A Market Design for Storage Capacity Trading on Indian Power Exchanges

1. Context and Purpose

India is now formally recognising Energy Storage Systems (ESS) in grid codes and policies (IEGC-2023, National Framework for ESS-2023, BESS guidelines, etc.)
At the same time, policy support for storage (ISTS waiver for storage projects till June 2028, viability-gap schemes for BESS) is building a pipeline of assets.

So far, most BESS procurement is through bilateral / tender routes (SECI, DISCOM bids). Exchanges are used mainly for energy, not capacity. The proposal here is to create standardised storage capacity products traded on Indian power exchanges (IEX, PXIL, HPX) under CERC’s Power Market Regulations.

The purpose of this note is to provide a draft framework for stakeholder discussion on a step-by-step market design for trading storage capacity (MW and MWh) on power exchanges, along with clear definitions of all essential building blocks.

2. Key Terms (definitions)

• Energy Storage System (ESS) / BESS: A facility (batteries, pumped hydro, etc.) that absorbs electricity, stores it, and later injects it back into the grid. BESS refers specifically to Battery Energy Storage System.

• Power capacity (MW): Maximum instantaneous discharge (or charge) capability of the storage.

• Energy capacity (MWh): Usable amount of energy that can be discharged from full charge (e.g., 100 MW × 4 hours = 400 MWh).

• Duration (hours): Energy capacity divided by power capacity. A “4-hour battery” can discharge its rated MW for 4 continuous hours.

• Round-trip efficiency (%): Energy out / Energy in over a full charge–discharge cycle (typically 80–90% for Li-ion).

• State of Charge (SoC): Percentage of stored energy relative to maximum energy capacity.

• Storage Capacity Product: A tradable contract that represents the right to call a specified MW of discharge from a storage asset for a specified duration, within a defined time window, subject to performance rules.

• Time Slice / Time Block: A defined period (e.g., 18:00–23:00) during which storage must be available/deliverable.

• Capacity Payment (₹/MW-block): Payment for being available to deliver capacity (not for energy itself). Energy is separately settled at market price.

• Availability Obligation: Requirement on the storage provider to keep the contracted MW (and necessary SoC) ready during the contracted time slice.

• Performance Factor: A factor (0–1) applied to payments based on how much of the contracted obligation was actually delivered (e.g., 0.9 if 90% of contracted MW was delivered when called).

• Physical Product: A product that leads to physical delivery / injection into the grid.

• Financial Product: A product that settles only financially based on price differences or performance indices, without physical scheduling through SLDC/RLDC.

• Day-Ahead Market (DAM): Exchange segment where energy (and potentially storage capacity) is traded for delivery on the next day.

• Real-Time Market (RTM): Exchange segment closer to delivery (e.g. 1-hour or 15-minute ahead) where participants can fine-tune positions.

• Ancillary Services Market / MBAS: Markets for frequency control, reserves, system balancing; increasingly those markets can be market-based and co-optimised with energy.

• Revenue Stacking: Combining multiple revenue streams for storage from energy arbitrage, ancillary services, capacity payments, etc.

3. Design Objective

Allow storage capacity to be competitively discovered and traded on exchanges, so that DISCOMs and buyers can procure firm, flexible capacity in standard products, while storage providers can stack revenues on top of existing tenders and ancillary markets.

This is not a full US/EU-style capacity market. It is a modular layer that can sit on top of existing DAM/RTM/MBAS in India and evolve towards a more formal adequacy framework later.

4. Step-by-Step Market Design

Step 1 – Create a clear regulatory category for “Market-linked Storage Capacity”

Design item:

• Regulatory recognition of “storage capacity product” within CERC Power Market Regulations & IEGC.

What needs to be defined:

1. Eligible technologies

   • BESS & pumped-storage hydro (PSP) in pumping/generating mode

2. Registration process

   • Storage asset registers with the exchange as a Storage Resource with declared MW, MWh, duration, round-trip efficiency, ramp rate, and SoC telemetry.

3. Metering & telemetry

   • Mandatory 1–5-minute metering, SoC visibility to SLDC/RLDC and exchange for verification and settlement.

Purpose: Give exchanges and system operators a legal and operational basis to treat storage as a distinct asset class, not just as a generator or a load.

Step 2 – Standardise Storage Capacity Products

Introduce standard contracts that can be listed on exchanges:

1. Product attributes

   • Rated capacity (MW) – e.g., 1 MW contract size.

