Market Coupling Reset: Fixing Design Flaws, Leaving Core Questions Open

An Analysis of the Draft CERC (Power Market)(Second Amendment) Regulations, 2026 - Issued April 17, 2026

Introduction: A Reform Reborn Under Scrutiny

The genie of market coupling is out of the bottle once again It remains to be seen how power exchanges—and possibly the stock market—respond to this shift. 

On April 17, 2026, the Central Electricity Regulatory Commission (CERC) issued a Draft Notification proposing the Second Amendment to the Power Market Regulations (PMR) 2021. On the surface, it looks like a routine regulatory step to operationalize market coupling. But nothing about market coupling in India has been routine.

This draft comes after one of the most contested regulatory episodes in India's electricity sector history: a CERC order on July 23, 2025, that directed market coupling implementation was challenged before the Appellate Tribunal for Electricity (APTEL) by India Energy Exchange (IEX); SEBI found insider trading worth Rs 173 crore linked to CERC's Economics Division officers who leaked Unpublished Price Sensitive Information before the market coupling order was made public; and APTEL, in its judgment dated February 13, 2026, while declining to set aside the impugned order on maintainability grounds, took a strong stand - directing that the CERC officers named in the SEBI order be kept away from the regulation-making exercise on market coupling.

It was against this backdrop -  legally, ethically, and procedurally fraught -  that the current draft notification was issued. This blog examines its content, its implications, what it gets right, and what still remains a concern.

What is at stake in this reform is not merely a change in price discovery mechanism, but a deeper shift in market design. While the stated objective of market coupling is efficiency through uniform price discovery and optimal resource allocation, the sequence of regulatory actions has led to a perception that the reform may also alter competitive dynamics among exchanges.

(The substantive issues raised here echo the concerns extensively documented earlier - on the weak economic case, the round-robin MCO model, procedural gaps, and insider trading

risks - as analysed at length on this blog: Market Coupling: A Premature Reform Hijacked by Private Interests)

What the Draft Notification Actually Does

The Draft Second Amendment to PMR 2021 makes four substantive interventions:

1.  Designates Grid India as the Market Coupling Operator (MCO)

The earlier contested order of July 23, 2025, had proposed a "round-robin" model where competing private exchanges would rotate as the MCO - a concept that was widely criticised as technically fragile, governance-weak, and fraught with conflict of interest. The new draft replaces this with a clean, unambiguous designation: Grid Controller of lndia Limited (Grid India), the national system operator, shall function as the Market Coupling Operator. Grid India will form a dedicated cell for this purpose.

2.  Defines the Scope of Market Coupling through a New Regulation 39

Market coupling will apply to the Day-Ahead Market (DAM), Real-Time Market (RTM), and such other segments as may be notified separately, with the flexibility to notify different dates for different segments. This staged approach is a departure from the blunderbuss implementation timeline that was criticised in the previous order.

3. Establishes a Structured Bid Collection and Price Discovery Framework (Regulations 39Aand39B)

Power exchanges will collect bids in a uniform format and transmit them to the MCO through secured channels. The MCO will aggregate bids across all exchanges to enable price discovery on the principle of maximisation of economic surplus. In case of congestion, market splitting will apply. The crucial operational details will be spelled out in a Power Market Coupling Procedure (PMCP) to be formulated by Grid India within six months of notification, with Commission approval.

The PMCP will cover roles and responsibilities, operational sequences, bid submission formats (including encryption and decryption protocols), features of the price discovery algorithm, scheduling and delivery, accounting, clearing and settlement, and procedures for dealing with operational constraints or delays.

4. Extends Existing Regulatory Obligations to the MCO (Regulation 39D)

IT infrastructure requirements, cybersecurity norms, information dissemination obligations, and market surveillance requirements - all currently applicable to power exchanges - will also apply to Grid India in its role as MCO.

