DP31 PDF

Central Electricity Regulatory Commission
Discussion Paper
on
Market Based Economic Dispatch of Electricity: Re-designing of

Day-ahead Market (DAM) in India
No RA-14026(11)/3/2018-CERC
Prepared by Staff of
3rd and 4th Floor, Chanderlok Building,
36, Janpath, New Delhi-110001
Website: www.cercind.gov.in
December, 2018
1
Disclaimer
The issues presented in this discussion paper do not represent the views of the Central
Electricity Regulatory Commission, its Chairman, or Individual Members, and are not
binding on the Commission. The views are essentially of Staff of CERC and are
circulated with prime aim of initiating discussions regarding Market Based Economic
Dispatch of Electricity in India through redesigning day-ahead market in power
exchanges and soliciting inputs of the stakeholders in this regard.
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Table of Content
1. Introduction 4
2. Issues in the current day ahead market design 9
3. International Experience 15
4. Proposed Framework – Market Based Economic Dispatch on a

Day Ahead basis. 24
5. Implementation and Operational Aspects of MBED

Mechanism 31
6. Benefits of Market Based Economic Dispatch 45
7. Challenges and Way Forward 54
Annexures 60
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1. Introduction
1.1 Indian Power sector is characterized by multiplicity of players across all segments
of the value chain viz., generation, transmission, trading and distribution. There are more
than 600 generating stations, 30+ transmission licensees, 70 odd distribution licensees, 2
power exchanges, 40 odd trading licensees, load dispatchers at the center, in each of the
five regions and in each of the 29 States. The total installed generation capacity is 346
GW (as on September 2018), out of which 57% is from Coal, about 13% Hydro, 21%
Renewables, 7.2% Gas, and 2% Nuclear. (Figure 1)
Figure 1. All India Installed Capacity (as on September 2018)
Coal
21%
Gas
Diesel
13% Nuclear
57%
Hydro
2%
7%
0% Renewable
Source: http://www.cea.nic.in/reports/monthly/installedcapacity/2018/installed_capacity-09.pdf
1.2 Most of the generation capacities are tied up in long term power purchase
agreements (of 25 years) with the distribution companies (discoms) and the rest in
medium term contracts (up to 5 years) and short term contracts (up to 1 year). As
depicted in Figure 2, at 87% long-term transactions dominate the share of total electricity
transactions in the country. Discoms for meeting majority of their daily power need, self-
schedule generation from the portfolio of these long-term contracts and the remaining is
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procured through bilateral transactions with other discoms, through power exchanges or
traders. Self-scheduling refers to the practice followed by the discoms to requisition
power from the generating stations with which they have contracts. While placing such
request/ requisition, the discoms are not obligated to intimate to the system operator the
variable cost of such contracted generator.
Figure 2. Volume of electricity Transactions in India
4% 2% Volume of Electricity Transactions
7% Long-Term
Bilateral
Power Exchange
Through DSM
87%
Source: Market Monitoring Report, August 2018
1.3 In case of the generating stations tied up in long term PPA, scheduling is done on
day ahead time horizon based on the timeline as indicated in Figure 3. Every day by 6AM
the Inter-State Generating Stations (ISGS) declare their capabilities for the next day and
intimate to the concerned Regional Load Dispatch Center (RLDC). RLDC validates these
capabilities and informs each state of its respective entitlements. Once the entitlements
have been communicated, the State Load Dispatch Centers (SLDCs) request dispatch
from the ISGS with respect to their share out of the declared capability for the following
day. If the ISGS wants to sell power to the market, consent has to be obtained from its
beneficiary first. The beneficiary has to communicate its consent by 9:45 AM. Thereafter,
the SLDCs carry out reviews to calculate the State’s power requirement from the ISGS,
based on the forecasted load, State’s own generating capability and the long-term,
medium-term and short-term bilateral arrangements with the ISGS. This schedule is
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communicated to the RLDC by 3PM. The RLDC having all the required information
computes the dispatch schedule for the ISGS and similarly the drawal schedule for the
states by 6PM. The states as well the ISGS have the opportunity to make modifications to
their drawal schedules and declared capabilities respectively by 10PM.
Figure 3. TimeLine for Day Ahead Scheduling of Long Term Transactions
Time Inter-State Regional Load State Load

Generating Station Dispatch Centre Dispatch Centre
00:00
Declared Capability for the
following day
(0000 hrs. to 2400 hrs.)
06:00
State Entitlements
08:00
Beneficiary consent regarding
quantum and duration of power
09:45
Drawal schedule for
each ISGS as per LT, MT
and ST bilateral
interchanges
15:00
Dispatch
Schedule
Drawal
18:00 Schedule
Modification in Declared Modification in Drawal
Capabilities if any Schedule if any
22:00
24:00
Source: CERC Staff Analysis
1.4 As regards short term transactions constituting Advance scheduling, first come
first serve (FCFS) contracts, day ahead bilateral contracts and transactions through the
power exchanges, their scheduling follows the timeline as indicated in Figure 4.
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Figure 4. Time-Line for Scheduling of Short Term Transactions
The advance scheduling refers to scheduling up to 3 months in advance. Buyers have to

make applications by the end of the first month for advance scheduling for the fourth
month. Applications for advance scheduling in the third month must be made 5 days prior
to the end of the first month and similarly applications for the second month must be
made 10 days prior to the end of the first month.
1.5 After the advance scheduling deadlines, there is a provision for first-come-first
serve (FCFS) contracts. The applications for FCFS need to be made four days prior to the
day of operation and approval for the same is granted within three days. Finally, after the
deadline of FCFS contracts, there is a provision for scheduling day ahead bilateral
contracts the applications for which are made within 3 days prior to the day of scheduling
and up to 3PM of the day preceding the date of operation. Applications made within this
time period are processed together only after processing the collective transaction
applications made during the same time period.
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1.6 In so far as the transactions in the day-ahead market segment of the power
exchanges are concerned, the bidding takes place from 10AM to 12 noon, a day prior to
the day of operation. Provisional matching is sent to the NLDC for approval by 1PM and
the NLDC reverts with congestion related information by 2PM. Based on the
information, the power exchanges send the final scheduling request to the NLDC by
3PM. Once the NLDC confirms the scheduling request of the power exchange by 4PM,
the power exchanges inform the SLDCs of the approved schedules by 5:30PM. The
RLDCs and SLDCs incorporate all the collective transactions in their daily schedules.
1.7 Day Ahead Markets are a part of a continuum involving the multi settlement
markets. While a DISCOM contracts capacity in Long Term, it schedules the power
mostly in day-ahead time horizon. Therefore, each of these markets – along the
continuum, allows the DISCOM to “correct” its position by either buying more
contracted quantity (if it perceives that the demand will increase) or selling (directly,
being a deemed trader or through a separate trader) excess contracted quantity (if it
perceives that the demand will decrease).
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2. Issues in the current day ahead market design
2.1 At present, under the self-scheduling mechanism the discoms prepare their
schedule from their portfolio of contracts to meet the expected load. These schedules are
submitted to the load-dispatch centers as per the timelines discussed in section 1. This
process does not mandate the discoms to declare the cost of their scheduled generation,
more precisely, the variable cost.
2.2 There are consequential issues that arise due to self-scheduling. For instance, it
leaves several low-cost generation capacities partially or sub-optimally utilized. This is
because, the discoms do not have visibility of other cheaper options nor do they have the
right to requisition/schedule power from the generating stations with which they do not
have a contract. Figure 5 depicts how scheduling in individual silos by each discom can
lead to sub-optimal utilization of lower cost generation while relatively expensive
generation is used. Discoms do not have the opportunity to identify cheaper generation
outside their portfolio due to the lack of visibility of such available capacity.
Figure 5. Self-Scheduling / Merit Order in silos
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As depicted in Figure 5, under self-scheduling mechanism there remains a possibility of

some cheaper generation capacities not getting scheduled fully (un-requisitioned surplus
or URS) when some expensive generation resources are scheduled. This is because each
discom operates in its own silo. In this example, URS at VC of Rs. 2.5 (Genco 2), and Rs.
3.0 (Genco 3) remain unutilized while higher cost generating stations (Gencos 6, 7 & 8)
are scheduled. This is because Discom B or Discom C does not have contract with
(Genco 2) or (Genco 3), and each one of them operates in its silos without the visibility of
the other.
2.3 The Figure 6, theFigure 77 and the Figure 8 show the generation portfolio of five
States viz. Andhra Pradesh, Karnataka, Telangana, Maharashtra, and Chhattisgarh (for
which primary data have been collected) stacked in the order of their variable cost. The
energy dispatched and declared capacity, respectively for one time block on a particular
day; each time-block for a day and for all days of a month have been aggregated.
Figure 6. Actual and Max. Possible Generation for 5 States for one time block (Slot-1 of the
1st July, 2016
Source: CERC staff analysis
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Figure 7. Actual and Max. Possible Generation for 5 States for a day (1st July,2016)
Figure 8. Actual and Max. Possible Generation for 5 States for the month of July, 2016

Note: For Five States (Andhra Pradesh, Karnataka, Telangana, Maharashtra, Chhattisgarh)
maximum possible generation at Declared Capacity (DC) (in MUs) Vs. Actual Generation (in
MUs) have been arranged in ascending order of variable cost of generators.
The two overlapping area graphs show the actual generation (AG) dispatched by these
generators and their declared capacity (DC). It is observed that there are several low-cost
generators (in a time block, a day as also in a month) with surplus DC remaining unused
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while relatively expensive generators were being dispatched. This implies, they were not
dispatched completely by their state and in the absence of a platform where this low-cost
capacity could be made visible to other buyers, the plants remain partially un-utilized.
Self-scheduling adds a layer of opaqueness in the system and makes it difficult for the
system operator to identify and dispatch the unused low-cost generation. The dark area in
excess of the light area in the graph represents the scope for optimization in scheduling
and dispatch. That area represents the surplus unused relatively low-cost generation.
2.4 The case for sub-optimal utilization of generation assets becomes all the more
prominent when the actual generation of each state is combined together and is contrasted
with the cumulative pooled generation of all the five states taken together, as depicted in
Figure 9.
Figure 9. Actual Dispatch vs. Pooled Dispatch (MUs) July, 2016 (cumulative)
The light green line indicates the cumulative actual generation of all the generators in the
five States, where as the dark green line shows the cumulative pooled generation
(equivalent to the declared capacity) of all the generators in the five States, stacked in
merit order. It can be seen from the above figure that the system marginal cost in the
actual dispatch scenario is much higher than that of the pooled dispatch. In other words,
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the available URS from plants with cheaper variable costs is not utilized, whereas the
plants with higher variable costs are being dispatched.
2.5 There could definitely be some explanations for non-utilization of cheaper sources
of generation. For instance, factors like transmission constraint, maintenance shut down,
ramping constraints, technical minimum etc. could be responsible for such results.
However, simulations have been done (as explained in later sections of this paper) by
applying some of these constraints and the results of the constrained optimization still
show definitive scope for optimization of generation resources.
2.6 The other challenges emanating from the practice of self-scheduling include lack
of flexibility to meet seasonal and diurnal variation in demand. For example, a discom
having contracts with hydro generators may not need to use this available capacity in
monsoon period. In other cases, in order to meet peak demand in the evening, discoms
are forced to keep running costlier generation capacity at its technical minimum in off
peak period even at the cost of backing down of cheaper generation. De-centralized self-
scheduling does not allow optimum utilization of cheaper generation capacity because of
lack of visibility of demand from other discoms. The availability of un-requisitioned
surplus (URS) from low cost generating stations also implies a potential for optimizing
scheduling and dispatch in order to lower cost of power procurement for discoms.
2.7 The extant practice followed to provide day-ahead schedule (of the generation
contracted under long-term agreements) often weakens physical and financial sanctity of
transactions, as both the generator and the discom can revise schedule 4 time blocks
ahead of dispatch without any financial liability. This makes system operation prone to a
lot of uncertainties.
2.8 To summarise, the key challenges of the existing mechanism of self-scheduling

are as under:-
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i. Self-scheduling restricts visibility of low cost generation available with other

