Dissertation Report

Financial Derivatives & Risk Hedging in Power Trading in India
ABSTRACT
The new Electricity Act 2003 has already brought forth numerous changes in the
electricity sector. Enactment or the implementation of the act is now one of the greatest
tasks lying ahead of those well wishers of this industry. One of the greatest achievements
of this over haul in power industry can be considered – is the freedom to buy and the
freedom to sell the electricity.
As mentioned above the freedom to buy and sell electricity thereby creating or tending
towards a perfect market in this sector, which was previously almost a monopoly market
run and maintained by State Electricity Boards, is now widely opened up for a greater
private participation. Trading is now considered as a distinct activity. A robust trading
system is very important for free and fair competitive electricity market operation.
Trading system should be capable of risk hedging associated with price volatility and
other unexpected changes. This report focuses on various derivatives in Power exchange
and relevant derivatives with respect to Indian Context. It is being said that Power
Exchange will be developed in 2012. So the Demand availability, Supply options,
Decision of Market Clearing Price on seasonal basis and options for Generating Sources
are discussed. Lastly the strategy for each type of plant/sources in Power Exchange that
weather they should go for Long Term PPA, Future Contracts and Spot Market
Competitive Bidding is being discussed.
Ajay Yadav
MBA (Power Management)
University of Petroleum and Energy Studies
CHAPTER 1
INTRODUCTION
Objective of Study
• To study the concept of Power Exchange and hence Derivatives and its role in
competitive power market.
• To analyze the scenario of each type of Generating sources and Risk Management
of them in Spot Market.
Data source
Secondary data source are used.
Scope
• Study is done for 2012 with the assumption of Power Exchange existence.
• Risk Management is done for Generating Stations only.
• Derivatives are analyzed using qualitative study.
Chapter Scheme
Chapter 1: Introduction to Power Trading and Power Exchange
In this chapter, definition of Trading, sections governing Trading as per Electricity Act
2003, role of Trading in emerging market structure and Introduction of Power Exchange
has been done.
Chapter 2: Structure of Power Exchange in India: In this chapter, detailed study of
Power Exchange w.r.t. Foreign Market, Barriers and Benefits in Indian Power Exchange
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is being described.
Chapter 3: Derivatives for Risk hedging
In this chapter, detail description of each possible type of Derivatives is described and the
derivative i.e. best suitable for Indian Power Market is identified.
Chapter 4: Risk Hedging for Generating Stations
In this chapter, analysis for each type of generating station w.r.t. Power Exchange is done
considering the case of 2012.
Chapter 5: Conclusion and Suggestion
In this chapter, Conclusion and suggestion are described.
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CHAPTER 2
Introduction to Trading and Exchange
The electricity consumers in India have long been served by vertically integrated State
Electricity Boards (SEBs). The reform model adopted by a number of states resulted in
restructuring of some of the SEBs, leading to separation of generation, transmission and
distribution segments and their corporatisation. Regulatory reform included setting up of
Central Electricity Regulatory Commissions (CERCs) and State Electricity Regulatory
Commissions (SERCs). The monopolistic nature of bulk supply as well as retail supply
has been abolished with the enactment of the Electricity Act 2003 (the Act). This led to
deepening of the reform process by dismantling this monopoly in the power sector. The
new Act provides for non-discriminatory open access of the transmission network, de-
licensing of generation including captive power generation. The Act also recognizes
trading as a distinct activity. Such provisions of the Act provide an enabling
environment for development of bulk power market in the country (Fig. 2). Phased open
access of the distribution network by respective state utilities provides consumer choice
subject to open access regulations including the cross-subsidy surcharge.
Electricity trading is essential for meeting peak demand and for overall resources
optimization. There is a need to explore the possibility of developing a common platform
for electricity trading where trade would be conducted in an equitable, transparent and
efficient manner.
Prior to the Indian Electricity Act, 2003, the electricity industry recognized generation,
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transmission and supply as the three principal activities, and the legal provisions were
also woven around these concepts. Bulk purchase and sale, although a regular
phenomenon between State Electricity Boards and/or licensees was construed as part of
the activity of supply of electricity. It is only with the enactment of the Electricity Act,
2003 that the transaction involving purchase and sale of electricity has been recognized
as a distinct licensed activity. This has been termed as ‘Trading’ and defined in section
2(71) of the Act as “purchase of electricity for resale thereof….” The Regulatory
Commissions have been given the powers to grant trading licence. Recognition of trading
as a separate activity is in sync with the overall framework of encouraging competition in
all segments of the electricity industry. The entry barriers have been sought to be
removed and the State Electricity Boards have been mandated to be reorganized within a
definite time frame. This is expected to result in multiplicity of players in generation,
transmission and distribution, a sine qua non for competition. In such a scenario, traders
are expected to add value by facilitating the transfer of surplus power available in one
region to the regions experiencing deficit of supply. The next step in the direction of
inducing competition, as the Act envisages, is to create a framework of market in
electricity where buyers and sellers could meet and engage in purchase and sale of
electricity. The responsibility of developing the market in electricity has been vested with
the Regulatory Commission.
As a corollary to the above competitive framework, appropriate pricing philosophy has
also been envisaged in the Act. Sections 61 to 66 comprising the Part on “Tariff” in the
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Electricity Act, 2003 provide for three ways of electricity price determination/discovery
viz:
- Tariff regulation/determination by Regulatory Commissions (Section 62);
- Determination of tariff through bidding process (Section 63); and
- Price determination/discovery in the Electricity Market (Section 66).
Section 62 of the Act is the substantive provision for tariff determination by the
Regulatory Commissions. For regulating/determining the tariff, the Regulatory
Commissions are required to notify the Terms and Conditions of Tariff in terms of
Section 61 of the Act. Central Electricity Regulatory Commission (CERC) as well as
most State Electricity Regulatory Commissions has already issued Terms and Conditions
for Determination of Tariff.
Section 63 of the Act seeks to move away from regulated tariff to tariff determination
through bidding process. The Central Government is required to issue guidelines for
transparent process of bidding, which it has already done.
Section 66 providing for Development of Market in electricity by the Appropriate
Commission, is the last step in the sequel to electricity pricing philosophy as envisaged in
the Act. The provision is quoted as: “Section 66 the Appropriate Commission shall
endeavor to promote the development of a market (including trading) in power in such
manner as may be specified and shall be guided by the National Electricity Policy
referred to in Section 3 in this regard.”
The National Electricity Policy issued on 12th February, 2005, that “Development of
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power market would need to be undertaken by the Appropriate Commission in
consultation with all concerned”.
In line with the responsibility cast under section 66 of the Act towards development of
such a platform, the Central Commission now proposes to design the framework of price
determination /discovery in the electricity market.
Electricity is in the concurrent list of the constitution i.e. both the central as well as the
state regulators have undertaken regulatory initiatives that followed the Act. The Central
Electricity Regulatory Commission (CERC) has introduced regulations for short-term
and long-term open access, and has defined rules for transmission capacity allocation and
congestion management. It continues to use regional postage stamp method for
transmission pricing. In a well developed bulk power markets such rules would need to
be redesigned.
The existing market structure for the bulk power market is primarily characterized by
bilateral and multilateral contracts between generation plants owned by central and state
governments, IPPs, surplus captive generation capacity and the distribution
utilities/SEBs. Less than 5 % of the gross energy generated in the country is being traded
either through negotiated trading arrangements or brokered by power traders. In a sellers
market, the trading activity is far from competitive and this led to complaints of higher
margins being charged by some traders. Armed with the provisions of the Electricity Act
2003, the CERC imposed a trading margin of Paise 4 per kWh on trader brokered
exchanges. This however, does not recognise relative scarcity in some parts of country or
some hours of the day. In case trading is undertaken in a competitive environment,