The Corrections: What the Draft Gets Right

1. Abandonment of the Round-Robin MCO Model

This is the most significant correction. The round-robin model-where IEX, PXIL, and HPX would rotate as the MCO -was objectively bad policy. As detailed in the earlier analysis on this blog, it would have produced fragmented governance, inconsistent clearing outcomes across different runtime environments, embedded conflicts of interest (a commercially competing exchange controlling pre-coupling order data), duplicative infrastructure costs, and fragmented accountability in case of disputes or failures. Europe's SDAC model works precisely because it relies on a single neutral operator running a certified algorithm - EUPHEMIA - on one platform.

By designating Grid India, which is already the neutral system operator managing the national grid, CERC has moved the MCO function to an entity with no commercial interest in exchange market share. This removes the most glaring structural flaw of the original implementation design.

The draft correctly separates the legal designation of Grid India as MCO (done through this amendment) from the operational commencement of market coupling (to be notified separately). This allows Grid India time to build the PMCP, develop the algorithm, put in place IT and cybersecurity infrastructure, and undergo the algorithm audit mandated under Regulation 28 before market coupling goes live. This staged approach was absent from the July 2025 order, which had set an unrealistic January 2026 deadline.

2. The Grid India Conflict of Interest Question

While designating Grid India as the Market Coupling Operator (MCO) removes the obvious conflict of the round-robin model, it creates a different problem that deserves equal attention.

Section 27(2) of the Electricity Act, 2003 explicitly prohibits the National Load Despatch Centre — operated by Grid India — from engaging in the business of trading in electricity. This restriction exists to ensure that the entity managing grid operations remains neutral and does not use its privileged operational position for commercial gain. On a strict literal reading, the MCO function may not violate this prohibition, since the MCO does not buy or sell electricity — it aggregates bids, runs the price discovery algorithm, and communicates clearing results to the exchanges. No electricity passes through the MCO's hands commercially, and this is therefore not "trading in electricity" as defined under Section 2(71) of the Act, which means purchase of electricity for resale.

However, the purpose behind Section 27(2) is directly and seriously engaged. The provision was designed to keep the system operator free from any commercial entanglement in the market it controls. As MCO, Grid India will receive complete, aggregated bid data from all power exchanges — buy bids, sell bids, prices, and volumes — before market clearing is completed. This is among the most commercially sensitive information in the electricity market. The conflict deepens further because Grid India simultaneously procures ancillary services — frequency regulation, spinning reserves, and balancing power — from the very same generators and market participants whose pre-clearing bids it will now see in advance. Even without deliberate misuse, this creates a structural information asymmetry that Section 27(2)'s underlying intent was meant to guard against.

The draft notification's response to this — requiring Grid India to set up a dedicated internal MCO cell — is an administrative fix, not a structural one. A cell within the same organisation does not constitute the kind of institutional separation that the Act's framers had in mind when they drafted Section 27(2). Since the provision predates the concept of market coupling entirely and was never drafted to address this scenario, CERC and the Ministry of Power would be well advised to either obtain a formal legal opinion on whether the MCO designation is consistent with Section 27's intent, or introduce an explicit statutory or regulatory provision that defines the MCO role, ring-fences it from Grid India's ancillary services procurement function, and establishes enforceable information barrier protocols subject to independent audit. Proceeding without that clarity leaves the designation legally untested and potentially open to challenge — and more importantly, leaves a genuine conflict of interest unresolved at the heart of India's most significant power market reform in years.

3.  Mandate for a Detailed Procedural Framework Before Go-Live

The requirement for Grid India to formulate and get Commission approval for the PMCP within six months is a meaningful check. The PMCP must spell out roles and responsibilities, the operational sequence of events, bid formats including encryption protocols, features of the price discovery algorithm, processing of bids, clearing and settlement, and crucially - a procedure to deal with operational constraints or delays. This addresses, at least structurally, the critique that the previous order lacked a credible operational plan.

4.  Algorithm Audit Obligation Extended to Grid India

Under the new Regulation 39D, Regulation 28 obligations applicable to power exchanges - including the requirement to get the price discovery algorithm audited before commencement of operations and once every two years thereafter - will also apply to the MCO. This responds to one of the important concerns: that the coupling algorithm must be independently certified before going live.