discoms or generators;
ii. Costlier generation is used despite availability of cheaper generation – leading to
inefficiency and increased system cost;
iii. Given that the discoms are not obligated to reveal the variable cost of the
generation that they are scheduling, true system marginal cost is not known;
iv. Self-scheduling often constrains optimum utilization of renewable sources of
energy. As the visibility of a discom is limited to its own territory, surplus
renewable energy in the State is curtailed. Further, with increase in penetration of
Distributed Energy Resources (DER) at Distribution Network (which SLDC and
RLDC are not able to observe), DISCOMs would need to take into account
generation from such sources, to ensure flexibility in the system while catering to
‘net load (demand minus the generation from embedded RE resources)’. This is
critical because such embedded sources of renewable generation need to be taken
explicit cognizance of while scheduling other conventional sources.
2.9 The following section explores international experience in the context, especially
on optimum utilisation of generation resources, before recommending a framework
suitable for India.
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3. International Experience
3.1 The independent system operators (ISOs), in the US have over the period adopted
the centralized bid-based pool model as market design. In the process of designing and
moving towards a centralized pool-based approach they have continued to accommodate
self-schedules in a way that do not compromise their objective of least-cost grid
operations. This has provided the ISOs room to gradually develop the market design to
incentivize more and more participants to go through the energy market rather than
submit self-schedules1. Currently, electricity transactions regardless of whether part of
the day-ahead energy market or self-scheduled, all get settled financially at the market
clearing price (MCP)2. Hence effectively, buyers who submit self-schedule become the
price takers since they have to settle at prices cleared in the day-ahead market. Bilateral
contracts do not generally relate to the dispatch of available resources but instead
‘stipulate how economic rents from spot markets and the risks of lower than expected
capacity factors will be allocated between parties.
PJM
3.2 The PJM’s day-ahead market calculates the hourly clearing prices for the
following operating day on the basis of all the generation offers, demand bids, increment
offers, decrement offers as well as bilateral transaction schedules which are submitted3.
All generators have to submit offers in the day-ahead market regardless of their operating
status (e.g: maintenance or unplanned outages). Self-scheduled generators also have to
submit their MW schedules to the day-ahead market. Buyers are required to submit their
hourly demand bids for the following operating day as MW quantities at particular
locations, which they are willing to purchase. (See Figure 1010)
1
Electricity Contracting in the United States (USAID Report 2018)
2
Wholesale Market Design Initiatives in the United States (EPRI)
3
PJM Manual 11, 26th July 2018
15
Figure 10. PJM Market Timeline
Source – PJM Manual 11: Energy and Ancillary Services Market Operations
3.3 The buyers can also submit price sensitive demand bids which include the price
along with the MW quantity and location. After all the submissions are made, the prices
are calculated on the basis of Locational Marginal Pricing (LMP) concept which
considers three components; the system energy price, congestion price and loss price. The
PJM scheduling philosophy for the day-ahead market is “to schedule generation to meet
the aggregate demand bids that results in the least-priced generation mix, while
maintaining the reliability of the PJM RTO.” The day-ahead schedule is calculated
based on least-cost, security constrained resource commitment and dispatch for each hour
of the following operating day4.
4
PJM Manual 11, 26th July 2018
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New York Independent System Operator (NYISO)
3.4 NYISO’s markets are designed to ensure that bilateral contracts don’t affect the
ISOs objective of meeting the system load with least-cost and reliable electricity
generation. A buyer is allowed to self-schedule its day-ahead demand with its contracted
generators and communicate it to NYISO. However, all state generators (even if self-
scheduled) are required to submit economic bids to the ISO comprising the quantum of
electricity offer with a price for the following day. NYISO’s day-ahead market closes the
earliest amongst the different ISOs. Their bidding period starts seven days prior to the
day of delivery and closes as early as 5AM the preceding day. (see Figure 11)
3.5 The ISO then combines all the generator offers which include generators offering
electricity in the energy market as well as self-scheduled generators. The bids are
processed and schedules are prepared by 11AM. Therefore, the schedule of the contracted
generators does not impact the ISOs process of optimizing the available generation
resources to ensure that the least-cost dispatch takes place in the system, effectively
helping lower the system costs and costs to the buyer as well. The buyers who submit
self-schedules have to be price takers since they do not bid a price into the day-ahead
market. Bilateral contracts consist of 40% of the total electricity transactions and the rest
60% take place through NYISO’s locational based marginal price (LBMP) market.
3.6 The following flow chart shows the NYISO’s process right from bidding phase to
financial settlement. All the bids from the power exchange as well as the self-schedule
load and generation go through NYISO for centralized dispatch in merit order.
California ISO (CAISO)
3.7 California has been through a few phases of power market restructuring in the last
three decades. Till 2009, CAISO’s market design consisted of Load Serving Entities
(LSEs) self-scheduling their day-ahead and hour ahead demand while the CAISO market
only used economic bid-based dispatch of generation in the real time through economic
bids. Therefore, self-scheduling was a major part of their day-ahead process and only the
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real-time energy transactions went through CAISO market. This bilateral day-ahead
market design put the burden of optimizing the day-ahead schedule on the utilities.
Optimizing their schedule was important since they had to meet the residual demand or
supply through the CAISO market at the real-time prices.
Figure 11. NYISO Day-Ahead Market Process
Source: NYISO – Day-Ahead Scheduling Manual 11
3.8 In 2009, the market was redesigned on the lines of the PJM market. The CAISO
markets require the participants to submit economic bids which include the quantity
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along with a price. Self-scheduled load or generation has to submit only their quantity
and as mentioned earlier, they would be price takers in this scenario. So, locational
marginal prices (LMPs) are discovered in both the day-ahead and real-time markets and
all generation and load is settled at these prices. There have been a number of contracts
that have developed to facilitate participation of buyers and sellers who are part of long-
term bilateral contracts. Contracts for differences (CfD) being the most widely used as
effective arrangement between the parties.
3.9 With increase in penetration of renewables into the grid, self-scheduling brings in
major concerns. Self-scheduling makes it difficult for the CAISO to react to changes in
the system. Renewable curtailment increases as significant amount of self-scheduled
resources are online. Presently, CAISO is directing its efforts to reduce self-scheduling to
ensure that RE curtailment is minimized as much as possible.
3.10 Production cost savings were examined in the Midwest ISO (MISO) region as the
markets transition from a decentralized or less centralized dispatch operations (called as
‘Day One’) to a centralized market-driven unit commitment and dispatch process (called
as ‘Day Two’)5. The analysis suggested as the market transitioned from a Day 0 (pre-
RTO) to Day 1, production cost declined around 1.35% and transitioning to Day 2
operations yielded further reduction of 2.61%. Absolute savings across MISO in fuel and
S02 from Day 0 to Day 2 amount to around $261 million a year, out of which $172
million are due to transition from Day 1 to Day 2. Implying that at a constant rate the
savings would amount up to $1.72 billion in 10 years. Recently, MISO advertised that in
2017, “its centralized dispatch system and modelling software resulted in a cost
savings between $229 million and $259 million from improved unit commitment
among the RTO’s 30 balancing authorities6.”
5
Generation Cost Savings from Day 1 and Day 2 RTO Market Designs, Brattle Group 2009
6
RTO Insider, MISO touts $3 billion in 2017 savings
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Integrated European Electricity Markets
3.11 Similar to India and contrary to the US, in European Union the system and market
operators are distinct organizations which function independently. Figure 12 shows a
simplified version of EU’s day-ahead market design7.
Figure 12. Organization of Electrical Power System in EU
Source: How the European day-ahead electricity market works, Bertrand Cornélusse
http://www.montefiore.ulg.ac.be/~cornelusse/material/CoursEM20170331.pdf
Each region has its own system operator which is known as Transmission System
Operator (TSO) and each region has its own power exchange which operates day-ahead
markets, intra-day markets, balancing markets etc. Over several years EU has been trying
to achieve their goal of an integrated European electricity market to increase
transparency, efficiency, liquidity and most importantly social welfare8. Therefore, seven
power exchanges; EPEX Spot, CME, Nord Pool, OMIE, OPCOM, OTE and TGE have
7
How the European day-ahead electricity market works, Bertrand Cornélusse -
http://www.montefiore.ulg.ac.be/~cornelusse/material/CoursEM20170331.pdf
8
PCR Project, Price Coupling Region - https://www.belpex.be/wp-content/uploads/PB102-7.6.1-PCR-Standard-
Presentation_detailed_last_1.pdf
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taken the initiative of integrating their markets and adopting price coupling mechanism to
discover single electricity prices across regions9.
3.12 Currently, these seven exchanges operate across 23 countries10 and are working
towards integrating more power exchanges. In the day ahead markets of these exchanges,
price clearing takes place once a day for all the regions where it is possible to match the
bids between different regions/power exchanges and utilize cross-border generating
resources implicitly. Integrating more regions and implicitly allowing cross border
trading can realize social welfare benefits to the tune of €16 - €43 billion by 2030.
3.13 Moreover, accommodating high levels of RE integration and balancing it over a

wider region has allowed several geographic and technical diversities to be exploited
which reduces the overall balancing volume11. Several other benefits of an integrated
market based on market coupling principles have already been achieved. Figure 13
summarizes different benefits achieved and potential to achieve more. Integrated or larger
markets in EU and US have delivered least cost electricity to consumers by efficiently
optimizing the use of available generating resources while ensuring the security of the
grid at the same time. Additionally, it also advances the climate and environment goals of
clean energy transition by successfully accommodating high levels of intermittent RE
sources.
3.14 Europe’s primary initiative on integrating electricity markets has been the Target
Electricity Model12. The model is based on two broad principles; Energy only regional
markets and market coupling. The benefits to be realized upon successful integration as
per the Target Electricity Model across Europe are around €2.5bn to €4bn per year. A
2013 report13 stated “about 58%-66% of these benefits have already been achieved due to
9
PCR Project, Price Coupling of Region - https://www.belpex.be/wp-content/uploads/PB102-7.6.1-PCR-Standard-
Presentation_detailed_last_1.pdf
10
Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Hungary, Italy, Latvia, Lithuania,
Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and UK.
11
Realizing the benefits of European market integration, Regulatory Assistance Project, May 2018
12
The EU “Target Model” for electricity market – fit for purpose?, Oxford Institute for Energy Studies
13
Report for Directorate-General Energy European Commission by Booz & Company, revised July 2013
21
the level of market coupling present in large electricity markets of north-western Europe
and the Nordic region”.
Figure 13. Benefits of an Integrated European Energy Market
Source: Based on Booz & Co. 2013. Benefits of an integrated European energy market and
European Commission Staff working Document impact assessment, Part 3/5
Market coupling allows two or more electricity markets from different areas to integrate
through implicit cross border allocation14. Integration has made it easier for EU member
states to adopt high levels of RE penetration without substantial investments in
transmission capacity upgrades.
Elspot: Nord Pool Spot’s Day-ahead Auction Market
3.15 Elspot is the Nord Pool’s Day-Ahead spot market where power is traded based on
auction mechanism. All the participants must send their hourly buy and sale offers to
Nord Pool Spot at the latest by noon the day before the actual power is transacted through
the grid. The power purchase orders are aggregated to a demand curve and sale offers to
the supply curve. The intersection of the two curves gives the market price for one
specific hour. The Nord Pool then publishes the report to the participants the quantum of
electricity bought and sold for each hour of the following day and to the Transmission
System Operator (TSO). TSO later uses this information to calculate the balancing power
for each participant during the real time transaction.
14
Market Coupling, European Union Electricity Market Glossary
22
3.16 The system discovered price based on the supply and demand in a given region is
theoretical in nature and applies only when there are no grid related bottlenecks.
However, due to existing bottlenecks, the Elspot area is divided into a number of bidding
areas. TSO decides the number of bidding area and its boundaries based on the
transmission infrastructure in place for the particular region. Nord Pool spot exchange
calculates a price for each bidding area for each hour of the following day.
3.17 Based on the available transmission corridor and capacity in the transmission grid,
the Nord Pool spot market integrates the different bidding areas to maximize the overall
social welfare in the combined market. In this manner, along with calculating the day-
ahead prices, the Elspot market also carries out congestion management to bring out an
efficient system through an implicit auction. The available transmission capacity is used
to equalize the price differences as much as possible.
3.18 The surplus area is one where consumption is lower than the supply and hence
lower clearing price as compared to deficit area with lower supply and higher
consumption. This price difference between the two bidding area may be reduced based
on the available transmission capacity as the export of power from the surplus to deficit
area is reflected as an additional purchase for surplus area and additional sale for deficit
area.
3.19 Nord Pool spot market carries out day-ahead congestion management both on
external and internal transmission lines15 among the bidding areas to maximize the
overall efficiency of the system and optimize the generation cost of the system.
3.20 Given the concerns arising out of the self-scheduling process as highlighted in the
preceding section and with due regard to the international experience of optimisation of
resources in day ahead/ real time, the following section proposes a market design for
India that optimizes dispatch and saves costs for consumers.
15
Nordic Electricity Exchange and Nordic Model – Nord Pool
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4. Proposed Framework – Market Based Economic Dispatch on a

