Why in news?

India is moving toward restructuring its electricity trading system through proposed regulations on market coupling, issued by the Central Electricity Regulatory Commission (CERC). Market coupling aims to aggregate bids from all power exchanges and determine a single, uniform market-clearing price, replacing the current system where different exchanges set varying prices.

Traditionally, electricity in India is sold through long-term power purchase agreements (PPAs) between generators and distribution companies (DISCOMs). However, power exchanges enable short-term trading to manage demand fluctuations, where surplus electricity is sold at market-driven prices.

The proposed reform seeks to shift from this decentralised price discovery system to a unified one, with the Grid Controller of India designated as the central operator responsible for implementing market coupling and ensuring efficient price discovery.

What’s in Today’s Article?

• CERC’s Market Coupling Proposal: Key Features and Developments
• Electricity Trading in India: Structure and Market Mechanisms

CERC’s Market Coupling Proposal: Key Features and Developments

• The Central Electricity Regulatory Commission has proposed amendments through the Power Market (Second Amendment) Regulations, 2026, building on the 2021 regulations where market coupling was first introduced.
• Market coupling is a system where buy and sell bids from all power exchanges are combined to determine a single, uniform market-clearing price (MCP) for electricity.
• It moves price discovery from individual exchanges to a central Market Coupling Operator (MCO) to optimize transmission, enhance price transparency, and maximize economic surplus.
• Objectives of Market Coupling
  • Market coupling aims to:
    • Enable uniform price discovery across power exchanges
    • Reduce price disparities between regions
    • Provide a reliable benchmark price for policymakers
    • Improve market efficiency and stability
• Grid India as Market Coupling Operator (MCO)
  • The Grid Controller of India is proposed to act as the Market Coupling Operator (MCO), responsible for:
    • Operating and managing market coupling
    • Creating a dedicated internal cell for this function
    • Until formal rollout, power exchanges will continue price discovery.
• Centralised Price Discovery Mechanism
• MCO will aggregate bids from all power exchanges.
• Determine a single market-clearing price (MCP).
• Based on maximisation of economic surplus (buyer + seller benefits).
• Ensures efficient and transparent pricing.
• Power Market Coupling Procedure (PMCP)
  • Grid India will develop a detailed Power Market Coupling Procedure (PMCP) within six months.
  • PMCP will define:
    • Roles and responsibilities of MCO
    • Standardised bid formats
    • Design of the price discovery algorithm
• Uniform Bid Collection and Transmission
• All power exchanges will:
  • Collect bids in a standardised format
  • Share them with MCO via secure channels within defined timelines
• This ensures consistency and seamless integration across markets
• Phased Expansion Across Market Segments
  • Market coupling will initially apply to:
    • Day-Ahead Market (DAM) - DAM is a financial and physical electricity trading market where participants buy and sell power for delivery the following day.
    • Real-Time Market (RTM)
  • Gradually extended to other electricity market segments
• Controversies and Legal Challenges
  • Insider Trading Allegations - Securities and Exchange Board of India (SEBI) flagged irregularities. Allegations of confidential information leak involving a CERC official.
  • Industry Opposition - India Energy Exchange, holding over 90% Day-Ahead Market (DAM) share, opposed the move.
  • Concern: loss of competitive advantage under uniform pricing.
• Market Structure and Key Players
  • Dominant player: India Energy Exchange (IEX)
  • Other exchanges:
    • Power Exchange India Limited
    • Hindustan Power Exchange Ltd

Electricity Trading in India: Structure and Market Mechanisms

• India’s electricity trading system is gradually shifting toward a more market-driven and flexible model, with short-term trading gaining importance alongside traditional long-term contracts.
• Dual System: Long-Term Contracts and Short-Term Markets
  • Electricity trading in India operates through two main channels:
    • Long-term Power Purchase Agreements (PPAs): Typically 25-year contracts between generators and distribution companies
    • Short-term markets: Facilitated through power exchanges to manage demand fluctuations and surplus supply
• Market-Based Price Discovery
  • Electricity is traded through bids (demand) and offers (supply).
  • The market-clearing price (MCP) is determined where demand and supply intersect.
  • This system allows:
    • Generators to optimise output and revenue
    • Utilities to efficiently meet variable demand
• Types of Power Markets Based on Timing
  • Spot Market
    • Real-Time Market (RTM): Near-immediate electricity delivery
    • Intraday Market: Same-day trading, hours before delivery
  • Day-Ahead Market (DAM)
    • Closed auctions for 15-minute time blocks
    • Electricity delivered the next day
  • Term-Ahead Market (TAM)
    • Contracts for delivery from 3 hours to 11 days ahead
• Growth of Short-Term Electricity Markets
  • Volume increased from 65.90 Billion Units (2009-10) to 238.35 Billion Units (2024-25)
  • Growth rate:
    • Short-term transactions: 8.9% CAGR
    • Total generation: 5.8% CAGR
  • Share in total electricity generation rose from 9.6% to 13.03%