Evolving Strategies in the Power Sector: The Case for Rethinking Energy Swapping

Energy-swapping agreements have been driven by objectives such as cost-saving, operational flexibility, and risk mitigation. However, evolving market dynamics raise questions about the relevance of these factors in the overall decision-making process.

May 28, 2024. By News Bureau

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Hydroelectric production

Electricity

Invest Shoppe India Limited

In the dynamic landscape of power distribution, energy swapping, a collaborative arrangement wherein two utilities or states exchange power to balance seasonal variations in energy supply and demand, stands as a cornerstone for DISCOMs and states to navigate the complexities of seasonal variations in supply and demand.

This tried and tested method, characterized by a cashless exchange of energy between entities has been favored by industry players for its ability to efficiently manage power portfolios. For example, hilly states often have surplus energy during the summer (June to September) due to high hydroelectric production. This gives them the opportunity to ‘swap/bank’ this excess energy with states like Punjab and Haryana, which experience heightened demand during the Kharif crop season. Subsequently, the surplus energy is supplied back to the hilly states during the winter period. In this arrangement, there are no direct cash transactions for the swapped energy, meaning no direct tariff payments are made for the energy swapped. However, Discoms may apply a premium or discount when returning the banked energy.

Take for instance, a hypothetical scenario involving two DISCOMs - D1 & D2 - engaged in a reciprocal arrangement to balance power demands and ensure stability in both regions. The agreement between Discom ‘D1’ and Discom ‘D2’ involves a structured exchange of power during specific time slots to mitigate seasonal power variations. D1 commits to supplying power in predetermined time slots (0000hrs to 0600hrs & 1800hrs to 2400hrs) during April and Oct to March. In return, D2 agrees to reciprocate during the months of June to September, within the same time slots, with an additional 5% premium. For the agreed period, D1 provides 100 MW of power to D2, resulting in approximately 234 MUs of energy supplied. Conversely, D2 returns approximately 246 MUs to D1, inclusive of a 5% premium.

The weighted average cost of power for D2 during the period of power drawl is calculated at Rs. 4.94/kWh (MCP of IEX for FY24). However, during the period of power supply, D2 incurs a higher weighted average cost of power at Rs. 7.26/kWh (MCP of IEX for FY24). This indicates that D2 could have potentially saved about Rs. 57.12 crore if they had not opted for the power swapping arrangement. The above case denotes that historically, energy-swapping agreements have been driven by objectives such as cost-saving, operational flexibility, and risk mitigation. However, evolving market dynamics raise questions about the relevance of these factors in the overall decision-making process.

Further, despite its perceived benefits, swapping transactions may introduce complexities into the overall power purchase mix. Factors such as counterparty risk, market price movements, and administrative complexity add layers of uncertainty and potential challenges to the process. In light of these considerations, exploring alternative market-based solutions offered by power exchanges is encouraged.

Power exchanges offer a range of products, including Day-Ahead Market (DAM), Real-Time Market (RTM), and Long Duration Contracts (LDC). These products can be leveraged by DISCOMS and open access entities to procure power, taking into account factors such as base requirements, peak demand, off-peak demand, and variations in demand during weekends. Additionally, segments like DAM and RTM facilitate competitive price discovery and offer flexibility in power procurement. The inherent flexibility of RTM markets enables market participants to meet demand variations of electricity in shorter windows, support large-scale renewable energy integration, and maximize grid security.

Therefore, before entering into such agreements, DISCOMs must conduct a comprehensive analysis to weigh the benefits against potential downsides. While energy swapping remains a viable tool for managing seasonal variations, with evolving energy landscape it is important for DISCOMs to reassess their role in overall procurement strategies and explore alternative solutions offered by power exchanges to remain agile with long-term strategic objectives and adaptive in the approach.

- Ashish Kapur, CEO, Invest Shoppe India Ltd.