Day Ahead basis.
4.1 The discussion in the preceding sections highlights the need for optimization of
scheduling and dispatch of generation capacities through a suitable market design. The
international experience offers alternative market designs in order to ensure optimum
utilization of generation in different time horizons. It is in this backdrop that a Market
Based Economic Dispatch (MBED) model is proposed in this section. This model
would function on a day-ahead time horizon and schedule and dispatch all generation
purely on economic principles, subject of course to technical constraints.
4.2 The objective of the MBED will be to meet the system load by dispatching the
least-cost generation mix while ensuring that security of the grid is maintained. This will
ensure that the total cost of generation i.e. system cost, to meet the system load in all
time-blocks for a day is minimized. Given the current market framework in India,
involving the system operator and the market operator separately, the proposed market
design also envisages both these institutions to perform their respective functions as at
present. The system operation will address the physical settlement of electricity, whereas
the market operations will involve bid solicitation and all financial settlements. The
market platform would discover the market clearing price in each time-block in a day that
reflects the true value of the electricity dispatched.
4.3 The MBED model involves primarily the following two aspects, viz., ‘Scheduling
and Dispatch’ and ‘Settlement of Contracts’, which is being elaborated in the subsequent
paragraphs.
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MBED (First Aspect): Scheduling and Dispatch
4.4 In the MBED model, the sellers (central generators, state generators, independent
power producers (IPPs)), traders and discoms as sellers) would be required to submit
offers for all the time-blocks (which can be a single offer or block offer or multi-part
offer) for the following day to the Power exchanges. These offers would reflect the
quantum of electricity that the sellers are willing to supply at a particular price. Similarly,
the buyers’ bids would indicate the quantum of electricity they are willing to buy at a
particular price.
4.5 Figure 14 depicts a simple schematic in which the discoms submit demand bids
and the generators place supply offers.
Figure 14. Market Based Economic Dispatch
Genco 1
VC = Rs 1.5 Genco 2
VC = Rs 2.5
Genco 3
Discom A VC = Rs 3.0

Genco 4
VC = Rs 1.7
Discom B
Market Operator
Genco 5
VC = Rs 2.0

Discom C
Genco 6
VC = Rs 3.5
Genco 7

Genco 8 VC = Rs 3.0
VC = Rs 4.0

Source: CERC Staff analysis
This could be appreciated by contrasting with the current framework of self-scheduling in

silos by discoms as depicted in Figure 5 in the previous section. Unlike in the existing
framework where the discoms requisition power specifically from their contracted
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generators, in the proposed MBED model the discoms would bid into the power
exchange for procuring power and meeting their demand. (See Box-1)
Box-1: Existing Framework Vs Proposed Market Based Economic Dispatch
4.6 The generators are expected to bid based on their variable/marginal cost of
generation. The existing bilateral contract holders will be paid the fixed cost separately
outside the market and as such would also be induced to bid in the market based on their
variable/marginal cost of generation. This is expected to ensure discovery of the true
system marginal cost. Once the bids and offers are received, the market clearing engine
will seek to optimize the dispatch of generation sources. The buyers will be supplied
electricity as per their load and the generators will get dispatched in merit order up to the
point where the total system load is met; and the contracts would be settled bilaterally.
26
MBED (Second Aspect): Settlement of Bilateral Contract (BCS)
4.7 The second important aspect of the proposed framework includes settlement of the
electricity transacted. The market operator would discover the market clearing price
(MCP) after the bid period closes. The MCP in each time-block would be the bid value of
the last generator/sellers’ offer matched to meet the demand offers which would reflect
the marginal value of the electricity i.e. the cost of producing one more unit of electricity
to meet an additional unit of demand. All the buyers will pay to the market operator at
MCP for the day-ahead demand. Similarly, all the generators will be paid at the MCP
according to execution of their selected bids. This uniform price settlement will take
place for all the demand bids and the generator/sellers offers that are part of the day-
ahead period. This has been represented in Figure 15.
Figure 15. Pay in / Pay out in the Market Based Economic Dispatch
Genco 1
Discom A Genco 2
Genco 3
Discom B Genco 4
Genco 5
Discom C Market Operator
Genco 6
Discom D Genco 7
Genco 8
Discom E Genco 9
Genco
Discom’s Payment = Discom’s load X MCP

Genco’s Revenue = Genco’s total scheduled generation X MCP
! "#$%&' )*+',-. = ! 0,-%& 1,2,-3,
Note: Under No Transmission Constraint
Source: CERS Staff Analysis
27
4.8 The Day Ahead Market follows uniform pricing principle. However, in case the
Discoms and the Generators (tied in long term PPAs) were to participate, both would face
the volatility of Day Ahead Market prices but because they are tied in bilateral contracts
and have committed a price to each other, there would be a hedging arrangement (to be
referred as Bilateral Contract Settlement or BCS) of refunding the difference between the
market clearing price and the contracted price (the contracted price in this case would
mean the variable cost as determined by the Appropriate Regulatory Commission, since
the fixed cost would be paid separately based on availability as per the current practice).
4.9 Such an arrangement of bilateral contract settlement (or BCS) reduces exposure to
variability of prices. If a generator and a Discom are exposed to the same Market (Area)
Clearing Prices, then such an arrangement (BCS) removes their exposures to variation in
that Market Clearing Price (MCP) for a given contract quantity over a given contract
period.
4.10 The arrangement of BCS between the market clearing price and the contracted
price, entails a payment by the generator to the discom equal to:
(Market Clearing Price – Contract Price) x Contracted Capacity scheduled
under MBED summed over all blocks in a day
• The contract quantity is in MWh in each block, while the contract price is in
INR/MWh.
• The MCP could, in principle, be either day-ahead or real-time
• This formula is applicable only when Discom and Generator are located in the same
bidding zone and there is no congestion.
4.11 It is important to compute BCS payments by summing the {(contract quantity) ×

(MCP - (contract price))} over all time blocks in a day because some generators might
put in block offers / linked offers and hence may get prices lower than the market
clearing price in some blocks but their average per unit realization from the markets over
all time blocks will be greater than or less than to the price offered by them for the entire
block offer.
28
4.12 This proposed mechanism (Figure 16) ensures that the financial obligations of the
existing contracts remain intact and the contracting parties’ position is hedged against the
MCP.
Figure 16. Arrangement for Bilateral Settlement - Simple Case
Source : CERC Staff Analysis
4.13 Here, the buyer shall receive an amount equivalent to the difference between the
MCP and contract price times the quantum of contracted capacity scheduled from each of
its contracted generators. If the MCP is less than the contract price, then it will mean that
the discom contracted generator has not been dispatched and in that case there will not be
any need for BCS. This would essentially act as a hedging mechanism for the buyer to
ensure that they are covered against the risk of spot price volatility and their cost of
procurement does not increase. The buyers would still continue to pay the fixed costs for
the contracted capacity based on declared availability and regardless of whether the
generator gets dispatched. This would ensure that the generators get paid for the capacity
as per the existing contract.
4.14 BCS envisaged in the paper is a mechanism to provide hedging to both the parties
against the price volatility in the market. It is reiterated that BCS is purely a non-tradable
bilateral arrangement and is meant to grandfather the existing contracts (primarily the
long-term physical contracts).
29
4.15 The Market Based economic dispatch mechanism as explained above (with the
features of ‘Scheduling and dispatch’ and ‘Settlement of Bilateral Contract Settlement’ is
summarised and depicted in Figure 17.
Figure 17. Proposed MBED Framework
4.16 Having explained the conceptual framework of the MBED mechanism, we will
now deal with some specific implementation and operational aspects of the framework in
subsequent sections.
30
5. Implementation and Operational Aspects of MBED

Mechanism
BCS under congestion and market splitting
5.1 In the existing DAM at the power exchanges, market participants contest for
supply and purchase of electricity in each time block to meet their demand on a day-
ahead basis. There are occasions when the market splits owing to congestion. This results
in buyers on the “downstream” of congestion paying a higher amount and the
generators/suppliers on the “upstream” of congestion being paid – even for the electricity
supplied to the downstream of congestion - a price equivalent to the upstream MCP
which is lower than the downstream MCP. This leads to higher inflow than outflow of
cash to the Power Exchanges. This “excess” amount is called “Congestion Amount” as
per the provisions of the Power Market Regulations of CERC.
5.2 In the proposed MBED framework, under transmission constraints, Discoms and
Generators located in different bid regions may face (apart from the ‘temporal risk’ being
addressed through the BCS explained in the previous section) the ‘Spatial Risk’ due to
difference in Area Clearing Prices (ACP) of bid areas. This risk can be addressed by
allocating the “Congestion Amount” to the entities having bilateral contracts and paying
the fixed charges for transmission.
5.3 Even under the existing system, the bilateral contract holders who pay the fixed
charges for transmission have priority in terms of usage of the transmission network.
Following the same principle, in the proposed MBED framework as well, it is important
to ensure that such entities are not denied access unless the grid is faced with contingent
conditions, as these users pay transmission charges. It is proposed that all transmission
users with bilateral contracts, who are paying transmission charges shall specify the
points of injection and points of withdrawal from the grid and the system operator shall
certify that all these transactions, will simultaneously not violate grid security and
reliability and hence will be technically feasible.
31
5.4 All such bilateral contract holders participating and getting cleared in the day-
ahead market will then receive the “Congestion Amount” if the congestion occurs in the
“direction” of the contract and will have an obligation to pay for congestion if the
congestion occurs in the direction “opposite” to the direction of the contract.
5.5 Congestion Amount will be sufficient to pay out all the bilateral contract holders if
the “bilateral contracted capacities” required to be transferred (by duly considering the
direction) across the congested points do not exceed the network capacity.
5.6 The settlement procedure under market split and due to spatial price risk have
been explained with an example as follows:
Consider Region –A and Region-B with demand bids and supply offers for an hour as
shown in Table 1
Table 1. Assumptions for Congestion settlement
Quantity Price Quantity Price

Region -A (Rs/M Region -B (Rs/M
(MW) (MW)
Wh) Wh)
Supply Offers Supply Offers
Generator Generator
without with Long
G1_DAM 1200 5000 G2_LT 500 3000
any Term
Contract contract
Must Run Generator
G1_DAM_ Generator without
200 0 G2_DAM 500 7000
RoR without any
price Contract
Generator
with Long
G1_LT 1500 3000
Term
contract
Demand Offers Demand Offers
L1 Discom-1 700 7000 L2 Discom-3 1500 8000
L1a Discom-2 1000 5000 L2a Discom-4 100 7500
Generator G1_LT in Region-A has bilateral contract for 1500 MW capacity with Discom
L2 in Region-B at Rs. 3000/MWhr and Generator G2_LT in Region- B has a bilateral
contract for 500 MW capacity with Discom L1 in Region-A. The Available Transmission
Capacity (ATC) from Surplus Region (Region-A) to Deficit Region (Region-B) is upto
32
1000MW. These sets of offers and bids in Region-A and Region-B would result in Area
Clearing Price (ACP) of Rs.5000/MWh and Rs.7000/MWh for Region–A and Region-B
respectively as shown in Figure 18.
Figure 18. Sample case for settlement under ‘Spatial Price Risk’

