- In economic terms,
electricity (both power and energy) is a commodity capable of being
bought, sold and traded. Power is the metered net electrical output of
a generator at any given time and is measured in Megawatts (MW).
Energy is electricity that flows through a metered point for a given
time and is measured in Megawatt Hours (MWh).
- The most significant
characteristics of electricity are that it cannot be easily stored and
it flows at the speed of light. Thus, it must be produced at virtually
the same instant that it is consumed and unlike other commodities, it
is not possible, under normal operating conditions, to keep it in
stock, ration it or have customers queue for it. Furthermore, demand
and supply vary continuously.
- The non-storability
of electricity makes the electricity market different from other
financial markets and other commodity markets. Shortages in
electricity generation or peaks in electricity demand results in
unparalleled jumps, spikes, and volatility in spot electricity prices.
The only way by which additional demand can be met is by maintaining
spare generating capacity and fuel inventories at power stations.
transactions (bids and offers) in electricity are typically cleared
and settled by the market operator or a special-purpose independent
entity charged exclusively with that function
Basics of Indian Power Sector
- The electricity
sector in India is predominantly controlled by Government of India's
public sector undertakings (PSUs) with National Thermal Power
Corporation and National Hydroelectric Power Corporation being the
major national level players. The sector was opened to the private
sector in 1991 and it is expected to account for 30% of India's installed
capacity by 2017.
- The PowerGrid
Corporation of India is responsible for the inter-state transmission
of electricity and the development of national grid. The entire
country has been divided into five regions for transmission systems,
namely, Northern Region, North Eastern Region, Eastern Region,
Southern Region and Western Region. The Interconnected transmission
system within each region is also called the regional grid.
- The Electricity Act,
2003, recognizes trading as an independent activity and accordingly
prescribes issue of trading licences by the Central Electricity
Regulatory Commission (CERC) for inter-state trading.
- Around 66% of the
electricity consumed in India is generated by thermal power plants,
25% by hydroelectric power plants and 3% by nuclear power plants. More
than 50% of India's commercial energy demand is met through the
country's vast coal reserves.
- The country is
currently focusing more on other alternative sources like wind energy,
nuclear power and solar power on a major scale to significantly boost
its installed capacity.
- In India bulk
transmission has increased from 3,708 ckm (circuit km) in 1950 to
around 6.6 million ckm in 2009 and the country is the third largest in
the world in terms of total length of transmission and distribution
- Electricity losses
in India during transmission and distribution are extremely high and
are around 30% against a world average of only around 10%.
Indian Supply Demand Scenario
- India is world's 6th
largest energy producer and consumer, accounting for 3.4% of global
energy consumption. Due to India's economic rise, the demand for
energy has grown at an average of 3.6% per annum over the past 30
- In March 2009, the
installed power generation capacity of India stood at 147,000 MW while
the per capita power consumption stood at 612 kWH.
- The country's annual
power production increased from about 190 billion kWH in 1986 to 720
billion kWH in 2009.
- Despite the growth
in the sector, demand still outstrips supply. While, the average power
shortage is around 8-9%, peaking shortages hit around 12-15%. Due to
shortage of electricity, power cuts are common throughout India and
this has adversely effected the country's economic growth.
- The Indian
government has set an ambitious target to add approximately 78,000 MW
of installed generation capacity by 2012 with a mission to ensure
Power for All by 2012. Meanwhile, the total demand for electricity in
India is expected to cross 950,000 MW by 2030.
- Despite an ambitious
rural electrification program, some 400 million Indians lose
electricity access during blackouts. While around 83% of Indian
villages have an electricity line, just 47% of rural households have
access to electricity in 2009.
Market Moving Factors
- Like any other
commodity the price at which electricity is determined by the current
supply-demand scenario and participant's perception of the upcoming
market fundamentals. However, intrinsically different nature of this
commodity prevents suppliers / buyers from actually stocking
electricity in anticipation of future demand.
- As setting up a new
power station is very capital intensive, power stations maintain spare
capacity or stock additional fuel to meet seasonal, anticipated /
unanticipated peaking of demand.
- The availability of
coal and water for power generation is the major limiting factor for
power generation in India. For most power generating company's fuel is
the most important cost factor, with it accounting to more than 50% of
cost of production, followed by operating expenses.
- Coal shortage has
become an important issue for thermal power generation in India.
Despite, the country's vast coal reserves, imports have picked up in
the recent years and power utilities are reported to have imported
around 18 million tonnes in 2008-09 and the target for 2009-10 has
been sharply hiked to 35 million tonnes.
- Monsoon is an
important price determining factor for electricity too. Adequate
quantity of well-distributed, timely rains increases the water
availability for agriculture and reduces the power consumed. More
importantly, availability of water for power generation is dependent
on the amount of rains received at various dams and catchment areas in
- The overall economic
scenario determines the electricity usage by industry and influences
- Seasonal factors
like temperature, monsoon determine the power consumed by retail
consumers and have a profound influence on prices.
- Price of electricity
in other global markets has no direct influence on Indian prices.
However, indirectly the global prices of crude oil, coal influence the
raw material cost for domestic power plants and in the long run impact
domestic power prices.