We have read it word by word so that you don’t have to.😀
Agenda👇
● A brief about Market Coupling
● Arguments For Coupling
● Arguments Against Coupling
● Key takeaways from the latest Circular
● What are the key variables an investor should look in IEX today
● Closing Thoughts
A brief about Market Coupling
As per the CERC Power Market regulations, Market Coupling is:
“Market Coupling” means the process whereby collected bids from all the Power Exchanges are matched, after taking into account all bid types, to discover the uniform market clearing price for the Day Ahead Market or Real-time Market or any other market as notified by the Commission, subject to market splitting”
As per the government and the regulator, it serves the following three purposes:
(1) Discovery of uniform market clearing price for the Day Ahead Market (DAM) or Realtime Market (RTM) or any other market as notified by the Commission;
(2) Optimal use of transmission infrastructure;
(3) Maximisation of economic surplus, after taking into account all bid types and thereby creating simultaneous buyer-seller surplus.
On 21.08.2023, CERC issued a Staff Paper on Market Coupling. CERC asked everyone to share their opinions on the following questions:
i. Does the current market scenario form a compelling case for Market Coupling?
ii. Effect of coupling on technological innovation and competition
iii. Operational Aspects:
a. Who shall be the Market Coupling Operator?
b. Which Algorithm should be adopted for a coupled market?
c. How will the Clearing & Settlement be carried out?
d. In which market segments coupling should be introduced first?
e. Changes in the Settlement Process
There were 127 responses in total for the same. Let’s look at the summary of views “FOR” and “AGAINST” market coupling.
Arguments For Coupling
Those who were in favour of market coupling gave the following reasons for it to be implemented:
● Improved competition
● Increased volumes
● Lower transaction costs
● Ease of operation
● Better services
● Check on monopoly
● Better transmission corridor allocation
● Integration of cross-border power markets
● Pave the way for reforms, like MBED, SCUC, and the introduction of financial derivatives
Arguments Against Coupling
Those who were against of market coupling gave the following reasons for it to be NOT implemented:
● Disruption that may be caused by market coupling
● Role of power exchanges getting diminished as a bid collecting agency,
● Dampening effect on innovation & technology investments
● Adverse effect on competition
● No improvement in transmission infrastructure utilization, the addition of another layer in the form of a Market Coupling Operator (MCO), and the resultant increase in transaction costs
● Adverse impact on smaller traders’ businesses
● Violation of power exchange license conditions, etc
Key takeaways from the latest Circular on Shadow Pilot of Market Coupling
Evidence-Based Results of Examining Coupling on DAM & RTM:
1. Bid data from IEX and PXIL for the RTM for 40 days in 2022-23 was considered where bids, including cleared and uncleared bids, were available on both trading platforms.
2. The analysis for the DAM pertains to the months of January, February, and March 2023.
3. Results show that there is a possibility of uncleared bids (buy and sell) getting cleared in a coupled scenario. However, the overall gains in terms of increase in volume and economic surplus may not be significant.
4. CERC finds these results broadly in conformity with the largely accepted view that under the prevailing market structure, where one dominant power exchange holds about 99% market share in DAM and RTM, merely coupling bids of all the power exchanges will not yield substantial improvement in market outcome.
CERC believes it imperative to bring in more participation in the market, which would not only improve supply availability and encourage competition amongst suppliers but also facilitate a platform for optimizing the resources.
Resource adequacy framework is being evolved to ensure the adequacy of supply to meet demand in all time horizons reliably and at the least cost. But this will take time, and as such, the Commission feels it is expedient to explore all options to optimally utilize the existing capacity.
Security Constrained Economic Dispatch (SCED) is one such optimization tool.
Coupling RTM with SECD
Some context on both RTM & SECD
RTM was introduced on the power exchanges from 1.6.2020, with the primary objective of providing buyers & sellers with a platform to trade closer to real-time to manage their energy imbalances which are known only closer to actual delivery.
SCED, on the other hand, has been implemented as a pilot from 1.4.2019 to reduce the system cost via optimization of the schedule of the participating generating stations. The model dispatches the generators based on their variable cost, i.e., the cheapest available generator to its full capacity, followed by the next higher variable cost generator, honouring the technical capabilities, and so on, until the entire requisition is met. This results in incremental/ decremental changes in the existing schedule of the generators, which is settled through a national pool.
Primarily, the generators whose tariff is determined or adopted by CERC participate in SCED, whereas in RTM, the sellers constitute the regulated generators, IPPs and merchant power plants, open access consumers and DISCOMs. The former (SCED) is a regulated cost-based optimization measure, whereas RTM is an auction/price-based market
segment.
On the face of it, these two market segments (SCED and RTM) may look heterogeneous, but the fact remains that the ultimate objective of both is system and cost optimization.
Hence CERC explored coupling these two. The results of the simulation are here below:
1. The findings from the simulations revealed that the maximum increase in cleared volume was approx. 1100 MW. Additionally, the price variation range was reduced by 5%, the price cap hits declined by approximately 10%, and the average coupled MCP was lower than the average MCP of the dominant exchange by Rs.0.422/kWh.
