September 29, 2012
The government recently permitted foreign investment up to 49% in power trading exchanges. This included a foreign direct investment component of 26%. The move is expected to strengthen power exchanges, en
hance availability of electricity and improve its distribution. Here’s how:
What are Power Exchanges?
Power exchanges are online platforms that help generators and consumers come together and discover prices based on the demand-and-supply mechanism. India has two operating exchanges: Financial Technologies promoted India Energy Exchange, which owns about 93% market share, and Power Exchange India Ltd, which is jointly promoted by NSE and NCDEX. The two exchanges trade 2% of the total 800 billion units generated in the country. Two more power exchanges have been proposed: National Power Exchange, a joint venture of NTPC, NHPC, PFC and TCS, and another by Ahmedabad-based Marquis Energy Exchange.
How do they help address power shortages?
While retail consumers are largely served by state electricity distribution companies, large consumers with requirement above 1 megawatts can approach power exchanges for buying electricity. The prices at exchanges are market-determined and during the past month have touched record levels. With private sector participation increasing in the power sector and the market moving from a regulated to a market-driven regime, more buyers and sellers are opting to trade electricity through exchanges.
How will FDI help?
Foreign investors have been attracted to India’s power sector given the huge gap between demand and supply. FDI approval will help foreign investors step into the area and help power exchanges raise funds and bring advanced technology. Of the 49% investment cap, the total foreign direct investment should not exceed 26% while investment by foreign institutional investors should not cross 23% of the paid-up capital. While FII investments would be permitted under the automatic route, the FDI portion would fall under the government approval route.
Source: Media reports