CERC tightens regulations on flexible power contracts to prevent market manipulation

In a move to enhance transparency and combat potential market manipulation in India’s power sector, the Central Electricity Regulatory Commission (CERC) has issued directives to power exchanges aimed at reforming contract structures and trading mechanisms. This action was prompted by significant deviations in price observed in day-ahead contingency (DAC) contracts compared to the day-ahead market (DAM), raising concerns about market integrity and fragmentation caused by overly flexible contract designs.

The decision to intervene was motivated by stakeholders and the Ministry of Power highlighting substantial and sustained price premiums in DAC contracts starting in October 2023. These deviations were seen as straying from the intended purpose of addressing short-term grid imbalances post-DAM closure, veering instead towards becoming a separate price discovery platform with distorted outcomes. Over time, power exchanges had introduced a range of new contracts beyond their original offerings, including day-ahead contingency, intra-day, real-time market, term-ahead, green contracts, and any-day single-sided contracts to meet evolving grid complexities and stakeholder needs.

One key issue identified by CERC was the excessive granularity in term-ahead market contracts. The introduction of overlapping and user-defined delivery slots led to fragmented market liquidity, hindering standardization needed for healthy competition. This allowed buyers to customize contracts, potentially increasing price manipulation risks and reducing trading window depth. CERC directed power exchanges to discontinue user-defined time slots and focus on standardized contracts like round-the-clock, peak, off-peak, and night blocks.

Concerns also arose about the operation of any-day single-sided contracts, which had become inefficient due to buyers issuing multiple requisitions across exchanges for the same demand. The lack of stringent timeframes and incentives for non-serious participation led to capacity blocking and uncertainty. To address these issues, CERC mandated specific timeframes for each stage of the any-day single-sided contract process, along with measures to prevent non-serious bidding and ensure only genuine bids enter the market.

A significant change ordered by CERC pertained to the price discovery mechanism in DAC contracts, shifting from a continuous matching model to a uniform price-step auction model. This change aimed to enhance transparency and fairness by aggregating all bids and clearing them at a single market price. While stakeholders had mixed reactions to this shift, CERC deemed unified pricing essential to prevent anti-competitive practices and support price predictability.

In contrast, despite concerns about low liquidity, intra-day contracts were retained as they provide an alternative energy procurement path when real-time market prices spike or bids remain unfulfilled. This decision acknowledges the importance of intra-day contracts in complementing real-time market transactions and meeting the needs of distribution companies and green energy producers.

Overall, CERC’s directives signal a concerted effort to address market inefficiencies, enhance transparency, and curb potential market manipulation in India’s power sector. By reforming contract structures, trading mechanisms, and price discovery mechanisms, the regulator aims to create a more level playing field and foster robust competition in the power market.