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the resulting sale of electricity would not attract the trading margin. Setting up of an
organised platform for trading electricity contract is under consideration for some time.
Power Exchange is a proven mechanism for efficient and transparent trading, i.e. a way
to enhance competition in the market, as it gives a true picture of the profit and loss of
any utility with respect to their competitors. The price determination at power exchange
is mainly done by bidding. Most of the countries are following a two side bidding, where
supply bid as well as demand bid is asked for the determination of market clearing price
(MCP).
However, there have been some issues in the determination of prices, which means these
prices have not represented the true picture of the services being offered in the market. In
case of California Crisis many issues have been analyzed for the proper functioning of
any Power Exchange. The issues are:-
1. Market manipulation.
2. Withholding capacity.
3. Strategic bidding.
As India is also in a way to develop the concept of Power Exchange, it can take lessons
from these existing exchanges and can come with a proper solution for the same.
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CHAPTER 3
Structure of Power Exchange in India
Bulk electric power supply in India is mainly tied in long-term contracts. The bulk
suppliers are mostly the central or state owned generating stations, as also a few IPPs.
The SEBs/Discoms who have the obligation to provide electricity to their consumers
mainly rely on supplies from these long-term contracts. However, it is neither feasible
nor economical to meet short term, seasonal or peaking demand through long-term
contracts. Be it a deficit scenario or otherwise, power trading is essential for meeting the
short terms demand at an optimum cost. Similarly, power trading is essential for
distribution utilities for selling short-term surpluses in order to optimize the cost of
procurement. A few captive generating plants participate in trading in order to optimize
their operating cost and in the process, supply electricity to the grid. The Open Access
Regulations and Inter-State Trading Regulations of the Central Commission have
facilitated power trading in an organized manner. Today, it is possible to trade electricity
between any two points in India through inter-State Open Access on advance reservation
basis, on current reservation basis, on day ahead basis and even on real time basis.
Annual volume of electricity traded through open access route is of the order of 12-13
BU constituting about two percent of the total energy availability.
The bilateral trading going on at present is mostly between SEBs/Discoms. It is either
through a trader as a counter party or direct.
Some of the trading is taking place on barter basis. The power trading agreements are
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mostly inter-state or inter-regional, requiring Open Access through the CTU network.
Main features of the existing power trading are summarized below:
1. Sellers dictate prices by inviting bids from the traders. Traders bidding the highest
obtain the limited supplies and sell it to deficit entities after topping it with trading
margin.
2. Transmission access has to be arranged separately.
3. Trading is taking place through non-standard loose bilateral contracts. Generally, there
is little or no penalty if the supplier fails to supply or the buyer backs out.
4. There is established scheduling procedure at the regional level, which aggregates the
trading schedule in day- ahead schedules.
5. Payment for scheduled traded energy is settled directly by the concerned parties. It is
usually through LC.
6. There is energy accounting mechanism at the regional level and all deviations from
schedules are handled through UI mechanism.
7. Volume of traded electricity is tending to become stagnant, while its price continues to
increase.
8. Sellers located in different Regions cannot compete on equal footing due to pan caking
of transmission charges.
9. In spite of assured demand, the captive and merchant IPPs are not coming for trading
in a big way, in the absence of a mechanism for energy accounting etc. Thus, there are
barriers for entry into the electricity market.
10. Open access to large consumers recently allowed by the State

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Though the power-trading scenario in India is at a nascent stage, it is growing at a rapid
pace. The power market in India has evolved over the last four years and it is expected
that it is likely to grow at a faster pace – with the reforms of SEBs and building up of
transmission highways across the regions to increase Inter-regional power transfer
capacity from currently available 8000 MW to 30,000 MW.
The purpose of the Power Exchange is to explore the possibilities of creating a common
platform for trading electricity in India so that:
• PX as security against PPA defaults
• Cross- border trading: At present, cross border trading is going on essentially
on long-term contracts or on barter basis. In the long run, the creation of voluntary
Power Exchange would be positive development not only for India but for the
South Asian region as well.
• PX as facilitator of consumer’s choice: If there were a PX, the consumer would
have the assurance that he can get his backup or peak demand met from PX
whenever power from bilateral source is not available.
• Existing resources are optimally utilized and availability of power supply
increases.
• Standardization of electricity as a tradable product can be achieved.
• Electricity is valued in terms of time of the day/season and there are clear signals
for adding capacity.
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In a Power Exchange, it is possible to allow both buyers and suppliers to participate in
the bidding process in an equitable manner. The Power Exchange could be a counter
party to all the deals in order to ensure payment security to all the participants. A well-
designed and functioning Power Exchange providing payment security to participants has
the potential to energize the power sector and put it into orbit of self sustained growth.
Markets for electricity generally require sufficient generation capacity. Therefore in
India, where there are moderate off-peak surpluses and large peak shortages, we should
move cautiously towards development of electricity market. In an overall deficit scenario
like we have, one cannot think of wholesale change from regulated tariffs to market
driven wholesale prices. Under the present circumstances, it is essential that no long-term
contracts are re-opened or disturbed for the sake of market development. It is suggested
that one should focus on improving the existing trade, and from there, try to carve out
road map for future.

