One Nation, One Price: How Market Coupling Will Reshape India’s Power Market

The power market of India is undergoing a major change. This is because the regulatory body, i.e. Central Electricity Regulatory Commission (CERC), has come up with the idea of ‘Market Coupling’.

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Why Uniformity in Power Market is Required?

Currently, electricity in India is traded at varied prices on different exchanges. The popular three power exchanges namely “Indian Energy Exchange (IEX)”, “Power Exchange India” and “Hindustan Power Exchange of India” function as individual entities. 

Each exchange collects bids and determines prices separately, which often leads to multiple prices for the same electricity at the same time. This creates gaps and affects buyers and sellers.

The CERC draft rules now suggest a centralised approach. All bids will be brought together, and a single price will emerge. At first glance, this may seem like a technical shift. In reality, its impact could be much wider. It may influence power bills, trading behaviour, and even company earnings over time.

To understand how this shift will work in practice, it is important to first look at the core idea behind it.

What is Market Coupling?

Market coupling refers to a regulatory approach within the electricity industry whereby different power exchanges are linked through an algorithm that helps to identify the same market clearing price for all platforms. Market coupling pools all buy and sell bids from these exchanges and clears them together to create a "One Nation, One Grid, One Price" framework.

In order to understand this, take a look at the following example. Currently, it is possible for one unit of electricity to be priced at ₹100 on one exchange, ₹110 on another, and ₹90 on a third exchange. A buyer on the higher-priced exchange ends up paying more, while a seller on the lower-priced exchange may earn less. This creates inefficiency and distorts the market.

And now in the case of market coupling, all of these bids will fall into the same pool. Rather than considering each exchange individually, it will look at the overall demand and supply, resulting in the calculation of one price, for example, of ₹100 in the above example.

Despite the simplicity of this idea, its execution depends heavily on a central authority that will manage this large pool of data and ensure the smooth functioning of the system.

This is where ‘Grid Controller of India Ltd’ comes into the picture.

Role of Grid India

Grid Controller of India Ltd will play a major role in this regard. This is because it will be the ‘Market Coupling Operator’ in the whole scenario. This entity will control the entire process. It will collect the bids made by the exchanges. The bids will be aggregated, and then the process of price discovery will be conducted.

The framework of the Market Coupling process shall initially be restricted to the Day-Ahead Market and the Real-Time Market segments. Later, other segments may be incorporated. The timeline for implementation in each segment shall be established by the CERC later. It can specify a different date for each segment. Until that particular date, the exchanges will handle price discovery in their individual manner. After that, this task shall fall under the responsibility of Grid India.

How the Process Will Work

The entire process would be conducted in an organised manner.

Initially, all exchanges will uniformly gather the bids. Both buy and sell bids will be considered together.

Afterwards, these bids will be transmitted in a secure manner to the Market Coupling Operator. This step will adhere to specific timelines.

The next step involves the aggregation of the bids. In other words, the bids from all the exchanges will be pooled to maximise economic surplus.

Finally, comes the step of price discovery. A single price will be discovered for all trades that are cleared through this process.

Effect on Power Exchanges

The proposed reform is expected to alter the manner in which exchanges function. The importance of price discovery will decline. Exchanges will become venues where bid submission takes place. These changes might have implications for volumes and income generation.

Wide Effects on the Economy

The impact of market coupling is not limited to the power sector alone. This may impact the larger economy. Many industries depend heavily on electricity for daily operations. Even a small change in power prices may influence the overall cost structure.

With a single price mechanism in place, price variations across exchanges are likely to reduce. This may lead to more stable and predictable electricity costs. For industries such as manufacturing, steel, cement, and textiles, this stability is important. It helps in planning production and managing expenses more effectively.