NSE and BSE are major stock exchanges in India with rapidly changing prices. However, market coupling relates specifically to power exchanges like IEX, PXIL, and HPX, which trade electricity, not stock exchanges.
While all exchanges require electricity to operate their infrastructure, market coupling concerns price harmonization in power trading platforms. Market coupling ensures that multiple power exchanges discover a single, uniform price, reducing price disparities for participants in the electricity market.
You might be thinking How is this concept important? This article will answer that question, along with clearing the basics like meaning and the effect it has on the Indian Energy Exchange, or IEX.
What is Market Coupling?
In the electricity market, a system known as “market coupling” connects several power exchanges in order to use a common algorithm to determine a single, fair price. Better efficiency and price transparency result from ensuring that electricity moves from places with lower prices to those with higher demand.
Key Features:
- Single Price Discovery: To determine a consistent market-clearing price, all exchanges employ the same algorithm.
- Effective Transmission: Depending on supply and demand in real time, electricity is delivered where it is most needed.
- Improved Market Transparency: Guarantees equal access for all players and removes price disparities between platforms.
- Decreased Congestion Costs: By efficiently routing electricity flows based on price signals, market coupling can help reduce grid congestion costs, although comprehensive congestion management involves additional grid operations.
- Promotes Competition: Smaller exchanges have an equal opportunity to expand and provide services to more participants.
How Does Market Coupling Work?
Let us see the working of market coupling:
1. Submission of an Order:
On the power exchange of their choice (e.g., IEX, PXIL, HPX), buyers and sellers submit their bids and offers.
2. Pooling in one place:
A single market-clearing platform, run by a market coupling operator such as NLDC in India, aggregates all bids and offers from various exchanges.
3. Algorithm for matching:
- All exchanges use the same algorithm to match supply and demand.
- Price, quantity, and available transmission capacity between regions are all taken into consideration.
4. Consistent Price Finding:
- Every exchange has a single Market Clearing Price (MCP).
- To ensure the best possible use of resources, power moves from low-priced to high-priced areas.
5. Execution of Trade:
- All exchanges execute successful trades at the same clearing price at the same time.
- Transmission is made smooth by grid operators, such as POSOCO.
Example:
| Exchange | Average Bid Price | Demand (MW) | Supply (MW) |
| IEX | ₹3.00/kWh | 500 | 800 |
| PXIL | ₹5.00/kWh | 600 | 300 |
Without market coupling:
- Although IEX bids power at a lower price, buyers on PXIL pay its higher price.
- IEX might have unsold surplus electricity.
With market coupling:
- Bids from both exchanges are centrally cleared together.
- Power is optimally transferred from low-price (IEX) areas to high-price (PXIL) areas using available transmission capacity.
- A single market-clearing price (e.g., Rs. 4.00/kWh) is set for all participants.
Impact of Market Coupling on Indian Energy Exchange (IEX)
1. A decline in pricing power
At the moment, IEX sets the price benchmark for power trades and enjoys the benefits of deep liquidity. This benefit might diminish if a single price is found across exchanges. Because all exchanges will use the same pricing system, IEX’s power will be diminished.
2. Equitable Conditions for Newcomers
Access to the same market-clearing prices as IEX will help new or smaller exchanges, such as PXIL or HPX, which previously struggled with lower volumes. This could encourage innovation in services and healthy competition.
3. Variation in Trade Volumes
Trading volume redistribution could result from market coupling. Instead of using IEX by default, participants might look into other platforms that provide better incentives or service quality.
4. Modifications to Operations
It may be necessary for IEX to adjust its technical systems in order to conform to the central clearing mechanism. Since the current fee structure is based on volume and market dominance, there may also be changes to the revenue models.
5. Greater Efficiency and Transparency
Market coupling encourages transparency, even though it might threaten IEX’s market share. Participants will benefit from faster execution, fewer arbitrage gaps, and more predictable pricing, particularly large consumers and producers of renewable energy.
Bottomline
The conclusion can be drawn that market coupling is a good way of uniforming all the platforms and removing the price disparity. Currently, IEX dominates India’s electricity trading market with a large market share, effectively influencing price benchmarks. A successful economy must decide prices based on the demand and supply rather than on the discretion of one body.
The users will be served better, and the uniformity will ensure smooth functioning and effective utilization of resources.