernment CentralElectricityRegulatory Commission NationalLoad Di t hCenter Dispatch C t CentralGenerating Stations CentralTransmission Utility PowerExchanges 28StateGovernments StateElectricityRegulatory Commissions 28StateLoad Di t hCenters Dispatch C t PrivateSector Players PrivateSector Players BilateralMarkets

5RegionalLoad Di t hCenters Dispatch C t StateGenerating Stations StateTransmission Utilities

PowerMarketoperations

PeculiaritiesofIndianPowerMarket

HugeGapinDemandandSupply GenerationbalancedaccordingtoLoadorloadsheddingifgenerationis inadequate q (as ( currentscenarioinIndia) ) MaintenanceofFrequencyof50Hertzessential(AlternatingCyclesper second) CascadingblackoutsifFrequencyfallsbelow48.5Hertz HeavypenaltiesfordeviationsfromProjectedDemand/Generation

PowerGeneration

Generationprojectstiedinlongtermbasis(1225year) Costrecoverymodelsaretwoparttariffs
Fixedcost:capitalcost,debtrepayment,depreciation,ReturnonEquity(RoE) Variablecost:fuelcost,O&M,workingcapital

Allcost+RoEispassthrough Toearnfixedcost, ,g generating gunitshaveto

declareplantavailabilityandprovidegenerationschedulestoLoadDespatch CentersonDaytoDaybasis Deviationfromdeclaredavailabilityattractpenalties(unscheduledinterchange mechanism) h i ) Despatch allowedonMeritOrderbasisbysystemoperator Objectivefrommaximumproductiontooptimalproduction D Despatch t h onbasis b i of foptimum ti l loading di t toreduce d operation ti cost tof fgeneration ti Leastcostpowerpreferredtocostlypower

DemandSupplyManagement

For illustr rative purposes o only

in100M MW

BASELOAD BASELOAD

BaseLoad ManagedthroughLongTermPPAs SeasonalVariations ManagedthroughShortTermtrades,by 1)Traders,2)BilateralContractsor3)BankingArrangements DailyVariations Managedthrough 1)DayaheadPowerExchangeor2)UIBalancing

Hours

BaseLoadManagement

Baseloadisminimumamountofpowerthatutility/distributioncompanymustmakeavailable toitscustomers
Baseloadmanagedthroughlongterminstruments powerpurchaseagreements
Termbetween T b 1225years Nontransferablecontractswithdefinedsetofbuyerandseller

RulesdefinedbyCERC andprocesssetbySystemOperator LDCs receivedemand(drawlschedule)&supply(generationschedule)positioninadvanceforon dailybasisthroughthetermofarrangement Networkaccessprovidedtogeneratorsandprocureronlongtermbasisleavinglittleforcompetitive market Otherrequestfornetworkaccesstreatedinsequencewithlongertenuregettingpriority Entiregenerationtiedupwithofftakerforlongtermwithavailabilitybeingdeclaredondailybasis (ESSENTIALLYALONGTERMMARKET) Noornegligiblecapacitymadeavailablefortransactionsthroughelectricitymarket

LoadDespatch Centers(LDCs)aremanagingdemandandsupplyonDAILYBASISforlongterm

Economics:Loadmanagementbasedoncostofgeneration(regardstoefficiency)

Deviationsinlongtermmarketmanagedthroughmedium&shorttermarrangements

MediumTerm
MediumTermarrangements Mismatchindemandandsupplypositioncausedduetoseasonal variations Mediumtermmarketcharacterizedby
Nontransferablebilateralcontractsforperiodof3monthsto3yearsmade directlyorthroughmarketintermediaries PresenceofstronglicensedtradersfacilitatingOTCmarket

LDCaremanagingdemandandsupplyonSEASONALBASIS
LDCsreceivedemand(drawl)&supply(generation)scheduleinadvance Networkaccessprovidedonbasisofavailabilityofexistingtransmission capacity

Managementofseasonalvariations

ShortTermarrangements Mismatchindemandandsupplypositionduetoexigencyandseasonalvariations
Contractdurationdefinedupto thetermof3months

Mediumtermmarketcharacterizedby
Bilateraltransactions(DayAhead,SameDay,FirstComefirstServe,Banking,Bilateral Auctions). WeeklycontractsofferedbyPX alsofindaplace Presenceofstronglicensedtraders&approvedPX

LDCs aremanagingdemandandsupplyonDAYAHEADBASIS
Networkaccessprovidedonbasisofavailabilityofexistingtransmissioncapacity

