Green Energy Trading Takes a Hit in 2023
The green market segment at the IEX has witnessed a 50% YoY dip between July and September
Renewable energy trading at the Indian Energy Exchange (IEX) in 2023 so far has seen a considerable drop compared to 2022, with the traded energy reaching its lowest in October 2023 at 188 million units (MU).
Seasonality, floods, and inconsistent renewable energy generation are a few of the many reasons behind the drop in renewable energy trade. The increasing power demand and the drop in renewable generation have forced entities to trade mostly on the conventional electricity market, in turn reducing the buy bids in the green market segments.
The Green Day-Ahead Market and the Green Term-Ahead Market have been trending low with frequent fluctuation in the average trading prices.
The chart below shows the green market trade trend at IEX from January 2022 till October 2023.
Renewable energy trade on exchanges mostly depends on the availability of merchant power with generators. In rare cases, large-scale projects tied up in power purchase agreements (PPA) trade the surplus capacities at the exchanges.
Prabhajit Sarkar, Founder and CEO of Ampera Energy and former MD and CEO at the Power Exchange India, said, “In situations of lower generation, most renewable energy projects would seek to fulfill their obligations under the longer-term PPA and thereby have lower capacity as merchant projects to participate in the power markets. The drop in power generation from solar and wind sources this year has translated to reduced supply in the green energy markets, where volumes have come down and prices have increased. The trend of lower RE power traded on the exchanges this year is not surprising.”
The Seasonal Impact
2023 has been a year full of unusual seasonal changes with untimely monsoons, flooding in some parts of the country, and rainfall deficit in others.
According to Sarkar, hydropower generation has a key role in providing the base load capacity, and projects with pondage/storage also help manage peak demand, thereby helping stabilize the electricity prices for consumers at the exchanges.
He said, “With a much lower than expected rainfall, especially during August and September, hydropower availability was limited. This also shows through the constrained supply and high prices during August, when power prices discovered on the exchanges hit the ceiling consistently. Also, in early October 2023, due to the glacial lake outburst flood and associated extreme flooding in Sikkim, the dam of a very large hydropower plant was washed away, and several hydropower plants in the Teesta River basin were adversely affected.”
While hydropower has been at its lowest, wind generation has also taken a hit over the last few months due to a lean season. With solar mostly tied up in long-term PPAs, the market depends on hydropower because of its round-the-clock power generation.
According to a Renewable Energy Trade Expert, the Teesta River basin situation impacted almost 1,700 MW of hydropower generation this year, resulting in a drop in sell bids in the green market, which constitutes solar, wind, and hydropower.
Merchant power project developers have faced a challenge in managing the demand at the exchanges, moving most of the buy bids to the Day-Ahead Market.
Amit Kumar, co-founder at Altilium, a renewable energy consultancy firm, said, “We have seen developers with 9 to 10 MW capacities are now generating 2 to 2.3 MW, which is almost 70% less. Hydropower has dropped because of the flooding situation in Himachal Pradesh, destroying projects in the region, which supply power to consumers in Delhi and Uttar Pradesh and the stream of power to trade at the exchanges. Solar capacity is very minimal when it comes to merchant power projects; it mostly depends on wind, hydro, or biomass-generated power.
Kumar also pointed out the recent emergency provisions invoked by Karnataka under Section 11 of the Electricity Act, compelling all generating stations, including the private ones, to supply the generated power to the government, as one of the reasons for the drop in renewable energy traded at the Exchange.
He said, “Much of its impact is also coming from Karnataka because of Section 11 implementation; almost 300 MW private renewable energy projects have been diverted to the state, leading to a sudden drop from October 16.”
With the buy-side liquidity declining in the green market segments, generators have turned to the DAM market for most of their trades.
The chart below shows the trend in the GDAM market trade and the corresponding prices from January 2022 until October 2023.
The GDAM market provides for the waiver of transmission charges of ₹0.50 (~$0.006)/kWh compared to the DAM market. With very few buy bids in the GDAM market, most generators consider foregoing the waiver benefit and trading in the regular power market due to the higher liquidity.
Kumar said, “Ultimately, it is the sale rate realization that matters. RE or non-RE, no one cares. Most of the traders are selling under the DAM market, which has both conventional as well as RE buy bids, not G-DAM or G-TAM. Even with the impact of the transmission charges, the trade makes business sense because the delta difference in DAM is still far better. In GDAM, there was no liquidity, and the sell bids were almost four times the buy bids. So, the clearance ratio and liquidity was very low.”
