Recent Trends in Power Trading

&

Power Market Development

Rakesh Kumar

PTC India Ltd. Power Summit 2008, Kathmandu

24 September 2008

2

Indian Power Sector : Key Statistics

Indian power sector is the third largest in Asia after China and Japan

Installed Capacity: 1,45,588 MW (as on 31st March 2008)

Peak Demand: 108,866 MW

Demand Met : 90,793 MW

Peak Deficit: 16.6%

Energy Requirement : ~ 740 BU

Energy Availability: ~ 666 BU

Energy Deficit: 9.9%

The per capita electricity consumption for 2005-06 at 631^ kWh (CEA General Review 2006), remains far below the world average of 2,429 kWh.

3

An Overview of Indian Power Sector (1)

Coal-dominated fuel mix:

Coal : 53%

Hydro : 25%

Gas : 10%

Renewable : 8%

Nuclear : 3%

Oil : 1%

Share of hydro declining in the generation mix

Unmet planned targets in generation capacity addition

In last 3 Plan periods, target versus achievement ~ 50%

11th Plan (2007-2012) Target: 78577 MW

4

An Overview of Indian Power Sector (2)

Regional Demand-Supply Deficit (2007-08)

Deficit

Northern Region: 9.1%

Western Region : 23.2%

Southern Region: 9.0%

Eastern Region: 11.0%

North-Eastern Region: 23.0%

Aims for “Power to All” by the year 2012

Domestic energy resources not adequate to meet the total requirement

Need for diversification of energy resources and regional cooperation - for energy security

5

Scene prior to introduction of power market concept (1)

Monopoly Suppliers (SEBs, Private Licensees)

Generators (CGSs, IPPs and SEBs) with capacity fully tied up

Each SEB had an allocated share in a Central/ Jointly owned station

Price setting by Central/ State Governments – SEBs hardly having any say

Entire sector developed on fixed rate return

Interplay of market forces remained non-existent

Utilities would back-down in case of low demand and resort to load shedding in case of excess demand

Power as a resource for earning revenue did not exist in this cost based regime

6

Scene prior to introduction of power marketconcept (2)

Prior to power trading as a business concept: power exchanges between the States/vertically integrated utilities were characterized by:

Small , Intermittent volumes

Mostly in the nature of emergency support

Without any commercial arrangements

Non-payment or payment delays with resultant disputes

The exchanges were further limited due to lack of transmission inter-connections

Sustained shortages, both in energy and peak demand, discouraged initiatives

Skepticism about success of trading was widespread

7

Genesis of power trading in India

PTC was formed in 1999 as a Government of India initiative for development of power market and incentivising market based investments to the Power Sector, specially from the private sector:

Pioneer Role : Initiated development of short term power market and introduced innovative products for customers

Efforts lead to beginning of sustained trading during 2000-01 (1.6 Billion units ) and also optimum utilization of existing resources

Exponential growth established the viability of trading as a business concept

Facilitate development of Power Projects particularly through private investment

Promote Power Trading to optimally utilize the existing resources

Develop power market for market based investments into the Indian Power Sector

Promote exchange of power with neighbouring countries

8

• Short & Medium Term transactions for peak/off-peak load

balancing: different products brought in the market

• Duration of Transactions (Few hours to 3 years)

• Hours of Supply

• Round the Clock

• Evening Peak / Morning Peak

• Night Off Peak / After Noon Off Peak

• “As and When Available” Power for balancing Scheduled

Interchanges

• “Weekend / Holiday Power”

• Banking of Power

Introduction of New Products

Continuous

development of

new products as per

market requirements

9

PTC India – Key achievements

Established the viability of concept

Power market can play key role in growth of sector

Credible intermediary

Payment Security Mechanism

Weekly billing to reduce credit risks

Right to divert in case of default

Relationship of trust, transparency

Comfort to developer of power projects –by addressing market risks

Comfort to lender – by addressing credit risks

A catalyst for private investment in the sector

10

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Emerging Industry Structure

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OPEN ACCESS : Transmission

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11

EA 2003 and enabling provisions on Power Market

Electricity Act 2003

The intent and object of the EA 2003 is to develop power market through increased competition, more players and protect consumer interests

Development of Power Market – EA 2003, Section 66, “The Appropriate Commission shall endeavor to promote the development of power market…”, guided by the National Electricity Policy

Suitable safeguards to prevent adverse effect on competition

Recognized Trading as a distinct activity

Definition under section(2) (47): “Purchase of electricity for resale thereof”

Adequate and progressive provisions governing open access both :

• to transmission networks (inter-state and intra-state) and

• to distribution networks

12

National Electricity Policy on Power Market

National Electricity Policy 2005 – Para 5.7

“ To promote market development, 15% of the new generating capacities, be sold outside long term PPAs”.

