Imagine treating electricity like a bag of rice you could negotiate, bargain, and pay for directly over the counter to suppliers. This is exactly what India’s energy authority, the Central Electricity Regulatory Commission (CERC), aims to establish in the country – crucially, with an added assurance of safety and security provided by regulations that cut fraud or cheating.
Earlier in February, CERC breathed new life into the country’s electricity market with the issuance of guidelines for a regulated over-the-counter platform, which sector executives claim to be the world’s first. How would such a platform work, and are there any challenges involved?
What is an over-the-counter market?
In India, and many countries in Europe, the energy market operates with the help of a power exchange. A power exchange is a platform that allows people to trade electricity like a commodity – the way a stock market exchange allows people to trade stocks.
An electricity power exchange provides a spot market, where electricity is delivered almost immediately as the time it is purchased (mainly day-ahead). The system matches demand and supply for each time block, while providing a public price index that is transparent and visible to all. This is like any other market – think trading for Apple or Google shares on NASDAQ, America’s stock exchange, where stock prices fluctuate constantly to reflect the market’s demand and supply.
In contrast, an over-the-counter market is one where electricity is bought and sold without the help of a power exchange. Customers buy electricity directly from power generators or companies, either through direct contact or via the help of a broker. As a result, electricity prices are determined based on bilateral contracts set by the parties instead.
The over-the-counter system invariably allows for greater flexibility in the ecosystem. Players can determine their own contract terms and timeframes based on their own energy needs. However, where the over-the-counter market lacks is transparency.
The over-the-counter system invariably allows for greater flexibility in the ecosystem
In a power exchange system, price transparency is guaranteed through the platform’s anonymous auction features, while price discovery is done by matching supply and demand. In contrast, an over-the-counter system is susceptible to price manipulation by traders, since it exists outside the strict regulations of a power exchange. Challenges also arise in reporting and dispute settlements, since there is no central authority or platform, like an exchange, to oversee the contracts.
With greater flexibility also comes greater risk. Players risk defaulting and suffering from loss due to poor business decisions or misunderstandings before entering an over-the-counter contract. This can pose serious consequences to buyers and sellers.
High time for a regulated over-the-counter platform
These challenges and more point to the need for greater certainty and security in the over-the-counter market. At present, there are no platforms to facilitate the direct interaction between buyers and sellers in an over-the-counter market in India, but that will soon change following CERC’s announcement.
The implementation of a regulated over-the-counter market will allow the players to explore untapped sources of power to meet consumer needs, and will serve as another market enabler. A regulatory framework and regulated platform will provide a safety net for consumers and companies alike.
Indian market players have also welcomed the move. According to Bengaluru-based REConnect Energy, the new over-the-counter platform has the potential to accelerate clean energy transition in the country. Companies can operate inter-state and engage with a variety of suppliers and consumers under the new, single platform.
Renewable companies can also accelerate their capacity addition plans and expand on existing assets, while traditional power generators like those in coal and gas can make efficient use of their surplus capacity.
In transition towards a competitive market structure
India, like many parts of developing Asia, is set along a roadmap with critical energy reforms. Achieving energy security and sustainability for its booming population requires the transformation of old systems, and the addition of new ones.
Looking at our counterparts in the West, the situation was very similar in many regards in their past. 20 years ago, Europe’s wholesale market was dominated by over-the-counter trading. After significant reforms to its market structure, entailing market liberalisation and the transition into a competitive system, over-the-counter trading was soon replaced by spot market trading facilitated by a power exchange.
Advancements in technology have also enabled the transition. While over-the-counter trading was done via phone calls or facsimile in the past, improvements in digital tech and data analytics have enabled new platforms and features to be developed. Electronisation of the market known today has put information into the hands of everyone, and with appropriate policy to follow the landscape, such as those issued by CERC, energy trading will become a basic right easily accessible to anyone, anywhere.