“It is always better for us, as we cannot store the power, so we must sell it. The Real-Time Electricity Market (RTM) has also helped manage the load. The realization in RTM and DAM is the same if the Market Clearing Price (MCP) is the same. So the liquidity of the DAM segment is always the highest as it is one of the largest and oldest markets at the Exchange,” he added.
The IEX traded 24.07 BU from the conventional power market compared to 747.64 MU from the Green Market segment during the second quarter of the financial year 2023-24.
The power demand in the country this year has been on the rise. The country witnessed a staggering peak demand of 240 GW on September 1 this year and in excess of 200 GW throughout August. The peak power supply stood at 199.50 GW in September 2022. The Central Electricity Authority has forecast an all-India peak power demand of 256.53 GW in the financial year 2024-25, rising sharply from 2023-24.
According to Kumar, most entities at the exchanges are simply looking for cheaper power, green or not. The DAM market segment offers them both, whereas the GDAM segment is often considered as the premium power, which entities consider only once their power requirements are fulfilled.
He said, “Earlier, my rationale for power buying was the cost of procurement plus one rupee, which we were paying for renewable energy certificates (RECs), considered as my replacement cost. In an overall strategy as a buyer, my outflow of capital is much lower if I go in for DAM plus REC. Very rarely do people buy power just because they want to be green. We don’t know anyone, except for a few MNCs in India, who do that today.”
Sarkar concurred with Kumar, adding that price increases in the green markets have been in tandem with what is happening in the larger market.
He said, “Green power has usually drawn a premium over conventional power. We have all seen the substantial increase in demand coupled with intermittent fuel supply side issues leading to substantial increases in the power prices several times during the course of the year. This has also been reflected in the overall increase of the weighted average prices in GTAM and GDAM segments.”
The DISCOM Reluctance
The green market segments and REC trade mostly receive traction from distribution companies (DISCOM) looking to fulfill their Renewable Purchase Obligations (RPO).
The graph below shows the REC trade trend from January 2022 until October 2023.
There has been a constant debate about the reluctance most DISCOMs have displayed in paying the price to purchase green attributes and fulfill their RPO targets.
According to the renewable trade expert quoted above, the most important reason for DISCOMs not complying with the RPO targets is the lack of pressure on them from the government and no penalties imposed for non-compliance.
He said, “If the DISCOMs are forced to comply, we might easily see all the REC quantum traded month on month. Considering the buy bids are less, people are even holding on to the RECs, hoping the prices go up in the future and the liquidity increases. Even with the lower prices, the REC trade has not seen much traction, and it is not because everyone has fulfilled their RPO targets; it is because DISCOMs are not under pressure.”
According to Sarkar, the REC prices haven’t been reflective of the drop in the RE generation through the year.
While discussing the DISCOM perspective, Sarkar commented, “In such a scenario where prices of new RE generation capacity was falling rapidly whereas REC prices remained upwards, most DISCOMs were not convinced about buying RECs to fulfill their RPO. Compounding this problem was the lack of enforcement of the RPO guidelines by most State ERCs. Furthermore, with the application of GST on RECs from 2018 onwards, the price disparity has been further accentuated. All these have led to an exceedingly low participation in the REC transactions.”
The increase in power demand and the sequential drop in renewable generation over the last few quarters have deflected most of the entities to the other market segments and physical power purchase agreements.
Sarkar remains hopeful about the Green Market segment gaining back its popularity at the exchanges amidst the increasing power demand.
He said, “Now, with the removal of the floor prices, and with prices in the market truly indicative of the ‘green premium,’ it is hoped that the REC framework would make a lot of sense for participants to fulfill their RPO obligations by ‘greening their purchased power’ rather than everyone trying to ‘purchase green power’ directly. The REC trading also needs to be simplified with greater fungibility between different types of RE sources and a reduction in categories of such RE sources. This mechanism does require a far greater degree of support from the policymakers and regulators across the country so that an otherwise efficient mechanism is not relegated to the wayside.”
With the drop in renewable generation, the government has said it would not shy away from adding coal-based capacity if needed to meet the increasing power demand.
While the stakeholders remain positive about renewable generation picking up in the coming quarters with the addition of new capacities, the green market segment trade might continue to see a downward trend as entities continue prioritizing meeting the power demand over adding green power.
Mercom India’s Q2 2023 Solar Open Access Market Report provides an in-depth analysis of the Green Market segment and state-wise data on energy traded.