2. Some of the other potential benefit
When price caps were hit, and the SCED generators were ramp-constrained, the power exchanges helped lower the coupled prices.
On average, electricity generated by SCED generators was cheaper than what was supplied on the power exchange. Therefore, these generators served the demand that otherwise remained unmet on the power exchange.
When the cheaper power exchange supply served SCED demand, there could be conditions that result in higher availability of spinning reserves. In
such cases, when the power exchange supply replaced the SCED supply, some of the SCED plants were either partially or completely relieved, thereby making them available to provide reserves.
The simulation results showed a reduction of cycling instructions to generators, thereby leading to lower wear and tear and, hence, improved reliability.
It also made a case for better congestion management.
3. Based on the simulation results presented by the staff, the Commission is of the view that the proposed coupling of RTM with SCED may enable harnessing of the unutilized generation, serving the unmet demand and resulting in significant cost optimization. This would help increase the depth of the market while ensuring system reliability, as noted in the simulation results.
4. Commission finds that there are apparent benefits (though marginal) in coupling RTM; RTM with SCED; and DAM, as discussed in the preceding paragraphs. The Commission, however, also takes cognizance of the fact that the proposed coupling of RTM, RTM with SCED, and DAM is a novel concept. Therefore, following a guarded approach, the Commission has decided to implement the proposed model in a shadow pilot.
5. Shadow Pilot Project:
I. Coupling of the Real-Time Market of the three power exchanges
II.separately coupling of the RTM at the 3 exchanges along with SCED
III. coupling of DAM of the three exchanges
6. Directions by CERC to Grid-India:
I. Develop, within two months from the date of this Order, the necessary software as required for running the shadow pilot for coupling
II. Implement the shadow pilot of coupling as proposed above
III. Share the operational experience in the form of a monthly report for four months and a feedback report at the end of the four months.
IV. Suggest the feasibility of coupling the DAM and SCUC within two months
7. Based on the insights gained while running the shadow pilot, the Commission shall further decide upon the need for creating the necessary regulatory framework for market coupling.
What are the key variables an investor should look at in IEX today?
Of course after reading about market coupling, you may ask how one should look at the business of IEX.
Let’s break it down into three parts.
1. Market Coupling: As things are moving, the probability of market coupling getting implemented is quite high now. So, let’s assume that market coupling gets implemented. The market share of IEX can drop from the current 98% to say 70% or if you want to be even more conservative, assume 50%. Isn’t that even great if the volume on the power exchange market increases multi-fold? While one can argue on the market share percentage, no one disagrees that the volumes are slated to go up on exchanges because of several government initiatives to help everyone in the value chain. Yes, you may say that IEX will probably not have the same monopoly it used to have. True. But isn’t that priced in significantly if not completely?
And here we are assuming that market coupling will get implemented. What if it is not? A good re-rating?
2. Indian Gas Exchange:
I. 1st Natural Gas trading exchange
II. Automated platform with cutting-edge technology
III. Efficient & transparent market-driven price discovery mechanisms like IEX
IV. Indigenous price benchmark
V. Strategic Partners
IEX
NSE
GAIL
ONGC
OIL
Adani Total Gas
Torrent Gas
VI. Get listed on the stock exchange by 2025 as per the directive of the government. (Value creation for IEX shareholders)
3. International Carbon Exchange:
I. Will help India achieve its target of reducing the emission intensity of its GDP by 45% by 2030 to limit global warming to 1.5 degrees Celsius.
II. Will enable participants to buy and sell voluntary carbon credits at competitive prices through its transparent & reliable Exchange platform, thereby helping large corporates meet their ESG requirements.
III. Almost 500 million units of carbon credits are traded globally presently. By 2030 this is expected to be almost 1,500-2,000 million carbon credit units – an increase of 3X/4X in trading volume (based on a study with McKinsey).
IV. By 2030, India will sell almost 200 million carbon credits, with demand from Indian corporations alone expected to be about 120-130 million
V. Know more about carbon credit and government notification on the same here in this 2 min video: https://youtu.be/8ZnriMZf4E8
VI. This is what the management of IEX says about its scope and prospects in a 10 min video here: https://youtu.be/Cz-j90lgxWc
We have written enough about the positives and the negatives of the business above to provide you with some context. However, we are not going to give you any buy/sell recommendations
SEBI Disclosure: ~4 year Old Holding, No recommendation to buy/sell
Closing Thoughts:
Never believe anyone in life and stock markets. Have your independent view. Your views may be completely different from ours. And that should be completely fine with both of us. Only time will tell who is right and who is wrong. At the moment these are all nothing but just conjectures (based on incomplete information).
Hence, we would like to close with this that we read in Safal Niveshak’s newsletter today where Morgan Housel talks about how to get along with people you disagree with.
That’s it.
Thanks for reading.
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