Saturday, October 23, 2021




  • Discussion paper is not comprehensive.
  • Transmission & Distribution costs are not accounted.
  • Will need re-writing of all long term Power Purchase Agreements (PPAs).
  • Capacity building of Discoms personnel shall be done to remove road blocks.
  1. The Ministry of Power, GoI has issued a discussion paper on 1.6.2021 (No: 23/16/2020-R&R) inviting suggestions on implementation of Market Based Economic Dispatch (MBED) in Indian power sector.

After achieving ‘ONE NATION – ONE GRID – ONE FREQUENCY’ in December, 2013, the GoI now aims to achieve ‘ONE PRICE’ also.

The GoI had introduced Security Constrained Economic Dispatch (SCED) with a smaller set of generators from April, 2019 and wanted to introduce MBED to reap more benefits to the sector.

The discussion paper states that the Distribution companies would benefit to the extent of Rs. 12,300 Cr if implemented fully. Sample estimate is made based on 2016-17 figures and benefit is estimated at Rs.6,220 Cr on generation cost (based on 5 sample states). The estimated figures for sample states are as follows:

Net Benefits for the StateAPChhattisgarhMaharashtraTelanganaKarnatakaTotal
Amount (Cr)7082183391234764627
As % of  procurement cost6.06.611.

The paper also states the intention of the GoI to go ahead with implementation of phase-1 MBED with the NTPC thermal stations from 1-4-2022.

  1. To understand more on the topic, the understanding of fundamentals of electricity sector & present set up may be useful:
  2. There are three types of companies in the sector i.e., generating companies, transmission companies and distribution companies.
  3. Generating companies generate electricity and pump it to the transmission companies. (exception: small capacity projects below 10MW are connected to distribution network)
  4. The transmission companies construct & maintain EHT (Extra High Tension) lines and substations. The voltage level is 66 kV and above.
  5. The distribution companies also construct & maintain lines and substations having voltage 33 kV and below. These companies draw power from EHT lines (from Transco) and step down the voltage level (11kV, 415V or 230V) and supply to the consumers as per their requirement.
  6. These Discoms are in direct relation with the consumers in all matters of electricity i.e., supply & billing.
  7. There will be loss of electricity in the lines (in transmission and distribution lines) due to inherent resistance of the conducting material and thus loss level is dependent upon the length of the line.
  8. Further, there will be power loss in the transformers because of continuous stepping up and stepping down of voltage level of electricity to meet the needs of end consumer.
  9. Thus the cost to the consumer is total cost of all these components Viz.,:
    1. Cost of generation
    1. Cost for transmission = Cost of line & its maintenance (usually calculated in terms of Rs/kW/Month or Rs/MW/Month)+ Transmission line losses (%)
    1. Cost for distribution = Cost of line & its maintenance (usually calculated in terms of Rs/kVA/Month or Rs/MVA/Month) + Distribution line losses (%)

[We may ignore commercial losses (theft, etc) for ideal conditions]

  • In earlier days, the main consideration for establishment of generating station was the load center. That is, wherever the power is required, the new generating plants are planned. This is called load centre concept in those days.
  • These generating plants not only generate power, but are also helpful to maintain the voltage level in the area.
  • But due to technological advancements in the transmission sector, it was found economical to transmit electricity instead of transporting coal to the thermal stations. Thus the pit head power,  stations (the power stations established at the coal mines) are coming up in the recent time to generate power at lower costs.
  • As mentioned above, the consumer is in direct contact with Discoms for his power requirements. The Discoms will thus enter into agreements with the generating companies for supply of power. The Discoms also enter into agreement with Transmission company for transmitting the power from generating station to the Discom network.
  • The generating stations may be set up by the public sector companies, both state and central PSUs, or private companies. We can see these stations established at various locations in the country and connect to the grid.
  • The transmission lines are laid by state Transmission companies and Central Government company (POWERGRID). Power grid mainly looks after the needs of transmission of power from one state to another (inter-state transmission). The central generating station NTPC and other nuclear plants are connected to Power grid. State transmission company looks after the transmission lines within the state (intra-state transmission).
  • At present, the cost of transmission within the state is calculated on an average basis, irrespective of length of line & quantum of power flown from one point to another. The average values of transmission cost and losses within the state are considered for all Discoms within the state.
  • Similarly, the cost of distribution is also calculated on average basis within that particular Discom irrespective of flow of power from one point to another point in the Discom area.
  • However, the charges payable to the Powergrid for transmission of power from central generating stations to the state network is calculated based on line length, quantum of power and its flow direction. Therefore the transmission charges payable to the Power grid depends upon the line length of the power flown from one point to another. And the power grid calculates the line losses on average basis.
  • Therefore, the impact on cost of power supplied to the consumer depends upon the source of power station & its location, the distance of the power flow from generating station to the consumer point, network costs and losses.
  1. What is SCED and how it is different from MBED:

We all know that the power once generated shall be consumed instantaneously. Power cannot be stored (exception: small quantities can be saved in battery systems, etc). Therefore, the Discoms will announce their requirement of power for the next day and prepare its contracting generators to supply the same. The generators also confirm its capacity to generate in the next day. In case of any issues with the generating units, the Discoms shall be informed by the generators accordingly and Discoms plan for next alternate source. However, in the real time (i.e., on the next day), there may be variations in the demand from the consumers. If the demand can be met through the available sources then the supply will be extended to the consumers and if not, supply will be stopped for a while (which is also called as load shedding). So, generally, the Discoms plan and agree with the generating stations for a bit higher capacity.

The Discoms agreement with generating stations would be on two part tariff. One is fixed cost (capital cost payment) payable on capacity availability and another is variable cost (cost of coal and operating cost) which will be paid only when the power is generated by the station. Therefore, the Discoms power requirement plan shall be made meticulously on scientific basis to ensure cheap power to the consumer. If its estimation is on higher side, it has to make higher payment to the generators without utilizing the generation capacity. If the estimation is on lower side, it ends up with supply shortage and resort to load shedding.

National grid

The GoI has identified this issue during early 90s. Some states were having surplus power while some states are suffering with acute shortage at the same instance. Therefore, the GoI had installed robust transmission system in the country and connected all states. The ONE GRID could be achieved during December, 2013 (Initially, the North Eastern & Eastern grids were connected in 1991; then Western Region connected to NE-ER in March, 2003; then North grid was connected in August, 2006 and finally Southern grid was connected to the central grid on 31st December 2013 by commissioning of 765kV Raichur-Sholapur transmission line achieving “ONE NATION – ONE GRID – ONE FREQUENCY”).

Thereafter, in the process of utilizing the resources effectively, the GoI introduced Security Constrained Economic Dispatch (SCED) system from April, 2019. In this system, the participating generators will announce their capacity and cost (variable) for the next day. The participating Discoms will also schedule their power requirement. The generators will be listed on merit order basis (i.e., the whose variable cost is low will be booked first, then next, etc) to meet the total requirement of power to all Discoms. By this way, the generators whose cost is low will be utilized to their full capacities and high cost stations are not dispatched to full extent. Thus there will be benefit to the participating Discoms. It is possible in this mechanism that the Discom will get power from a generating station, other than its contracting station.

The word, ‘Security Constrained’ used in SCED to represent that the generating stations will not be asked to operate below its technical limits (mostly at 55% of its full capacity in Indian context). The generators will be continuously available for Discoms to meet its requirement in real time dynamics, after concerned RLDC matches the power requirement of Discoms & generators for next day and announced/declared. Thus all the generators tied up with Discoms are in service as in usual practice, even costlier plants are in service but running at low load.

But, in case of Market Based Economic Dispatch (MBED) proposed from 1-4-2022, the costlier generating plants may not run, even to their technical limit, thus the savings would be more. However, such generators will be allowed to sell their capacity in the market during real time operations.

Thus the MBED envisages pooling of all generators in the country and their generation depends upon their position in the merit order list i.e., low cost power only will be utilized.

  1. MBED – How it works:

The generators and Discoms get enrolled in the power exchange. Discom will give their scheduled requirement for the next day (day ahead schedule for each block of 15 minutes). Similarly, the generators will give their availability and rate (variable cost only, without any retrospective revision of fuel cost adjustment). The power exchange will match and dispatch schedules will be announced, purely based on merit order. Therefore some generators will not be scheduled for dispatch at all. The generators will be paid the fixed cost as per the agreement by the Discoms as done in usual course.

The real time variations in the exchange will be accounted separately and final adjustment of amounts payable by Discoms or receivable by the generators will be made.

After announcement of scheduled dispatches, the Discoms have to pay for their power requirement to the power exchange, which in turn will be paid to the generators. Therefore, the Discoms need money to pay upfront to the power exchange, which in normal course, the Discoms pay the generators in 45-60 days. Therefore, the mechanism proposes to provide working capital requirement of about Rs.55,000 Cr to the Discoms through PFC/REC at interest rate of 10.5%. At the same time, Discom will pay the amount against their requirement of power duly deducting 2% of the total amount (to meet the cost of liquid capital), which will be paid to the generators by the power exchange. By this way, the liquidity to both generators and Discoms is ensured.

