Electricity futures to remain tool for hedging: Sebi chief Pandey

As the stock markets open up for electricity derivatives, Tuhin Kanta Pandey, chairman of the Securities and Exchange Board of India (Sebi) on Friday said that the regulator has taken steps to ensure that these contracts remain a tool for hedging rather than undue speculation.

 

Speaking at the launch of electricity monthly futures at the National Stock Exchange (NSE) in Mumbai, the Sebi chairman highlighted that safeguards have been put in place to ensure that electricity derivatives ‘remain true to their intended purpose’.

 

Electricity futures are financial contracts that allow participants to lock in the price of electricity for a specified future month without involving any physical power delivery.

 

“Electricity has been categorised as a high-volatile commodity, thereby attracting a high initial margin requirement. This will discourage undue speculative activity. Additional margins may be imposed in times of heightened volatility,” said Pandey.

 

Another risk management tool highlighted by the Sebi chief is daily price limits which will protect investors from sudden and extreme price movements. 

The contracts have been launched after consultation with the Central Electricity Regulatory Commission (CERC) which oversees physical delivery based contracts on power exchanges. 

 

The electricity futures will help players hedge against the price volatility and will complement the physical power trading. The key participants who will trade these contracts are power generators, distribution companies, power exchanges, end consumers, and other traders. 

 

The Sebi chairman said that these contracts will address challenges such as price volatility in spot markets due to demand supply dynamics, financial stress on discoms which are locked into long-term power purchase agreements, and facilitate investments in power generation infrastructure and renewable energy.

 

Further, discoms will also be able to procure electricity at predictable prices and avoid extreme short-term price fluctuations and their downstream effects on tariffs and subsidies.

 

“Electricity derivatives mark the next phase of India’s power market reforms. As India marches toward its net-zero commitments and a greener grid, a deep and liquid electricity derivatives market will be essential for a reliable, sustainable, and investor friendly power sector,” noted the Sebi chair.

 

On NSE, the trading of electricity futures contracts started on July 14 with minimum unit trading of  50MWh (50,000 units of electricity) and a minimum tick size of ~1 per MWh. The exchange has also specified norms for open position limits for individual clients and on an aggregate basis, upper limits, and initial margin requirements. These contracts will be cash-settled.

 

The Multi-Commodity Exchange (MCX) also launched electricity futures contracts on July 10.

 

Several global exchanges already trade electricity derivatives, including EEX (Europe), PJM (USA), and ICE (UK).