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In a PX, price is determined by anonymous bidding so as to match demand and supply of
electricity. However, several variations in this process are possible. Some of the issues,
which need to be decided before setting up the PX in Indian context, are listed below:
(i) National power exchange Vs many power exchanges
(ii) Mandatory Vs Voluntary participation
(iii) Double side bidding Vs supply side bidding
(iv) Uniform pricing Vs Discriminatory pricing
(v) Day-ahead exchange Vs same day exchange
(vi) Time block for bidding (hourly/half-hourly etc.)
(vii) Congestion management
(viii) Taking care of operational inflexibilities of generating stations
So, it is needed to take consideration other successful Power Exchanges running across
the world. In this report, only two main markets is being summarized through which
India should take lessons to design their market:
1. U.K. Electricity Market
UK has been one of the leaders in developing spot electricity market trading system,
which links the physical and financial domains. The initial competitive electricity market
structure involved an electricity Pool for England and Wales.
After a review, a new electricity trading arrangements (NETA) evolved slowly which
provides the new structure and rules for the E&W electricity market.
The transactions taking place within the NETA market are electricity price-quantity
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transactions on a half-hourly basis. The system operator (SO) and power exchanges (PX)
are central to the functioning of the E&W electricity market under NETA.
PXs provide contracts that are ‘cleared’ giving a guarantee against default on a contract.
Trading through brokers, over the counter (OTC) trading and other financial instruments
(Options and futures), also forms the part of market trading. The SO for E&W, National
Grid (NGC), currently has two functions: firstly the management of high voltage
transmission system as transmission system operator (TSO) and secondly the supply of
operational services. Generation forecasting, congestion management and provision of
ancillary services are managed by NGC as SO. In addition the balancing mechanism
allows the SO to maintain local and national balances of generation and consumption in
real time, thus price and volume agreements within the balancing mechanism are made
directly with the SO.
2. Nordic Electricity Market
Nord Pool, the Nordic Power Exchange, is the world's first international commodity
exchange for electrical power. The Nordic power market which trades with neighboring
countries and is dominated by hydropower, can be seen to be very different from that in
E&W. The existence of a transmission system linking Denmark, Norway, Sweden and
Finland provides the basis for physical electricity exchanges organized on a national basis
for these countries. The national transmission system operators (TSOs) are responsible
for reliability and balance settlements. Nordel facilitates co-operation between these
TSOs and deals with planning, operation and transmission pricing.
Nord Pool organizes trade in standardized physical and financial power contracts
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including clearing services to Nordic participants. The spot price for the Nordic
electricity market is set by Nord Pool every hour. Elspot and Elbas are Nord Pool auction
based spot market for trade in power contracts for physical delivery . On Elspot, hourly
power contracts are traded daily for physical delivery in the next day's 24-hour period.
On Elbas, continuous adjustment trading in hourly contracts can be performed until one
hour before the delivery hour.
The objective of Nord Pool financial market is to provide an efficient market, with
excellent liquidity and a high level of security to offer a number of financial power
contracts that can be used profitably by a variety of customer groups.
Right time to launch PX
The timing of launching a Power Exchange is very important. Once a Power Exchange
has been launched, it would be under pressure to fulfill the expectations of buyers. As per
the technical estimate of CEA, the all India peaking shortage is of the order of 12000
MW. The price at which this demand exists is not known. However, it would be
reasonable to assume that the above figure of unmet demand is conservative and it
definitely exists at a price level corresponding to the average aggregate cost of bulk
supply for various utilities, which is of the order of Rs.2.00 per unit. Assuming the unmet
demand to be elastic, it would be fair to assume that in the electricity market there is
short-term demand of the order of 5000 MW at a price level of about Rs.4.00 per unit on
a typical day during summer. The above scenario is dynamic, and has to be viewed in the
backdrop of increasing demand and capacity addition going on continuously.

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Going by the international experience, it can be argued that the right time to set up a
Power Exchange would be when the aggregate demand and supply streams are more or
less evenly placed on all India basis and the twin objectives of meeting the peak demand
and resource optimization could be achieved through a common trading platform. On the
other hand, it may be prudent to launch it in the near future even in a situation of
shortage, to send the tight signal to investors and consumers about transparent market
development. Finally, unequivocal support of the Central and State Governments,
Electricity Regulators and cooperation of all other stakeholders would be necessary for
creating a suitable environment required for building a common trading platform.
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CHAPTER 4
Derivatives for Risk Hedging
A derivative is a financial instrument (contract) between two parties with opposite views
on the market, who are willing to exchange certain risks. They are the instruments
(contracts) that do not represent ownership rights in any asset but, rather, derive their
value from the value of some other underlying commodity or other asset. When used
prudently, derivatives are efficient and effective tools for isolating financial risk and
“hedging” to reduce exposure to risk. The general types of risk faced by all businesses
can be grouped into five broad categories: market risk (unexpected changes in interest
rates, exchange rates, stock prices, or commodity prices); credit/default risk; operational
risk (equipment failure, fraud); liquidity risk (inability to pay bills, inability to buy or sell
commodities at quoted prices); and political risk (new regulations,
expropriation).Barriers to the development of the electricity derivatives market are
numerous:
• The physical supply system is still encumbered by a 50-year-old legacy of vertical
integration.
• Electricity markets are subject to Central and State regulations that are still
evolving.
• As a commodity, electricity has many unique aspects, including instantaneous
delivery, non-storability, an interactive delivery system, and extreme price
volatility.
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• The complexity of electricity spot markets is not conducive to common futures
transactions.
• There are also substantial problems with price transparency, modeling of
derivative instruments, effective arbitrage, credit risk, and default risk.
4.1) Commonly Used Electricity Derivatives
Commonly used electricity derivatives traded in electricity markets include forward
price contracts, swaps, options, and vesting contracts.
Forward Price Contracts. The primary derivative used in electricity price risk
management is the forward price contract. Electricity forwards typically consist of a
custom-tailored supply contract between a buyer and seller, whereby the buyer is
obligated to take power and the seller is obligated to supply a fixed amount of power
at a predetermined price on a specified future date. Payment in full is due at the time
of, or following, delivery. This differs from a futures contract, where contracts are
marked to market daily, resulting in partial payment over the life of the contract.
Forward contracts are traded bilaterally or over the counter between two financial
institutions or between a financial institution and one of its corporate clients and the
contracted parties usually customize the contract in order to make it fit their
needs.Usually, in future contracts, there is a range of possible delivery date. Whereas
forward contracts have a specific expiration at which the asset is delivered
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and payment is made. The buyer of contract is called long whose purchase obligates
him to accept delivery unless he liquidates his contract with an offsetting sale. The
seller of the contract is called short.
Futures Contracts: - Electricity futures contracts differ from forward contracts in
that a highly standardized fixed price contract is established for the delivery or receipt
of a certain quantity of power at some time in the future—usually, during peak hours
for a period of a month. Also, futures contracts are traded exclusively on regulated
exchanges. To meet the long-term hedging needs of the customer (load-serving
entity), power marketers typically combined several months of futures contracts into a
“strip” of deliveries. Future contracts include an obligation to buy or sell a specified
quantity of an asset at a certain future time for a certain price. The futures are
standardized contracts which are traded on and cleared by an exchange and the
exchange could guarantee that the contract would be honored.
However, that the only point of negotiation is the price. All other terms and
conditions are pre-specified, thereby making it a standardized contract. The main
justification of futures contract is that it permits specialization between two elements
of the economic process: the function of holding commodities and the function of
bearing the risk of price changes. The seller of a future contract on a commodity does
not normally intend to deliver the actual commodity nor does the buyer intend to
accept delivery; each will, at some time prior to delivery specified in the contract,
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cancel out obligation by an offsetting purchase or sell. In fact, historically, less than
one or two percent of futures contract have been fulfilled by actual delivery.
Electricity Price Swaps. Electricity swap contracts typically are established for a
specified quantity of power that is referenced to the variable spot price at either the
generator’s or consumer’s location. Basis swaps are also commonly used to lock in a
fixed price at a location other than the delivery point of the futures contract. That is,
the holder of an electricity basis swap has agreed to either pay or receive the
difference between the specified contract price and the locational spot price at the
time of the transaction.
Contract for Differences (CfDs)
CfDs, which are mechanisms to stabilize the power costs to consumers and revenues
to generators, is one form of forward contract. These contracts are suggested due to
the fact that the spot price set by PoolCo fluctuates over a wide range and difficult to
forecast over a long periods. A CfD can be either one way or two-way. A two-way
CfD is similar to financial future contract and is defined in terms of a strike price (Rs.
/kWh), and a quantity (kWh). When spot price is above the strike price, the seller
pays buyer an amount equal to difference between the spot price and strike price and
when the spot price is below the strike price, buyer pays the seller an amount equal to
the difference between strike price and spot price. Thus both parties have hedged their
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exposure to spot price. A one way CfD is similar to financial option contract and also
include an option fee in addition to strike price and contract quantity. Under one way
contract, difference payments are made only if spot price rises above the strike price.
Options Contracts: - Many electricity customers prefer to have a delivery contract
with flexible consumption terms. They prefer to pay the same rate per kilowatt-hours
no matter how many kilowatt-hours they use. An electricity supplier who is holding a
futures contract covering the delivery of a fixed number of kilowatt hours is therefore
at risk that the consumer could use more or less electricity than his futures contract
covers. To cover the risk, a supplier often buys an electricity option (i.e., the right but
not obligation to purchase additional power at a fixed price. An option contract
includes a right (not obligation) to buy or sell a specified quantity of an asset at a
certain future time for a certain price. In case of futures/forwards, contract is either
held for delivery or liquidity, but option contracts may be held for liquidity, delivery
or expires worthlessly. To enter an option contract, the buyer pays a premium to the
seller of options, while in futures and forwards, the buyer does not have to pay any
charges. A call option gives the holder the right to purchase the underlying asset at
some future date, and a put option gives the holder the right to sell the underlying
asset at some future date. Let utility-A purchase call options from utility-B with a
strike price of Rs.4/kWh at a premium of Rs.2/KWh. For utility- A, any future price
of Rs.4/kWh or less would result in loss equal to premium, which is Rs.2/kWh. At a
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future price of Rs.6/kWh, utility-A’s profit (loss) is zero (it is called break even
transaction) and at any price greater than Rs.6/kWh, utility-A would gain up to an
unlimited value. In another case let utility-A purchase put options from utility-B with
a strike price of Rs.8/kwh at a premium of Rs.2/kWh. For utility-A, any future price
at Rs.8/kwh or more would result in a loss equal to the premium, which is Rs.2/kWh.
At a futures price of Rs.10/kWh, utility-A’s profit (loss) is zero (it is called break
even transaction) and at any price less than Rs.8/kWh, utility- A would obtain a gain.
Since option contracts are tradable, the holders have the flexibility to sell the contract
in secondary market. However, option contracts are financial instruments and are not
directly related to physical delivery of electricity. The holder does not have to
exercise this right. This fact distinguishes options from future contracts. A new
electricity forward contract bundled with bilateral financial options or optional
forward contract is introduced in, which gives option holder a right but not an
obligation to purchase or sell the contract energy at a delivery time for a given price.
This allows both seller and buyer to take advantage of flexibility in generation and
consumption to obtain monetary benefits while simultaneously removing the risk of
market price fluctuations.
4.2 ) Derivative Options Suitable for Indian Power Exchange: In the long run, it
would be desirable to develop financial hedging instruments such as contract for
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differences to provide security to buyers and suppliers against price fluctuations.
Financial derivatives such as forwards and futures, contract for differences etc are
generally in vogue in established electricity markets. Traders and financial institutes
bring liquidity to the market for financial derivatives. However, the idea of some of
the commodities exchanges to start futures trading around some price discovery like
UI price, without any physical delivery would be nothing but pure speculation. It
would not be of any help in bringing investment in the power sector. In the Indian
context, futures markets need not be encouraged/facilitated, since they are inherently
speculative in nature.
Forward markets comprise of long-term PPAs and short-term bilateral, and these would
not be routed through PX. The Balancing market is adequately and fully taken care of by
the established UI mechanism, and PX shall have no role in it. Contracts for differences
are not relevant/applicable in our case. The purpose of options would be served by
resorting to spot sale/purchase or UI. Thus, the only type of market left to be catered by a
PX would be spot market, which in our case may include day-ahead and days-ahead.
Regarding trading in derivatives and futures, this issue should be decided keeping in view
the expectations of the customers of the PX.
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CHAPTER -5
Risk Hedging for Generating Stations
5.1 Supply Options for Power Exchange:
As per 16th Electric Power Survey (EPS), the likely installed capacity of each Generating
station with respect to their type of generation is given in Appendix Table No. 5.1.
The CEA in its long term planning of 11th five year plan (2007-2012), has reported in 16th
EPS survey that likely installed capacity will be as given in Appendix Table No.5.2
Ministry of New and Renewable and Energy (MNRE) has projected a grid connected
renewable capacity addition of 13,500 MW during 11th plan.
The different sources are given in Table 5.3
Sources / Systems Generation(MW)

