Advantage of Market Based Economic Dispatch


From UPSC perspective, the following things are important :

Prelims level : NA

Mains level : Economics,Energy,Infrastructure

Market Based Economic DispatchContext

  • The game changing scheme is being proposed by the central government in power sector governance. The scheme under consideration is the market-based economic dispatch (MBED). When it comes to any drastic change in the power sector, a clash between the Centre and the states is inevitable.

What is Market Based Economic Dispatch (MBED)?

  • Market Based Economic Dispatch (MBED) is new approach towards power distribution to help distribution companies save costs and transition to a new form of power market.
  • It is a shift to a centralised framework, marks a radical departure from the current decentralised, voluntary pool-based electricity market.

Market Based Economic DispatchWhat is the framework under MBED?

  • The cheapest power from across the country will be dispatched to meet the system wide demand. The architecture would also lead to a “Market clearing price”.
  • Sellers and buyers will place their bids for the day market, and an outcome of this will be the discovery of the market clearing price.
  • This process is expected to generate significant savings for consumers.

What is the Present system of power Distribution?

  • Under the present regime, each distribution company (Discom) is bound by the power purchase agreements (PPAs) that it holds.
  • It can schedule power only from its own PPAs, starting from the cheapest PPA and then moving up; it cannot schedule power from the PPA of some other distribution company.

Market Based Economic DispatchWhat are the drawbacks of present system?

  • Financial Burdon:
  • The Indian government responded to COVID-19’s economic shock with a stimulus package of Rs.20-lakh crore, out of which Rs.90,000 crore was earmarked for discoms (later upgraded to Rs.1,25,000 crore). While it was called a stimulus, it is really a loan, meant to be used by discoms to pay off generators.
  • Discoms owe one lakh crore rupees to generators, and without such an infusion the chain will collapse.
  • States are defaulters:
  • State governments are the biggest defaulters, responsible for an estimated a third of trade receivables, besides not paying subsidies in full or on time.
  • On an annual cash flow basis, the shortfall in subsidy payments appears very low, only about 1% but cumulative unpaid subsidies, with modest carrying costs, make discoms poorer by over Rs.70,000 crore just over the last 10 years.

Market Based Economic DispatchWhat will be the Advantages of MBED?

  • Centralized approach: The centralised dispatch will be done with the assistance of electricity exchanges. Each discom and each generator will place a bid in the day-ahead market of the electricity exchanges, which will indicate how much power is being demanded/ supplied at what price.
  • Pan India market: These bids will enable the load dispatcher to construct a pan India demand and supply curve, the intersection of which will determine the market clearing price (MCP). All generators whose variable cost of generation is below the MCP will be asked to dispatch and all of them will receive the same MCP irrespective of what they had bid. Generators whose variable cost is higher than the MCP will sit idle.
  • No loss to discom: The MBED is so devised that its operation will not affect the current finances of either the discoms or the generators for the following reasons.
  • First, the fixed cost of the generators will still be paid by the discoms outside the market as determined by the regulator.
  • Second, if the MCP comes out to be Rs 3 per unit, and if in the case of any PPA, the variable cost is Rs 2.75 per unit, then the generator will compensate the discom to the extent of Rs 0.25 per unit. Similarly, if the MCP so determined is Rs 2.50 per unit, then the discom will compensate the generator to the extent of Rs 0.25 per unit.
  • Increasing efficiency: The logic is that by adopting MBED, only the relatively efficient plants will generate, without affecting the revenues of either the discoms or generators. Hence, the total cost of generation under the MBED system would be less.
  • Less pollution: There would be less coal consumption and less carbon dioxide injected into the atmosphere.
  • Easy integration with renewable: It would also mean less movement of coal leading to decongestion of railway tracks. Further, there would be enhanced renewable integration since the balancing area would shift from state to national level.
  • Single market clearing price (MCP): Incidentally, since there are three electricity exchanges in operation today, there would be three different MCPs determined. What we need is a single MCP for which there will be an institution called the “market coupler”. It will be the job of the coupler to determine a national MCP based on what has arrived at the three different exchanges.

Why states are opposing?

  • High generation cost: The reason is the state-owned generators are relatively inefficient and may have to sit idle as their variable cost of generation is likely to be more than the MCP.
  • Political backlash: Today, the states are operating their own generators to the hilt, even though they are inefficient, and drawing only the balance from the more efficient interstate generating stations. Keeping state generators idle has its own political implications and no state would be enamoured of this idea.


  • Power distribution companies (discom) are sinkhole of government finances. Every year budgetary support is needed to this loss-making companies , With due consultation, all states and union territories need to adopt and implement the MBED and save the resources for other development activities.

Mains Question

Q. India has became the power surplus nation, however power distribution and financial unsustainability is still a nightmare for union and states. Elaborate.

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