SCED: A Case of Regulatory Gaming

1. Introduction: What is SCED?

Security Constrained Economic Dispatch (SCED) is a mechanism introduced by the Central Electricity Regulatory Commission (CERC) for optimizing the scheduling of thermal power generation across central sector generating stations (ISGS) to minimize the total variable cost of electricity generation, subject to transmission and system constraints. Implemented initially as a pilot in 2019, SCED redispatches generation from lower variable cost (VC) thermal units to displace higher VC generation, supposedly resulting in national economic savings without altering the quantum of energy scheduled to beneficiaries.

The SCED framework overlays existing day-ahead schedules, aiming to improve overall system efficiency without disturbing PPA-based allocations or tariffs. While the concept appears theoretically sound, practical implementation under India's regulated tariff regime has led to unintended consequences and gaming opportunities that undermine its claimed benefits.

2. Who Are the Participants — and Why Are Others Excluded?

Participants:
- currently, only central sector thermal ISGS stations under Section 62 of the Electricity Act, 2003 participate in SCED.
- These include NTPC, DVC, and NLC stations whose tariffs are determined by CERC on a cost-plus basis (Regulated Tariff Mechanism).Between 2019-22, 49 Generating Stations with 58180 MW capacity have participated in this voluntary scheme.

Excluded Generators:
- State Generating Stations (SGS): Not part of SCED unless opted for, as they fall under state jurisdiction and dispatch is handled by SLDCs.
- Independent Power Producers (IPPs): Typically operate under Section 63 with tariff-based competitive bidding. Their tariffs are often fixed or have restrictive clauses that do not allow redispatch or variable cost adjustments.

Reasons for Exclusion:
1. Tariff Rigidity: Section 63 IPPs have fixed/bid tariffs with limited cost pass-through.
2. PPA Limitations: Most IPP and state PPAs do not include redispatch provisions.
3. Accounting Challenges: Lack of a uniform compensation mechanism for non-ISGS stations.
4. Regulatory Jurisdiction: SCED is currently limited to ISGS plants under CERC's control.

This exclusion undermines the efficiency potential of SCED by limiting the generator pool to only a subset of thermal stations .

3. Step-by-Step Actions by Stakeholders

A. ISGS Generators (e.g., NTPC):
1. Declare Day-Ahead Availability (DC) to RLDC.
2. Submit Variable Cost (ECR) based on normative heat rate and latest fuel prices.
3. Nominate part of their capacity for SCED dispatch (usually +/-15%).
4. Follow dispatch signals (up/down) issued by Grid India.
5. Measure and report actual generation vs. schedule.
6. Participate in weekly settlement of SCED pool account.

B. System Operator (GRID INDIA – NLDC/RLDCs):
1. Collect data on declared capacities and variable costs.
2. Run optimization engine to determine cost-optimal redispatch.
3. Issue revised dispatch schedules within security constraints.
4. Monitor compliance and perform real-time balancing.
5. Calculate deviations and energy deltas from SCED dispatch.
6. Manage SCED pool settlement and reporting.

4. Claimed Benefits — and the Reality

Claimed Benefits:
- Reduction in national variable cost of generation.
- Optimal utilization of low-cost thermal plants.
- System-wide efficiency without affecting DISCOM energy entitlements.
- No additional cost to consumers.

(Annexure-A highlights the claimed benefits from SCED between 2019-2022 as reported by Gridco.)

Critical Reality:
- Illusion of Efficiency: SCED is based on self-declared variable costs, creating scope for manipulation.
- DISCOMs Do Pay: While DISCOMs receive the same schedule, generators recover their actual (higher) costs later through CERC’s true-up mechanism, indirectly impacting DISCOMs.
- Limited Generator Pool: Only central cost-plus plants are included; excluding state and private plants limits system-wide optimization.
- No Market Signal: SCED rewards administrative declaration rather than competitive bidding or operational efficiency.

5. Gaming the SCED and the Truing-Up Loophole

The most critical flaw in the current SCED framework is the gaming opportunity it offers to cost-plus generators.

How the Gaming Works:

1. Generators declare artificially low variable costs—often by temporarily using linkage coal—during low-demand periods to improve their SCED merit order.

