Power exchanges to wait longer for long-term forward contracts

However, IEX, PXIL inseperate petitions had made a strong case for the introduction of trading in long term contracts to meet market requirements

Power exchanges’ plan to launch delivery-based long-term forward contracts will be further delayed, with the Central Electricity Regulatory Commission (CERC) disposing petitions by the Indian Energy Exchange (IEX) and the Power Exchange India Ltd (PXIL), saying the matter is pending before the Supreme Court.

IEX and PXIL had submitted separate petitions to CERC. The two exchanges had made a strong case for the introduction of trading in long-term contracts to meet the requirements of market participants.

IEX's daily turnover is 80 million units (MUs) while PXIL's is 2 MUs.

Currently, IEX and PXIL are permitted to trade in day-ahead and day-ahead contingency contracts of up to two weeks.

While considering the petitions, CERC admitted that according to the provisions of CERC (Power Market) Regulations, 2010, it can permit any exchange to introduce long-term/tenure contracts. However, the regulator expressed its inability to grants approval at this juncture, as its own petition is pending before the Supreme Court.

CERC moved the apex court after the Bombay high court had ruled in February 2011 that the provisions of the Power Market Regulations with respect to electricity derivatives, forward, and future contracts, are inoperative. In their petitions,  IEX and PXIL argued that with long-term/tenure contracts, they will be able to trade additional power, which is currently done through bilateral contracts. Further, the exchanges can bring transparency and power generators will be able to decide what their generation will be and how many plants will go in for outages.

“One of the key problems in the sector is lack of power price visibility over one year and beyond. Generating companies get exposed to price risks in the absence of forward price curve. Forward markets can provide such visibility, an important hedge needed by generators as well as distribution companies,” Rajesh K Mediratta, director (business development) at IEX, told Business Standard.

PXIL had submitted that longer-tenure products are the need of the hour, as it helps a participant transact power for a longer duration of time in a transparent and competitive platform provided by the exchanges. "The longer-tenure contracts would guard against the price and quantity variation that a participant is exposed to in the day-ahead market," said a PXIL spokesperson.

According to CERC's market report for April, of the total electricity generation, 7,606 MUs (9.8 per cent) were transacted through short-term, comprising 3,449 MUs (4.5 per cent) through bilateral (through traders and term-ahead contracts on power exchanges and directly between distribution companies), followed by 2,577 MUs (3.3 per cent) through day-ahead collective transactions on IEX and PXIL and 1,580 MUs (two per cent) through unscheduled interchange (UI, a mechanism to improve grid efficiency).

Of the total short-term transactions, bilateral constitute 45 per cent (35 per cent through traders and term-ahead contracts on power exchanges and 10 per cent among distribution companies), followed by 34 per cent through day-ahead collective transactions on power exchanges and 21 per cent through UI.