Opinion Power imbalance: The governance shift in the power sector needs centre-state cooperation
Market based economic dispatch system may help governments to save revenue, but Centre needs to bring states on board
The centralised dispatch will be done with the assistance of electricity exchanges. (Representational/File) 
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A paradigm shift is being proposed by the central government in power sector governance. The scheme under consideration is the market-based economic dispatch (MBED). As is usually the case, when it comes to any drastic change in the power sector, there is a clash between the Centre and the states. This is exactly what is happening now.
Under the present regime, each distribution company (discom) is bound by the power purchase agreements (PPAs) that it holds. It can schedule power only from its own PPAs, starting from the cheapest PPA and then moving up; it cannot schedule power from the PPA of some other discom. For example, let us consider the case of two discoms, A and B. Let’s say both have PPAs totalling 1,000 MW each. Discom A has three PPAs of 500 MW, 300 MW and 200 MW with a cost of Rs 3.00/unit, Rs 3.25/unit and Rs 3.50/unit, respectively. Discom B also has three PPAs of similar capacity but costing Rs 3.25/unit, Rs 3.50/unit and Rs 3.75/unit, respectively. If on a certain day, due to rains, discom A wants only 800 MW of power (as against its kitty of 1000 MW), it will forgo the most expensive PPA of Rs 3.50/unit. If this share of 200 MW is transferred to discom B, it stands to gain since it can then avoid drawing power from its most expensive PPA which costs Rs 3.75/unit, thus saving Rs 0.25/unit. This is the basic logic of MBED. Instead of all discoms operating in silos, restricting themselves to their own PPAs only, the entire demand of the country will be met by pooling together all the PPAs and there will be a centralised dispatch (as against decentralised dispatch) starting from the cheapest PPA.
The centralised dispatch will be done with the assistance of electricity exchanges. Each discom and each generator will place a bid in the day-ahead market of the electricity exchanges, which will indicate how much power is being demanded/supplied at what price. These bids will enable the load dispatcher to construct a pan India demand and supply curve, the intersection of which will determine the market clearing price (MCP). All generators whose variable cost of generation is below the MCP will be asked to dispatch and all of them will receive the same MCP irrespective of what they had bid. Generators whose variable cost is higher than the MCP will sit idle.
This, however, is not the end of the story. The MBED is so devised that its operation will not affect the current finances of either the discoms or the generators for the following reasons. First, the fixed cost of the generators will still be paid by the discoms outside the market as determined by the regulator. Second, if the MCP comes out to be Rs 3 per unit, and if in the case of any PPA, the variable cost is Rs 2.75 per unit, then the generator will compensate the discom to the extent of Rs 0.25 per unit. Similarly, if the MCP so determined is Rs 2.50 per unit, then the discom will compensate the generator to the extent of Rs 0.25 per unit. So why this elaborate exercise? The logic is that by adopting MBED, only the relatively efficient plants will generate, without affecting the revenues of either the discoms or generators. Hence, the total cost of generation under the MBED system would be less and there would be less coal consumption and less carbon dioxide injected into the atmosphere. It would also mean less movement of coal leading to decongestion of railway tracks. Further, there would be enhanced renewable integration since the balancing area would shift from state to national level.
Incidentally, since there are three electricity exchanges in operation today, there would be three different MCPs determined. What we need is a single MCP for which there will be an institution called the “market coupler”. It will be the job of the coupler to determine a national MCP based on what has arrived at the three different exchanges. The government could appoint the national load dispatcher as the coupler or the responsibility can also be given to the three exchanges, by rotation. The latter arrangement is followed in some Western countries.
Why are the states objecting to the MBED scheme? The reason is the state-owned generators are relatively inefficient and may have to sit idle as their variable cost of generation is likely to be more than the MCP. Today, the states are operating their own generators to the hilt, even though they are inefficient, and drawing only the balance from the more efficient interstate generating stations. Keeping state generators idle has its own political implications and no state would be enamoured of this idea.
On paper, the MBED scheme seems to be a good proposition though not all experts are convinced. Some pilot studies, however, have been conducted, which suggest monetary gains if the MBED system is adopted. In any case, a lot of groundwork needs to be done including redrawing of regulations before introducing the MBED. The plan was to introduce the pilot scheme by the beginning of the current financial year but things seem to have got delayed. There are rumours that the regulators are yet to make up their minds and would like further deliberations in the matter before taking a leap.
The writer is senior visiting fellow, ICRIER and former member (Economic & Commercial), CEA
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