Trading Green Power through Energy Markets
Blog: NASSCOM Official Blog
By Indranil Chatterjee, Head – Risk, Alliances & Diversification
Renewable energy has acquired the center stage among global economies and is today the fastest-growing source of energy in the world. With the signing of Paris Climate Agreement in 2016, renewables have become indispensable in the fight against climate change. India has been taking steps towards a sustainable economy by increasing the share of renewables in the energy mix to 450 GW by 2030.
Renewable energy capacity in India is currently being added mainly through the competitive bidding route, wherein both the developer and the buyer enter into a long-term power purchase agreement (PPA). However, in recent years issues related to forced curtailment of renewable energy, payment disputes and long-term PPAs being renegotiated have been on the rise. To address these disputes, the global trends suggest moving towards innovative market models including the most preferred model – the Contract for difference or the CfD
What is CfD?
Market-based CfD mechanism for renewables is a model that helps in trading and scheduling power at the exchange at market prices with guaranteed revenue to the generator. The price guaranteed which is known as the strike price for the renewable energy generator is determined through auction and the generator executes a PPA at that strike price. In case the discovered market price is more than the strike price, the generator pays this difference to the market pool and if the market discovered price is less than the strike price, the pool pays the difference to the generator. The pool is maintained by a government entity with a good credit rating to provide support to renewable energy developers.
With around 88 per cent of the power generation coming from long term PPAs in India, customization of the CfD model is required to bring it in accordance with the existing market model. The establishment of an efficient, transparent, competitive and liquid market has proved to be crucial for the accelerated development of renewable energy in advanced economies such as the UK, US and Germany.
Benefits of CfD
The most important benefit is that a market enabled CfD model will help in discovering a competitive price of power based on the marginal cost of each generation source and provide long-term as well as short-term price signals for future capacity addition.
CfD mechanism can facilitate transfer of surplus renewable energy generation from renewable-rich states to renewable-deficit states and enhance grid balancing, thereby ensuring grid security. Additionally, it can help with payment security considering trade scheduled in the market is backed by advance payment, resolving the payment security concerns of generators and the working capital requirement. Centralized pooling of renewable energy through CfD at the power exchanges decreases aggregate forecasting errors and helps the distribution utilities manage their load efficiently.
It reduces exposure to deviation settlement mechanism and at the same time reduces the strike price-MCP compensation burden on the unscheduled ‘must-run’ power generation. Given the wide-ranging benefits, the CfD model can certainly provide a massive push to India’s renewable energy market and can enable us to transform into a sustainable green energy economy in the longer run.
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