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Wholesale Electricity Market Reforms Can Help India Achieve Its National Climate Targets

Adopting national-level wholesale electricity dispatch plans can reduce system costs and maximize the benefits of green growth initiatives outlined in India’s Union Budget.

India recently released its 2023 budget (the Union Budget), outlining the government’s key priorities for the coming fiscal year. Green growth is a core foundation of the budget, which allocates INR 35,000 crores (US$4.2 billion) for capital investments toward energy transition and net-zero objectives. This money will go toward initiatives such as viability gap funding for battery energy storage and plans to develop pumped storage projects. The Union Budget investments into green growth are laudable but achieving the country’s climate targets will require addressing structural issues that continue to challenge India’s power sector.

Currently, the scheduling and dispatching of power generators is not optimized, leading to economic strain for distribution companies (discoms) across the country. In June 2021, the Ministry of Power proposed a Market-Based Economic Dispatch (MBED) mechanism to address this and to help integrate the next generation of renewable energy assets needed to meet the country’s 2030 targets.

How Can MBED Drive India’s Green Growth?

Currently, discoms self-schedule generation at the state or regional level and lack visibility beyond their generation portfolio, resulting in reliance on inflexible long-term contracts and dispatch of generators with high variable operating costs. Self-scheduling hinders grid flexibility, limiting the ability to react to seasonal or geographic variability of generation, and creating curtailment risk for renewable energy generators.

Under the MBED proposal, discoms and generators will submit bids to a national market operator that will rank the bids on a country-wide basis based on price and provide a day-ahead dispatch schedule. Establishing optimization of scheduling and dispatch on a pan-India basis will have multiple benefits, including addressing renewable energy curtailment events, broadening the scope of balancing, and realizing system cost savings.

Currently, states with a high concentration of renewable energy generators witness curtailment of electricity, especially during the monsoon season. For example, in 2021 Andhra Pradesh reported approximately 1,350 instances of wind or solar generators being curtailed with over a third of these curtailment events occurring during the monsoon heavy month of July. Andhra Pradesh aims to accommodate 120 gigawatts of renewable energy projects, however frequent occurrences of curtailment caused by system limitations pose a financial risk that could impact future investments in the sector. MBED can minimize the risk of renewable curtailment by expanding the geographic area of dispatch from the state level to the national level.

The power grid is also required to be kept within specific frequency parameters to maintain balance. MBED can help broaden the scope of the balancing area, which can address challenges in states with a growing concentration of renewable energy generation. The regional and national balancing potential is significantly higher than most of the individual state’s balancing potential. By broadening the scope of coordination from state level to national, balancing reserves can be shared across regions reducing the overall volume of balancing reserves required to meet system demands. Renewable energy-rich states such as Karnataka and Tamil Nadu will benefit from having access to balancing resources beyond their state borders and potentially lower the discoms’ investments in necessary reserve capacities.

Centralized scheduling and dispatch under MBED can have additional benefits for system operations. By reallocating from the highest to the lowest cost generation on a pan-India basis, MBED may lower the average cost of supply of plants. Based on RMI’s analysis, the efficient dispatch of a pooled generator proposed through MBED can result in potential cost savings of INR 1.5–4 crore (US$184,000–US$491,000) per day. These savings are impacted by technical and operational constraints and will vary across states.

SCED—The Launch Pad for MBED

The savings projected from MBED are consistent with the findings of the Security Constrained Economic Dispatch (SCED) pilot conducted by Grid-India beginning in 2019 that aimed to optimize scheduling and dispatch of participating thermal interstate generation stations. As of February 2022, 49 plants were participating, and the pilot successfully demonstrated savings of close to 2 crore (US$241,000) per day. The success of the pilot has resulted in the Ministry of Power announcing an expansion of SCED to regional thermal plants, including implementing day-ahead scheduling. SCED can potentially evolve into MBED as it promises to create an integrated wholesale market where generators and discoms across India can participate.

Globally, improved coordination across generators and distributors via wholesale markets has demonstrated economic and environmental benefits. The Western Energy Imbalance Market (WEIM) is a voluntary real-time energy market in California and the surrounding states that finds low-cost energy to meet consumer demand across participants. Since its inception in 2014, the WEIM has surpassed INR 16,000 crore (US$ 2 billion) in benefits and avoided over 700,000 metric tons of greenhouse gas emissions. The establishment and expansion of the WEIM can serve as a model for India for determining a pathway toward successful pan-India scheduling and dispatch coordination via MBED.

Building off two decades of evolution, India needs to ensure that the right electricity market structure is in place to develop a reliable, flexible, and cost-effective power sector. Optimizing scheduling and dispatch through MBED is an important next step in market development. However, additional measures should be taken to ensure transitioning to MBED is a success. A robust transition plan outlining the structure and responsibilities of how the market will operate, as well as a pathway for assessing and meeting technological readiness is key. A process for the financial transition for discoms should also be developed. Transparent, consistent, and standardized data reporting will be necessary for evaluating the efficiency of national wholesale market operations.

The budget intends to put India on track to achieve predefined national targets, including meeting 50 percent of the country’s power generation capacity from non-fossil fuel sources by 2030. Reforming electricity markets is necessary to ensure the power sector is well suited to integrate higher levels of renewable generation and maximize the economic and environmental benefits realized through the Union Budget expenditures. These steps can establish India as a global leader in this innovative sector and put the nation on a pathway to net zero by 2070.