Electricity Derivatives in India: Interview with Rajendra Abhijeet

India’s electricity market is undergoing a significant transformation with the introduction of electricity derivatives. In this interview, hosted by Power Peak Digest and published on the YouTube channel Electricity Market in India, Rajendra Abhijeet, a seasoned expert with over 15 years of experience in the power sector, specialising in regulatory and compliance, shares insights on how these financial instruments are reshaping India’s power trading landscape. The discussion explores the mechanics of electricity derivatives, their role in addressing market gaps, and their potential to enhance efficiency, transparency, and resilience in India’s electricity market.
How do electricity derivatives differ from traditional physical delivery through PPAs and exchanges, and what specific gap are they meant to fill in the current market?
Electricity derivatives are financial contracts that allow participants to hedge power purchase prices without the need for physical delivery of electricity. Unlike traditional trading in India, which relies on physical supply through long-term Power Purchase Agreements (PPAs) or short-term spot markets on exchanges, derivatives enable market participants to manage price volatility. For instance, a generator selling power on a power exchange or through short-term PPAs can sell a futures contract to lock in a minimum price, protecting against price drops in the spot market. Similarly, distribution companies or large industrial consumers can use derivatives to secure stable purchase prices. The primary gap these instruments address is financial risk management, offering a tool to mitigate the volatility inherent in India’s evolving power market, which is shifting toward merchant markets and higher renewable energy penetration.
How do futures and options function in the context of electricity derivatives, and how do exchanges like MCX and NSE support such trades?
Futures and options are key tools for hedging price risks in electricity derivatives, though they operate differently. Futures are binding contracts where both buyer and seller are obligated to settle at the contract’s expiry. For example, if a distribution company buys a July electricity futures contract at 5 rupees per unit and the average spot price on the Indian Energy Exchange (IEX) is 6 rupees, the company pays 6 rupees to the exchange but receives a 1-rupee difference through the futures settlement, effectively maintaining a purchase cost of 5 rupees. Options, in contrast, provide the right, but not the obligation, to exercise the contract at a specified price, requiring the buyer to pay a premium for this flexibility. For instance, a generator purchasing an option at 5 rupees per unit pays a premium, say 10 paisa per unit, to protect against a price crash. If the spot price falls to 4 rupees, the generator can exercise the option to sell at 5 rupees, recovering the difference minus the premium. Currently, exchanges like the Multi Commodity Exchange (MCX) and National Stock Exchange (NSE) are launching futures contracts, enabling participants to trade monthly contracts and settle based on the average spot market price, thus supporting price risk management.
With rising market volatility, especially due to renewable integration, how can electricity derivatives help discoms, generators, and large consumers hedge financial risks tied to price and supply variability?
The integration of renewable energy and the shift toward short-term markets have increased price volatility in India’s power sector. Electricity derivatives offer a solution by enabling market participants to manage these risks. Distribution companies can use futures contracts to lock in expected purchase prices, particularly during peak seasons when supply shortages may drive up spot market prices. For example, securing a futures contract ensures that even if spot prices rise, the distribution company settles at the predetermined futures price, shielding it from cost spikes. Generators can sell futures or buy put options to establish a minimum revenue floor, protecting against price drops. Large commercial and industrial consumers, similar to distribution companies, can use derivatives to cap procurement costs. These tools enhance budgeting certainty, reduce exposure to short-term volatility, and enable more confident commercial planning for all stakeholders.
Beyond hedging, what broader benefits, such as price discovery, liquidity, or transparency, can electricity derivatives bring to India’s electricity market?
Electricity derivatives provide benefits beyond hedging, significantly enhancing India’s power market. They facilitate price discovery by reflecting the market’s collective expectations. For instance, if August futures trade at 2 rupees per unit, it signals market participants’ price forecasts, aiding generators in planning sales strategies and buyers in procurement decisions. Additionally, derivatives increase market liquidity by attracting a broader range of participants, including traders, financial investors, and speculators, who do not need to engage in physical power delivery. This increased participation fosters a more robust market. Furthermore, derivatives improve planning and financing by offering revenue assurance, making projects more bankable for developers and enabling distribution companies to manage budgets effectively. Collectively, these instruments create a financial layer over the physical market, enhancing efficiency, transparency, and resilience.
