The Energy Regulation and Markets Review - Stikeman Elliott

India
Power Market Regulations aim to transform the role of power exchange from acting as
price signal for investments to the dual role of providing price signal as well as acting as
risk transfer platform. The market is bifurcated into over-the-counter (‘OTC’) markets
and exchange-traded markets. The Power Market Regulations envisage:
a various types of OTC contracts (back-to-back deals, deals with open position,
aggregation of sellers or buyers, spot contracts, derivatives, etc.);
b contracts traded on exchanges (spot, day-ahead, term-ahead, financial derivatives
on exchanges, etc.);
c capacity contracts, ancillary services market contracts and renewable energy
certificates (‘RECs’); and
d derivative contracts, ancillary services contracts.
Capacity contracts, although mentioned in the Power Market Regulations, are not yet
permitted to be transacted and will be developed in due course, keeping in view the
demand–supply gap. Further, long-term delivery-based OTC contracts are not proposed
to be controlled by the power market regulations. These are mentioned in the market
oversight section only for the purpose of reporting by electricity traders. Currently, only
spot trading in power is allowed by CERC on both the Indian Energy Exchange and the
Power Exchange India Limited.
In 2010 the CERC also issued regulations on introducing RECs. The REC is
a market-based policy instrument created to increase and promote renewable energy
capacity. Under the REC mechanism, renewable energy producers get tradeable
generation-based certificates if they do not opt for the preferential feed-in tariff offered
by the state distribution utilities. These RECs can be bought by certain obligated entities
(such as electricity distribution licensees and captive power consumers) to fulfil their
renewable purchase obligations (‘RPOs’).
The Indian gas markets are relatively small but expanding rapidly. In comparison
with electricity market, the gas market has much to evolve in terms of outreach in most
states and pricing issues. As per NELP, the domestic market shall have the first choice on
the utilisation of natural gas discovered and produced domestically.
The MoPNG has been regulating the allocation and pricing of gas produced by
ONGC and OIL (both state-owned companies) by issuing administrative orders from
time to time. The gas produced by joint ventures and by NELP operators is governed
by the respective PSC between the government and the producers. Contractors are
entitled to market gas in the domestic market on an arms’-length basis subject to the
government’s Gas Utilisation Policy.
The price of liquefied natural gas (‘LNG’) is generally linked to the price of crude
oil, especially for long-term supplies. It is purchased on term contracts or on a spot
basis on mutually agreeable commercial terms. The resultant price of regasified LNG is
typically significantly higher than the price of domestic gas, including from the NELP
fields. The prices of such supplies being linked to crude are inherently volatile. The
MoPNG had proposed pooling of LNG and natural gas prices, which the Ministry of
Power rejected.
The Indian Multi Commodity Exchange undertakes online trading of natural
gas since June 2006. A memorandum of understanding was signed between GAIL and
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