The congestion amount received by the Market Operator would be Rs. 20, 00,000 as
shown in Figure 19. The payment settlement for Discoms, L1 and L2 having bilateral
contracts of 500 MW and 1500 MW under BCS are explained in Figure 20 and Boxes 2A
and 2B.
33
Figure 19. Settlement with Market Operator in Market Split
Source : CERC Staff Analysis
34
Figure 20. Final Settlement in Market Split with BCS and Congestion Amount
5.7 In the market splitting methodology, areas on either side of the congested corridor
are identified separately and then the area which has the higher price, draws electricity
from the area with the lower price just as much as the capacity of the congested line will
allow. Under this scenario, it is important to ensure that available capacities are fully
utilized and the sale- purchase balance requirement is satisfied in both areas.
35
5.8 Payment settlement with BCS would be done as follows:
Box 2A: Payment and Settlement of bilateral

contracts
Signatories to bilateral contracts are protected by BCS and are hedged for 'Locational risk”
[ ( MW x Rs/ MWh) =
Payment Settlement for L1 and G2 Rs. ]
Amount contractually obligated between L1 and
(a)
G2 =Rs. (500 x3000) =Rs.15,00,000
(b) Payment by L1 to Marker Operator on account of
bilateral contract of 500 MW = Rs. (500 x 5000) = Rs. 25,00,000
(c) Payment to G2 by Market Operator = Rs. (500 x 7000) = Rs. 35,00,000
Excess Amount with G2 above contract revenue= = Rs. (35,00,000-
(d)
[(a) - (c)] 15,00,000) = Rs.20,00,000
(e) Amount to be paid by G2 to L1 to cover 'Price = Rs.(500 x (5000-3000)) =Rs. 10,00,000
Risk' of L1
Effective price for L1 after payment from G2 = Rs. (25,00,000 -
(f)
=[ (b) - (e)] 10,00,000) =Rs. 15,00,000
which is equal to its obligation to pay under bilateral contract = ( a)
Note G2 after having paid Rs.10,000,000 to L1 to cover Price Risk for L1, still left with an excess
amount of Rs. 10,00,000. [i.e. (d) - (e) ]. Hence G2 must pay back excess amount (Rs. 10,
00,000) that it got because of its “location” in congested zone to Market operator (MO)
(g) Amount to be paid to Market Operator by G2 to

cover 'Location Risk' of L2 due to Congestion =Rs.( 500 x (5000-3000)) =Rs. 10,00,000
(h) Effective amount received by G2 for 500MW = (35,00,000-10,00,000-
=[ (c )-(e ) - (g)] 10,00,000) =Rs. 15,00,000
which is equal to its obligation to receive under bilateral contract = ( a)
36

Box 2B: Payment and Settlement of bilateral

contracts
Payment Settlement for L2 and G1
(h) Amount contractually obligated between L2 & G-1 = Rs. (1500 x 3000) = Rs. 45,00,000
(i) Payment by L2 to Market Operator (MO) on account = Rs.
of bilateral contract of 1500 MW = Rs. (1500 x 7000) 105,00,000
(j) Payment to G1 by Market Operator (MO) = Rs. (1500x 5000) = Rs. 75,00,000
Excess amount with G1 above contract revenue = =Rs. (75,00,000-
(k)
[ (h)- (j)] 45,00,000) =Rs. 30,00,000
=Rs. (1500 x (5000-
(l)
Amount to be paid to L2 by G1 on account of BCS 3000)) =Rs. 30,00,000
which is equal to the excess amount with G1 = (k)
Net pay out for L2 after BCS amount from G1= [ (i) - =Rs.(105,00,000 -
(m)
( l)] 30,00,000) =Rs.75,00,000
Excess amount L2 is still paying for contracted =Rs. (75,00,000 -
(n)
power 45,00,000) =Rs.30,00,000
Thus L2 faces Temporal Risk and Locational Risk because of congestion and its location. L2
under its long term contract with G1 has right to use transmission network and hence need to be
protected for the Locational Risk and Temporal Risk. Hence, the Market Operator would pay
differential amount from the amount paid by G2 under location risk and the congestion amount
with Market Operator.
Congestion Amount with Market Operator on account
(o) of price difference corresponding to ATC of =Rs. (1000x (7000-
1000MW 5000) =Rs. 20,00,000
Amount received by L2 from Market Operator = [ (g) =Rs.
(p)
+ (o) ] (10,00,000+20,00,000) =Rs.30,00,000
= Rs. (105,00,000 -
(q) Effective price for L2 after payment from G1 and 30,00,000-30,00,000)
Market Operator = [(i) - (l) - (o)] =Rs. 45,00,000
which is equal to its obligation to pay under bilateral contract = ( h)
37
Voluntary vs. Mandatory participation in the MBED framework
5.9 The participation in the Market Based Economic Dispatch model in Day-Ahead
Market (DAM) time horizon would initially be voluntary for the parties. Ideally all
procurement by discoms should be done through DAM. However, the discoms may retain
some generators on the self-schedule list and allow others, with whom they have long
term PPAs to participate directly in the market. Maximum participation in the Market
Based Economic dispatch would ensure multiple benefits to the system which include but
not limited to overall reduction in the system marginal cost and the consequent reduction
in the cost of power procurement at National level, better flexibility in the system to
manage high penetration of intermittent resources in the system, better assessment of
Ancillary Services etc.
5.10 The existing arrangement of self-scheduling of the long-term contracts described
above should ideally hold good during the transition period (of say one year), after which
all such generators as well as the discoms with whom they have contracts should also be
mandated to participate in the day ahead Market Based Economic Dispatch system. This
transition of one year is considered necessary to enable the discoms to accustom
themselves to the market dynamics and prepare for participation in such market
mechanism.
5.11 Both the Discoms and the Generators, under such an arrangement could opt for the
following alternatives
Option 1: The Discoms could self-schedule the generators with whom they have
bilateral contracts (LT/MT or ST) and access the Power Exchanges for the balance of
their energy requirements. This is largely the current practice followed by most
Discoms, except a few where they use power exchanges to replace their costlier
contracts with cheaper options from the power exchanges.
Option2: Discoms and Generators will continue to hold long term / bilateral contracts.
The Discoms will have the right to self-schedule but on the day ahead both the
38
discoms and the self-scheduled generators will get scheduled/dispatched through the
DAM. Discoms will approach the power exchanges with their demand bids and the
self-scheduled generators will offer their capacities entirely on the exchange along
with their price offers. The generators and the Discoms, who are locked in bilateral
fixed price / regulated price contract, get paid / are paid by the Power Exchanges
(Market Operator) at the market clearing price, and outside the market they can settle
bilaterally the difference between the market clearing price and the contracted price by
way of BCS as explained in the preceding section.
5.12 This proposition of the Day Ahead Market would allow National Level Merit
Order Dispatch through a voluntary market mechanism. Option 1 should be available
during the transition period of one year, post which Option 2 should be followed. This is
expected to yield benefits in terms of meeting demand at reduced cost (explained in
subsequent sections).
How Discoms and Generators would bid in the proposed mechanism?
5.13 Discoms may choose to submit ‘Fixed Demand’ in each Block, which is price
inelastic and “has to be served”. The quantum of such demand could be to the extent of
capacity contracted bilaterally by the discom. In the existing system, the discom would
have scheduled such demand (through self-scheduling) before bidding in the Day Ahead
Market (DAM). Further, Flexible Demand by the discom, over and above the ‘Fixed
demand’ in each block will be price sensitive similar to the existing practice of
participation in the DAM. The sample format is presented in Table 2.
39
Table 2. Sample bidding format for Discom
Discom : Name
Date : dd/mm/yyyy
Forecasted Demand :
Fixed Bid Price Cap -1 Price Cap - 2 Price Cap -3 Price Cap -4 Price Cap -5
Time
MW MW Rs/ MW MW Rs/ MW MW Rs/ MW MW Rs/ MW MW Rs/ MW
00:00:-00:15
00:15 - 00:30
00:30 - 00:45
00:45 - 01:00
01:00 - 01:15
01:15 - 01:30
01:30 - 01:45
5.14 Generators having bilateral contracts would recover their fixed charges
bilaterally “outside” the market as per the existing practice. Therefore, it is envisaged
that these generators would offer the quantum (in MW) at their variable costs (or
regulated variable charges). The generators will normally offer at such prices to
maximize their probability of getting dispatched and yet remain profitable.
5.15 It is important from the system operation point of view to have all the necessary
information to ensure that economic dispatch takes place while the security of the grid is
not compromised.
5.16 Hence, with the inclusion of larger set of generators, the system needs to ascertain
transmission constraints in greater detail (as compared to the current practice) along with
technical details from the supply bids (capabilities) of participating generators (which
would include but not limited to ramp-up/down constraints, minimum up/down time,
Technical Minimum, start-up/shut down costs).
5.17 The generators can be provided with options to either supply the technical
information and costs separately or subsume the costs in their price offers. The latter,
however, as per global experience might lend physical operations uneconomical under
certain conditions. Therefore, as the markets mature and more generators and DISCOMs
opt for MBED, they may themselves prefer to offer supplies with multi-part offers. This
will also help co-optimize procurement of Day Ahead Energy and Ancillary Service
(AS).
40
5.18 As mentioned in the discussion Paper on ‘Re-designing Ancillary Services

Mechanism in India’ by the Staff of the Commission, the Day Ahead Markets will co-
optimize procurement of Energy and Ancillary Services for each block of time on the
subsequent day. This would require the suppliers to specify their availability in each time
block along with the maximum amount of AS services they would wish to offer. The
demand for Ancillary Service (AS) will be dynamically specified by the system operator
in accordance with the set of rules approved by the Commission.
Figure 21. Bidding by Discoms and Generators in MBED
TimeLine of Scheduling and Dispatch under the Proposed Framework:

During Transition
5.19 Provision for self-scheduling: Self- scheduling will continue to operate as in the
existing framework for long term contracts. In other words, as depicted in Figure 3, the
generator tied up under long term PPA will continue to declare their availability and the
discoms through their SLDCs will have the right to requisition/ schedule these
41
generators. However, if part of the contracted capacities in any generating station remains
un-requisitioned after 9.45 a.m., such un-requisitioned surplus (URS) capacities will have
the right to participate in the day ahead market of the power exchange starting from 10.00
a.m. For such URS, the discoms shall not have the right to recall, but the net revenue
earned by these capacities (URS) by participating in the DAM or RTM shall be shared in
the ratio of 50:50.
5.20 Market Based Economic Dispatch (MBED) through power exchanges: From 10.00
a.m. to 12.00 noon, MBED model will operate where the un-requisitioned capacities of
the Long Term/ Medium Term/ Short Term PPA and other generators not tied up in any
contract can participate. The discoms to the extent of the requirements for power over
and above their long term/ medium term contracts will participate in this market.
Beyond Transition
5.21 After the transition period, the Discoms will still have the right to self-schedule
until 9.45 am. But as the day ahead market commences at 10 am, both the discoms and
the self-scheduled generators will bid in the DAM – the discoms with their demand bids
and the self-scheduled generators with their capacities along with their price offers.
5.22 The day ahead bilateral and the power exchange based contingency market will
continue to operate with the same timeline as indicated in Figure 4.
5.23 While the above timelines relate to day ahead scheduling and dispatch, the real
time market will start from 00.00 hrs of the day of the operation.
Inter-linkage between Day Ahead and Real Time Energy Market

