Ministry of Power released a discussion paper on Market Based Economic Dispatch (MBED) seeking public comments. Ensuring economic dispatch of capacity at the national level can result in savings when compared to current scheduling practices. However, the existing proposal, to be initiated in a phase-wise manner over the next couple of years will have significant techno-economic, contractual, legal and policy implications on the sector. The discussion draft circulated by the Ministry of Powers raises more questions than it answers and fundamentals of the proposals are not detailed adequately. This is also the case with studies conducted to assess benefits from the scheme and the analysis to show DISCOMs over-schedule in practice.

Assuming muted thermal capacity addition going forward, more ‘backed down’ contracted capacity will  get scheduled with increase in future demand and the savings from MBED will reduce over time. The proposal, its benefits and required long-term changes for implementation should be evaluated in this context.

Some potential implementation challenges  with the current mechanism are detailed below.

• Impact on working capital of DISCOMs in case there is delay in Bilateral Contract Settlement (BCS) payments by generators in MBED especially as no contractual mechanism to mitigate delay in specified in the proposal
• If BCS settlements are provided by DISCOMs to thermal generators who bid less than VC and clear in MBED, the risks undertaken during bidding by the generators are hedged by the DISCOMs. This protection could result in risky bidding strategies. This should be avoided by explicitly clarifying that BCS settlements by DISCOMs to generators will not be provided.
• Implications on MBED participation in case: 
  --adequate Letter of Credit (LC) order is not provided for any capacity (as MoP 2019 order prevents DISCOM participation in power exchanges in case of non-provision of adequate LC for any generator)
  --There is not agreement among multiple beneficiaries of a generator on which exchange to participate in for MBED.

Before MBED is launched, it is suggested that multiple pilots with the aim of economic dispatch at the national level be tried out to evaluate the best design, suited to ground realities. Some of these include:

• Implementation of MBED at a regional level for a period of 2 months
• Compulsorily requiring sale of URS power in the DAM if power not scheduled by DISCOMs.
• Expanding the scope of SCED by mandating it for all generators contracted by DISCOMs and implementing look ahead and unit commitment for a three day ahead demand forecast by SLDC.

For these pilots, participation by DISCOMs and suspension of right to recall can be incentivised. Such approaches will help better understanding of various risks and to develop appropriate mitigation mechanisms.

Our earlier comments on the 2018 CERC discussion paper ‘Market Based Economic Dispatch of Electricity (MBED): Re-designing of Day-Ahead Market (DAM) in India’ are available here.