How are SEBI and CERC coordinating to ensure smooth market functioning, and what was the impact of the 2021 Supreme Court ruling on their respective jurisdictions?
The Securities and Exchange Board of India (SEBI) oversees electricity derivatives, while the Central Electricity Regulatory Commission (CERC) regulates the physical electricity market. The 2021 Supreme Court ruling clarified this division, stating that SEBI has jurisdiction over financial contracts, while CERC governs physical electricity markets. This resolution ended a long-standing dispute between the two regulators, which had delayed the launch of electricity derivatives in India. The clarity spurred increased consultations, product design, and preparations by exchanges like MCX and NSE to introduce these financial instruments. The ruling has paved the way for a structured regulatory framework, enabling the imminent launch of derivative products and fostering a more integrated market ecosystem.
Who are the key stakeholders expected to participate in the electricity derivatives market, and what are the entry requirements?
Key stakeholders in the electricity derivatives market include distribution companies, generators, large commercial and industrial consumers, traders, and financial intermediaries. Distribution companies, as major power buyers, are critical for market success. Generators, including renewable and thermal producers, particularly those avoiding long-term PPAs, will use derivatives to secure revenue. Large consumers seek to manage electricity costs, a significant expense in their operations. Traders and financial intermediaries act as market makers and speculators, enhancing liquidity. To participate, stakeholders must register with SEBI-authorised brokers, comply with Know Your Customer (KYC) norms, and maintain minimum margin balances as required by exchanges. Corporate players and distribution companies may also need board resolutions or internal risk management policies. Participation is open, but success depends on risk appetite, operational readiness, and market literacy.
What risks should early participants watch out for, and what steps are needed to build trust in the market?
Early participants in India’s electricity derivatives market face several risks. Low liquidity is a primary concern, as it can lead to wide bid-ask spreads, making it costly to enter or exit positions. Without significant participation, particularly from distribution companies, markets may remain shallow. Additionally, many power sector entities lack internal readiness to trade financial products, requiring trained personnel and robust risk management policies to navigate complex instruments. Daily mark-to-market settlements in futures contracts, where participants adjust margins based on daily price differences, may create perceived financial risks, potentially misunderstood by management or auditors unfamiliar with derivatives. Regulatory uncertainty also poses a challenge, as distribution companies must justify derivative losses to regulators without clear accounting guidelines. To build trust, regulators and exchanges must ensure liquidity by encouraging participation from major utilities, develop clear guidelines for accounting and regulatory compliance, and invest in capacity building to enhance market literacy and institutional confidence.
How does India’s initial approach to electricity derivatives compare with mature markets like Europe and North America, and what lessons can be applied?
India’s electricity derivatives market is in its early stages, unlike mature markets in Europe and North America, which have over 15–20 years of experience. These markets offer diverse contract types, nodal pricing, and widespread participation from utilities, traders, and financial investors. In contrast, India’s market currently focuses on monthly futures contracts settled against regional prices, with limited participation expected initially. Lessons from mature markets include mandating participation from large utilities, as seen in Norway’s Nord Pool, where major utilities were required to trade in derivatives, boosting liquidity and confidence. Additionally, developing forward curves—price forecasts published by regulators—can help participants plan and manage risks effectively, particularly for smaller players lacking sophisticated forecasting capabilities. Allowing convergence between physical and financial markets, such as unified clearing houses to reduce margin costs, would also enhance efficiency. Implementing these strategies could accelerate India’s market maturity.
What key developments in regulatory structure or technological space are foreseen in the next three to five years that could shape this new market?
Over the next three to five years, the electricity derivatives market in India is expected to evolve significantly. Contract durations are likely to extend beyond the current four-month limit, potentially including quarterly or multi-year contracts, enabling longer-term planning. The variety of contracts may also expand to include products tailored for specific segments, such as solar generators, who currently cannot hedge based on solar-specific hours due to settlements based on round-the-clock average prices. Regulatory advancements will likely focus on integrating physical and financial markets, such as establishing a single clearing house to streamline margin requirements. Technological innovations, including advanced price forecasting tools and trading platforms, could enhance market accessibility and transparency. These developments, combined with increased participation and regulatory clarity, will shape a more robust and mature electricity derivatives market in India.