   • Minimum duration (hours) – e.g., 2-hour and 4-hour standard products.

   • Time slice (daily) –

     • Evening peak block: 18:00–22:00 IST (EVEN)

     • Morning ramp block: 06:00–09:00 IST (MORN)

     • Custom regional blocks aligned with CERC’s peak/off-peak definition. (CUST)

   • Delivery period –

     • Day-Ahead: for following days’ time slice (DA)

     • Monthly: entire calendar month (all days’ time slices) (MON)

     • Seasonal: June–September, October–February, etc. (JUN-SEPT) etc.

2. Example product definition

“STOR-4H-EVEN-DA”: 1 MW of 4-hour storage capacity available every day tomorrow during 18:00–22:00, with minimum 95% availability obligation, settled per day.

3. Definition recap

• STOR-4H: 4-hour minimum duration storage product.

• EVEN: Evening peak time slice (18:00–22:00).

• DA: Day-Ahead auction.

These codes can be extended for monthly/seasonal contracts (e.g., STOR-4H-EVEN-M, STOR-4H-EVEN-JUN-SEP).

Step 3 – Define Obligations and Rights of Storage Sellers

Storage provider’s obligations:

1. Availability obligation

   • Ensure sufficient SoC and readiness to discharge the contracted MW for at least the contracted duration during the time slice.

   • Provider can charge at any time outside the time slice, or explicitly scheduled charging inside the slice at system operator’s discretion.

2. Dispatch obligation

   • When the system operator (RLDC/SLDC) or exchange dispatch algorithm issues a call instruction, the provider must deliver up to contracted MW, subject to SoC constraints.

3. Performance factor

   • Measured as:
     Performance Factor =  

   • Used to scale capacity payments and penalties.

Buyer’s rights:

• In exchange for paying a capacity payment, the buyer gets:

  • Priority call on the contracted storage capacity during the time slice.

  • Right to direct whether that capacity is used to:

    • Inject energy to cover its own load, or

    • Follow system operator signals (e.g., balancing/ancillary).

Step 4 – Market Segments & Tenors on Exchanges

Develop three layers of capacity products on exchanges:

1. Long-term auctions (LT-STOR)

   • Tenors: 1–3 years, possibly aligned with DISCOM resource adequacy planning.

   • Frequency: Quarterly or half-yearly auctions via exchanges under CERC oversight.

   • This can come at later stage as presently the products traded on Indian Power Exchanges are limited for period up to 90 days

2. Mid-term / Monthly auctions (MT-STOR)

   • Monthly or seasonal products for DISCOMs and large buyers to fine-tune their capacity portfolio.

3. Short-term / Day-Ahead products (DA-STOR)

   • Day-ahead storage capacity auction, coupled with DAM timing.

   • Useful where DISCOMs or traders see short-term tightness (e.g., heat wave peaks).

Each segment uses the same product definitions, only varying tenor.

Step 5 – Auction & Clearing Design

Auction mechanism:

• Single-sided (sellers only) or double-sided (buyers & sellers) uniform price auction for each product/time slice.

• Bids from sellers:

  • Quantity: MW of storage capacity offered.

  • Price: ₹/MW-block for the defined period (per day, per month…).

• Bids from buyers:

  • Quantity: MW of capacity required.

  • Price: Willingness to pay (₹/MW-block).

• Clearing rule:

  • Standard pay-as-clear (uniform clearing price) for each product in each bidding zone, analogous to DAM.

  • Optionally, zonal prices if CERC creates capacity zones to manage transmission constraints.

Definitions:

• Uniform clearing price: All accepted bids receive/pay the same price = intersection of aggregate supply and demand curves.

• Zonal product: Product defined separately for each grid region (e.g., NR/WR/SR/ER/NER) to reflect transmission limits.

Step 6 – Integration with Energy Markets (DAM/RTM) and Dispatch

The core design choice is to keep energy and capacity separate but coordinated:

1. Energy scheduling

   • During the contracted time slice, energy delivery from storage can be:

     • Self-scheduled by the capacity holder into DAM/RTM, or

     • System-optimised via a dispatch signal (e.g., an ancillary / balancing call).

2. Two main models:

Model A – Buyer-scheduled energy

2. • Buyer receives a storage right and uses it to submit combined bids in DAM/RTM (energy + capacity).

   • Storage operator is paid separately for capacity; energy settlement happens at DAM/RTM prices.

