The Central Electricity Regulatory Commission (CERC) has issued directions to power exchanges, focusing on reforming contract design, trading mechanisms, and operational transparency.

The principal trigger for this order was the consistent price deviation in day-ahead contingency (DAC) contracts from the day-ahead market (DAM), alongside concerns of potential manipulation and market fragmentation caused by overly flexible contract structures.

The need for intervention became particularly pressing after stakeholders and the Ministry of Power flagged steep and sustained price premiums in DAC contracts beginning in October 2023. These deviations were seen as a digression from their intended role of addressing short-term grid imbalances following the closure of DAM rather than becoming a parallel price discovery platform with distorted outcomes.

The power exchanges had, over time, introduced a variety of new contracts beyond their original offerings. While day-ahead contracts were the only available option in 2008, the regulatory framework evolved to permit additional instruments such as the day-ahead contingency, intra-day, real-time market (RTM), term ahead (daily, weekly, monthly), green contracts, and any-day single sided (ADSS) contracts. These additions were made to accommodate the increasing complexity of grid operations, including higher renewable energy penetration, and to cater to the procurement flexibility needed by distribution companies (DISCOMs) and large consumers.

However, this evolution had unintended consequences. One central issue CERC identified was the excessive granularity in term ahead market (TAM) contracts. The exchanges had introduced overlapping and user-defined delivery slots, which fragmented market liquidity and undermined the standardization essential for robust competition.

In some cases, buyers were effectively crafting bespoke contracts, which ran counter to the regulatory intent of having pre-specified time blocks to consolidate trading volumes. The Commission concluded that while customization offers flexibility, it also increases price manipulation risks and reduces the depth of each trading window.

Consequently, it directed all power exchanges to cease offering user-defined time slots and restrict trading to a set of standardized contracts, including those based on established blocks like round-the-clock (RTC), peak, off-peak, and night.

Similar concerns were raised about the operation of ADSS contracts. Originally introduced to allow buyers to specify delivery days and time blocks for purchase requests, the ADSS mechanism had, in practice, become prone to inefficiencies. Buyers were found to be issuing multiple requisitions across different exchanges for the same demand, often with extended acceptance windows of up to 28 days.

This practice led to uncertainty and sellers’ artificial blocking of capacity as they awaited confirmation or rejection from buyers. Additionally, some exchanges offered rebates or waived auction initiation fees if trades failed to materialize, further encouraging non-serious participation.

To curb these issues, CERC mandated strict timeframes for each stage of the ADSS contract process: a bid receiving window capped at 48 hours, an initial public offering auction not exceeding two hours, a reverse auction lasting a minimum of two hours (extendable until midnight), and a final acceptance window also capped at 48 hours, excluding the reverse auction date. Exchanges were also instructed to collect a declaration from buyers if they had listed similar requisitions on other platforms and to discontinue any practice of waiving auction fees, thus ensuring only serious bids reach the trading floor.

A significant structural change ordered by the Commission relates to the price discovery mechanism used in DAC contracts. Until now, DAC contracts used a continuous matching model, where trades were executed as and when matching bids were found. This simple model allowed for disparities in the price paid by different participants for the same time block, introducing inefficiency and the potential for abuse. Given the increased liquidity in the DAC segment over recent years, CERC has called for a shift to a uniform price-step auction model.

This mechanism aggregates all bids and clears them at a single market price to enhance transparency and fairness. The Commission reasoned that such an auction-based model would prevent anti-competitive practices and support more predictable pricing. While stakeholders had mixed reactions—some preferring the predictability of continuous matching—the regulator determined that the benefits of unified pricing outweighed the operational trade-offs.

The Commission also acknowledged the potential challenges of migrating to an auction-based mechanism, especially regarding the time required for bid finalization. To mitigate these issues, it supported a proposal to split the DAC trading window (currently from 13:00 to 23:30 hours) into multiple smaller auction sessions to preserve market responsiveness.

Additionally, it rejected a proposed interim mechanism requiring the display of bids for ten minutes before matching, citing the technical and financial burden on exchanges. Instead, it asked power exchanges to formally propose system changes, following which CERC would review and approve the new contract specifications.

In contrast to the changes in DAC, the intra-day market was spared withdrawal despite longstanding concerns about its low liquidity. Stakeholders, including DISCOMs and green energy producers, defended the utility of intra-day contracts, noting that they complement RTM by offering alternative paths for energy procurement when real-time prices spike or bids go unfulfilled. Recognizing this, the Commission retained intra-day contracts but required delivery timeline standardization across exchanges.

It also encouraged using “market” order types—where participants agree to transact at prevailing best prices—instead of fixed-price bids to streamline operations and increase the likelihood of successful trades. Simultaneously, the Commission ordered Power Exchange India to discontinue its “dynamic” contracts in the intra-day and DAC segments, as they deviated from the standardized design essential for a competitive marketplace.

Lastly, to bolster market transparency, the CERC directed all power exchanges to publicly display the number and volume of buy and sell bids submitted for all contingency and term ahead contracts alongside the usual data on executed trades. This initiative aims to equip stakeholders with better market intelligence and foster greater accountability in trading behavior.

In April this year, CERC invited stakeholder feedback by April 23, 2025, on a proposal by the Indian Energy Exchange to introduce real-time trading in renewable energy.

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