SC on Electricity Futures in India

After years of delay, it seems like the roadblock is finally over for electricity futures to trade in the Indian derivative market. It will allow both producers and consumers to enter into futures and options deals to hedge against price volatility and other associated risks. The decision was pending for some time now since discussion between the market regulator, SEBI and power regulator, CERC entered an impasse over jurisdiction disputes.

New development suggests that both parties have finally entered an agreement where SEBI will oversee all the financial transactions related to electricity futures contracts and CERC will control physical settlement of the futures.  However, it has to get concurrence from the SC bench that was hearing the arguments regarding jurisdiction dispute of electricity futures contracts between SEBI and CERC. The decision was pending due to COVID-19 and may get a clearance anytime during this month.

Commenting on the matter an official said, “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.”

What it means to the Indian derivative market

After the consensus, the ground is prepared for pure play futures to be traded in the derivatives market. Futures and options are quintessential for any matured market, and it isn’t any different for the electricity sector. It is a major reform initiative to make the electricity market more vibrant, both for producers and consumers, which include both government and private players.

Electricity futures in India started in 2009, but it reached to an impasse over jurisdiction dispute between SEBI and CERC. But finally, the matter seems to have resolved. Once future trading begins, ICX, which is the largest energy commodity exchange, will start offering derivatives to the participants. Initially, the market discourages speculation and these futures will be sold purely on delivery basis. While commenting over the development, Head – Business Development of IEX,  Rohit Bajaj mentioned,

“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.”

India is currently having a production surplus of electricity with an installed power generation capacity of Rs 370 GW with both public and private producers. The market demand is experiencing a slack amid COVID-19 outbreak which has reduced power demand in various sectors. Consumers can benefit from buying futures to limit their market exposure when the demand shoots up after the lockdown is lifted. Electricity futures contracts will help them safeguard their interest against any abnormal price rise.

Conclusion

So far, electricity trading was limited to spot contracts of 11 days. Introduction of electricity futures is a big leap for the derivatives market for the power sector that will help members through price discovery around the year. Electricity futures are helpful since power prices are volatile. Once the lockdown gets over, there will be a rise both in demand and price for electricity. Producers can sell their perceived surplus to consumers who want to hedge against any dramatic movement in the market.

However, it seems like there is still time before the trading starts. The decision was already delayed because of COVID-19 condition and might take a little longer to become a reality under the extended lockdown condition.