5.24 In order to facilitate coordination between contracting of power (through Long
Term / other types of contracts, as highlighted in previous section), scheduling and
availability of least cost power, the staff of the Commission has come out with a series of
papers on Real Time Markets, Ancillary Services Markets and now the present paper on
Day Ahead Markets. These markets are interlinked since the final payments happen
based on the “contract” (which could happen in advance), schedule of electricity (which
happens on a Day Ahead Basis and after Real Time Markets) and actual flow of electrical
42
energy (which happens ex-post the transactions have actually materialized). The timeline
through the day ahead to the real time has been depicted in Figure 22.
5.25 Day ahead transactions are financially binding and physically feasible (unit
commitment), and the changes in day ahead commitments (as a consequence of unit
tripping or contingencies for generators, and due to load variation for discoms) can be
corrected by participating in the real-time market. However, the Day-Ahead as well as
the Real-time schedules shall be financially settled separately at their respective MCPs.
While the position in terms of day-ahead commitment can be corrected (for reasons as
stated above) in the real-time “energy market”, any change/deviation in the real-time
schedule will be settled through deviation settlement mechanism/ancillary services
mechanism.
5.26 The issue of right to recall has already been explained in detail in the Staff Paper
on Real Time Market. However, to put the discussion in perspective, it is clarified that so
long as the provision of right to recall prior to the gate closure in real time exists, the
generators tied up in long-term contract – in the event of their having sold the un-
requisitioned surplus in the day ahead or any other time horizon – will have to buy back
from the real-time market to meet their contractual obligation, if the discoms exercise the
right to recall.
43
Figure 22. Timeline between Day Ahead and Real Time Energy Market
44
6. Benefits of Market Based Economic Dispatch
System Cost Savings

6.1 The MBED is expected to lead to cost savings for the system as a whole. This is
explained by a sample illustration as follows. Let’s consider a discom - Discom A having
a demand of 2000MW for a time block of 15 minutes. Discom A has contracts with four
generators Genco 1 to Genco 4 with variable costs ranging from Re. 1 per kWh to Rs. 4
per kWh respectively as shown in the Table 3.
Table 3. Available URS for Discom-A in the existing system
Discom- A with Demand of 2000 MW for a time block

Available
Declared
Variable Cost Generation Un -
Capacity on
- under (AG) to Meet requisitioned
Day Ahead
contract the Demand of Surplus (URS)
(DC)
2000MW
(MW) (Rs./Unit) (MW) (MW)
Genco-1 500 1 500 0
Genco-2 600 2 500 100
Genco-3 700 3 500 200
Genco-4 1200 4 500 700
6.2 Discom-A is not able to utilize its URS available with cheaper generation (i.e.
URS of Genco-2 and Genco-3) because it is obligated to keep its the last generator
(Genco-4) at its technical minimum (assumed in this case as 500MW). Now, in this case,
the cost of procurement for Discom-A to meet 2000 MW would be Rs. 12.5 Lakhs.
6.3 In the MBED mechanism, since the dispatch of generation is based on aggregated
merit order, the URS of Genco-2 and Genco-3 would be utilized and would replace some
of the more expensive plants in the system. Assuming the market clearing price (MCP) at
Rs. 5.00 per kWh for the same block, the payment for the Discom- A would be Rs. 25
lakhs (i.e. 2000 MW x Rs. 5 / kWh x (1000/4)). But Discom-A would at the same time
get a refund of Rs. 13.50 Lakh through BCS as shown in Figure 23. Thus, the net pay out
45
for discom is Rs. 11.50 Lakh (Rs. 25 Lakh – Rs. 13.50 Lakh), thereby yielding a net
saving of Rs.1.00 Lakh (Rs. 12.50 Lakh – Rs 11.50 Lakh).
Figure 23. Procurement Cost in Present Design and Proposed MBED Design (MCP (Rs.
5/kWh)>Contracted Price (Rs. 4/kWh))
Discom A : Present Cost of Power Discom A : Cost of Power in MBED
Cost of power (AG)= Cost of power (RG) = a – b

(500*1 + 500*2 + 500*3 + 500*4) * 250 a) Payment at MCP: 2000 *5* 250 = Rs 25 lakhs
= Rs 12.50 lakhs b) BCS = [500*(5 - 1) + 600*(5 - 2) + 700*(5 - 3) +
200*(5-4)] * 250 = Rs 13.50 lakhs
Cost of power (a – b) = Rs. 11.50 lakh
Net Savings = (12.50 – 11.50) = Rs. 1.00 lakhs
Note: Multiplication by (1000/4) =250 to take into
account 15 Minute Time block
In addition to the net savings of Discom A in the proposed MBED scenario vis-à-vis
existing cost of power procurement as shown above, the Discom will earn additional
revenue on the basis of 50:50 revenue sharing mechanisms from the sale of URS to the
market. The net settlement shall be carried out at the end of the day of actual dispatch as
shown in Annexure IV.
6.4 Another scenario when the MCP is less than the contacted price has been
represented in Figure 24.
46
Figure 24. Procurement Cost in Present Design and Proposed MBED Design (MCP (Rs.
3/kWh<Contracted Price (Rs. 4/kWh))
Discom A : Present Cost of Power Discom A : Cost of Power in MBED
Cost of power (AG)= Cost of power procured (RG)= a-b

(500*1 + 500*2 + 500*3 + 500*4)*250 a) Payment at MCP: 2000 *3* 250 = Rs 15 lakhs
= Rs 12.5 lakhs b) BCS= [500*(3-1)+600*(3-2)+700*(3-3)]*250 =
Rs 4 lakhs
Cost of power (a-b) = Rs. 11 lakh
Net Savings = (12.5 – 11)= Rs. 1.5 lakhs
As is evident from the above table the gains for a discom are higher when the MCP is less
than its contracted price.
6.5 The efficiency of the proposed framework has also been tested based on
simulation on one-year historical data for five states in India. The system costs were
computed for the contracted generating stations in the five states (AP, Karnataka,
Telangana, Maharashtra, and Chhattisgarh) to meet the demand in the present self-
scheduling framework as well as the proposed Market based economic dispatch
framework (after factoring in the constraints, viz., Technical Minimum requirement,
47
Ramp Up/Down Capability and Transmission Constraint). The detailed methodology and
the assumptions used for the simulation have been attached as Annexure -1. Figure 25
below shows the actual cumulative generation (AG) from contracted generators of five
states stacked up in merit order and the revised cumulative generation (RG) as per MBED
framework to meet the aggregated demand for the month of July 2016.
Figure 25. Meeting System Demand at Lower Variable Cost- July 2016

6.6 The revised generation optimizes on the unutilized low-cost generation to meet the
load. Therefore, the total load is met at a significantly lower variable cost than the current
dispatch framework. This is also evident from the representation of generator wise
dispatch (actual and revised) as shown in Figure 26.
48
Figure 26. Actual generation and Revised Generation in MBED mechanism for 1st July,
2016

The above Figure shows the utilization of cheaper generation to meet the aggregate
demand of five States for a day in the month of July 2016. While, the light green bars
represent actual generation and red area the URS available with the generator, dark green
bars show the revised generation after MBED mechanism. It can be seen that with
MBED the system demand can be achieved with cheaper generation (represented by
dotted line). The generators on the left side of the dotted line (cheaper generators) are
getting utilized maximum reducing their URS significantly, while the generators on the
right side of the dotted line (costlier generators) are getting backed down. Similar
analysis for each State has been shown in the Annexure -2.
6.7 The above optimization yields significant savings in overall system costs. Table 4
summarizes the system costs in the present and proposed framework from the simulation
for the month of July 2016 and financial year 2016-17.
49
Table 4. Saving in cost of generation in MBED (simulations for 5 states)
System Costs (Total Cost of Generation) (All figures in Rs. Cr)

Present Self- Market Based In
Net
Scheduling Economic Dispatch Percentage
Savings
Framework Framework ( %)
July 2016 3781 3343 438 12%
FY 2016-17 58949 52729 6221 11%
Source: Simulation Result based on the data from Five States for FY 2016-17
The potential benefits of the MBED mechanism are substantial as observed by optimizing
dispatch in just five states. Table 4 estimates the overall saving in the system cost by
optimum utilization of the cheaper generation available in the system to reduce the
system cost by 11%.
6.8 As a result of optimization of the generation cost under the MBED as indicated in
Table 4, the cost of power procurement of the State (constituting all discoms in the State
put together) is also likely to reduce. A simulation was carried out to compute the State
wise landed cost of power procurement under the MBED model after factoring in the
POC charges’. The Table 5 summarizes the result of the simulation.
Table 5. Benefits to State Discoms for Five States –Simulation Results
Reduction in Cost of Procurement (Rs. Cr)

Andhra Maharas
Chhattisgarh Telangana Karnataka Total
Pradesh htra
In (Rs. Cr) 703 218 3392 234 77 4,624
In
6.00% 6.56% 11.85% 2.72% 0.74% 7.37%
Percentage
Source: Simulation Result based on the data from Five States for FY 2016-17
As it is evident from the above Table, the benefits/savings in cost of procurement accrue
to all the five States considered.
6.9 The Figure 27 shows how the utilization of Declared Capacity (DC) changes in the
proposed dispatch framework. All generators in the portfolio of the five states are stacked
50
as per merit order and consistent with the results displayed earlier and the hypothesis, that
current self-scheduling framework sub-optimally utilizes the available low-cost
generation. Dispatch optimization through MBED framework increases utilization of
low-cost generators while reducing and backing down in certain cases, the expensive
generators. Total cost of fuel input reduces as expensive generators are being backed
down. Consequently, reduction in fossil fuel consumption has positive environmental
impact that can help India progress towards its climate goals
Figure 27. Utilization day ahead declared capacity (DC) of Generators

6.10 Another study (Greening the Grid Report, 2017) carried in the Indian context
states that, “larger pool of conventional generators is also more cost effective to operate
because a broader customer base can access energy from the most cost-efficient plants in
the balancing region without the incentive to use generation in their state.”16
16
Greening the Grid Vol I, National Study
51
Furthermore, with the level of RE penetration envisaged, it is important to look at larger

balancing areas which could facilitate reduction in the total production costs of
conventional generators as well as reduce RE curtailment. The following Figure 28
shows the impact of regional as well as national level coordination in scheduling and
dispatch of power with the inclusion of 100GW solar energy as well as 60GW wind
energy. The report estimates that there would be production cost savings of up to 2.8%
annually with only 1.3% RE curtailment if regional scheduling and dispatch were
implemented for all generation and load.
Figure 28. System Saving with 160GW wind and Solar
Source: Greening the Green, Study Report 2017

Similarly, if scheduling and dispatch was implemented at a national level, it would lead
to 3.5% savings with only 0.89% RE curtailment.
6.11 Several experiences around the world and studies have concluded that the uniform
price brings in the most efficient outcome in the short as well as the long run. The single
biggest advantage of uniform price auction is that it incentivizes the generators to offer
their generation at the least possible cost17.
17
Uniform Price vs Differentiated Payment Auctions, Brattle Group 2017
52
6.12 Price discovery takes place at low cost if all buyers and sellers go through the
market. The day ahead prices will also allow the buyers and sellers to identify which new
contracts can be mutually beneficial to enter into18. This will ensure that there is adequate
and meaningful information available to both parties while making decision regarding
future long-term contracts.
6.13 Utilization of low-cost stranded assets is another benefit of Market Based
economic dispatch.
18
Review of Recent RTO Benefit-Cost Studies, LBNL 2005
53
7. Challenges and Way Forward

