Implementing Market Coupling: India could learn from the European Union experience

Introduction and economic rationale of market coupling

India’s electricity sector is undergoing a major transformation, shifting from a system dominated by long-term power purchase agreements to a more flexible, market-oriented structure. Over the past two decades, short-term electricity trading has gained prominence through the  emergence of power exchanges and innovative market products. According to the Central Electricity Regulatory Commission’s (CERC’s) annual report, Short Term Power Market in India: 2023-24, short-term transactions accounted for 12.5 per cent of the total generation in financial year (FY) 2023–24, with exchange-traded volumes growing at a  compound annual growth rate of 22.4 per cent between 2009 and 2024.

The road ahead

Market coupling represents the next logical step in India’s evolving electricity market, promising greater transparency, efficiency and the optimal use of the transmission infrastructure. Yet, its roll-out will not be without challenges. Regulatory clarity under CERC is critical to ensure neutrality and instil market confidence. In particular, the neutrality and independence of the MCO are essential to prevent any bias towards any one exchange, which could compromise the level playing field market coupling intends to create. Equally important is the design of a robust algorithm that can optimise energy, reserves and transmission, while handling complexities of real-time bidding and settlement. Transparency in data sharing, without compromising confidentiality, will also be essential. Finally, more pilot studies are needed to test different algorithms and pricing methods, aiming to maximise the benefits of market coupling, particularly because the single shadow auction conducted did not yield favourable outcomes.

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