-As the power markets develop, it would be feasible to finance projects with competitive generation costs outside the long term PPAs….this will increase the depth of power markets….and in long run would lead to reduction in tariff”

Ministry of Power

A progressive ‘ Merchant Power Policy’ with a view to add 15,000 MW capacity by 2011-12

13

Power Trading Scenario In India

Inter-state trading licenses (25 Years validity) in the purview of CERC

Twenty Six (26) Trading licenses issued by CERC

Volume of bilateral exchanges is still low (about 2.5% to 3% of energy generation)

Total short term market approximately 21 billion units* in 2007-08

* Includes cross- border

Trading Volumes (in MUs)

1102911846

1418815023

21301

0

5000

10000

15000

20000

25000

FY 04 FY 05 FY 06 FY 07 FY 08

14

Key Players and Market Share (2007-08)

Market Share 2007-08

46%

16%6%

8%

7%

4% 12% 1%PTC

NVVN

Adani

Tata Power

JSW

Reliance Energy

Lanco

Others

Trading Licensees

Volumes (MU)

PTC # 9889NVVN 3324Adani 1322Tata Power 1682JSW 1479Reliance Energy 776Lanco 2600Others 229Total 21301

15

Increasing realization among utilities of power as a source for revenue

earning

• Improved PLF, particularly of State Power Utilities

•An example: DVC - a rise of 5% in PLF

• No backing down

• Reduction in load shedding

Benefits of Trading (1)

Trading results in optimization of resource utilization

82

74

75

73

72

6970

60

65

70

75

80

85

2001 2002 2003 2004 2005 2006 2007

16

Benefits of Trading (2)

The short term market has created “value” for power. There is a distinct shift towards higher revenue realization

Price volume break up (%) 98

36

92

59

125

48

26

FY 05 FY 06 FY 07

Rs 1-3 Rs 3-4 Rs 4-5 Rs 5-6

Power as a resource for earning revenue did not exist

17

• Encouraged IPPs to invest in generating assets- spurt in investment

based on competitive tariff due to widening demand –supply gap

•Market-based returns

•No sovereign/government guarantee

• Large merchant capacity is being funded

• States Governments of Chhattisgarh, Jharkhand, Orissa, Himachal

Pradesh, J&K, Uttaranchal, etc. have recognized “ Power as Resource”

• Planned rapid capacity additions – have devised policies to become

Power Hubs

• MoU with developers for Capacity addition

• Jharkhand 9,110 MW

• Chhattisgarh 30,000 MW

• Orissa 17,000 MW

•Tamil Nadu 10,000 MW

Benefits of Trading (3)

A paradigm shift from Cost plus return regime to “market determined returns”

18

Bilateral Electricity Trading with Bhutan

Salient Features:

Nodal agency for exchange of power with Bhutan

PTC entered into long term power purchase agreement with Department of Energy, Bhutan

PTC purchasing surplus power on long term basis from following three projects in Bhutan:

• Chhukha HEP (336 MW)

• Kurichhu HEP (60 MW)

• Tala HEP (1020 MW)

Run-of –the River Projects

4 Hours peaking

19

Indo-Bhutan Power Exchange

Year Energy export to India (MUs)

Revenue to RGoB

(Nu. Million)

2003-04 1751 2691

2004-05 1735 2708

2005-06 1762 3452

2006-07 2963 5695

2007-08 5234 9778

20

Indo- Nepal Power Exchange

PTC - an active member of Indo-Nepal Power Exchange Committee

Pursuing opportunities for short term and long term trade in electricity for mutual benefits

Acting as facilitator for transmission inter-connection between the two countries- Investment in transmission capacity

Arranged 25 MW RTC power to NEA

Initialed PPA with SMEC West Seti for purchase of 750 MW power and MoU with Braspower for purchase of 309 MW power from Arun III HEP

Proposing to facilitate formation and partner in a company in Nepal for accelerating hydro power development.

21

West Seti Project- Salient Features

West Seti HEP of 750 MW (5 Units of 150 MW) is a reservoir type hydro project located in western part of Nepal

Being developed by SMEC West Seti Hydroelectric Power Corporation Ltd. as an Export Project- financial closure expected shortly

To generate average energy of 3300 GWh per annum

Full off-take by PTC

Reservoir Capacity –Equivalent to one full month generation-which could provide peaking power for about 8 Hrs at full capacity round the year

Market values such power highly due to peaking support and flexibility !

