Lets understand what is Market-Based Economic Dispatch (MBED) and Market Coupling
In December 2018, the Central Electricity Regulatory Commission(CERC) released a draft proposal for the Market-Based Economic Dispatch (MBED) system.
The proposal outlined that, under the MBED, all power transactions would be conducted through power exchanges, including those tied up in Power Purchase Agreement (PPAs). Instead of each Discom having its merit order individually, there would be a shared pool of all power generators to fully utilize sources traded on the exchange.
The MBED would allow for pooled electricity produced by all the Gencos to be purchased by Discoms from the cheapest electricity source through the exchange, thereby reducing their costs. Furthermore, the implementation of MBED would increase the opportunity size, and volumes traded on the exchanges.
Additionally, the CERC has proposed the implementation of a Market Coupling Operation (MCO) in its Draft of Power Market Regulations 2020, which will determine the price at which electricity will be traded on all power exchanges. This will help to arrive at a ‘uniform market clearing price.
The MCO will club buying and selling bids on all power exchanges to facilitate better price discovery and an increased opportunity to serve more customers. Although the market coupling has been introduced, the timeline for its implementation has yet to be determined.
This introduces a potential drawback for market leader – IEX, as it may nullify the advantage of liquidity on the platform. Analysts believe this may dry up volumes in a significant manner for IEX among other power trading platforms. This led to IEX stock correcting by around 8% today on 08.06.2023
What does this mean for IEX?
IEX’s monopoly has been due to the depth and liquidity it provides the participants. The proposed market coupling will take away this advantage. In one stroke, the ‘competitive advantage’ and the exact reason why IEX is a monopoly gets destroyed.
I still feel even after the implementation of Market Coupling, the market share between power exchanges will be determined by product offerings and technological services. Remember Integrating the API-based bidding system was one of the first innovations that IEX implemented on its platform. This system was also integrated with all its customers as well in order to pass on bidding information to Exchange. Time sensitivity is of utmost importance to the Real-Time Electricity Market (RTM) in the power trading industry since every task of the power trading has a clear completion time with a minute granularity. Any delay or failure caused therefore can have far reaching consequences. And that calls for cutting down on manual processes and turning power trading system highly automated which IEX is trying to achieve. So clearly IEX has the advantage when it comes to Tech innovations in its product offerings as against its competitors.
But after the introduction of MBED (Market based Electricity dispatch), which basically forces power gencos & buyers to get on to spot power markets even when they have bilateral contracts, would increase the volumes & in a way compensate for potential loss of IEX in market share by market coupling. When does the MBED happens is not yet known. The expectation is that such a measure as MBED would be brought in phases. For instance, in the first phase, CERC may require all inter-state generating stations of NTPC to go through the exchanges.
I also believe that CERC will have to hold talks with all the stakeholders (IEX included) and then come out with a paper before the implementation of Market Coupling. So they will have to lend an ear to IEX and their arguments on this issue.
Remember last time in Jan 2022, IEX’s Rajesh Mediratta, Director – Strategy and Regulatory Affairs, had argued that IEX feels that now is not the time to bring in such a reform of market coupling. At present, only 7% of the total electricity consumption is traded on the power exchanges. Mediratta said that measures such as ‘market coupling’ could be brought in at a time when the traded volumes increase to about 15-20%.
Let’s wait for the management’s commentary on this issue this time.
Disclaimer: Invested, biased.
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