A problematic power equation -ForumIAS Blog

Source: The post is based on an article “One Nation, One Grid: A problematic power equation” published in The Business Standard on 20th September 2022.

Syllabus: GS 3 – Infrastructure

Relevance: advantages and disadvantages of MBED power mechanism

News: The concept of “One Nation, One Grid, One Frequency, One Price” was announced in October 2021. The policy is based on the market-based economic dispatch, or MBED, mechanism. There are many issues associated with this mechanism.

It is part of the National Electricity Policy of 2021 which proposes to double the penetration of short-term power markets by 2023-24.

The intention of this policy is to reduce the price of power to the consumer but the procedure by which this goal will be achieved appears problematic.

What is the Market-Based Economic Dispatch (MBED) mechanism?

The centralized policy is based on the market-based economic dispatch or MBED mechanism.

Under this mechanism the power ministry is planning to set up a central scheduling and pooling system.

What will be the benefit of MBED mechanism?

First, this system will allocate power at a favorable price by prioritizing the least-cost and most efficient generators and removing more expensive ones.

Second, this system will reduce consumers’ power-purchase cost initially by 5 per cent and will help in the distribution of cheap power across the country.

Third, this system will also replace the existing decentralised and voluntary system which operates through a network of load dispatch centres.

Fourth, it will lead to a “uniform clearing price”. Sellers and buyers will be able to bid for the day ahead of the market leading to market clearing price. This in turn will help to generate savings for consumers.

However, there are many problems associated with this centralized MBED mechanism.

What are the problems associated with MBED?

First, generators use their capacity under long-term power-purchase agreements (PPAs) up to 25 years with state distribution companies (discoms) at negotiated prices.

Therefore, it is unclear how MBED will work in these long-term PPAs in its “lowest-cost” pricing.

Second, the inclination of states to offer power to politically sensitive groups below actual cost will impose burden on discoms.

This has already made the financial conditions of discoms bad and their dues on states stand at Rs 1.3 trillion.

As per a recent study by the RBI, a bailout of discoms in 18 large states is likely to impose a burden equivalent to around 2.3 per cent of the GSDP of these states.

Central schemes have been unsuccessful in addressing the problems of discom.

Third, MBED can create constitutional problems.

Power lies in the concurrent list of the Constitution and centralising pricing and supply decisions can take away the autonomy of states.