Wind Power 10000
Biomass Power 2100
Small Hydro 1400
TOTAL 13,500
Captive Power Plants :As per 11th plan, surplus power from new captive power plants
will be about 12000 MW into the grid in between 2007-2012.The installed capacity of
CPPs has increased from 588 MW in 1950 to 19,103 MW in October 2006.
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Merchant Power Plants: As per 11th plan about 10,000 -12000 MW capacity expected
to be developed up to 2012.
So, considering Table no. 5.1, 5.2 and 5.3 and CPPs with MPPs, the anticipated
generation would be as per given in Table 5.4
S.No. Sector/Sources Status up Additional Generation

to 2007 Generation(Between up to 2012
2007- 2012 as per
11th plan)
1 Central Sector 46319 36655 82974
2 State Sector 76607 48876 125483
3 Private Sector 17645 23152 40797
4 Captive Power Plant 19103 13500 32603
5 Merchant Power _ 10000 10000
Plant
TOTAL 159674 132183 291857
TABLE 5.4
Now the PLF of each type of generating sources are given in appendix Table 5.5:
Now contribution from each sector/sources in power exchange would be as per given in
Table 5.6:
S.No. Sector/Sources Contribution

1 Central Sector 15%
2 State Sector 0%
3 Private Sector 50%
Captive power
4 Plant 40%
Merchant power
5 Plant 70%
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For Central Sector the contribution is taken as on an average 15% because as per given in
CERC regulations there is required to reserve at least 15% not bound through Power
Purchase Agreement. For State sector the contribution is taken as 0% because state
generating stations are not able to fulfill their own requirement and surplus power is
traded through banking concept. For Captive Power Plants the contribution is taken as
40% since as per EA2003, the CPPs must have to utilize at least 52% of power
consumption themselves. Also the Merchant Power plants are not bound through PPAs
their contribution is taken as highest i.e. 70%.This is all about generating sources
availability in Power Exchange. It is being given in excel Sheet in next page.
26
Ajay Yadav
Supply Availability for Power Exchange
Sector/Sources Thermal
Capacity PLF Contribution Total

Central 58447 0.72 0.15 6312.276
Private 18692 0.72 0.5 6729.12
Sector/Sources Hydro

Central 17247 0.59 0.15 1526.36
Private 4556 0.59 0.5 1344.02
Sector/Sources Nuclear
Capacity PLF Contribution