Legal aspects of incorporating BCS
7.1 The proposed MBED mechanism along with BCS mechanism ensures optimum
utilisation of cheaper generation and benefits of additional generation would be shared
between generators and discoms equally in the ratio of 50: 50. It is envisaged in the
proposed mechanism that a generator will get dispatched if its variable cost is lower than
the marker clearing price (MCP). Those generators whose variable cost are above the
MCP, would not be dispatched but will recover their fixed cost through existing
contracts. Further, additional revenue from cheaper generators would be shared with
discoms in the ratio of 50:50. Thus the proposed mechanism with BCS mechanism will
safeguard interest of both buyers and sellers.
7.2 Given that the MBED and BCS guarantee and safeguard discoms’ original
commitment of variable cost, the arrangement will also not conflict with the existing coal
linkage policy which puts a restriction on the sale of power from the linkage coal based
generating stations, to the short-term market. It is based on this philosophy that the Tariff
Policy also allows sale of un-requisitioned surplus from the long term contract based
generators in the short term market. Relevant extract of the Tariff Policy is reproduced
below for ready reference:
“6.2 Tariff Structuring and associated issues
1 ) …..
Power stations are required to be available and ready to dispatch at all times.
Notwithstanding any provision contained in the Power Purchase Agreement (PPA), in
order to ensure better utilization of un-requisitioned generating capacity of generating
stations, based on regulated tariff under Section 62 of the Electricity Act 2003, the
procurer shall communicate, at least twenty four hours before 00.00 hours of the day
when the power and quantum thereof is not requisitioned by it enabling the generating
stations to sell the same in the market in consonance with laid down policy of Central
Government in this regard. The developer and the procurers signing the PPA would
54
share the gains realized from sale, if any, of such un-requisitioned power in market in
the ratio of 50:50, if not already provided in the PPA. Such gain will be calculated as
the difference between selling price of such power and fuel charge. It should, however,
be ensured that such merchant sale does not result in adverse impact on the original
beneficiary (ies) including in the form of higher average energy charge vis-à-vis the
energy charge payable without the merchant sale. For the projects under section 63 of
the Act, the methodology for such sale may be decided by the Appropriate Commission
on mutually agreed terms between procurer and generator or unless already specified in
the PPA.”
7.3 Further, the existing long term contracts covered under Section 62 of the
Electricity Act, 2003 provide reference to CERC regulations for scheduling, dispatch and
recovery of cost for such generators. Hence, the amendments in the CERC regulations
would automatically get inroads into such contracts. For generation capacities under
Section 63, in order to participate in MBED on day ahead basis, there might be a need for
supplementary PPA based on mutual agreement between the generator and the buyer.
The fixed cost under Long term PPA could be settled as per the existing arrangement, and
generators could participate in the MBED market for their energy cost only. BCS
mechanism would not only ensure the hedging for discoms but also earn additional
benefits for additional generation. The appropriate Commission needs to approve such
supplementary PPA in to order to enable such generating capacities to participate in the
MBED day ahead market mechanism
Contracts in times to come
7.4 Currently, the long/medium-term contracts include both capacity and energy
obligations as discussed in the paper. Going forward, there can be capacity markets to
achieve long-term security of supply to meet the present and future demand and also
facilitate investments into capacity additions. Secondly, as we look ahead at high levels
of RE in the grid, the objective of the buyer must go well beyond just procuring capacity
for existence but procuring capacity with specific attributes which can deliver as needed.
55
Therefore, the price of a MW of an inflexible coal plant should not be the same as the
price of highly flexible gas plant. Future contracts must focus on capability of the power
plant to deliver when needed. High RE penetration will bring situations where certain
capacities may need to ramp up or down in a matter of minutes or even seconds.
Therefore, capability contracts must be explored going ahead. These contracts are to
ensure that capacity with specific characteristics and attributes is available to the buyer as
needed. A portfolio can have various such capability contracts to ensure that all levels of
deviations and emergencies are covered.
7.5 It is believed that the proposed MBED framework – where the existing legacy
contracts are proposed to be brought to the market only on their variable costs – will help
develop the desired level of capacity market in future. The discoms will re-align their
strategy about the capacity contracting in future - depending on whether and to what
extent they have to bear the fixed cost of those generators (legacy contracts) which don’t
get cleared in the DAM (because of high variable cost) ; or whether they have to face
high price in the energy only market in the absence of hedging through capacity
contracting. As a corollary, the generators will also take a considered call on the extent to
which they need to hedge their revenue through capacity contract and the proportion for
which they would play purely in the energy only market. Such intrinsic demand and
supply is expected to yield a robust framework for ideal capacity market in future.
7.6 Secondly, as we envisage a future with capacity/Capability contracts and energy
only markets, we have to explore several hedging instruments and mechanisms that can
cater to different risk sources and profiles. This is a common feature of a well-
functioning market, where participants explore different instruments and trading
arrangements which reduce their exposure to the market risk. -There are financial
derivatives such as futures and options contracts which can help hedge the spot price
volatility. Fuel price hedging can cover the price volatility against gas or coal prices.
Hedging instruments act as an insurance against the uncertainty against the various
elements of risk such as spot price volatility, fuel prices, demand, regulations etc. A
higher risk coverage would call for a higher premium. Therefore, a plethora of hedging
56
instruments can be developed and stakeholders will have to explore the most suitable way
to manage their risk. These transactions can take place ‘over-the-counter’ or in a formal
trading exchange.
Resource adequacy (RA)
7.7 Resource adequacy (RA) is commonly defined as the ability of a utility to meet the
consumer load at all times. Utilities or discoms have to demonstrate periodically that they
have sufficient reliable capacity resources to be able to meet the forecasted peak demand
and have a reserve over and above that. California’s RA program which was developed
after the 2001 crisis provides a good understanding and example. The program ensures
that the Load Serving Entities (LSEs) under the jurisdiction of the California Public
Utilities Commissions (CPUC) must demonstrate that they have sufficient reliable
capacity to meet their peak demand forecasted by the California Energy Commission
(CEC) plus a 15% reserve margin19. This allows California ISO (CAISO) to operate the
grid in a more reliable manner. RA is highly dependent on the type of the contracting
framework or market that is present. It is important to dwell on the fact that capacity
additions must be coupled with the capability of the capacity to deliver as needed by the
system operator.
Market Monitoring
7.8 An optimized electricity system should yield the same outcome as that discovered
by a well-functioning centralized market. If any difference between the two is noticed,
then it could potentially be an indicator that the market may not be functioning well and
this is where the role of an independent and universally trusted market monitor is crucial.
7.9 All commodity markets have their peculiarities, and a key peculiarity of an
electricity market arises from the fact that electricity is relatively expensive to store. A
consequence of this peculiarity is that the electricity market can be manipulated by
19
Resource Adequacy, California Public Utilities Commission
57
withholding production. Reducing market concentration can ensure that no supplier has
the ability to withhold production. Further, the competitiveness of the market must be
monitored and enforced as close to real time as possible.
7.10 Interventions such as price controls for mitigating market power may be necessary
where measures to reduce market concentration are weak or non-existent, however, they
undermine legitimate price formation. Effective competition is a necessary condition for
well-functioning markets.
7.11 Market monitoring needs to be enforced under the following broad heads:
a) Market surveillance to identify and address wrongdoing; and
b) Market performance assessment to examine and improve the economically
efficient functioning of the market, including the efficient formation of prices
when supply meets demand, usually referred to as “price formation.”20
The Commission recognises the need for strengthening the market monitoring and
enforcement and is already working in this direction.
Price-Coupling, Margin Money and Transaction Charges for Power Exchanges

7.12 CERC Regulations allow for multiple power exchanges to ensure competition in
Day-Ahead and intra-day markets. Structurally, the same can continue, however for
better system efficiency, one option is to combine the bids and offers of both the
exchanges. This would help not only in discovery of the same area clearing prices
(instead of multiple ACPs due to multiple power exchanges) but also in achieving higher
social welfare as compared to the sum of maximum social welfare in multiple power
exchanges. This can be implemented through two alternative mechanisms:
i) Market clearing engine could be operated by one of the power exchanges by
rotation. Here, the said (nodal) power exchange could receive “masked” buy
bids and sell offers from other power exchange. The names of the buyers and
20 Keay-Bright, S. (2016, July 27). The case for market monitoring—A key to successful electricity markets [Blog post]. Retrieved from http://www.raponline.org/blog/case-for-
market-monitoring/.
58
the sellers would be masked. The dispatch schedules would then be notified by
the individual exchanges; or
ii) Market clearing engine can be operated by an independent entity. All the
power exchanges could forward the bids and offers received in their individual
exchanges, to the independent entity. The dispatch schedules would then be
notified by the individual exchanges.
The clearing house in both the above options could be managed by an entity selected by
the Commission in accordance with procedures in this regard.
7.13 On implementation of the proposed MBED framework, the volumes of

transactions in the DAM as well as the RTM are expected to grow substantially. In this
context while the margin money requirement of the power exchanges is important for
guaranteeing payment security, a balance needs to be maintained to make sure the
participation of the discoms in the market does not become cost prohibitive. Similarly,
the transaction charges charged by the power exchanges need be reviewed with increase
in the volume of transactions in the market.
59
Annexures
Annexure –I Methodology of Benefits Estimation of a Market Based Economic Dispatch
This effort is an illustration of the benefits of centralized market operations in the day ahead
market. The power generation resources of five states are combined for the purpose of
scheduling and dispatch to assess the scope of savings if the Market Based economic dispatch
mode across regions, were to be adopted. For this, a Python based optimization tool has been
used to simulate and demonstrate these benefits for the states assumed to be participating in the
market in a closed mode. The period of simulation is Apr’16 to Mar’17.
Actual data on 15 minute block interval for each day in the past 12 months period specified has
been collected from the states/ SLDCs.
Assumptions used in the simulation
The simulation has been carried out using the following data and assumptions:-
Particulars Details
No of states considered 5 (Andhra Pradesh, Telangana, Karnataka, Chhattisgarh, Maharashtra)
Number of generation plants 121

considered
Andhra Telangana Karnataka Chhattisgarh Maharashtra
Pradesh
37 26 38 13 41
Thermal and Hydel (Hydel plants have been assumed to be operating at

Type of generation plants
full availability hence there would be no scope for optimization)
Ramping rate for coal based plants 1% per minute as per IEGC grid code
Technical minimum limits for operation 55%

of coal based plants
Transmission congestion charges Congestion charges are assumed to be same as determined in Px day
ahead market
PoC charges and losses As per relevant CERC orders
Following additional assumptions have been considered:-
1. For a state, the total actual generation of all generation plants has been considered equal to
the scheduled demand for a slot. Dispatch of plants is then carried out to fulfil the total
scheduled demand for all the states put together.
2. Contract prices of generation plants are assumed to be same as the variable costs
3. The entire demand of each of the state is assumed to be totally met in the centralized day
ahead market
60
Methodology for simulation
• Base case scenario
In the base case scenario, we have assumed participation of thermal and hydel plants (State,
Central and IPPs) of all the 5 states mentioned above. While thermal plants would have URS
available with them (Difference of Declared capacity less Actual generation), it is understood
that hydel plants would have been dispatched to their maximum possible extent and hence there
would not be any scope for additional generation from hydel plants. Thus, actual generation from
hydel plants has been factored in and assumed to be same in Centralized day ahead dispatch as
well.
The simulation for benefits estimation has been carried out in the following steps:-
1. Estimation of scheduled demand: Sum of actual generation for all the gencos for each slot
is calculated. In absence of scheduled demand by SLDC, the sum of actual generation for all
the gencos is assumed to be same as scheduled demand. Block-wise scheduled demand has
been calculated
For a given time block,
5
!"ℎ$%&'$% )$*+,% !))(/0 = 234

467
is the total number of thermal and hydel generators,

Where, 8 234 is the Actual generation in
MW of 9:; generator.
2. Base case dispatch: Merit order stacking of generation plants is done considering the actual
generation quantum provided by SLDC. Total cost of generation (variable cost) is
determined for this scenario.
For a given time block, considering total number of generators (thermal and hydel) after
stacking in merit order is N.
Total Cost of generation (Base case) for a given time slot is:-
5
<=>? @< A8B = 234 ∗ D<4 ∗ 0.25 ∗ 1000

467
Where, 9 is the 9 th generator considered in the merit order, 234 is the Actual generation of 9 th
generator in MW and D<4 is the Variable Cost of 9 th generator in INR/kWh.
Total cost of generation for a complete year is calculated as per the formula given below
POQ NO
J=?+' <=>? @< A8B = <=>? @< K,M

M67 K67
61
Where > is the time slot for a day and d is the day of the year
3. Dispatch of stations as per available DC: Post step 2, stations are again dispatched as per
merit order stacking according to the quantum of Declared Capacity available with each of
the stations. There would be situations where cheaper generation plants would have URS and
hence MW dispatched from them would be more than what was dispatched in step 2. Total
cost of generation based on total demand required and entitlements are determined.
An optimization problem is executed where the objective function is to minimize the cost of
power generation over the optimization timeframe subject to demand supply balance
constraint, a constraint requiring that any generator cannot operate below its technical
minimum and a ramp up/down constraint. Consideration of all the generators here ensures
that they are dispatched based on their combined merit order, that is in the ascending order of
their variable costs. This results in cost savings in comparison to the present mechanism
where the generators are normally dispatched as per their respective portfolio of contracts.
The extant mechanism results in more efficient (lower variable cost) generators remaining
under-utilized while costly (or rather relative inefficient generators) serve the demand. The
dual (marginal value) of the demand supply balance constraint in this optimization problem
gives the Market Clearing Price (or the System Marginal Cost of Generation).
4. Calculating net system charges: Total system costs arising out of the model (With actual
generation) are calculated and compared with the revised system costs incurred by the states
(With Centralized dispatch as per Declared Capacity). Net reduction in system costs due to
implementation of the Centralized mechanism is then determined.
8$? !R>?$* <ℎ+ST$> (8<)(A8B)

