Management investment and risks in Indian electricity generation markets

Abstract

Electricity and energy market reforms are the two key challenges before policymakers under the broad goals of climate change mitigation and energy security. The central policy challenge in managing investment and risks in electricity generation market is to delineate long-term responses that deliver competitive equilibrium, taking into account dynamics of energy and electricity markets, environmental externalities, geopolitical risks, and socioeconomic and technological uncertainties. In this context, the research addresses the following questions: 1. What are various risks and long term uncertainties in electricity generation markets? 2. What are the impacts of these uncertainties on investment decisions in electricity generation markets against the backdrop of reforms? 3. How do these uncertainties propagate among the primary energy, generation, and environmental markets? 4. What policy options are required for supporting electricity generation investment choices? A modeling framework is developed to address these questions by soft-linking i) bottom-up and top-down models representing energy, environment, and electricity generation market dynamics; ii) Monte-Carlo simulation to assess implications of uncertainties on investments, iii) index modeling for diversity assessment, and iv) a decomposition model formulation for assessing the future drivers of emissions. Major findings from the research are: 1. Market reforms have increased the generation capacity and have diversified the generation portfolio by creating more competitive market structures and attracting domestic and foreign capital and technologies, However, reforms have been inadequate in addressing electricity supply shortfall. 2. Emerging electricity market has altered the risk landscape and enlarged the investment opportunities, thus enabling a generator to adopt a portfolio approach to optimize investment decisions. 3. The current Indian energy and electricity generation portfolios are highly risk sensitive vis-à-vis future climate policy regulations. Future generation investment choices and retrofitting decisions are highly sensitive to the nature and timing of carbon market policies and fuel price volatilities. 4. Regional energy trade would drive energy and electricity portfolios to a more climate efficient equilibrium that reduces long-run power prices and improves energy security indices. 5. Stringent global climate stabilization, e.g., 450ppmv CO2 (or 2 deg C temperature increase) requires enlarging primary energy and electricity generation choices, such as early availability of nuclear and CCS technologies. Climate focused strategy to push these technologies leads to higher power prices and improves energy security. Higher carbon prices on the hand induce early economy – wide decarburization. The key contributions of the research are: i) development of integrated modeling framework & its application to model Indian energy system till the year 2050: ii) impact assessment of climate policy on generation investment decisions, iii) quantification of energy security risk, iv) quantification of various drivers of emissions, and v)quantified comparative assessment of alternate policy regimes.