Date: 29/09/2022

Relevance: GS-2: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Infrastructure: Energy, Ports, Roads, Airports, and Railways etc.

Key Phrases: Power sector reforms, Governance shift in power sector, Market-based economic dispatch (MBED), Electricity generation and distribution, Power purchase agreements (PPAs)

Context:

• A paradigm shift is being proposed by the central government in power sector governance as the government is mulling to implement the market-based economic dispatch (MBED) system at the earliest.

The traditional mechanism

• Traditionally, each distribution company (discom) is bound by the power purchase agreements (PPAs) that it has signed.
• 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.

How will the MBED be implemented?

• The centralized dispatch will be done with the assistance of electricity exchanges.
• Each discom and each electricity generator company will place a bid in the day-ahead market of the electricity exchanges.
• The electricity exchanges 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.

The MBED will not affect financial positions of discoms/generators

• The fixed cost of the generators will still be paid by the discoms outside the market as determined by the regulator.
• 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.
  • Thus 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.

MBED will be environment friendly

• The efficient generators and discoms will require less coal vis-a-vis current demands.
• Also it will lead to less carbon dioxide injected into the atmosphere.
• It would also mean less movement of coal leading to decongestion of railway tracks.
• There would be enhanced renewable integration since the balancing area would shift from state to national level.

Administering the market clearing price (MCP)

• Currently there are three electricity exchanges in operation.
  • These exchanges will determine three different MCPs which may pose implementation challenges.
• We need a single MCP for which an institution called the “market coupler” can be established.
  • 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
  • The government can also give responsibility of determining MCP to the three exchanges, by rotation such practice is followed in some Western countries.

Why are the states objecting to the MBED scheme?

• The reason behind the objections is the state-owned generators are relatively inefficient.
  • These state-owned generators 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 even though they are inefficient.
  • They draw only the balance from the more efficient interstate generating stations.
• Today no state wants to keep state generators idle as it has its own political implications.

Way Forward

• The MBED scheme seems to be a good proposition but its implementation holds the key.
• Some pilot project studies suggest monetary gains will be there if the MBED system is adopted.
• Irrespective of results for a successful implementation a lot of groundwork needs to be done including redrawing of regulations before introducing the MBED.
• The scheme has been delayed because the regulators are yet to make up their minds and have asked for more deliberations in the matter before taking a leap.

Conclusion:

• India has a significant inter-regional power transmission capacity through its complex interconnected power grid that requires close coordination between grid operators and power project generators across coal, gas, hydro, nuclear and green energy sources run by the Centre, states, and the private sector.
• The government has invested significantly over the last decade to achieve larger inter-regional transfers of electricity and eliminated most constraints.
• Therefore the MBED scheme fits in the vision of the government and will aid the larger ambition of the government of “One Nation, One Grid, One Frequency" if implemented in the right spirit.

Source: Indian Express

Mains Question:

Q. The proposed electricity generation and distribution system, the market based economic dispatch (MBED) may help governments to save revenue, but Centre needs to bring states on board, Comment. Also discuss advantages of the MBED system vis-a-vis the current electricity generation and distribution system. (250 words).