Electricity distribution companies source nearly 92% of their requirement through long-term power purchase agreements (PPA) for supply to retail consumers. The remaining 8% is secured through short-term transactions, and such prices are higher than long-term PPA rates because of the uncertainty in returns.
The power regulator recently amended the Unscheduled Interchange (UI) norms wherein over-drawing state utilities were also required to pay congestion charges, which may compel state distribution companies to meet their additional demand from the short-term market. "The new regulations have raised concerns that market prices will rise as UI rates are mostly considered as the benchmark for negotiations in the bilateral market," said a government official who did not wish to be named.
"The distribution utilities of power-deficit states have little choice other than to buy electricity at high prices to meet demand," said Pramod Dev, chairman, Central Electricity Regulatory Commission.
Unscheduled interchange refers to buying and selling of electricity apart from the planned sale or purchase through long-term power purchase agreements. According to the official, the commission is studying various methods for a price limit such as a differential price cap based on cost plus other factors like return on equity, plant capacity utilisation and fuel cost.
Another alternative could be a uniform price cap based on the most expensive fuel type, which would be applicable for all generators. In 2009, the average short term power prices in the OTC electricity trading markets and power exchanges have been at Rs 6.41 per kilo watt hour (kwh) and Rs 5.73 per kwh for trading of 25 billion units and 5 billion units respectively, according to the latest CERC report.
The size of the short-term market is 3-4% of the total generation in the country, which creates a market of about
Rs 15,000 crore.