Electricity is Different— A legal commodity

Safe, reliable and affordable electricity is a fundamental building block for all modern societies. It is one of the key components of sustainable development, providing the backbone for society’s social and economic well being. However, electricity differs from all other energy sources, in that it is an unembodied source of energy. All other energies are corporeal, and are indeed contained in some material which has some volume, some weight, and is, from the economic point of view, storable, so that it represents capital, in the form of some inventories. Electricity is invisible. Its presence can be determined from its effect. It does not represent a storable commodity, and does not represent capital or running assets in the form of stocks. It is a phenomenon associated with stationary or moving electric charges, a fundamental property of matter and is borne by elementary particles. The particle involved is the electrons, which carry a charge designated, by convention, as negative. Electricity is a form of energy. Various manifestations of electricity are the result of the accumulation or motion of numbers of electrons. Static electricity cannot be taken from one place to another and cannot be produced in bulk. Dynamic or current electricity can easily be taken from the generation station to far-off places by means of wires and cables. This can be generated in bulk and at high voltage. Electricity is specified as a service of general economic interest. The special qualities of electricity have always been known. It has to be consumed immediately when produced and delivered which raises problems and makes it incompatible with a market driven service.

Divergent Operational Economics

Electricity clearly is more complex energy product than other energy source. Electricity may be available for small, medium or large industrial users, at different times of the day such as peak or off-peak hours, and at different times of the year, and all these qualities of electricity must, from the economic standpoint, be treated as different goods, since they have various and differing production, and distribution costs.

Unique short-term supply-and-demand characteristics make electricity an unusual product. Short-term power market covers contracts of less than a year for electricity traded under bilateral transactions through inter-State trading licensees and directly by the distribution licensees, power exchanges and deviation settlement mechanism (DSM). It constitutes about 12 per cent of the total electricity generation in India.

Electricity market is significantly spike-prone than many comparable systems. Bilateral electricity contracts take place well in advance that may be for a week, month or up to one year. Therefore, the nature and duration of contract influence the price of power. Price of DSM plays an important role in ensuring system balance and secure reliable grid operation. The price of electricity during peak period is higher. For deployment of electricity to customers scheduling and despatch, imbalance settlement, congestion management and support services are essentially required. The volume of electricity transacted is sometimes constrained due to transmission congestion. The challenge of balancing supply and demand is compounded by the lack of cost-effective storage options. The physical fundamentals of energy inform the economic fundamentals of electricity. Electricity is the most volatile of commodities.

Electricity is a Standard Product

In an interconnected network, electricity is an entirely standard product. Electricity is network energy. The only means available for transporting energy in the form of electricity is over transmission lines. Standards play an important role in the power industry. Switching to another supplier cannot produce “better” electricity. The standard system of supply is the alternating current system and standard pressure for domestic supply is 220 volts, alternating at 50 cycles (hertz) per second 230 volts in India. Major concern for electrical power system is to maintain reliable uninterrupted power supply. Network improvement improves power quality. Flexible Alternating Current Transmission System (Facts) devices increase the ability of transmission capacity of lines, and help control power flow over designated transmission, electronically and statically. Distribution static compensator (D-STATCOM) is used for voltage regulation, compensation of reactive power, correction of power factor and elimination of current harmonics. On-load tap changer (OLTC) transformers are used between multiple voltage levels to regulate and maintain the voltage, which is supplied to customers. Automatic Voltage Regulators (AVRs) regulate the voltage to ensure electronic units to continue to operate during extreme mains voltage variations, without getting damaged. Evaluating the standards of performance include voltage variation, neutral voltage variation, voltage unbalance, dips, swells, transient, interruption at point of supply and harmonics. Smart systems are needed for network which can communicate the real-time information and power quality deviations for measurement and monitoring of harmonics. In an electricity network, supply and demand must match at all times if the whole system is not to collapse.

Inability to Store Power

Electricity is not storable. This is probably the most important difference between electricity and other commodities. Almost all other products can be stored. This allows consumers and producers to smooth out peaks in demand and prices. However electricity cannot itself be stored on any scale, but it can be converted to other forms of energy for storage and then back again reconverted to electricity. This has the same effect as storing electricity, but is not really storing electricity. Without the ability to store, a free market inevitably exposes consumers to huge volatility in prices and gives ample opportunity for market manipulation by generators who can withhold power to force up prices. Storage is not a generating system, but it can be combined with generating technologies to provide backup power for intermittent and peak power needs.  There exist batteries that can store electrical energy mainly for households and more powerful batteries as well which can even charge small factories for short interval. Nevertheless, there are scant storage capacities to the extent of grids. Due to the high cost of electricity storage at grid-scale, with minor exceptions, only as much electricity is generated as is required. The integration of distributed generation resources on the low voltage grid requires the support of active demand response and energy storage systems to maintain grid stability.