22

Power Market –Facilitating Private Investments

The market determined prices in the short term market has encouraged IPPS and merchant generators to look at the sector with renewed vigour and as an investment destination

An evidence of this is that PTC has entered into PPAs to procure long term power with IPPS for more than 10,000 MW and / MoUs for around 30,000 MW

Power market has in fact become a catalyst for private investment in power sector

75,000 MW under development by IPPs without any Government support

Rs. 40,000 to Rs. 45,000 Crores investment already committed

23

Power Market: Salient Features

The wholesale market for electricity in India is completely voluntary by design - that none of the market participants are obliged to operate through a restricted and compulsory market.

This is because the buyer is free to choose from any of the following options:

Long term PPA based mechanisms

Medium Term

Short term bilateral trades

Day ahead market (through the power exchange)

Real time mechanisms (UI)

Even the real time arrangements are completely voluntary, since the UI mechanism permits frequency to float within a range, providing tremendous flexibility to market participants.

Further, the rules regarding standards of supply are more liberal, permitting greater flexibility to utilities on demand side response.

24

Current Status of Power Market

A fledgling, nascent market

Limited growth of volumes of short term traded market due to

Overall deficit scenario

Limited number of active players and resultant liquidity crunch

Transmission constraints/congestion

Rising cost of traded power: (The average cost Rs. 4.50/kWh in 2007-08)

Due to overall shortage situation (widening demand-supply gap)

Lack of capacity additions

Linkage with UI rates and

Rising fuel prices

1.90%

2.00%

2.10%

2.20%

2.30%

2.40%

2.50%

(%)

2003-04 2004-05 2005-06 2006-07 2007-08

(Period)

Volume of Electricity Traded by the Trading Licensees in Total Generation (%)

25

Power Exchange : Some Interesting Trends

IEX commenced operation with effect from 28th June, 2008

The data up to 20th August, 2008 reflects that the average purchase bids received (in MUs) are about four times the average sale bids received (in MUs)

Even more interesting is that whatever is on offer by the sellers at perceived high prices are not being accepted by the buyers and less than 50% sales bid has actually been cleared by the market at market clearing price.

This data, interalia, establishes without doubt that the buyers are exercising their choice to procure prudently, keeping in mind “affordability” and “prudence-checks” to voluntarily not off-take power from sellers what they perceive as high cost.

Integrated Energy Policy:

26

Key Challenges

Market depth to be increased – more players, regional participation

Open Access Implementation

New Segment of prospective participants

Industry

SEZs

HT consumers

Group Captives

Merchant generators

Sufficient transmission capacities required for a vibrant power market

Government to initially support through ‘viability gap funding’

27

Power Market Development – Next Steps

Main thrust of the Electricity Act 2003 is competition, and power market development- it has many enabling provisions. Strict Implementation of EA 2003 enabling provisions is essential

Efforts are on to further deepen the market by introducing new trading products, easing open access and trade through Power Exchange

1st National Level Power Exchange in India i.e., Indian Energy Exchange (IEX) has become operational since June 2008

Power Exchange has started giving transparent signals on:Price

Demand

Liquidity

New Products on anvil – week ahead, fortnight- ahead, month-ahead, year ahead etc

Regional Energy Cooperation

28

Integrated Energy Policy Projections

153220

306

425

575

778

155233

337

488

685

960

0

200

400

600

800

1000

1200

2006-07 2011-12 2016-17 2021-22 2026-27 2031-32G

W

8% GDP Growth 9% GDP growth

Generation Mix 2031-32 (8% GDP growth)

24 BU

1%

401 BU

11% 375 BU

10%

2828 BU

78%

Hydro Nuclear Thermal RE

Source: Integrated Energy PolicyTotal 3628 BU

Generation Mix 2031-32 (8% GDP )

India – Installed Capacity

29

Window of Opportunities

Nepal is rich in hydro potential > 43000 MW techno-economic

Indian Power Market is a voluntary market – tariff competitiveness is key

Nepal Power Projects, due to moderate transmission distance involved up to load centers could be competitive

Integrated Energy Policy of India encourages hydro power from Nepal

A huge market next door, waiting to be tapped!

30

Power Market –Ripple Effect

Power trading share is 2.5% of India’s total energy

generated – but its indirect impact on the power sector is

several times bigger Visit us at <www.ptcindia.com>