Central 7280 0.64 0.15 698.88
Private 0 0 0 0
Sector/Sources WIND/RES

Central 0 0 0 0
Private 11588 0.35 0.3 1216.74

Captive P.P. 32603 0.6 0.4 7824.72
Merchant 10000 0.6 0.7 4200
P.P.
TOTAL=29852.12MW
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Ajay Yadav
5.2 ) Expected Demand Requirement In Power Exchange:
TRADING: With the increase in inter-regional transmission capacity and generation
capacity additions, the volume of trading is likely to increase considerably in the coming
years and expected to be between 50-65 BU by 2012.The 16th EPS report stipulates peak
demand of 1, 57,000 MW by 2011-12.
So, the expected requirement through Power Exchange will be:
Peak Demand=157000, Peak Shortage=13%, Requirement=157000*.13=20410 MW.
Also, the trading done will be:
Volume of Trading=60BU, Trading through Exchange= (6,00,00,000*0.7)/8760=4800
MW.
The expected demand at peak through Power Exchange:
Total Demand Peak Shortage Demand+Trading Volume=20410+4800=25210MW.
COST OF GENERATION:
The average cost of generation going on right now of different generating Sources are as
per given in table 5.7
Source Present
Value(Rs.)
Hydro 2
THERMAL
Coal 2.25
gas 3.5
lignite 4
NUCLEAR 6
Renewable 6.5
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Ajay Yadav
It is expected that the marginal cost will be almost same to the average cost of generation
of each plant, taking this fact into consideration, at 6% inflation rate the cost structure
could be like as given in Table 5.8
Source FV in 2012 at Inflation

Rate 6%(Rs.)
Hydro 2.66
THERMAL
Coal 3.01
Gas 4.69 5.02
Lignite 5.36
NUCLEAR 8.04
Renewable 8.71
TABLE 5.8
5.3) Calculation of Expected Demand during Maximum Peak and Minimum Peak
in 2012 and Supply to Meet that Demand:
Calculation of Peak Demand:
First we have to go through the calculation of peak demand during the present situation; I
have taken the case of April 2005 - March 2006.
The peak demand of each region are given in appendix at table no. 5.9, 5.10, 5.11, 5.12
and 5.13
So, the demand met and the requirement of the country as a whole in 2005-06 is given by
adding each region wise to the corresponding month as a given in Table 5.14
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Ajay Yadav
Month Demand Requirement shortage

met (MW) (MW)
5-Apr 79206 89646 -0.38
5-May 82995 89102 -0.98
5-Jun 79127 90078 0.10
5-Jul 77015 84572 -6.02
5-Aug 80907 89143 -0.94
5-Sep 81166 88645 -1.49
5-Oct 82969 90215 0.25
5-Nov 81657 90088 0.11
5-Dec 80627 90586 0.67
5-Jan 81049 91555 1.74
5-Feb 79703 93291 3.67
5-Mar 83559 92930 3.27
TABLE- 5.14
The average of the peak requirement is 89987.58.
Now as previously calculated:
Peak Demand=157000, Peak Shortage=13%, Requirement=157000*.13=20410
Also the shortage given is -0.98% as per table no. in 2005-06 this shortage will be the
same in 2012.
Average requirement= Peak Demand*100/(100+Peak Demand)=19687.3 MW.
So in this way monthly requirement can be calculated of the power exchange, since we
know the average and the shortage as per given in Table 5.15
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Ajay Yadav
Requirement
Shortage Average (MW)
-0.38 19687.29 19612.56
-0.98 19687.29 20410.00
0.10 19687.29 19707.07
-6.02 19687.29 18502.48
-0.94 19687.29 19502.51
-1.49 19687.29 19393.56
0.25 19687.29 19737.04
0.11 19687.29 19709.26
0.67 19687.29 19818.21
1.74 19687.29 20030.21
3.67 19687.29 19493.54
3.27 19687.29 20331.60
TABLE 5.15
The peak load curve w.r.t demand and requirement is given in Figure 5.1:
PEAK REQUIREMENT IN 2005-06

Requirement(MW)
95000
90000
85000
80000
Apr- May- Jun- Jul-05 Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar-
05 05 05 05 05 05 05 05 06 06 06
Month Series1
As per given in PGCIL website the maximum peak demand day during the year 2005-06
is 30/05/05 and the minimum is at 26/02/06.
Considering this fact the total demand and the requirement of each region is being
calculated and by adding them the figure that came is as shown in Table 5.16 and Table
5.17.
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Ajay Yadav
Maximum Peak Demand in 30/05/05
Time/ NRLDC SRLDC NERLDC WRLDC ERLDC Total

Region Requirement
(MW)
1:00 hrs. 22100 19000 650 23300 16263 81313

2:00 hrs. 22250 19250 625 22900 10531 75556
3:00 hrs. 21583 18651 625 22850 10215 73924
4:00 hrs. 22300 19425 675 22775 10600 75775
5:00 hrs. 21600 19865 650 22800 10529 75444
6:00 hrs. 22850 20000 700 23300 10888 77738
7:00hrs. 22300 20125 750 23800 10794 77769
8:00 hrs. 22155 20250 725 23600 10783 77513
9:00 hrs. 22250 22000 700 23700 11238 79888
10:00 hrs. 21750 21350 625 23800 10931 78456
11:00 hrs. 21850 22000 625 23850 11119 79444
12:00 hrs. 20100 20250 650 23800 10250 75050
13:00 hrs. 21050 20100 650 23875 10450 76125
14:00 hrs. 20265 20175 600 23562 10260 74862
15:00 hrs. 20135 20200 600 23635 10234 74804
16:00 hrs. 20365 20000 750 23240 10279 74634
17:00 hrs. 22315 21000 800 23200 11029 78344
18:00 hrs. 23100 22365 900 22835 11591 80791
19:00 hrs. 24271 23000 1100 24550 12093 85014
20:00 hrs. 24050 23164 1100 24600 12079 84993
21:00 hrs. 23150 21356 850 24400 11339 81095
22:00 hrs. 23560 21256 800 24489 11404 81509
23:00 hrs. 22500 21145 640 24400 11071 79756
24:00 hrs. 21300 19000 600 24310 10225 75435
TABLE 5.16
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Ajay Yadav
The daily load curve of 30/05/05 is given in Figure 5.2.
Peak Load Curve of India in 2005-06

Demand(MW)
Peak
Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar-
05 05 05 05 05 05 05 05 05 06 06 06
Month
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Ajay Yadav
Maximum Peak Demand in 26/02/06

TIME/ NRLDC SRLDC NERLDC WRLDC ERLDC Total
REGION Requirement
(MW)
1:00 hrs. 18250 14000 650 23700 11650 68250

2:00 hrs. 18150 13230 650 23400 11358 66788
3:00 hrs. 18030 12250 600 23200 11020 65100
4:00 hrs. 18300 13250 575 23150 11319 66594
5:00 hrs. 18500 14560 625 23000 11671 68356
6:00 hrs. 18600 15000 750 23300 11913 69563
7:00hrs. 18590 15200 700 23000 11873 69363
8:00 hrs. 18450 15200 650 22600 11725 68625
9:00 hrs. 18500 15325 725 22700 11813 69063
10:00 hrs. 18680 16650 750 23000 12270 71350
11:00 hrs. 18890 16650 775 23200 12379 71894
12:00 hrs. 19100 16700 650 23550 12500 72500
13:00 hrs. 19450 17250 650 23500 12713 73563
14:00 hrs. 19560 17250 600 23400 12703 73513
15:00 hrs. 19650 17300 725 23500 12794 73969
16:00 hrs. 20050 18250 625 23400 13081 75406
17:00 hrs. 20500 18000 725 23400 13156 75781
18:00 hrs. 20450 17000 850 22800 12775 73875
19:00 hrs. 20621 16650 1050 23200 12880 74401
20:00 hrs. 20800 18850 1000 24000 13663 78313
21:00 hrs. 21300 19000 1025 24400 13931 79656
22:00 hrs. 21250 18350 975 24300 13719 78594
23:00 hrs. 19850 16650 900 24350 12938 74688
24:00 hrs. 19750 15050 850 24150 12450 72250
TABLE 5.17
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Ajay Yadav
The daily load curve of 26/02/06 is given in Figure 5.3
PEAK REQUIREMENT IN 30/05/06
86000
84000
82000
80000
Time(Hrs.)
78000
76000
74000
72000
70000
68000
s.
s.
s.
s.
s.
s.
s.
s.
s.
s.
s.
s.
hr
hr
hr
hr
hr
hr
hr
hr
hr
hr
hr
hr
00
0
00
00
00
00
:0
:0
:0
:0
:0
:0
:0
7:
Requirem ent(MW)
1:
3:
5:
9:
11
13
15
17
19
21
23
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Ajay Yadav
5.4) Effective Generation during Peak Demand In 2012
The installed generation region wise is given below:
INSTALLED GENERATION REGIONWISE
NRLD SRLD NERLD WRLD ERLD TOTAL(MW

