The introduction of futures and pure play options as commodities on the electricity trading platform would be a major reform initiative that would help develop a strong and vibrant energy market.
The introduction of derivatives has been delayed due to jurisdictional issues between the Securities and Exchange Board of India (SEBI) and the Central Electricity Regulatory Commission (CERC) and a pending Supreme Court case also needs to be resolved.
Sources familiar with the development told IANS that SEBI and CERC have reached an agreement to allow electricity futures trading.
The former would oversee the operation of all financially traded electricity futures contracts, while the latter would regulate physically settled futures contracts where electricity is delivered at a future date at the contract price.
âThe bridges have been cleared for the start-up of the electricity futures market in India, with regulators having a broad understanding of how to proceed while allowing derivatives for market participants.
“They will still have to get the approval of the Supreme Court which oversaw the question of the jurisdiction of the electricity futures contracts between SEBI and CERC,” said an official source.
The source added that there could be further delays due to the economic downturn which has also impacted demand for electricity. In addition, the Covid pandemic has delayed the hearing and the settlement of all questions by the Supreme Court, which now only deals with essential cases.
Futures and options work best in a rising market where players need to hedge their positions to minimize losses. Pending strong demand growth as the economy unblocks Covid-related disruptions, the current time is considered opportune to open up the electricity derivatives market.
“We hope that the derivatives market for the electricity sector can open up early in the next fiscal year. Full authorization for futures trading could take up to two quarters after the Supreme Court rejects the case at its next hearing.
“We have made petitions to CERC to become an active participant in the electricity futures market once it opens and initiate longer lasting contacts,” Rohit Bajaj, business development manager, told IANS. , Indian Energy Exchange (IEX).
IEX is the country’s largest electricity exchange.
While India presents a large electricity market with an installed generation capacity of almost 385 GW and a large number of private and public sector participants, it does not yet offer the option of futures trading which characterizes all mature markers.
Although electricity is currently available in excess, its trading is limited only through spot contracts (up to 11 days) on the exchanges. Electricity futures trading began in 2009, but the case soon ended in court on jurisdictional issues.
âThe introduction of electricity futures would be a welcome development for the electricity industry. For any mature market, the future and options are essential. It should not be seen as an instrument facilitating speculation, but as an instrument which promotes hedging and allows price discovery in the medium-term markets. with counterparty risk mitigation, âsaid another executive at a public sector power generation company.
Once future transactions begin, power exchanges such as IEX would be able to offer derivatives to participants. These can be electricity futures contracts with a clear delivery schedule (delivery at a price at a future date) and other derivative instruments such as call and put options.
This will help both producers and consumers to mitigate risk by hedging their positions with derivatives.
The start of derivatives would also be useful for the sector at a time when spot electricity prices have fallen on the exchanges and hover around Rs 2.70-2.80 per unit due to the industrial downturn and economic downturn. other disruptions related to Covid. The futures market will provide these indications in advance.
Power producers can sell their perceived surplus over time, and consumers, who expect higher consumption and higher prices, can buy power on the same platform.
Trading in electricity futures will also be useful as electricity prices are volatile. Those who buy or sell electricity in the spot market will directly benefit. That aside, trading through an exchange would be safe because its clearinghouse provides a collateral system that mitigates counterparty credit risk.
However, some still fear that these products will concentrate the commodity on a handful of players, who could then control prices. But with weak demand and a surplus situation now, that seems unlikely.
(Subhash Narayan can be contacted at [email protected])