Power exchanges get new regulations

After stock exchanges came commodity exchanges and now you have power trading exchanges. Their life just got more interesting, with the Central Electricity Regulatory Commission (CERC), the central power sector regulator, notifying a host of regulations they have to adhere to. The current exchanges too have been set up under the purview of the regulator, but these were in the form of guidelines. Just as there is a mind boggling number of entities who have entered and still want to enter the power trading sector, exchanges for power trading too are a hot sector. Realising that the regulations should precede and not follow the growth of exchanges, the CERC had earlier notified draft regulations and then followed it up with the final regulations.

The regulations are also to nudge the exchanges into evolving in a certain fashion. While explaining the draft regulations, the commission quoted the National Electricity Policy, 2005 in which 85% of the power will be sold through power purchase agreements. Under the PPA route, distribution utilities –mainly state electricity boards- enter into contracts with the power generators, to buy power from them at agreed rates. The remaining 15% would be sold through power trading. Merchant power plants are a rage in the country, with companies falling over each other to build power plants. In some years, there is going to be a lot of power floating around in the markets, up for sale. The medium term objective of the regulator is to develop a market where power can be efficiently traded. The market can also meet short term imbalances in power.

Also, the commission wants to develop price risk management tools or derivatives. This will be the second leg and the focus at present is on developing a vibrant spot market for power. Eventually, the power exchanges role will transform from being platform for price discovery to one that will also allow companies to manage risk. The commission cites the worldwide phenomenon of having exchange traded contracts which take care of systemic risk. Though it does not say so, it would want the present over the counter system of trading power to move to the exchanges.

The Key Regulations

  • Will apply to both OTC and exchange markets for electricity trading and to almost all kinds of instruments in the market. And, will be applicable to almost all entities associated with the power sector.
  • New contracts to be traded on the exchanges will need regulatory prior approval but existing contracts can continue.
  • Either a company or a consortium of companies who have set up a special purpose vehicle to set up a power exchange, can set up a power exchange.
  • It should have a minimum net worth of Rs 25 crore. If a power exchange separates its clearing function, it will need a minimum net worth of only Rs 5 crore.
  • Power exchanges can also set up separate clearing corporations, which too need a Rs 25 crore minimum net worth criterion.
  • Shareholding pattern:
  1. A shareholder who is not a member can hold up to a 25% shareholding
  2. A shareholder who is also a member can hold only up to a 5% holding.
  3. Members can collectively hold only 49% in a power exchange, either directly or indirectly.
  4. Existing exchanges have three years to comply with these new regulations. These are generally following the principle of having demutualised stock exchanges, with a separation of the people who run and manage the exchange and its members.
  • The board of the power exchange will have at least two independent directors or one-third of the board strength, whichever is higher. Member-directors are restricted to one-fourth of the total board strength.
  • Power exchanges will have to pay an annual registration fee: Rs 5 lakh for up to 5,000 million units traded in a year, Rs 10 lakh for up to 10,000 million units traded and Rs 30 lakh for others.
  • Members can charge a maximum of 0.75% of the transaction value to their clients. This is to prevent clients from being over charged.
  • The commission does not want a mushrooming of power exchanges. It has set a rule that will restrict the maximum number of exchanges in the market to 5. Power exchanges will be allowed to function for two years after which they will need to have at least a 20% market share. If a power exchange does not have a minimum 20% market share, for two consecutive years, it will have to either shut down or merge its operations with other players. This seems draconian and the market share could have been kept lower in the initial stages and then hiked later.
  • In addition to these, there are a host of regulation that pertain to various aspects of operation of a power exchange and a clearing corporation and their role and responsibilities.

Link to the regulations.

Link to the draft regulations that were put up for comments and a link to the explanatory memorandum, explaining the rationale behind the draft regulations.

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