C C C C C )
HYDRO 11118 11219 1076 6479 2494 32386

THERMAL 17322 15880 240 20876 15336 69654
GAS/DIESE 3275 4447 845 5540 190 14297
L
NUCLEAR 1180 830 0 1300 0 3310
NCES 360 3655 0 818 0 4833
TOTAL(MW) 33255 36031 2161 35013 18020 124480
TABLE 5.18
Now the actual generation region wise in the peak day of the year 30/05/05 is given
below in Table 5.19
Effective Generation as on Maximum Peak of the Year 30/05/06

NRLDC SRLDC NERLDC WRLDC ERLDC TOTAL
HYDRO 5112 5350 450 1240 360 12512
THERMAL 12700 7910 170 17860 1360 40000
GAS/DIESEL 1970 3490 460 3250 70 9240
NUCLEAR 688 390 0 1250 0 2328
NCES 160 2250 0 350 0 2760
TOTAL 20630 19390 1080 23950 1790 66840
TABLE 5.19
Now the actual generation region wise in the minimum peak day of the year 26/02/06 is
given below in Table 5.20
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Ajay Yadav
Effective Generation as on Minimum Peak of the Year 26/02/06

NRLDC SRLDC NERLDC WRLDC ERLDC TOTAL
HYDRO 6350 4370 650 3650 560 15580
THERMAL 12750 6030 130 16650 690 36250
GAS/DIESEL 1960 3020 70 1250 50 6350
NUCLEAR 750 460 0 670 0 1880
NCES 75 2000 0 360 0 2435
TOTAL 21885 15880 850 22580 1300 62495
TABLE 5.20
Now, referring to Table 5.20, on the basis of requirement and average calculation the
shortage can be calculated as per given in Table 5.21
Time(Hrs.) Requirement at 30/05/05

Total Requirement(MW) Average(MW) %
Deviation
1:00 hrs.
2:00 hrs. 75488 77892 -3.19
3:00 hrs. 75556 77892 -3.09
4:00 hrs. 73924 77892 -5.37
5:00 hrs. 75775 77892 -2.79
6:00 hrs. 75444 77892 -3.25
7:00hrs. 77738 77892 -0.20
8:00 hrs. 77769 77892 -0.16
9:00 hrs. 77513 77892 -0.49
10:00 hrs. 79888 77892 2.50
11:00 hrs. 78456 77892 0.72
12:00 hrs. 79444 77892 1.95
13:00 hrs. 75050 77892 -3.79
14:00 hrs. 76125 77892 -2.32
15:00 hrs. 74862 77892 -4.05
16:00 hrs. 74804 77892 -4.13
17:00 hrs. 74634 77892 -4.37
18:00 hrs. 78344 77892 0.58
19:00 hrs. 80791 77892 3.59
20:00 hrs. 85014 77892 8.38
21:00 hrs. 84993 77892 8.35
22:00 hrs. 81095 77892 3.95
23:00 hrs. 81509 77892 4.44
24:00 hrs. 79756 77892 2.34
75435 77892 -3.26
TABLE 5.21
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Ajay Yadav
Also we know that the maximum requirement will be 25210 MW. It is all sure that this
situation will arise on this day only i.e. 30/05/05. So, we know that peak requirement will
be at 1900 hrs.and the shortage will be 8.38%.
So, average can be calculated, and that will come 23907. Now, the peak requirement at
other time hours can be easily calculated as per given in Table 5.21:
Power Exchange in 30/05/2012
Average(MW) Total Time (hrs.)

Requirement
(MW)
23097 22384 1:00 hrs.

23097 22404 2:00 hrs.
23097 21920 3:00 hrs.
23097 22469 4:00 hrs.
23097 22371 5:00 hrs.
23097 23051 6:00 hrs.
23097 23060 7:00hrs.
23097 22984 8:00 hrs.
23097 23689 9:00 hrs.
23097 23264 10:00 hrs.
23097 23557 11:00 hrs.
23097 22254 12:00 hrs.
23097 22573 13:00 hrs.
23097 22199 14:00 hrs.
23097 22181 15:00 hrs.
23097 22131 16:00 hrs.
23097 23231 17:00 hrs.
23097 23957 18:00 hrs.
23097 25209 19:00 hrs.
23097 25202 20:00 hrs.
23097 24047 21:00 hrs.
23097 24170 22:00 hrs.
23097 23650 23:00 hrs.
23097 22368 24:00 hrs.
TABLE 5.21
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Ajay Yadav
The corresponding load curve is given in Figure 5.3.
Peak Demand on 30/05/2012

26000
25000
24000
Peak(MW)
23000
22000
21000
20000
3 : r s.
5 : r s.
7 : s.
: 0 s.
.
s.
9: rs.
11 hrs
rs
15 hrs
19 hrs
rs
23 hrs
hr
hr
h
h
h
00
00
00
00
00
0
:0
:0
:0
:0
:0
:0
1:
13
17
21
Time (Hrs.)
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Ajay Yadav
In the same way using ratio and proportion we can calculate the situation in 26/02/2012
Total Average(MW) % Deviation

Requirement
(MW)
68250 72144 -5.71

66788 72144 -8.02
65100 72144 -10.82
66594 72144 -8.33
68356 72144 -5.54
69563 72144 -3.71
69363 72144 -4.01
68625 72144 -5.13
69063 72144 -4.46
71350 72144 -1.11
71894 72144 -0.35
72500 72144 0.49
73563 72144 1.93
73513 72144 1.86
73969 72144 2.47
75406 72144 4.33
75781 72144 4.80
73875 72144 2.34
74401 72144 3.03
78313 72144 7.88
79656 72144 9.43
78594 72144 8.21
74688 72144 3.41
72250 72144 0.15
TABLE 5.22
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Ajay Yadav
Power Exchange as on 26/02/2012