2. Once demand picks up and dispatch becomes predictable, they raise their declared variable costs.

3. This leads to higher SCED up-dispatch and positive compensation from the SCED pool.

4. At year-end, they submit audited fuel costs to CERC and recover the higher actual costs through the true-up process.

Because Section 62 generators are allowed to recover actual fuel costs via annual true-up, any gap between revenue earned under SCED (based on declared variable cost) and the regulated tariff is reimbursed by DISCOMs—often with carrying cost. Thus, short-term under-recoveries are routinely compensated, eroding financial discipline.

Distortions in Cost Sharing:
Under both SCED and normal scheduling, the treatment of Energy Charge Rate (ECR) follows the same regulatory principles, but SCED distorts the incentives:

• Fuel price increases are considered uncontrollable and fully passed through to DISCOMs.

• Poor efficiency (higher-than-normative SHR) is initially hidden behind a normative ECR and only recognized later during true-up—again at DISCOMs’ cost.

• Operational gains (lower-than-normative SHR) are shared 50:50 with DISCOMs per Regulation 60.

By using normative costs for dispatch and recovering actual costs later, SCED creates an asymmetric framework: generators gain from higher dispatch and inefficiencies are reimbursed, while efficiency gains are only partially shared. DISCOMs bear most of the downside risk, undermining the efficiency objectives of SCED.

Lack of Regulatory Deterrence:

• No penalty exists for mis declaring variable costs.

• True-up considers audited actuals but ignores interim SCED gains.

This structure incentivizes gaming rather than genuine operational optimization.

6. Ineffective Guardrails

While SCED aims to promote efficient dispatch, its current framework lacks effective safeguards against gaming—especially by cost-plus (Section 62) generators. These generators can declare artificially low variable costs (VCs), gain more dispatch, and later recover actual fuel costs through the regulatory true-up process, often with interest. Weak real-time oversight and delayed audits mean such misreporting often goes undetected. Additionally, SCED's merit order is based entirely on self-declared VCs, making it prone to distortion. Heat rate compensation creates further opportunity for abuse, allowing generators to under-declare capacity, claim inflated losses, and receive double payments—once from SCED, and again through the tariff mechanism. Overall, SCED lacks transparency, timely enforcement, and financial penalties, making it vulnerable to manipulation while ensuring generators recover their full costs regardless of short-term behavior. This is evident from following real life example taken for State of Uttar Pradesh ARR and True-UP accounts for FY 2022-23:

In FY 2022–23, Uttar Pradesh received a SCED pool benefit of merely ₹26.19 crore. However, it paid an excess of ₹0.78 per kWh for 24.91 TWh energy purchased—amounting to approximately ₹1,942 crore—towards energy charges (ECR), primarily as compensation to NTPC. This excess cost was several times higher than the SCED benefit, highlighting the imbalance and disadvantage for the state under the current framework. On the other hand, NTPC’s up scheduling and down scheduling generating station also received their share of benefits varying from 0.2 per KWh to 0.13 per KWh where as UP Discoms paid on around 36% higher ( Rs 0.78 per KWh extra) ECR charges during the year after the truing up.

7. Conflict of Interest for System Operator in Ancillary Services

The system operator (GRID INDIA) is expected to act independently and neutrally. However, as SCED expands into more granular redispatch and overlaps with ancillary services like ramping reserves and frequency response, a conflict of interest arises:

- Gate Closure Conflict: After schedule finalization, GRID INDIA optimizes dispatch, which can affect spot market prices or favor certain generators.
- Overlap with Ancillary Procurement: SCED can mask or overlap with primary/secondary reserve signals, creating market opacity.
- Lack of Regulatory Oversight: No independent audit or transparency on SCED vs. ancillary overlaps.

This dual role of GRID INDIA — both optimizer and procurer — needs urgent regulatory separation or checks.

Besides, an independent audit of the SCED software, as well as the software used to estimate the benefits of market coupling across power exchanges, must be undertaken. Among other detailed technical aspects, it is important to note that in large-scale Mixed Integer Linear Programming (MILP) problems, the margin of error—commonly referred to as the duality gap—can exceed 0.5%. In this context, the benefits of market coupling, as projected by CERC based on simulations conducted by Grid India, are estimated at merely 0.3%. Such a benefit level falls well within the typical margin of computational error, raising serious concerns about the reliability and robustness of the claimed gains. 

