E-futures coming soon: Top exchanges seek SEBI approval for electricity derivatives launch

E-futures coming soon: Top exchanges seek SEBI approval for electricity derivatives launch

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Trading in electricity derivative contracts could soon become a reality in India, as leading exchanges MCX and NSE have submitted proposals to the Securities and Exchange Board of India (SEBI) for approval. According to one source, the request was made last month, with permission now sought from the regulator. Other exchanges may follow suit, depending on the response to the initial contracts.

The proposed contracts are set to be financial derivatives, settled in cash, with an initial focus on monthly contracts. Depending on feedback from market participants, exchanges may expand to other tenures. The launch of these derivatives is expected to benefit electricity distribution companies and large power consumers, allowing them to hedge against fluctuating power purchase prices.

MCX and NSE did not respond to Moneycontrol's queries, and an email to SEBI also went unanswered. Industry insiders noted that the Indian Energy Exchange (IEX), the dominant player in spot electricity trading, is unlikely to apply for electricity derivatives. The exchange would need to apply for a stock exchange license with SEBI and comply with other regulatory requirements. SEBI mandates a minimum net worth of Rs 100 crore for a stock exchange license, which may make it unfeasible for IEX and other spot exchanges to invest heavily. Instead, IEX and PXIL may collaborate with exchanges to share their spot rates as reference prices for derivative contracts.

In February, SEBI informed exchanges and stakeholders of its agreement with the Central Electricity Regulatory Commission (CERC) on the introduction of electricity derivatives. The regulatory note clarified that exchanges wishing to launch electricity derivatives should submit fresh proposals in accordance with the contract specifications agreed upon by SEBI and CERC. A joint working group of both regulators has recommended introducing futures contracts based on these specifications.

While exchanges have welcomed the move, industry insiders believe the real growth will come with the eventual launch of Contracts for Difference (CfD)—a long-term agreement between electricity producers and distributors, offering a fixed price to hedge against price volatility. However, approval for CfD contracts may take years, as regulators are still studying the proposal.

Globally, electricity derivatives have been in place for decades, with Norway launching them in 1996, followed by Germany and France between 2001-2004. Singapore introduced them in 2015. India, however, has been slow to adopt such contracts, primarily due to a regulatory turf war between SEBI and CERC, culminating in a lengthy legal battle. The issue was finally settled by the Supreme Court in 2021, with CERC agreeing to regulate physical delivery-based forward contracts, while SEBI will oversee financial electricity derivatives.