Time(Hrs.) Average(MW) Peak
Demand(MW)
1:00 hrs. 23097 21850
2:00 hrs. 23097 21382
3:00 hrs. 23097 20842
4:00 hrs. 23097 21320
5:00 hrs. 23097 21884
6:00 hrs. 23097 22271
7:00hrs. 23097 22206
8:00 hrs. 23097 21970
9:00 hrs. 23097 22110
10:00 hrs. 23097 22843
11:00 hrs. 23097 23017
12:00 hrs. 23097 23211
13:00 hrs. 23097 23551
14:00 hrs. 23097 23535
15:00 hrs. 23097 23681
16:00 hrs. 23097 24141
17:00 hrs. 23097 24261
18:00 hrs. 23097 23651
19:00 hrs. 23097 23820
20:00 hrs. 23097 25072
21:00 hrs. 23097 25502
22:00 hrs. 23097 25162
23:00 hrs. 23097 23911
24:00 hrs. 23097 23131
TABLE 5.23
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Ajay Yadav
The corresponding load curve of 26/02/2012 is given in the figure 5.4
Peak Demand(MW)as on 30/05/2012
30000
25000
Peak in MW
20000
15000
10000
5000
0
s.
s.
s.
s.
s.
s.
s.
s.
s.
s.
s.
s.
hr
hr
hr
hr
hr
hr
hr
hr
hr
hr
hr
hr
00
0
00
00
00
00
:0
:0
:0
:0
:0
:0
:0
Tim e in hrs.
7:
1:
3:
5:
9:
11
13
15
17
19
21
23
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Ajay Yadav
5.5) Calculation of Average Price on 30/05/2012:
The supply availability on the maximum peak day of the year is given in Table 5.20 Now
the total cost w.r.t the cost of generation will be
Total Cost of Total(MW) Total

Installed Generation Cost(Rs.)
Generation in 2012
32386 2.66 12512 33282
69654 3.01 40000 120400
14297 5.02 9240 46385
3310 8.04 2328 18717
4833 8.71 2760 24040
TABLE 5.24
Now considering the fact about the contribution through each generating sector like state
sector contribution is 0%, the contribution through each generating sources can be
calculated as per given in Table 5.25:
Source % Maximum Actual Contribution in

INSTALLED Supply in Power Contribution PX including
USED Exchange in PX CPP+MPP(MW)
HYDRO 38.63 2870 1109 3109

THERMAL 57.43 8042 4618 9642
GAS/DIESEL 64.63 5000 3231 6731
NUCLEAR 70.33 698 491 491
NCES 57.11 1217 695 2195
Total 17827 10144 22164
TABLE 5.25
Now taking the weighted average of column 2 & column 3 in Table 5.24 the weighted
average Price will hover around Rs. 3.63.
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Ajay Yadav
5.6 ) Calculation of Average Price on 26/02/2012:

The supply availability on the maximum peak day of the year is given in Table 5.21. Now
the total cost w.r.t the cost of generation will be
Sources Total Cost of Total(MW) Total

Installed generation Cost(Rs.)
Generation in 2012
HYDRO 32386 2.66 15580 41443
THERMAL 69654 3.01 36250 109113
GAS/DIESEL 14297 5.02 6350 31877
NUCLEAR 3310 8.04 1880 15115
NCES 4833 8.71 2435 21209
TABLE 5.26
Now considering the fact about the contribution through each generating sector like state
sector contribution is 0%, the contribution through each generating sources can be
calculated as per given in Table 5.27:
Source % Installed
Supply in Contribution Contribution in
Used Power in PX PX including
Exchange CPP+MPP
HYDRO 48.11 2870 1381 4251
THERMAL 52.04 8042 4185 13527
GAS/DIESEL 44.41 5000 2221 6221
NUCLEAR 56.80 698 396 1094
NCES 50.38 1217 613 1830
Total 17827 8796 26923
TABLE 5.27
Now taking the weighted average of column 2 & column 3 in Table 5.24 the weighted
average Price will hover around Rs. 3.50 on 26/02/2012.
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Ajay Yadav
Analysis for risk associated with each generating sources:
1) On 30/05/2012:
Sources/ Total HYDRO THERMAL GAS/DIESEL NUCLEAR NCES

Time Requireme
nt
(MW)
1:00 hrs. 22384 Y Y Y Y Y

2:00 hrs. 22404 Y Y Y Y Y
3:00 hrs. 21920 Y Y Y Y N
4:00 hrs. 22469 Y Y Y Y Y
5:00 hrs. 22371 Y Y Y Y Y
6:00 hrs. 23051 Y Y Y Y Y
7:00hrs. 23060 Y Y Y Y Y
8:00 hrs. 22984 Y Y Y Y Y
9:00 hrs. 23689 Y Y Y Y Y
10:00 23264 Y Y Y Y Y
hrs.
11:00 23557 Y Y Y Y Y
hrs.
12:00 22254 Y Y Y Y Y
hrs.
13:00 22573 Y Y Y Y Y
hrs.
14:00 22199 Y Y Y Y Y
hrs.
15:00 22181 Y Y Y Y Y
hrs.
16:00 22131 Y Y Y Y N
hrs.
17:00 23231 Y Y Y Y Y
hrs.
18:00 23957 Y Y Y Y Y
hrs.
19:00 25209 Y Y Y Y Y
hrs.
20:00 25202 Y Y Y Y Y
hrs.
21:00 24047 Y Y Y Y Y
hrs.
22:00 24170 Y Y Y Y Y
hrs.
23:00 23650 Y Y Y Y Y
hrs.
24:00 22368 Y Y Y Y Y
hrs.
45
Ajay Yadav
On Comparing Table5.25 column 3rd with the total requirement in MW, the table 5.28
can be evaluated. Here Y stands for Yes and N for No.
So, at maximum peak day of the year in 30/05/2012, each and every generating sources
qualifies except few exceptions with Renewable Energy. At 0300 hours in morning and
1900 hours only the renewable generation does not qualifies. So, on this day each
generating source will get maximum benefit through spot market.
The Market Clearing Price will be that of the Renewable energy source i.e. Rs. 8.71/kwh
except in 0300 hours and 1900 hours.
There would be no risk associated with any generating source because at maximum
number of hours (except two) DEMAND > SUPPLY.
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Ajay Yadav
2) On 26/02/2012: As per calculated in Table 5.27 available supply would be 24999
MW.
Sources/ TOTALRE- HYDRO THERMAL GAS/DIESEL NUCLEAR NCES

Time QUIREN
(MW)
1:00 hrs. 21850 Y Y N N N

2:00 hrs. 21382 Y Y N N N
3:00 hrs. 20842 Y Y N N N
4:00 hrs. 21320 Y Y N N N
5:00 hrs. 21884 Y Y N N N
6:00 hrs. 22271 Y Y N N N
7:00hrs. 22206 Y Y N N N
8:00 hrs. 21970 Y Y N N N
9:00 hrs. 22110 Y Y N N N
10:00 22843 Y Y N N N
hrs.
11:00 23017 Y Y N N N
hrs.
12:00 23211 Y Y N N N
hrs.
13:00 23551 Y Y N N N
hrs.
14:00 23535 Y Y N N N
hrs.
15:00 23681 Y Y N N N
hrs.
16:00 24141 Y Y Y N N
hrs.
17:00 24261 Y Y Y N N
hrs.
18:00 23651 Y Y N N N
hrs.
19:00 23820 Y Y N N N
hrs.
20:00 25072 Y Y Y N N
hrs.
21:00 25502 Y Y Y Y N
hrs.
22:00 25162 Y Y Y Y N
hrs.
23:00 23911 Y Y N N N
hrs.
24:00 23131 Y Y N N N
hrs.
TABLE 5.29
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Ajay Yadav
Here, the situation is totally different, there is a high risk associated with Gas/Diesel,
Nuclear and Renewable sources.
Gas/Diesel based plants are qualifying only at three blocks of each hour, Nuclear is
qualifying at two blocks and renewable at none. The only risk less are Hydro and
Thermal plants. The Market Clearing Price will also vary instantaneously accordingly
in the Spot Market in the Power Exchange.
So, the Gas/ Diesel and Nuclear must have to bid in Power Exchange with a strategy
and other than Power Exchange they have to go for Derivatives i.e. short term
contract.
Also it is desirable for Renewable to go for long term PPAs.
5.8 CASE STUDY:
Taken a hypothetical case of a Gas/ Diesel based Generating Station of 200 MW.
Now it has three options available with them:
1) Long Term PPA
2) Short Term Contract like DERIVATIVES.
3) Spot Market competitive Bidding.
As per given in table no. 5.8 the average cost of generation will be Rs. 5.02/kwh.
The generator will must want a minimum return of Rs.5.50/kwh.
So, the expected minimum return would be Rs.5.50/kwh. The generator has an option
to bound it with PPA through state utility at Rs. 5.50/kwh and minimize its risk. But
48
Ajay Yadav
as per Financial Concept of High Risk, High Return it can go for Spot market or
Derivatives.
Selection Chance Forecasted