DeviationsinmediumandshorttermmarketmanagedthroughDayAheadMarket

ManagementofDemandonDayAheadbasis
TransactionsatPowerExchanges

Calledspotmarketasitisclosesttooperationstorealtimemarketoperations SchedulingandopenaccessforcollectivetransactionsdiscoveredinaPX through anonymous y simultaneous(double ( sidedclosedbid) )competitive p bidding gby y marketparticipants(BuyersandSellers)presentlyonDayAheadBasis.
DayAheadauctionforallthe24hours,subdividedintohourlycontracts Completeanonymityofthebidsbetweentraders. FinancialsettlementandclearingtobedonebyPX Networkaccessprovidedonbasisofavailabilityofexistingtransmissioncapacity

PowerExchangesactsasacentralcounterpartyforallexchangebasedelectricity t transactions ti

ClearingandSettlementoftradeisresponsibilityofPowerExchanges

Actualflowofelectricitymanagedbysystemoperatorandisnottheresponsibility ofExchange
Furtherdeviationsaremanagedinrealtime

Managementofdeviationsinrealtime
UnscheduledInterchange(UI)

System operators (LDCs) have no control over the drawl or injection schedule.
therearenocontractstobesigned(noadministrativeformalities) noaccesschargesfees;notransmissioncharges;nolossesapplicable(noentrybarriers UImechanismfacilitatestheinstantaneous(realtime)injectionorwithdrawalofelectricityintoor outthegrid Realtimeimbalancesindemandandsupplyarebeingmanagedbytheparticipants Everyutilitybigorsmallhavingsomecontroloveritsgenerationorloadistransformedintoa formidablemarketplayerinrealtime. SameUIrateappliestoallinterutilitytransactionsattheregionallevel(homogeneity); Nobarriersintermsofavailabilityoftransmission

UI Mechanism introduced to restore grid frequency to normative levels

UI mechanism is being used as an alternative to formal trading.

Implemented as a balancing mechanism is now acting as a real time market

Managementofdeviationsinrealtime
UnscheduledInterchange(UI)

Normally, deviations in committed schedules are allowed six time blocks in advance.
Load Despatch Center appropriately manages generation and load to fit the revised schedules Deviations determined in 15minute time blocks through special metering. If the frequency is above 50 Hz (nominal frequency in Indian System), UI rate will be small and if it is below 50 Hz, it will be high. As long as the actual generation/withdrawal is according to the given schedule, the third component of ABT is zero.

Other cases of deviations, third component of ABT comes in picture.

Deviations priced according to system condition prevailing at that time.

In case of overdrawal (withdrawal in excess of schedule), beneficiary has to pay UI charge according to the frequency dependent rate specified.

TransactionsthroughUIMechanismdonotprovidetherightindicationofrealpriceofelectricity

TransmissionNetworkAccess
HIGH
LongTerm 12 25 years y specificsellerandbuyerset Pricingbasedoncostofassetandsocialized overall llbeneficiaries b fi i i

Medium M di Term T 3 monthsto3years

specific p sellerandbuyer y set Pricingbasedoncostofassetandsocialized overallbeneficiaries

ShortTerm Upto 3months

specific ifi seller ll and dbuyer b set t Pricingarrivedatasapercentageoflongterm transmissionpricing Earningsusedtoreducecostofassetforlong termconsumers

Transm missionaccesspriority

Accessonbasisoftermof networkusage Impropercongestions management,eliminatethe opportunitiesformoreefficient electricitytrading.

DayAheadSpot Market Forthe nextdayonly

AccessfortradesthroughPowerExchanges Collectivetransactions PricingbasedonPointofConnectiontariff

LOW

Challengeistomovefromterm basedaccesstocompetitive regime

TransmissionCongestionManagement
CounterTrading
S System t O Operator t trades t d poweragainsttheflow toensurefeasible despatch.

Redespatching
S System t O Operator t managessupplyand/or demandtoensurethat actualflowcomesbelow thetransfercapability

MarketSplitting
M Market k tsplit litinto i t deficit d fi it andsurplusmarketswith flowontheintervening corridorrestrictedto thatallowedbySystem Operator

TransmissionCongestionhandledbywayofMarketSplittinginIndia

Results R l i inprice i differential diff i lacrossmarkets k EverydaycongestionfundiscollectedbypowerexchangesanddepositedtoNLDC congestion managementfund

MarketonlyaffectstheoperationsofPowerExchanges Powerexchangeoperationsaffectedthemostbypresentcongestion managementtechnique

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