Model B – System-operator-scheduled energy

2. • Capacity is allocated to RLDC/SLDC as a reliability resource.

   • System operator dispatches storage based on system needs; capacity payment goes from buyer to storage provider; energy is settled at real-time price.

3. Co-optimisation (long term vision)

   • Eventually, a co-optimised algorithm can clear:

     • DAM energy,

     • Ancillary services, and

     • Storage capacity
       together, similar to some European and US markets.

Step 7 – Settlement, Penalties and Performance

Settlement components for a storage capacity seller:

1. Capacity payment
   Capacity Payment = Cleared MW * Clearing Price (₹/MW-block) * Performance Factor

2. Energy settlement

   • Energy (MWh) delivered or consumed is settled through normal DAM/RTM or ancillary markets at corresponding prices.

3. Penalty regime

   • If availability obligation is not met (low SoC, failed response):

     • Reduced performance factor.

     • Additional penalties if non-performance coincides with declared stress events (e.g., high system marginal price or scarcity conditions).

4. Scarcity pricing kicker (optional)

   • When system is tight (e.g., system marginal price in DAM/RTM hits a predefined scarcity band), storage capacity providers that perform can receive an uplift payment, encourage reliability when needed most.

Step 8 – Revenue Stacking Rules

To make storage bankable, the design must allow stacking while preventing double counting:

1. Allowed combinations

   • Storage capacity contracts on exchange +

   • Energy arbitrage in DAM/RTM +

   • Ancillary services / MBAS participation (frequency response, reserves) +

   • Bilateral contracts, as long as the same MW is not over-sold across products/time slices.

2. Non-over-sale constraint

   • For each time slice, the sum of contracted capacity across all markets ≤ physical capability (adjusted for SoC and duration).

   • Exchanges and system operators monitor this using registration data and telemetry.

3. Priority order

   • Regulatory rule could specify that reliability products (capacity + ancillary) have priority over pure arbitrage, to ensure security of supply.

Step 9 – Secondary Trading & Financial Products

Once primary physical capacity products are established, exchanges can layer risk-management instruments:

1. Secondary trading of capacity contracts

   • Buyers who find they no longer need contracted capacity (say, mild summer) can sell their capacity rights in a secondary market segment before delivery.

2. Financial storage capacity swaps

   • Contracts where parties settle the difference between realised capacity prices and a fixed strike price, without physical delivery (useful for storage operators and DISCOMs to hedge capacity price risk).

3. Index creation

   • Exchanges can publish Storage Capacity Indices (e.g., average clearing price for STOR-4H-EVEN-DA), which become benchmarks for contracts and financing.

Step 10 – Governance, Planning Linkage and Transition

1. Resource adequacy linkage

   • CEA/state utilities define required storage MW/MWh for each region/year (based on RE targets, curtailment, loss-of-load probability).

   • DISCOMs receive obligations to hold a certain quantity of storage capacity (or firm capacity) – they may fulfil this by:

     • Long-term contracts (SECI/NTPC etc.),

     • Own assets,

     • Exchange-traded storage capacity.

2. Regulatory overlay

   • CERC:

     • Notifies rules for listing storage capacity products, market monitoring, and abuse prevention.

   • SERCs:

     • Recognise cost recovery for DISCOMs using these products and align them with reliability standards.

3. Phased roll-out

Phase 1 – Pilot on Day-Ahead Evening Peak

3. • Launch a limited STOR-4H-EVEN-DA product in one or two regions with existing BESS/PSP.

   • Low penalty regime, learning focus.

Phase 2 – Monthly / Seasonal Products

3. • Add monthly/seasonal STOR products, integrate better with DISCOM planning.

Phase 3 – Co-optimisation & Ancillary Integration

3. • Move towards co-optimised clearing and a more complete resource adequacy framework.

5.  Final Words

In Europe and Great Britain, storage assets mainly earn through wholesale energy arbitrage in day-ahead and intraday markets, frequency response and other ancillary services, and participation in capacity mechanisms where they compete with conventional firm resources. The proposed Indian framework mirrors these mature practices by shifting from a tender-centric approach to exchange-traded capacity products, enabling storage developers to stack revenues across markets while staying within India’s regulatory boundaries. By introducing transparent, market-discovered price signals for flexible capacity, the design helps guide investment decisions in both BESS and pumped storage, ensuring that storage can scale in step with rising renewable penetration.