8. Is SCED Really a Zero-Sum Game?

Theoretically, SCED is designed as a zero-sum mechanism:
- Up-dispatched generators are paid from the SCED pool.
- Down-dispatched ones pay into it.
- DISCOMs pay the same tariff and receive the same energy.

But in Practice:
- True-up of higher fuel cost breaks the zero-sum logic.
- DISCOMs indirectly bear the cost through later tariff revisions.
- System-wide inefficiencies remain due to limited participation and declaration-based merit order. Hence, SCED is not truly zero-sum, especially when viewed over the full tariff cycle.

Despite the theoretical promise of more efficient dispatch, DISCOMs are not the true beneficiaries of SCED—especially when it involves cost-plus generators operating under Section 62 of the Electricity Act. The structural design of SCED, combined with the regulated tariff framework and ex-post cost recovery through true-up, ensures that any notional gains for DISCOMs are either short-lived or entirely illusory.

Why DISCOMs Are Not Real Winners Under SCED:

True-Up Guarantees Cost Recovery

Generators under Section 62 are entitled to full recovery of actual costs through the CERC-approved tariff true-up mechanism. This includes any short-term under-recovery arising from SCED redispatch. As a result, the apparent benefit of selecting low variable cost (VC) generators is nullified over time, as the differential is ultimately passed on to DISCOMs through revised tariffs.

Carrying Cost Amplifies the Burden

When generators recover the cost difference through true-up, they also claim carrying cost—the time value of money on deferred recovery. This inflates the eventual financial burden on DISCOMs, who must pay not only the reconciled cost but also an additional premium for the delay.

No Net Savings Materialize

While SCED may offer short-term operational savings through economic redispatch, these are effectively neutralized during the true-up process. The result is a redistribution of cost, not a reduction in it. For DISCOMs, any perceived gain in the SCED pool is offset by increased liabilities in future tariff orders.

Asymmetry of Information

DISCOMs operate at a disadvantage in terms of information transparency. They have limited insight into fuel procurement decisions, blending practices, or the timing of VC declarations by generators. This makes it difficult to challenge or even anticipate how these inputs will impact eventual costs.

No Influence Over Fuel Strategy

DISCOMs have no control over the generator’s operational choices, such as when to utilize linkage coal or blend cheaper fuels. Generators can exploit this autonomy to optimize their SCED position by lowering declared VC, while DISCOMs bear the financial implications later—without any say in the decision.

Therefore, the SCED framework, while marketed as a cost-saving tool, offers no durable financial benefit to DISCOMs under the prevailing regulatory construct. Instead, it introduces hidden liabilities through delayed cost pass-through, obscured decision-making, and regulatory asymmetries. Without systemic reforms to align incentives, improve transparency, and link dispatch with actual cost accountability, DISCOMs remain passive payers—not real winners—in the SCED regime.

SCED, in its current form, disproportionately benefits large and pit-head thermal plants by enabling them to secure more dispatch due to their lower variable and transmission costs. While this boosts their PLF and appears efficient, it leads to concentration of dispatch among a few players. For regulated generators, any short-term gains are offset by tariff true ups, meaning the overall benefit to the system or consumers is minimal. Ultimately, SCED reinforces existing dominance rather than fostering true economic efficiency.

9. Conclusion: 

it is fair to state that under the current SCED + true-up regime, DISCOMs are not real winners, and any savings they appear to accrue in the short term are later neutralized or reversed through the regulated tariff true-up processes, and in its current form, is an incomplete and potentially distortionary mechanism. While conceptually sound as a redispatch tool, its limited generator base, reliance on unverifiable declared costs, and detachment from market discipline make it a regulatory workaround rather than a robust reform.

In India for regulated tariff generating stations, SCED risks becoming a gameable cost redistribution scheme that undermines market credibility while offering illusory savings. In its current state, SCED does not materially transform India’s power sector efficiency and should be critically reassessed before further scaling.

Annexure-A- Claimed benefits