Towards more efficient power markets: Are restrictions on short-term market size needed?

The National Electricity Policy mandates that 15% of all new capacity addition should be transacted in the short-term market. However, is there a need for a ceiling on this number? This issue is a matter of debate within the Central Electricity Regulatory Commission (CERC), which has brought out a concept paper on the same.

• On one side are stakeholders that assert that the short-term market, which consists of the bilateral mechanism, unscheduled interchange and power exchange transactions, should be unfettered and be allowed to adjust on its own to ensure the most efficient distribution of power. On the other hand, some players call for a notified limit on the amount of power that can be traded through such mechanisms, in the interest of price stability.
• Even internationally there is a divergence of views on the matter. Brazil requires its utilities to project demand and lock-in at least 103% of the consequent estimates via long-term contracts, while more than 60% of power consumed in Norway is procured a day ahead. 
• One of the more cogent arguments for unrestricted short-term trade is that the market itself acts as a payment security mechanism and helps in risk mitigation by providing an alternative and quick route to generators to sell in case of defaults in their long term contracts. Thus, the liquidity risk is reduced, improving the generator's financial profile.
• The short term market also optimizes the distribution of power, by helping transfer power from surplus to deficit regions, important in a geographically and seasonally diverse country like India.
•  Short term markets are also an opportunity for generators to maximize profits, providing a fillip for new capacity addition and investment from the private sector. The short term market promotes increased competition among generators.
• It can, however, be argued that long term contracts help to bring cash flow certainties that are necessary for financial closure of projects. A very large proportion of short term contracts in the portfolio of generators would increase the risk for the project financer and increases the cost of debt for the generator.
• Further, from the perspective of system operations, a large volume of short term transactions creates congestion in transmission facilities due to unplanned power flows. The potential for such abrupt changes also creates challenges in long term transmission planning.
• While such issues are obviously on the central regulator's mind, as of now, it plans to direct SERCs to monitor Discoms to ascertain whether their purchases of power in short term is conscious and planned, or merely the result of lack of planning requiring last minute purchases. In addition, the portfolios of utilities also have to be monitored to ascertain the direction of movement of the average short term power procurement cost per unit over the last two to three years, along with the impact on their overall power procurement costs, in order to enable the CERC to make a more informed decision on the matter.