Honestly, I have no idea on what would happen to the existing Long Term Bilateral contracts after the introduction of Market Based Economic Dispatch (MBED). This is what I found in one of the discussion papers from CERC.
In case the Discoms and the Generators (tied in long term PPAs) were to participate, both would face the volatility of Day Ahead Market prices but because they are tied in bilateral contracts and have committed a price to each other, there would be a hedging arrangement (to be referred as Bilateral Contract Settlement or BCS) of refunding the difference between the market clearing price and the contracted price (the contracted price in this case would mean the variable cost as determined by the Appropriate Regulatory Commission, since the fixed cost would be paid separately based on availability as per the current practice).
If the spot rates (exchange rates for electricity) are lower than bilateral (like Power Purchase Agreements PPA) rates, volume shifts to exchanges like IEX, as we saw in Dadri-I with Delhi DISCOMS or Barh with Bihar DISCOMs.Backing down cahrges, DSM, and transmission charges too play a role to bring additional elements in realistic cost savings.
I believe the implementation of MBED would not be that easy and the expectation is that it would be done in Phases. The participation in the MBED model in Day-Ahead Market (DAM) time horizon would initially be perhaps voluntary for the parties.
Some challenges that I see are from the States. Remember that Electricity is a concurrent subject & responsibility of distribution rests with States. Govt. of India facilitates efforts of States to provide power to consumers in an improved manner. Will the States (especially Opposition rules states) agree to this new MBED policy?
In some ways, the MBED proposal is very similar to the GST mechanism implemented in India recently, where the state governments gave up their individual indirect taxation powers to pool their sovereignty to create a common market for goods and services in the country. The principal justifications for its implementation has been the efficiency gains, simplicity, and GDP growth push, not dissimilar to the MBED proposal. But GST policy implementation was the culmination of almost two decades of tax negotiations between the Centre and States. It is not clear that such a consensus has evolved for MBED, either from political authorities or from state discoms.
Sources:
https://cercind.gov.in/2018/draft_reg/DP31.pdf
https://cercind.gov.in/2019/Comments-MBED/22.%20Rohit%20Chandra_Comments_CERC%20MBED.pdf
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