SC's action may clear way for electricity futures in India

NEW DELHI: After years of delays, India may soon open a derivatives market for the power sector allowing both power generators and consumers to enter into futures contracts and use it as a new hedging tool to mitigate price volatility and other associated risks.

Introduction of pure play futures and options as products on power trading platforms would be a major reform initiative that would help in developing a robust and vibrant energy market. The introduction of the derivative products has got delayed over jurisdictional issues between market regulator SEBI and power regulator CERC.

Sources privy to the development told IANS that Securities and Exchange Board of India (SEBI) and Central Electricity Regulatory Commission (CERC) have now reached an understanding to allow futures trading in electricity.

The former is expected to oversee the functioning of all financially traded electricity forwards while the latter would regulate physically settled forward where electricity is delivered on future date at the contracted price.

"Decks have been cleared for the start of the electricity futures market in India with regulators reaching broad understanding on how to go about while allowing derivative instruments for market participants. They will still have to get concurrence of the Supreme Court that was overseeing the issue of electricity futures jurisdiction between SEBI and CERC," said an official source.

"The order on ending the case based on applications given by the two regulators got delayed due to Covid-19 related disruptions. It is expected anytime this month now. So the futures market could become reality this year itself," the source added.

Even after clarity on regulations, there may be further delays on account of the lockdown and economic slowdown that has also impacted power demand. Futures and options work best in a rising market where players need to hedge their positions to minimize losses.

While India presents a large power market with installed generation capacity of close to 370 GW and large number of participants from both private and public sector, it is yet to offer futures trading option that is the hallmark of all mature markets.

Though electricity is available in surplus now, its trading is limited and only through spot contracts (up to 11 days) on exchanges. Forward trading in electricity started in 2009, but the matter soon ended in court over jurisdictional issues.

"With clarity on regulations, electricity futures may soon start in the country. For any mature market, future and options are a must. This should not be seen as instruments facilitating speculation but the one that promotes hedging and allows price discovery in medium term markets with mitigation of counterparty risk," said Rohit Bajaj, head (business development) of IEX. IEX is the largest power trader in the country. (IANS)

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