The MBED also identified the difficulty in bringing all the generators and Discoms on one platform i.e., on one exchange, otherwise the mechanism will not work. Therefore, it suggested that the power exchanges may be coupled to determine the price and their matching in real time market. Presently, two power exchanges IEX (Indian Energy Exchange) and PXIL (Power exchange of India Ltd) are operating in India.

The MBED also identified that the transaction charges being levied by the Indian power exchanges are on higher side when compared to the European exchanges and suggest that these charges shall be reduced to avoid burden on discoms/generators.

  • Deficiencies in the paper and Preparedness for States and Discoms:

It is observed from the discussion paper that the implementation of MBED with effect from 1-4-2022 with the participation of NTPC plants aims at full utilization of generating stations whose variable cost is low and benefit the Discoms/consumers. It is hopeful that the following deficiencies would be addressed by the GoI while issuing final guidelines:

  1. There is a need for consideration of transmission cost while evaluating the cheap power to the Discom/consumer and the generation cost alone (will be low for pit head stations) cannot be the deciding criteria.
  2. The CERC issued regulations on sharing of interstate transmission charges and losses on 4.5.2020. The transmission cost is sensitive to distance, power quantity and direction. Sometimes, the Discoms have to pay part of network cost for connecting to the power grid even without any net drawl. The impact thus to be studied with reference to the source of power for arriving to the cheap power.
  3. It is possible for the critics to state that the mechanism helps only NTPC and other IPPs, as comparatively newer generating stations are set up by these and the State Gencos are not having the much pit head plants and hence their variable cost is on higher side.
  4. The mechanism may lead to a centralized scheduling and whether such huge volumes can be handled by a single entity is doubtful.
  5. The mechanism has not discussed about how the transmission congestion caused by consideration of generating units for power dispatch, when they are located at one location only.
  6. It was also not discussed about the charges & losses to be compensated to the state Transcos if their network is used to transmit the power from one state to another. It is pertinent to mention that the transmission charges are varying from state to state.

To achieve ONE NATION – ONE RATE, the preparedness of Discoms and their contracted generators is very much essential. The following are to be addressed by the state Transcos and Discoms:

  1. Similar to the CERC regulations on transmission charges, the state Transcos and Discoms also shall prepare the costs associated and to be applied for intra-state transmission of power, sensitive to the length, quantity, voltage level and direction accurately, instead of present method of state average. Similarly, the Discoms shall also do the same exercise for associated costs in their network. Further, the draft National Electricity Policy, 2021 also envisages the same. Then only the Discoms can judiciously recognize the cheapest power among various contracting sources available at its disposal.
  2. Such charges shall be levied and recovered from other drawee Discoms, whenever the power is flown through the state to recover part of network cost.
  3. The Discoms shall also prepare the combination of various power sources and applicable network charges to all agencies to decide upon the cheap source.
  4. For example, the variable cost of NTPC Simhadri (Vizag) stage –II is Rs.3.24, whereas it is Rs.3.04 for NLC (Neyveli, Tamilnadu) i.e., Simhadri is 20 paise higher. Even then it is advantageous for the AP state to draw power from NTPC Simhadri units as the power could be utilized to meet the base load requirement of EPDCL area and there will be huge savings on transmission & distribution costs.
  5. The mechanism may consider the hydro stations in the second phase along with grid ancillary services and hence the Discoms shall plan for future.
  6. Since the mechanism is aimed to increase the market purchases, the Discoms shall prepare and train their employees for the dynamics of market, both forecasting and real time operations.
  7. The Discoms need to re-negotiate with the generators for arriving amicable agreement on various possible issues that may be cropped up for participation in the scheme. Such issues include costs payable on account of idle running or shutdown & restart costs, employee costs for their idle time, costs associated with higher wear & tear of machinery, etc 
  • Discoms have to recognize and value the grid ancillary services i.e., maintaining voltage profile, tools required to accurately estimate power requirement, requirement of balancing sources, etc. as they are the responsible entities to maintain power parameters to the consumers.
B.N. Prabhakar is an MTech., PGDFM., LL.B., FIE. He is mentoring SWAPNAM, as President of the Hyderabad based NGO, besides working on conservation of Water, Power and Natural Resources.


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