Last week, India’s power regulator announced that by January 2026 the country’s Day-Ahead Markets (DAM) for electricity would be coupled.

The Central Electricity Regulatory Commission’s (CERC) decision creates a centralised pricing mechanism for DAM electricity contracts, linking up a fragmented system in which the country’s three power exchanges run separate auctions that can result in different prices for the same product. Other contracts may be phased in at a later date.

The CERC had already flagged its intention in the 2021 Power Market Regulations to introduce market coupling at the earliest possible time, in order to create a uniform market clearing price and optimise transmission infrastructure. Nevertheless, the attention around the announcement was dominated by the subsequent slump in the share price of Indian Energy Exchange (IEX), which controls about three-quarters of that market.

For IEX and its investors, the announcement was unwelcome news; one brokerage set a target price that pointed to a potential 50% erosion in the company’s stock value. For all stakeholders, though, it’s important to understand why CERC made the decision now, and how it will change India’s growing power industry.

Why the market needed coupling

In any electricity market, there are two key factors:

• Stability – Grids should operate within the frequency range set by the system operator (50 hertz in India), which occurs when demand matches supply. Any mismatch affects frequency.
• Optimal pricing – for suppliers and buyers.

To ensure this balance, a few other factors should be in place:

• Planning – The market should be able to predict demand-supply through accurate forecasting.
• Depth – The market should be deep and unfragmented enough so that it can’t be distorted by any single buyer, seller, or market operator.
• Contingency – Corrective measures should be available to any stakeholder so that they can stabilise the grid in an unforeseeable event (and avoid the kind of severe breakdown that affected Spain and Portugal this year).

In recent years, the Indian government and other industry entities have been introducing various tools to strengthen these factors and ensure the smooth functioning of the market. These include an updated Grid Code, introduction of open access regulations for transmission, and new capacity market rules.

Earlier this year, the market launched electricity futures; cash-settled contracts traded on exchanges like MCX and NSE. Gains or losses on these contracts are determined by the difference between the contract price and the DAM price that’s published by the three power exchanges: IEX, Power Exchange India, and Hindustan Power Exchange.

These three bourses facilitate about 6-7% of the power sold in the Indian market through various products traded on the DAM, Real-Time Market, and Term-Ahead Market, plus green variations on these instruments.

This arrangement poses risks to some of the factors discussed above, including:

Optimal pricing – With three exchanges operating independently and running their own auctions, price discovery can be distorted, and derivatives contracts will have no single price reference for settlement.

Depth – IEX’s domination raises the risk of opaque markets and price manipulation.

Coupling the DAM market is the first step in overcoming these issues. Each exchange, plus Grid-India, will act as a Market Coupling Operator on a rotational basis. Based on how the DAM project fares, coupling will be extended to the Real-Time and Term-Ahead market in a phased process.

Ultimately, the Indian grid may come to resemble the European model.

The European model

The EU began the phased introduction of Power Market Coupling (PMC) for the Day-Ahead and Real-Time markets in 2015, and completed the process for 21 countries by 2019.

PMC is designed to optimise the use of cross-border electricity transmission capacity, harmonise markets across different regions, and ensure efficient, competitive, and secure supply across states.

PMC works by coupling the day-ahead electricity markets of different countries, using a flow-based market coupling (FBMC) or available transfer capacity (ATC) model to determine how much electricity can be traded between countries based on available transmission capacity.

The process involves matching supply and demand across borders, taking into account transmission constraints, and calculating a single market price for each bidding zone.

Market coupling has delivered both benefits and challenges to the European grid.

• Benefits:
  • Price Convergence – PMC helps reduce price differences between regions, leading to more uniform electricity prices across the EU.
  • Resource efficiency – Optimising cross-border transmission capacity ensures electricity is generated where it is cheapest and consumed where it is most needed.
  • Renewables Integration – PMC facilitates renewables by enabling electricity to flow from regions with excess generation to regions with higher demand.
  • Security of Supply – PMC enhances the security of electricity supply by ensuring that electricity can be traded across borders in case of shortages or surpluses.

• Challenges:
  • Grid Congestion – One of the main challenges of PMC is managing grid congestion, especially in regions with high levels of renewable energy generation.
  • Regulatory Harmonisation: Differences in national regulations and market designs can pose challenges to seamless integration.
  • Investment in Infrastructure: Efficient PMC requires significant investment in cross-border transmission infrastructure, which can be a barrier to full market integration.

In July this year, India reached its target of 50% non-fossil generating capacity and plans to increase that further as it works towards a target of 500GW by 2030. High renewables penetration poses a challenge to the grid.

If India is to emulate the EU and push its renewables generation beyond 50%, the country will need the tools to develop market depth and transparent price discovery to ensure a stable grid. Market coupling is a significant step towards that goal.

 Sources:

• European Commission – Energy
• ENTSO-E (European Network of Transmission System Operators for Electricity)
• ACER (Agency for the Cooperation of Energy Regulators)
• Clean Energy Package

Indian Sources of Information

• CERC- Central Electricity Regulatory Commission
• Ministry of Power, Govt of India
• CEA (Central Electricity Authority)
• Grid India
• SEBI, NSE and MCX