India May Open a Derivatives Market for the Power Sector in the next fiscal year, Energy News, ET EnergyWorld
After lengthy delays, India could open a derivatives market for the power sector in the next fiscal year (FY 2022-23) that will allow both power producers and consumers to enter into futures contracts and use them as a new hedging tool to mitigate price volatility and other related risks.
The introduction of pure play futures and options as products on the power trading platform would be an important reform initiative that would help develop a robust and dynamic energy market.
The launch of derivative products has been delayed due to litigation between the Securities and Exchange Board of India (SEBI) and the Central Electricity Regulatory Commission (CERC), and a case pending in the Supreme Court also needs to be resolved.
Sources familiar with the development informed IANS that SEBI and CERC have reached an agreement to enable futures trading in power.
The former is intended to monitor the functioning of all financially traded electricity futures, while the latter regulates physically settled futures contracts in which electricity is delivered on a future date at the contractually agreed price.
“Decks have been cleared for the power futures market launch in India, with regulators having a broad understanding of how to operate while allowing derivative instruments for market participants.
“You still need to get approval from the Supreme Court, which oversaw jurisdiction over power futures between SEBI and CERC,” an official source said.
The source added that there could be further delays due to the economic slowdown, which has also impacted electricity demand. In addition, the Covid pandemic has delayed the hearing and settlement of all questions by the Supreme Court, which now only handles essential cases.
Futures and options work best in a rising market where players need to hedge their positions to minimize losses. With the expectation of large demand growth as the economy frees itself from Covid-related disruptions, the current time is believed to be propitious to open up the derivatives market to power.
“We hope that the futures market for the power sector will open at the beginning of the next financial year. Full clearance for futures trading could take up to two quarters after the Supreme Court dismissed the case at its next hearing.
“We have petitioned the CERC to become an active participant in the power futures market as soon as it opens and to establish long-term contacts,” Rohit Bajaj, head, business development, Indian Energy Exchange (IEX) told IANS .
The IEX is the largest electricity exchange in the country.
While India represents a large power market with an installed generation capacity of nearly 385 GW and a large number of participants from the private and public sectors, it does not yet offer an option for futures trading that is a hallmark of all mature markers.
Although electricity is now available in excess, its trading is limited to spot contracts (up to 11 days) on exchanges. Electricity futures trading began in 2009, but the matter soon ended in court over jurisdiction issues.
“The introduction of power futures would be a welcome development for the power sector. For any mature market, the future and options are a must. This should not be seen as a tool to facilitate speculation, but rather as one that promotes hedging and enables pricing in medium-term markets, “with counterparty risk mitigation,” said another public utility executive.
Once future trading begins, power exchanges such as the IEX would be able to offer participants derivative instruments. These can be power futures with a clear delivery-based schedule (delivery at a future price) and other derivative instruments such as call and put options.
This will help both producers and consumers to mitigate risk by hedging their positions through derivative instruments.
The start of derivative instruments would also be helpful to the sector at a time when spot power prices on exchanges have fallen and fluctuate in the range of 2.70 to 2.80 rupees per unit due to the industrial slowdown and other Covid-related disruptions. The futures market will give such indications in advance.
Electricity producers can sell their perceived surplus in futures, and consumers who expect higher consumption and price spikes can buy electricity on the same platform.
Trading power futures will also be helpful as power prices are volatile. Anyone who buys or sells electricity on the spot market benefits directly from it. That being said, trading on an exchange would be safe as their clearing house offers a guarantee system that mitigates counterparty credit risk.
However, there are still fears that these products would concentrate the raw material on a handful of players who could then control prices. But with low demand and a surplus situation, this seems unlikely.