Market Coupling : A Misguided Reform with Limited  Impact

Context:
The Central Electricity Regulatory Commission (CERC) Order dated 23rd July 2025 (Petition No. 8/SM/2025) proposes market coupling across multiple power exchanges. The move, intended to unify price discovery and enhance market efficiency, is framed as a structural reform. However, a closer assessment reveals that market coupling in its current form will have limited impact on actual market outcomes, particularly in shifting dominance away from the Indian Energy Exchange (IEX), which currently holds over 90% of the Day Ahead Market (DAM). This note outlines the reasons why market coupling, as proposed, is unlikely to deliver the intended transformation.

1. Conceptual Mischaracterization: Exchange Coupling vs. Market Coupling
CERC's order mischaracterizes the proposed framework as 'market coupling', whereas India's power market is already unified. What is actually being pursued is 'exchange coupling'—a limited mechanism for aligning price discovery across platforms while preserving the individual identities and operations of power exchanges. Unlike genuine market coupling in jurisdictions like the European Union, which involves the integration of fragmented markets under a single, neutral Market Coupling Operator (MCO), the Indian approach envisions a rotational MCO among the exchanges themselves. This not only undermines the principle of neutrality but also introduces potential conflicts of interest and operational ambiguity

2. Dominance of IEX Is Structural and Self-Reinforcing
IEX's market share is not an accident but a result of structural advantages:
- Liquidity Network Effect: With over 90% share, participants naturally gravitate toward IEX for better liquidity and order matching.
- Technology and Platform Strength: IEX has invested early in a fast, reliable, and user-friendly platform.
- Product Breadth: IEX offers a wide suite of instruments across DAM, RTM, G-DAM, RECs, and more.
- Brand Trust: With deep institutional memory and trust among DISCOMs, generators, and open access users, IEX enjoys first-mover loyalty.
- Market Surveillance and Cybersecurity: IEX has superior capabilities in real-time surveillance, encryption, and cybersecurity protocols (ISO 27001), ensuring trust and reliability. These features are not disclosed by other 2 exchanges.
None of these structural advantages are diminished by market coupling. The proposed model merely aligns price across exchanges without influencing volume migration or participant behaviour significantly.

3. Weak Evidence Base from Shadow Pilot
The shadow pilot cited by CERC shows negligible gains from market coupling:
- Only 0.3% improvement in DAM price convergence.
- 0.01% change in RTM.
- No stress testing or robustness checks to validate these findings.
Such marginal benefits do not warrant a major market restructuring, especially one that potentially disturbs the innovation and competitive fabric of the exchange ecosystem.

4. SEBI Precedent Ignored: Lessons from NSE-BSE
SEBI has resisted exchange coupling in the equity markets (NSE and BSE) precisely to preserve:
- Innovation incentives,
- Surveillance integrity, and
- Operational independence.
CERC’s disregard for this precedent is notable, especially when similar dynamics exist in power markets. Exchanges must compete not just on price discovery but also on services, technology, and market development.

5. Limited Impact on IEX Volumes Post-Coupling
Even with price coupling:
- Order routing remains at the discretion of market participants.
- Participants are likely to continue preferring IEX due to established systems, higher certainty of execution, and integration with their internal processes. While transaction fees charged by exchanges may influence business volumes, the absence of a lowest common denominator for service standards could discourage value addition and product innovation, as there would be little incentive for differentiation.
- PXIL or HPX may see some volume growth, but it is unlikely to meaningfully dent IEX’s dominant share in the short to medium term.

6. Operational Risks from Rotational MCO Model
- The proposal for rotational MCOs among exchanges, with Grid-India as a backup, introduces unnecessary complexity and room for manipulation.
- Global best practices favour a single, neutral MCO—usually the system operator (such as Grid-India)—to avoid conflicts of interest and ensure auditability.
- Cybersecurity, data access, and coordination risks increase under the rotational model.

7. Regulatory Overreach and Framework Deficiency
- Regulation 39 of PMR 2021 requires a separate regulatory framework for market coupling. No such enabling regulation or operational safeguard has been issued.
- There is no audit protocol, dispute resolution mechanism, or cyber-resilience assessment in the current proposal.

8. Stakeholder Concerns Overlooked
- Substantial feedback from exchanges, market participants, and consumer bodies has been disregarded.
- Regulatory capture risks are heightened when major policy shifts are introduced without addressing stakeholder objections.

9. Market Coupling May Undermine Competition
- By centralizing price discovery, market coupling risks turning exchanges into passive clearing entities.
- This may reduce incentives for innovation, customer-centric services, and cost-efficiency improvements.
- In the long term, it may consolidate IEX’s advantage rather than dilute it, contrary to the reform’s stated intent.

Conclusion
The proposed market coupling framework appears less motivated by genuine economic efficiency and more by an attempt to dilute the dominant position of IEX—an exchange that has earned its leadership through robust technology, deep market liquidity, reliable infrastructure, and consistent participant trust. The competing exchanges, unable to match IEX on service quality, product innovation, and operational scale, now stand to gain from a regulatory intervention that artificially redistributes market outcomes rather than fostering merit-based competition. This constitutes a potential case of regulatory distortion and may warrant scrutiny by the Competition Commission of India (CCI), as it raises serious concerns under the Competition Act regarding market fairness and the promotion of competitive neutrality. Ironically, rather than enhancing market efficiency or depth, the coupling exercise will merely eliminate price arbitrage across exchanges—an outcome that may reduce liquidity, discourage strategic bidding, and ultimately weaken market vibrancy. Far from leveling the playing field, this approach risks entrenching IEX’s dominance by disabling genuine competition, while introducing unnecessary operational complexity, ignoring global best practices, and proceeding on a weak empirical foundation.
 

Unless market coupling is accompanied by:
- mandatory volume-sharing mechanisms,
- a neutral and technically credible MCO,
- robust cybersecurity and operational safeguards,
- and a roadmap for competitive parity,

it will remain a superficial reform with little structural impact on market behaviour or outcomes.