MC Explains: What are Electricity Futures and how will they impact the power sector?

Current constraints include low liquidity, limited awareness of financial hedging, incomplete price data for modeling, and the need for regulatory coordination between regulators and power exchanges.

The regulatory approval to launch electricity derivatives marks a major step in integrating India’s energy and financial markets.

As renewables grow and price dynamics become more complex, these instruments are expected to play a crucial role in risk management, investment planning, and aligning India with global market practices. Here is a quick primer on the contracts:

What are electricity derivatives?
Electricity derivatives are financial instruments whose value is tied to electricity prices, allowing producers, distributors, industrial consumers, and traders to hedge against volatility or speculate.

How do electricity derivatives work in India?
Trading will be conducted on NSE and MCX, benchmarking against the PXIL (Power Exchange India Limited). Futures contracts are cash-settled and come in tenures such as weekly or monthly, enabling participants to hedge electricity price risk without actual power delivery. NSE has plans to launch quarterly and annual contracts at a later stage.

Also Read: NSE gets in principal approval for electricity futures from Sebi

What did SEBI approve and when?
In early June 2025, SEBI cleared electricity futures on both MCX (June 6) and NSE (June 11), allowing the launch of monthly electricity futures and marking energy derivatives under SEBI regulation.

How do contracts actually work?The upcoming electricity futures contracts on NSE will allow buyers and sellers to lock in a price for electricity, to be delivered in a future month without any actual physical delivery. Contracts represent 1 MW of electricity, involve daily marking to market, and settle in cash based on the difference between agreed and actual spot prices. NSE has set minimum order of 722 hours per month and maximum at 2,500 hours a month. This means that the contract is based on the total number of hours in that particular calendar month — 722 hours, which roughly translates to 30.08 days. Since electricity is traded in megawatt-hours (MWh), where 1 MW supplied for 1 hour equals 1 MWh, a base load contract that assumes continuous power delivery of 1 MW across all 722 hours amounts to 722 MWh.

According to NSE, electricity futures will be monthly contracts available up to four months ahead - the current month plus three subsequent months. These contracts are traded on business days from 9:00 AM to 11:30 or 11:55 AM. Each contract is quoted in Rs/MWh (megawatt hour), where 1 MWh equals 1000 units of electricity. The minimum tradable lot size is 50 MWh. For example, if the unit price is Rs 5, the contract value is Rs 2.5 lakh. Trading is done electronically, similar to commodities, and the contracts are cash-settled with no delivery requirement.

Who can participate in these contracts?
Market participants include independent power producers (IPPs), DISCOMs, large open-access consumers, energy traders, mutual funds, and banks. As cash-settled instruments, no grid access is required. Any eligible trading member, corporate buyer, generator, trader, or financial institution approved by Sebi can participate. Retail participants can invest via brokers, subject to exchange norms and risk disclosure.

What does this mean for DISCOMs and IPPs?
Electricity futures could potentially give IPPs a reliable price floor and a tool to cap cost risks especially during peak summer months for DISCOMs.

IPPs who heavily rely on long-term Power Purchase Agreements (PPAs) for revenue stability and project financing, can lock in prices for their upcoming monthly generations, and seek respite from spot price crashes, helping them to get more predictable cash flows.

Discoms that carry out bulk purchases of power from the market can hedge against price spikes with electricity futures.

How will it reduce volatility?  
Power prices are prone to volatility due sudden events like grid failure, power line tripping or a plant shutdown. Although such incidents spikes spot prices, monthly futures contract help protect against such short-term volatility as these contracts are settled based on average price across the whole month. To manage risks, NSE has put in place special margin rules. Every day, they monitor 8 key time blocks — like 10 am to 12 pm or 1 pm to 3 pm — when prices usually fluctuate the most. If high virtual prices are detected in these slots, additional margin is charged to ensure stability. This means that even if the spot market becomes volatile, traders in the futures market are protected through both pricing structure and risk controls. Also, unless a large volume of electricity is traded during those price spikes, it won’t significantly move the monthly average.

Why are electricity derivatives important?
Volatility from fuel costs, demand-supply imbalances, and renewables increases risks. These derivatives offer alternatives to long-term PPAs, enhance transparency, support renewable revenues, improve financial planning, and aid Discoms in debt relief.

How do electricity derivatives work globally?
Global markets like EEX, Nord Pool, and CME offer both cash-settled and physically settled electricity derivatives with features.

What are the challenges?
Current constraints include low liquidity, limited awareness of financial hedging, incomplete price data for modeling, and the need for regulatory coordination between regulators and power exchanges.

When will these be launched?
MCX is yet to announce the date. As per Harish Ahuja, NSE’s Head (Sustainability, Power/Carbon Markets, Listing SSE), the details on the launch date will be announced in the next 2-3 weeks. Ahuja added that around 2-3 large Discoms with around 55 percent market share had reached out for registrations to trade on the exchange.

While other products like quarterly, annual and CFDs also be provided?
In the initial stage, monthly settled electricity will be introduced on NSE platform, later NSE proposes to introduce Quarterly, Annual and Contract-for-Difference (CfD’) in near future subject to regulatory approvals.

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