Energy storage solutions can create huge economic opportunity for India. In February 2018, an expert committee under the chairpersonship of secretary, Ministry of New and Renewable Energy, with representatives from relevant Ministries, industry associations, research institutions and experts were constituted by the Ministry of New and Renewable Energy to plan the launch of a national energy storage mission (NESM) for India. This initiative was subsequently moved to NITI Aayog and Government of India launched the “Transformative Mobility and Energy Storage Mission” in March 2019. India Smart Grid Forum (ISGF) initiated preparation of an energy storage roadmap for India 2019-2032 in association with India Energy Storage Alliance (IESA). The study has resulted into energy storage roadmap for India 2019-2032; Energy Storage India Tool (ESIT) and guidelines for determining the variable renewable energy (VRE).

Environmental Impacts

Additionally, electricity is a variable and unpredicted commodity in the sense that the quantity of electricity produced often depends on unpredicted factors such as the weather. Electricity demand patterns and supply systems are themselves subject to climate change impacts. Projections for impacts on hydropower and bioenergy resources are more varied. Indeed, various hourly, daily, weekly, monthly, and seasonal discrepancies define the amount of electricity that enters the grid. Integration of renewables is more sensitive to weather and climate impact usually considers “ingredients” and not power “systems”. Components of the electrical system are affected by climate change via long-term changes in climate parameters, variability and extreme weather events. In the power markets full of solar energy, for example, the amount of energy produced is highly sensitive to the amount of sun during days. The power markets with dominating hydro power, as another example, are affected by precipitation during either rainfall or snowfall seasons, or both. For wind farms, wind speed is a key factor to returns and for investors financing wind farms, there is considerable uncertainty around returns since wind speed can be fairly volatile.  Furthermore, weather has impact on the other side of the market too, meaning it influences the demand for electricity. Weather represents a major risk for energy businesses as both energy supply and demand are dependent on weather outcomes.

Electricity on the Commodity Foothold

Immediate generation and consumption, however, lead to another quality of electricity. Electricity is intractable and intangible. An individual cannot see electrical current as well as cannot grasp it. It looks and feels exactly the same wherever it is generated. It has to be supplied immediately. The delivery period for electricity is zero. As soon as the switch is turned on, immediate consumption causes in turn immediate generation. Despite the fact it must be used immediately as it is generated and conversely, its supply must exactly demand at any given time across the grid. Yet, it also behaves unlike any other commodity.

Electrical energy carries some of the characteristics of a commodity. It can be bought, sold, traded and used in any quantity. There are no predetermined conditions for transportation and delivery. The logistics of the power market is an electric circuit that contains a continuous flow of electricity. The continuous flow is a significant, it allows immediate supply characteristic. Transmission network of a country is defined by its grid, a chain or, more accurately, a system of interconnected power lines and nodes that form the electric circuit with a continuous flow of electric current and transmit this current from producers to consumers and in the process some energy is wasted.

Homogeneity, through the existence of standardised qualities; storability, not really a necessary condition for a viable commodity spot, or futures, market; deliverability, and the existence of a competitive spot market carrying arbitrage operations; price variability and flexibility and the existence of speculators, that may want to carry price risks. These configurations applicable to the traditional commodities accord the electricity a character of commodity.

To Close

Electricity is a set of physical occurrences that produces the flow of electrical power or charge. It is both a naturally occurring phenomenon and one of the most prolific forms of energy used around the world. People have been aware of electricity for thousands of years. Ancient societies marveled at electric fish and noticed static electricity when they rubbed certain objects.
It was only in the last 250 years that scientists made attempts to harness electricity. In 1752, American inventor Benjamin Franklin conducted research on lightning using a kite and a key. This famous experiment demonstrated that lightning is electricity. Significant breakthrough took place in 1831 when British scientist Michael Faraday discovered the principles of electricity. In the late 1800s, Thomas Edison invented the first long-lasting incandescent light bulb, and inventor Nikolas Tesla pioneered the use of alternating current electricity. Modern society is totally dependent on reliable supplies of electricity for it to function. The largest global economies consume trillions of kilowatt-hours (kW-h) annually to power governments, businesses and home. As the global economy has grown, so too has demand for this vital resource. For most products, a market failure can be tolerated by use of substitutes and stores but Governments cannot incur the risk of electricity industry failure. By and large electricity is different.


*Harsha Rajwanshi is Assistant Professor of Law, Dean of External Relations, Gujarat National Law University & Faculty Advisor to GUVNL-GNLU Research Fellowship on Energy Law and Policy.

Join the discussion

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.