5.  Procedural Legitimacy Through a Draft Notification

The issuance of this notification as a draft, inviting public comment, represents a procedural improvement over the July 2025 order, which was condemned as a suo-motu direction bypassing stakeholder consultation despite 127 detailed submissions having been made on the Staff Paper. APTEL in its judgment noted this procedural concern. This draft opens a window for meaningful regulatory participation before the amendment is finalised.

The Concerns: What Still Needs Scrutiny

1. The Economic Case for Market Coupling Remains Undemonstrated

The draft notification does not address the central evidentiary concern raised by the shadow pilot results - that the DAM welfare gain was only Rs. 38 crore (0.3%) and the RTM welfare gain was a negligible Rs. 0.72 crore (0.01%) over the four-month pilot period. The CERC's own February 2024 order had found no substantial benefits given IEX's 99% market dominance. The comprehensive 29-month dataset reportedly told a different story from the cherry-picked 4-month data. None of this has been publicly reconciled. The draft notification is silent on the economic justification.

For a structural market reform of this magnitude - one that will fundamentally alter price discovery for India's entire short-term power market - the regulator owes stakeholders a transparent, comprehensive cost-benefit analysis using the full dataset before regulations are finalised.

2.  The Grid India Shadow Pilot Report Has Still Not Been Made Public (although it can be found 

in their website)

CERC's own February 2024 order directed that the Grid India shadow pilot report be made public for stakeholder awareness. It wasn't. The July 2025 order then relied selectively on findings from that unreleased report. The new draft notification does not remedy this gap. Before the PMCP is finalised and before the amendment takes effect, the complete shadow pilot reports - both the 4-month and the 29-month analyses - must be placed in the public domain. Without this, stakeholder comments on the PMCP will lack an adequate evidentiary foundation.

(subsequently- I could locate the web address of the Grid India's- "Implementation of Shadow Pilot on Power System & Cost Optimization through Market Coupling " from their website -" https://webcdn.grid-india.in/files/grdw/2026/01/Report%20on%20Implementation%20of%20Market%20Coupling%20Shadow%20pilot%20-%20Jan%202025_583.pdf Report by Grid-India on Market coupling simulation study"). 

This report had earlier established that coupling across all three power exchanges yields only marginal impact, with welfare gains of approximately 0.042% in RTM and 0.059% in DAM.

3.  Market Depth Remains Shallow - The Structural Pre-Condition Is Unmet

Market coupling derives its efficiency benefits from aggregating diverse bids across multiple competing exchanges in a deep market. India's situation is characterised by

shallow market depth (DAM is less than 4% of total electricity transactions) and extreme concentration (IEX holds approximately 99% of DAM and RTM volume). In such a market structure, coupling produces minimal welfare gains - as the shadow pilot itself demonstrated. The reforms needed to deepen the market (wider participation, more sellers, genuine multi-exchange competition) must accompany, or ideally precede, market coupling - not be assumed to follow from it.

4.  The SEBI Insider Trading Investigation Is Ongoing -  A Cloud Over the Process

APTEL's February 2026 judgment contains a significant observation: that CERC must ensure the officers named in SEBI's October 2025 interim order are kept away from the regulation-making exercise on market coupling until SEBI's investigation concludes. The tribunal reminded CERC that, "like Caesar's wife," a regulator must remain above suspicion.

The draft notification does not address how CERC has complied with this direction. Stakeholders and the public are entitled to know whether the officials implicated in the insider trading investigation have been recused from the current regulation-making process. Regulatory transparency on this point is not optional - it is the minimum prerequisite for restoring confidence in the integrity of the market coupling reform process.

5.  The PMCP's Scope -  Details That Matter

The six-month timeline for formulating the PMCP is reasonable. But the devil will be in the details. Key questions that the PMCP must address, and on which stakeholder input should be actively sought, include:

•     What is the specific algorithm to be used for price discovery, and who will certify it before go-live?

•    How will bid format harmonisation across exchanges be achieved - given that Grid India's own pilot feedback highlighted differences in bid structures and pre processing?

