India’s real time electricity market could lower costs of integrating renewables in the power system

On June 1, the Central Electricity Regulatory Commission (CERC) and the Indian Energy Exchange (IEX) launched the real-time electricity market. A real-time electricity market is a crucial pillar in the strategy to enhance the uptake of variable renewables like wind and solar in the power sector. It allows the more effective and efficient matching of variations in demand and supply of electricity. Let us see how it works by walking through a small example.

Imagine a wind power producer, who has offered to sell a distribution company a certain amount of electricity over the course of the next day. However, on waking up, the wind power producer realises that the weather forecast has changed, and his output will be lower than originally offered to the power distribution company. Previously, under the old system, the wind power producer would be forced to pay a regulatory-set penalty for the non-fulfilment of its offer to sell power to the distribution company. The problem was that the level of this penalty was set arbitrarily by the regulator. The penalty did not reflect the cost of sourcing short-term power to top-up the lost output of the wind-power generator in our example.

Under the new system, the wind power producer will go to the real-time energy market and put in a bid for the missing amount of electricity to allow it to fulfill its original contract with the power distribution company. The real-time market matches this bid with a supplier having surplus power and discovers the lower possible price.

We can also reverse the example. Imagine a power distribution company that has sourced a certain quantity of electricity for the following day. However, on the day itself, it discovers that its forecast of electricity demand was on the high side, and the amount of generation it has contracted is too large. In this instance, the distribution company can go to the real-time energy market and offer to sell its surplus contracted generation.

Thus, by creating a transparent and efficient process to reveal the value of short-term mismatches in demand and supply, the real-time energy market can create incentives to reduce and better manage these mismatches. In that way, the real-time energy market can reduce the cost of the short-term variability in wind and solar, which is an inherent characteristic of these generation sources. This is illustrated by the example of Germany, which introduced and progressively strengthened its real-time energy market several years ago.

The figure above shows the evolution of the balancing cost in Germany from 2008-2015, where balancing cost refers to the cost of compensating for the short-term mismatches between demand and supply. This cost has halved from 2008 to 2015 (pink line in the chart above), even as the installed capacity of wind and solar has grown 190% across the same period (blue area in the chart below). At the same time, the total generation capacity kept in reserve to meet short-term mismatches in demand and supply (so-called balancing reserve, purple line in the chart above) has decreased by 15%. The key message emerging from the chart below is that the introduction of effective, liquid and flexible real-time electricity market can lower the cost of integrating variable renewables into the power system. The hope is that the same will occur in India.

One of the reasons for the decline in the balancing cost in Germany is the fact that new market participants came into the real-time electricity market. Classically, in economics, as supply increases, prices fall. This is indeed what happened. In the short-term in India, the market participants are likely to be the existing generating stations of hydro, gas and coal. In the longer-term, the real-time electricity market will see the entrance of new players, including large industrial consumers, who can vary their consumption at short notice in order to balance demand and supply (so-called demand response). In addition, with the declining cost of lithium-ion batteries, the real-time energy market can provide a source of revenues for battery storage facilities taking advantage of their flexibility to buy electricity when the price is low and sell it when the price is high. Creating the market value for the services that batteries can provide is crucial for their deployment. By 2025, we can expect that solar coupled with a substantial degree of battery storage will be cheaper than the cost of new coal fired power plants (see figure below).

Source: Lawrence Berkley National Laboratory, new coal plant tariff range added by author in the grey bar, based on analysis here

Of course, the proof of the value of the real-time electricity market will lie in its effective implementation. It is crucial that the CERC ensures a wide participation in the market. There will need to be a capacity-building programme with the power distribution companies to allow them to improve their power demand forecasting and participation in the real-time market. Likewise, renewable power producers need to be encouraged to improve their production forecasting capacities, and to participate in the real-time electricity market. Despite these caveats, there is no doubt that the introduction of a real-time electricity market is a significant step forward in India’s transition to a renewables-based power system.

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