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Regulatory Impact of lifting trading margin caps

January 14, 2010

India’s Central Electricity Regulatory Commission (CERC) has announced changes to power trading margins. CERC, the power regulator, allows trading margin to be raised by c75% to INR0.07/kwh if sale price exceeds INR3/kwh (c80% of short-term volume).

The margin cap increase is a short- to medium-term positive for power trading companies like PTC India, which now can charge a higher margin for short-term trades. As 80% of PTC’s short-term (ex-cross border) trading volume is above INR3/kWh, it will benefit.

But increased competition from peers and power exchanges should limit the benefit longer term, when the trading margin should be lower than the prescribed cap. Further expect competition to get more intense and margins to fall again, because a) the supply of shortterm power is expected to increase at a faster pace than demand, and b) the number of power traders is expected to increase to 50-55 from the current 44. More important, the power exchanges, which charge only INR0.01/kWh, will also likely emerge as a preferred platform for short-term trading and limit the ability to charge higher margins

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