•    What are the inter-exchange settlement and cross-clearing mechanisms?

•   What are the cybersecurity protocols for the bid transmission channel, the coupling engine, and data storage?

•   What is the dispute resolution mechanism for price or volume discrepancies?

•    What are the operational contingency procedures - fallback modes if the MCO system fails mid-session?

•    How will the MCO's charges be structured and regulated to avoid burdening market participants?

The PMCP should itself be subjected to a public consultation process before it is approved by the Commission. The regulation mandates Commission approval but is silent on whether the PMCP draft will be published for stakeholder comment.

6.  No Timeline for Commencement -  Uncertainty for Market Participants

The draft amendment provides that market coupling will commence "from such date as may be notified by the Commission separately." While the separation of designation from implementation is correct in principle, the absence of any indicative timeline creates uncertainty for all market participants - power exchanges, distribution companies, generators, and traders - who must plan and invest accordingly. A PMCP development roadmap with milestone timelines would give the market clearer visibility.

The APTEL Judgment: What It Established and What It Didn't

APTEL's February 13, 2026 judgment merits careful reading. The tribunal dismissed IEX's appeal on the ground that the July 2025 impugned order was a precursor to regulation-making, not a final regulatory order, and was therefore not amenable to challenge under Section 111 of the Electricity Act. APTEL held that it lacked jurisdiction to review the regulation-making process at that stage.

But the tribunal was far from passive. It made two pointed observations. First, acknowledging the SEBI findings as prima facie credible, it directed CERC to ensure that the implicated officers are kept away from the market coupling regulation-making exercise. Second, it reminded CERC that as an independent regulator entrusted with protecting consumers of electricity, it must "like Caesar's wife, always remain above suspicion." The tribunal also clarified that the dismissal of the current appeal will not disable IEX from challenging the final regulations - once made - along with a simultaneous challenge to the underlying July 2025 order.

This judgment, in effect, cleared the legal runway for CERC to proceed with regulation-making while placing a strong ethical and governance obligation on the process. The April 17, 2026 draft notification is CERC's first move after that judicial direction.

Connecting the Dots: How the New Draft Addresses the Earlier Critique

My blog referenced earlier -  Market Coupling: A Premature Reform Hijacked by Private Interests -              had identified several structural deficits in the July 2025 order. It is instructive to see which of those concerns the new draft addresses and which it does not.

Conclusion: A Necessary Correction, But an Incomplete One

The Draft Second Amendment Regulations, 2026 represent a meaningful course correction.

The designation of Grid India as MCO is the right call, replacing a structurally compromised round-robin model with a neutral system operator. The staged approach to implementation, the mandate for a detailed PMCP, and the extension ofIT, cybersecurity, and surveillance obligations to the MCO all reflect a more serious engagement with the operational realities of market coupling.

But the reform remains incomplete. The economic case for market coupling under current market conditions has not been transparently made. The shadow pilot reports remain unpublished. The market depth pre-condition is unmet. Most significantly, the cloud of the SEBI insider trading investigation continues to hang over the entire process. CERC must proactively demonstrate, not merely assert, that the regulation-making exercise on market coupling is being conducted with complete integrity and independence from the officers under investigation.

Market coupling, as a concept, is not inherently flawed - it works well in jurisdictions with deep, competitive, multi-exchange markets and robust institutional infrastructure. India can get there. But the path requires honest acknowledgment of where the market currently stands, transparent data sharing with stakeholders, adequate technical preparation, and above all, a regulatory process that the market can trust.

The April 17 draft is a step in the right direction. Whether it leads to sound policy or merely a cleaner version of a premature reform will depend on what CERC does next - with the PMCP, with the shadow pilot data, and with the integrity questions that APTEL has placed squarely on the table.

The author's earlier detailed analysis of the market coupling controversy - covering the weak economic case, the round-robin MCO design flaws, the procedural violations in the July 2025 order, and the insider trading concerns - is available at: https://sites.google.com/view/rajpratap/market-coupling-a-premature-reform-hijacked-by-private-interests