General Characteristics

  • 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.
  • Wholesale 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 lines.
  • 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 years.
  • 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 county.
  • The overall economic scenario determines the electricity usage by industry and influences prices.
  • 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.