POQ NO 5 POQ NO 5
= 23U,V,4 ∗ D<U,V,4 ∗ 250 − B3U,V,4 ∗ D<U,V,4 ∗ 250

U67 V67 467 U67 V67 467
Where, 8 is the number of generators, X represents slot from 1 to 96, and Y represents day
from 1 to 365. 23U,V,4 and D<U,V,4 ,is the Actual generation and variable cost of 9 :; generator
X:; slot and Y:; day, respectively.
5. Calculating procurement costs of states: Savings in procurement cost by state discoms are
calculated as follows:-
a. State wise Actual Generation and Revised Generation is determined.
b. Cost of power procured for Actual Generation for each state are calculated as sum
product of quantum of energy dispatched from each generator and corresponding variable
cost of the generator. Mathematically, the same is depicted as follows:-
62
Cost of power procured = ∑ Quantum of energy generated from each generation plants
X Variable cost, \ Z[\ ∗ ]^\
PoC charges for each of the states is also calculated. Total procurement cost of each state
is thus:-
Total procurement cost = Cost of power procured + PoC charges
Slot-wise Procurement cost is given by:
J_<K A8B = 234 ∗ D<4 ∗ 250 + _a< <ℎ+ST$>4

467
POQ NO
J=?+' _S="&S$*$,? <=>? b=S R$+S J_<c A8B = J_<K M,K + _=< <ℎ+ST$>
M67 K67
Where, J_<K is the total procurement cost for a slot and J_<c is the total procurement
cost for an year, > represents slot and % represents day J_<M,K is total procurement cost
for > slot and % day.
c. Procurement costs for Revised Generation is determined as below:-

i. States having surplus generation post Market Based Economic dispatch (from own
portfolio): Assuming Andhra Pradesh has an actual generation of 8000 MW (from
thermal and hydel plants) but has a revised generation of say, 9000 MW from the same
portfolio of plants due to centralized dispatch of generators. Out of 9000 MW of revised
generation, 8000 MW will be procured at marginal cost in the power exchange and
subsequently the generators would refund the difference of marginal cost and contract
price to the discoms through existing Contracts for Difference with contracted
beneficiaries. Hence, effectively 8000 MW would be procured at contract price
(Variable cost of each genco after implementation of BCS) and excess revenue
generated from the rest 1000 MW (sold at marginal cost), which represents the
additional surplus power generated in the state, is shared between the generators of
Andhra Pradesh and its discoms in the ratio of 50:50.
For instance, for a surplus State with Scheduled Demand, !de in a particular slot, let’s
assume 8 is the number of generators from that state’s portfolio which are dispatched as
well as required to meet !de and / be the total number of generators dispatched in
state’s portfolio.
63
If
5f7
!de − B34 >0

467
Then,
hbb$"?9i$ <=>? =b _S="&S$*$,? h<a_
5f7 5f7
= B34 ∗ D<4 ∗ 250 + !de − B34 ∗ D<5 ∗ 250

467 467
5f7
B$i$,&$ B = B35 − !de − B34 ∗ (/<_ − D<5 )

467
j
+ B34 ∗ (/<_ − D<4 )

465k7
Where /<_ is the Market Clearing Price
If
5f7
!de − B34 =0
467
Then,
5
hbb$"?9i$ <=>? =b _S="&S$*$,? h<a_ = B34 ∗ D<4 ∗ 250

467
j
B$i$,&$ B = B34 ∗ (/<_ − D<4 )

465k7
ii. States having deficit generation post Market Based Economic dispatch (from own
portfolio): Assuming Andhra Pradesh has an actual generation of 8000 MW (from
thermal and hydel plants) but has a revised generation of say, 7000 MW from the same
portfolio of plants. The entire 7000 MW will be procured at marginal cost of the pool
and subsequently the generators would refund the difference of marginal cost and
contract price to the discoms through existing Contracts for Difference with contracted
beneficiaries. Hence, effectively 7000 MW would be procured at contract price
(Variable cost of each genco after implementation of BCS) whereas the 1000 MW of
deficit power will be procured at the marginal cost from the pool. There would be no
revenue sharing with discoms in this case.
64
Subsequently, PoC charges for each of the states are also calculated. Total procurement
cost of each state is thus:-
Revised procurement cost = Revised Cost of power procured + PoC charges
Mathematically,

hbb$"?9i$ <=>? =b _S="&S$*$,? h<a_
5 5
= B34 ∗ D<4 ∗ 250 + !de − B34 ∗ /<_ ∗ 250

467 467
Where /<_ is the Market Clearing Price
For a given slot for all the states put together,
Q
J=?+' <=>? =b _S="&S$*$,?(J<_d )(A8B) = h<a_K: + _=< <ℎ+ST$>

K:67
Q
J=?+' B$i$,&$ BK A8B = BK:

K:67
Where >? represent states and h<a_K: is the Effective cost of Procurement >? :; state.
BK: represents revenue of >? :; state
For the entire year,

POQ NO
J=?+' "=>? =b _S="&S$*$,? b=S R$+S J<_c A8B = J<_K M,K

M67 K67
POQ NO
J=?+' B$i$,&$ b=S R$+S Bc A8B = BK M,K

M67 K67
Based on the above, the difference in procurement costs of the state are calculated for actual
generation and revised generation profile. The additional revenue earned by each of the surplus
generating states, as a result of revenue sharing by generators, is also determined.
Additional constraints in the modelling:-

1) To calculate the extent of optimization possible, we have considered the Day-ahead Declared
capacity of the generators (State, Central, IPPs) and the actual dispatch. The difference of
both suggests the scope of optimization for each of the generator. We have not considered
any possible schedule revisions until intra-day time, which may result in lowering of
availability of these generators and subsequent reduction in scope of optimization.
2) Currently, discoms in the states follow decentralized self-scheduling practice wherein they
self-schedule (i.e. requisition power from) generating stations with which they have long-
65
term contracts. There is a possibility of unscientific planning which may result in Day ahead
availabilities of generators being not in line with real time demand requirements and hence
the extent of optimization may be greater.
3) The calculated URS values (DC less actual dispatch) for each generator would also include
effects of unit-tripping of generators, forced outages, transmission network overloading
causing outages etc. all of which would lead to actual dispatch being less than DC values.
Identification of the same is not possible under the current scope.
4) The simulation has been carried out for a closed system of five states. It is possible that when
the scope is extended to cover additional states, the growth in benefits may not be linear and
hence overall % benefits would change / reduce.
5) There is a possibility that a few generating stations would be declaring the DCs but power is
actually not dispatched from them continuously due to multiple reasons.
66
Annexure II – Actual Generation vs Revised Generation, Simulation Analysis

Overview for the month of July
Andhra Pradesh - Actual generation, URS available, Revised generation
(MUs)
(Variable Cost ( Rs./kWh)

500 7
6
400
5
300 4
3
(MUs)
200
2
100
1
0 0
AG URS RG VC
Telangana- Actual generation, URS available, Revised generation (MUs)

400 3.5
350 3
300

2.5
250
2
200
1.5
150
(MU
100 1
s)
50 0.5
0 0
AG URS RG VC
Chhattisgarh- Actual generation, URS available, Revised generation (MUs)

700 3 (Variable Cost ( Rs./kWh)
600 2.5
500
2
400
1.5
(MU
300
s)
1
200
100 0.5
0 0
AG URS RG VC
67
Maharashtra- Actual generation, URS available, Revised generation

(MUs)
1800 7
1600 6
1400
5
1200

1000 4
800 3
(MUs)
600
2
400
200 1
0 0
AG URS RG VC
Overview for the month of September
Karnataka- Actual generation, URS available, Revised generation (MUs)

600 4
500 3.5

3
400 2.5
300 2
(MUs)
200 1.5
1
100 0.5
0 0
ag urs ra vc
68
Annexure III – Cost of Procurement and Additional Revenue, Simulation Analysis
Andhra Pradesh – 1st April, Time Block – 0000hrs – 0015hrs

Actual
AG = 3866 MW
Generation Procured from pool at MCP
Revised Demand met

RG = 2016 MW AG
through own • Procured from pool at
Generation generation system marginal price
RG
• Refund to the extent of
MCP difference in system
Rs. 3.072 marginal price and contract
Discovered price
Procurement Cost – Revised Generation

Procurement Cost – Actual Generation Cost of Power at Contract Price (BCS)) Rs. 10,65,256
Discom Payment Rs. 32,64,871 Cost of Power Procured from the Pool Rs. 14,21,154
PoC Charges Rs. 1,36,201 PoC Charges Rs. 3,59,478
Total Cost of Procurement Rs. 34,01,072 Total Cost of Procurement Rs. 28,45,888
Maharashtra – 1st April, Time Block – 0000hrs – 0015hrs.
Actual
AG = 10678 MW
Generation Sold to the pool at MCP
Demand met
Revised
RG = 12032 MW through own AG • Procured from pool at
Generation generation
RG
system marginal price
• Refund to the extent of
MCP difference in system
Rs. 3.072 marginal price and contract
Discovered price
Procurement Cost – Actual Generation Procurement Cost – Revised Generation

Discom Payment Rs. 63,63,324 Cost of Power at Contract Price (BCS) Rs. 57,08,103
PoC Charges Rs. 2,66,531 PoC Charges Rs. 2,70,186
Total Cost of Procurement Rs. 66,29,854 Total Cost of Procurement Rs. 59,78,289
Additional Revenue Share (50%) Rs. 12,191
State Net Benefits

Andhra Pradesh Rs. 5,55,184
Maharashtra Rs. 6,63,756
69
Annexure IV – Final Settlement - Post MBED and RTM for different scenarios
Time Block of RTM: 0000-0100 hrs:
Considering a generator has DC 1200 MW and variable cost: Rs 4000 / MWh. It sells a total of 1200 MW in the MBED D-1
market:-
• 200 MW is sold to the market at MCP of Rs 5000 / MWh to its contracted beneficiary The Bilateral contract settlement
will happen for the 200 MW power sold to the market for use by the contracted beneficiary.
• Balance 1000 MW surplus power is sold to the market at MCP.
Further, the discom in the real time market utilizes its right to recall at the specified time block and requisitions for additional 100
MW power from the same generator when the RTM price is Rs 5000 / MWh.
Particulars
MBED (D-1) RTM (D)
Generator DC VC (Rs / Sold to beneficiary Sold to market MCP (Rs / Additional requisition MCP (Rs
(MW) MWh) (MW) (MW) MWh) from discom (MW) / MWh)
1200 4000 200 1000 5000 100 5000
Settlement mechanism Pre-MBED- MBED RTM