(%) MCP
0 3
20 4
40 5
60 6
80 7
100 8
Now let’s suppose that fixed cost is Rs. 3/kwh and variable cost Rs.2/kwh.
Now the generating station will go at Rs. 5.50/kwh with a risk associated at 50 %
selection.
The generator will always want to at least recover its fixed cost through PPA or
Derivatives if the bid is not selected.
Now the possible variations as per given in Table 5.8 in Power Exchange would be from
Rs.3/kwh to Rs. 8/kwh.
Hence, the Generating station should forecast first the MCP based on the seasonal
variation and previous data as per done in this chapter and then only should go ahead.
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Ajay Yadav
CHAPTER 6
Conclusion and Recommendations
This report addresses electricity trading in competitive power market.
The key issues and challenges related to trading business models for electricity are
critically examined. The risk management objective in the power business is much more
demanding. In vertically integrated structure, risk management is primarily accomplished
through ownership of generating and perhaps transmission assets and through long term
power purchase agreements. Deregulation plans that recognize the potential for high spot
market prices and incorporate appropriate hedging strategies that will be viable regardless
of spot price and without the need of price caps. Derivatives in market play an important
role in providing the price certainty for buying and selling electricity. . Due to lack of IT
implementation, the obstructions for real time market derivatives are huge and also
speculators may create hurdle to it.
After this, Risk Management for each of the generating sources is critically examined.
For that, it is supposed that Power Exchange has come in 2012, then applying various
tools the possible Demand and the supply options has being examined.
Then the peak season has been calculated and forecasted for 2012.
This has proven that Generating Stations with low average cost of generation will mostly
be benefited like Hydro and Thermal., but generating stations with high cost of
generation in short run like Renewable will have no place in Power Exchange except
during maximum peak periods.
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Ajay Yadav
So, it is being recommended that:
1) For Derivative market in Exchange, there should be a physical delivery of Electricity
and no Speculation should be done to have a stablisation.
2) There should be regulations associated with each type of plant so that each type of
generating sources whether Renewable or Diesel should participate with an equal
opportunity.
3) In the Power Exchange, there should be a voluntary trading market. It is because those
with high cost of generation source can go for any of the best suited option like PPA,
Derivatives for risk hedging in future and Spot Market to gain maximum revenue.
51
Ajay Yadav
REFERENCES
1) Report For The Working Group on Power for Elevanth Plan(2007-2012): Government
of India Ministry of Power
2) Demand forecasting for electric utilities. C.W. Gellings, PE (1991) The
Fairmont Press, Inc.
3. Power Diary. Uttar Pradesh Electricity Regulatory Commission. Luck now.
August 2000.
4. A Base paper on demand projection. Central Electricity Authority, Ministry
of Power, Government of India. New Delhi. December 1999.
5. www.cea.nic.in
6. www.planningcommission.nic.in
52
Ajay Yadav

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Financial Derivatives & Risk Hedging in Power Trading in India

freedom to sell the electricity.

private participation. Trading is now considered as a distinct activity. A robust trading

Exchange will be developed in 2012. So the Demand availability, Supply options,

Competitive Bidding is being discussed.

competitive power market.

Secondary data source are used.

• Risk Management is done for Generating Stations only.

• Derivatives are analyzed using qualitative study.

Chapter 1: Introduction to Power Trading and Power Exchange

has been done.

Chapter 2: Structure of Power Exchange in India: In this chapter, detailed study of

Chapter 3: Derivatives for Risk hedging

derivative i.e. best suitable for Indian Power Market is identified.

Chapter 4: Risk Hedging for Generating Stations

considering the case of 2012.

Chapter 5: Conclusion and Suggestion

In this chapter, Conclusion and suggestion are described.

Introduction to Trading and Exchange

restructuring of some of the SEBs, leading to separation of generation, transmission and

distribution segments and their corporatisation. Regulatory reform included setting up of

Central Electricity Regulatory Commissions (CERCs) and State Electricity Regulatory

trading as a distinct activity. Such provisions of the Act provide an enabling

subject to open access regulations including the cross-subsidy surcharge.

optimization. There is a need to explore the possibility of developing a common platform

as a separate activity is in sync with the overall framework of encouraging competition in

definite time frame. This is expected to result in multiplicity of players in generation,

inducing competition, as the Act envisages, is to create a framework of market in

the Regulatory Commission.

As a corollary to the above competitive framework, appropriate pricing philosophy has

- Tariff regulation/determination by Regulatory Commissions (Section 62);

- Determination of tariff through bidding process (Section 63); and

- Price determination/discovery in the Electricity Market (Section 66).

Regulatory Commissions. For regulating/determining the tariff, the Regulatory

Section 61 of the Act. Central Electricity Regulatory Commission (CERC) as well as

for Determination of Tariff.

transparent process of bidding, which it has already done.

Section 66 providing for Development of Market in electricity by the Appropriate

endeavor to promote the development of a market (including trading) in power in such

referred to in Section 3 in this regard.”

power market would need to be undertaken by the Appropriate Commission in

consultation with all concerned”.

determination /discovery in the electricity market.

Electricity Regulatory Commission (CERC) has introduced regulations for short-term

congestion management. It continues to use regional postage stamp method for

governments, IPPs, surplus captive generation capacity and the distribution

either through negotiated trading arrangements or brokered by power traders. In a sellers

some hours of the day. In case trading is undertaken in a competitive environment,

any Power Exchange. The issues are:-

Structure of Power Exchange in India

procurement. A few captive generating plants participate in trading in order to optimize

Regulations and Inter-State Trading Regulations of the Central Commission have

facilitated power trading in an organized manner. Today, it is possible to trade electricity

BU constituting about two percent of the total energy availability.

The bilateral trading going on at present is mostly between SEBs/Discoms. It is either

through a trader as a counter party or direct.

Main features of the existing power trading are summarized below:

2. Transmission access has to be arranged separately.

trading schedule in day- ahead schedules.

usually through LC.

schedules are handled through UI mechanism.

barriers for entry into the electricity market.

10. Open access to large consumers recently allowed by the State