Revenue /
Payment as per
contract
Revenue from beneficiary (pre- = Rs (200*4000)
(a)
MBED) = Rs 8,00,000
Rs (200 * 5000)
Revenue from beneficiary (MBED) (a1)
= Rs 10,00,000
Rs (1000*5000)
Revenue from URS sale (b)
= Rs 50,00,000
Revenue from URS sale if power was Rs (1000*4000)
(c)
sold in pre-MBED = Rs 40,00,000
(d) = =Rs. 10,00,000
Additional revenue from URS sale
(b)-(c)
Rs (200*(5000-4000))
Bilateral Contract Settlement (BCS) (e)
= Rs 2,00,000
Generator
(f) = = Rs 8,00,000
Net revenue from beneficiary
(a1)-(e)
Payment by generator for additional =Rs (100*5000)
(g)
power procured = Rs 5,00,000
Additional revenue to generator from = Rs (100*4000) =Rs (100*4000)
(h)
Discom for exercising recall = Rs 4,00,000 = Rs 4,00,000
(i) = (d)- =Rs 9,00,000
Net gain from URS sale
(g)+(h)
Net revenue to generator after 50% =Rs 4,50,000
(j)=(i)/2
sharing (50% of (h))
(a) + (h) = (f)+(j)= Rs 12,50,000
TOTAL GENERATOR REVENUE
Rs 12,00,000
= Rs (200*4000) Rs (200 * 5000)
Payment to generator (k)
= Rs 8,00,000 =Rs 10,00,000
Rs (200*(5000-4000))
Bilateral Contract Settlement (l)
= Rs 2,00,000
(m) = = Rs 8,00,000
Net payment to generator
(k)-(l)
Discom
= Rs (100*4000) Rs
Payment to generator for RTM
(n) = Rs 4,00,000 (100*4000)
purchase
= Rs 4,00,000
Net revenue to discom after sharing (o) = Rs 4,50,000
(k)+(n)= (m) + (n) - (o)
TOTAL DISCOM PAYMENT
Rs 12,00,000 = Rs 7,50,000
Note: This scenario will apply only if the generator sells the URS in the day ahead market despite such URS having been
identified by the discom for right to recall before the gate closure in real time. In case the discom does not identify such URS by
9.45 am on D-1 for exercise its right to recall before RTM, then the entire gains out of the sale of URS power to the market, on
day ahead basis, will be shared equally (in the ratio of 50:50) between the generator and discom.
70
Time Block of RTM: 0600-0700 hrs
market:-
Particulars
MBED (D-1) RTM (D)
Generator VC (Rs / Sold to beneficiary Sold to market MCP (Rs / Additional requisition MCP (Rs /
DC (MW) MWh) (MW) (MW) MWh) from discom (MW) MWh)
1200 4000 200 1000 5000 100 6000
Pre-MBED- Revenue
Settlement mechanism / Payment as per MBED RTM
contract
Revenue from beneficiary = Rs (200*4000)
(a)
(pre-MBED) = Rs 8,00,000
Revenue from beneficiary Rs (200 * 5000)
(a1) = Rs 10,00,000
(MBED)
Rs (1000*5000)
Revenue from URS sale (b) = Rs 50,00,000
Revenue from URS sale if Rs (1000*4000)
power was sold in pre- (c) = Rs 40,00,000
MBED
Additional revenue from = Rs. 10,00,000
(d)
URS sale
Bilateral Contract Rs (200*(5000-4000))
(e) = Rs 2,00,000
Settlement (BCS)
Generator
Net revenue from (f) = =
beneficiary (a1)-(e) Rs 8,00,000
Payment by generator for = Rs (100*6000)
(g)
additional power procured = Rs 6,00,000
Additional revenue to = Rs (100*4000) =Rs (100*4000)
generator from Discom for (h) = Rs 4,00,000 = Rs 4,00,000
exercising recall
(i) = (d)- =Rs 8,00,000
Net gain from URS sale
(g)+(h)
Net revenue to generator =Rs 4,00,000
after 50% sharing (50% of (j) =(i)/2
(h))
TOTAL GENERATOR (a)+(h)= (f)+(j)= Rs 12,00,000
REVENUE Rs 12,00,000
= Rs (200*4000) Rs (200 * 5000)
Payment to generator (k)
= Rs 8,00,000 =Rs 10,00,000
Bilateral Contract Rs (200*(5000-4000))
(l)
Settlement (BCS) = Rs 2,00,000
(m) = = Rs 8,00,000
(k)-(l)
Discom
Payment to generator for = Rs (100*4000) Rs (100*4000)
(n)
RTM purchase = Rs 4,00,000 =Rs 4,00,000
Net revenue to discom after = Rs 4,00,000
(o)
sharing
TOTAL DISCOM (k)+(n) = (m) + (n) - (o) =
PAYMENT Rs 12,00,000 = Rs 8,00,000
71
market:-
Particulars
MBED (D-1) RTM (D)
Generator DC VC (Rs / Additional
Sold to beneficiary Sold to market MCP (Rs /
(MW) MWh) MCP (Rs / MWh) requisition from
(MW) (MW) MWh)
discom (MW)
1200 4000 200 1000 5000 100 3000
Settlement mechanism Pre-MBED- Revenue / MBED RTM

Payment as per contract
(a)
(pre-MBED) = Rs 8,00,000
(a1)
(MBED) = Rs 10,00,000
Rs (1000*5000)
= Rs 50,00,000
Revenue from URS sale if Rs (1000*4000)
(c) = Rs 40,00,000
power was sold in pre-MBED
Additional revenue from URS = Rs. 10,00,000
(d)
sale
Bilateral Contract Settlement Rs (200*(5000-4000))
(e) = Rs 2,00,000
(BCS)
Generator
(f) = =
Net revenue from beneficiary
(a1)-(e) Rs 8,00,000
Payment by generator for = Rs (100*3000)
(g)
additional power procured = Rs 3,00,000
Additional revenue to = Rs (100*4000) =Rs (100*4000)
generator from Discom for (h) = Rs 4,00,000 = Rs 4,00,000
exercising recall
(i) = (d)- =Rs 11,00,000
Net gains from URS sale
(g)+(h)
Net revenue to generator after =Rs 5,50,000
(j) =(i)/2
50% sharing (50% of (h))
TOTAL GENERATOR (a)+(h)= (f)+(j)= Rs 13,50,000
REVENUE Rs 12,00,000
Payment to generator = Rs (200*4000) Rs (200 * 5000)
(k) = Rs 8,00,000
=Rs 10,00,000
Bilateral Contract Settlement Rs (200*(5000-4000))
(l)
(BCS) = Rs 2,00,000
(m) = = Rs 8,00,000
Discom (k)-(l)
Payment to generator for = Rs (100*4000) Rs (100*4000)
(n)
RTM purchase = Rs 4,00,000 =Rs 4,00,000
Net revenue to discom after = Rs 5,50,000
(o)
sharing
TOTAL DISCOM = (k)+(n)= (m) + (n) - (o)
PAYMENT Rs 12,00,000 = Rs 6,50,000
72
market:-
Further, the discom in the real time market puts forward a downward requisition of 50 MW for the specified time block from the
same generator. The generator can sell the specified quantum of power in RTM. RTM price is Rs 6000 / MWh.
Particulars
MBED (D-1) RTM (D)
Generator VC (Rs / Sold to beneficiary Sold to market Downward revision MCP (Rs /
DC (MW) MWh) MCP (Rs / MWh)
(MW) (MW) from discom (MW) MWh)
1200 4000 200 1000 5000 50 6000
Settlement mechanism Pre-MBED- Revenue / MBED RTM

Payment as per contract
(a)
(pre-MBED) = Rs 8,00,000
(a1)
(MBED) = Rs 10,00,000
Rs (1000*5000)
= Rs 50,00,000
Revenue from URS sale Rs (1000*4000)
if power was sold in pre- (c) = Rs 40,00,000
MBED
Additional revenue from (d) = = Rs. 10,00,000
URS sale (b)-(c)
Rs (200*(5000-
Bilateral Contract
(e) 4000))
Settlement (BCS)
= Rs 2,00,000
Generator Net revenue from (f) = = Rs 8,00,000
beneficiary (a1)-(e)
Revenue to generator =Rs (50*6000)
from Sale of power at (g) = Rs 3,00,000
RTM
Payment by generator to = Rs (50*4000) =Rs (50*4000)
discom for revised (h) = Rs 2,00,000 =Rs 2,00,000
quantum of power
(i) = = Rs 11,00,000
Net gain from URS sale (d)+(g)-
(h)
Net revenue to generator = Rs 5,50,000
(j)
after 50% sharing (50%
=(i)/2
of (h))
TOTAL GENERATOR (a)-(h)= (f)+(j)= Rs 13,50,000
REVENUE Rs 6,00,000
= Rs (200*4000) Rs (200 * 5000)
Payment to generator (k) = Rs 8,00,000
=Rs 10,00,000
Rs (200*(5000-
Bilateral Contract
(l) 4000))
Settlement BCS)
= Rs 2,00,000
(m) = = Rs 8,00,000
Discom Net payment to generator
(k)-(l)
Receivable from = Rs (50*4000) =Rs (50*4000)
(n)
generator for RTM sale = Rs 2,00,000 =Rs 2,00,000
Net revenue to discom = Rs 5,50,000
(o)
after sharing
TOTAL DISCOM = (k)-(n)= (m) - (n) - (0)
PAYMENT Rs 6,00,000 = Rs 50,000
73
Total consolidated revenue for entire day:-
Total revenue / (payment) for entire day Generator* Discom**
(Rs crs)
Pre-MBED 2.52 (2.52)
Post MBED and RTM settlement 3.09 (1.35)
*∑ (Generator revenue (Time Block1)*6) + (Generator revenue (Time Block 2)*6) + (Generator revenue (Time Block 3)*6) +
(Generator revenue (Time Block 4)*6)
**∑ (Discom revenue (Time Block 1)*6) + (Discom revenue (Time Block 2)*6) + (Discom revenue (Time Block 3)*6) + (Discom
revenue (Time Block 4)*6)
74

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Central Electricity Regulatory Commission

Market Based Economic Dispatch of Electricity: Re-designing of

2. Issues in the current day ahead market design 9

4. Proposed Framework – Market Based Economic Dispatch on a

5. Implementation and Operational Aspects of MBED

6. Benefits of Market Based Economic Dispatch 45

7. Challenges and Way Forward 54

Figure 1. All India Installed Capacity (as on September 2018)

Figure 2. Volume of electricity Transactions in India

4% 2% Volume of Electricity Transactions

Source: Market Monitoring Report, August 2018

Figure 3. TimeLine for Day Ahead Scheduling of Long Term Transactions

Time Inter-State Regional Load State Load

The advance scheduling refers to scheduling up to 3 months in advance. Buyers have to

2. Issues in the current day ahead market design

Figure 5. Self-Scheduling / Merit Order in silos

As depicted in Figure 5, under self-scheduling mechanism there remains a possibility of

Source: CERC staff analysis

Source: CERC staff analysis

Source: CERC staff analysis

Source: CERC Staff Analysis

2.8 To summarise, the key challenges of the existing mechanism of self-scheduling

i. Self-scheduling restricts visibility of low cost generation available with other

New York Independent System Operator (NYISO)

California ISO (CAISO)

Figure 11. NYISO Day-Ahead Market Process

Source: NYISO – Day-Ahead Scheduling Manual 11

Integrated European Electricity Markets

Figure 12. Organization of Electrical Power System in EU

3.13 Moreover, accommodating high levels of RE integration and balancing it over a

Figure 13. Benefits of an Integrated European Energy Market

Elspot: Nord Pool Spot’s Day-ahead Auction Market

4. Proposed Framework – Market Based Economic Dispatch on a

MBED (First Aspect): Scheduling and Dispatch

This could be appreciated by contrasting with the current framework of self-scheduling in

Box-1: Existing Framework Vs Proposed Market Based Economic Dispatch

MBED (Second Aspect): Settlement of Bilateral Contract (BCS)

Discom’s Payment = Discom’s load X MCP

Source: CERS Staff Analysis

4.11 It is important to compute BCS payments by summing the {(contract quantity) ×

Figure 16. Arrangement for Bilateral Settlement - Simple Case

Source : CERC Staff Analysis

Figure 17. Proposed MBED Framework

Source: CERC Staff Analysis

5. Implementation and Operational Aspects of MBED

BCS under congestion and market splitting

Table 1. Assumptions for Congestion settlement

Quantity Price Quantity Price

Source: CERC staff analysis

Figure 19. Settlement with Market Operator in Market Split

Source : CERC Staff Analysis

Source: CERC Staff Analysis

5.8 Payment settlement with BCS would be done as follows:

Box 2A: Payment and Settlement of bilateral

(g) Amount to be paid to Market Operator by G2 to

Box 2B: Payment and Settlement of bilateral

Voluntary vs. Mandatory participation in the MBED framework

Source: CERC Staff Analysis

5.18 As mentioned in the discussion Paper on ‘Re-designing Ancillary Services