NSE gets in principal approval for electricity futures from SEBI

NSE gets in principal approval for electricity futures from SEBI

Market regulator Securities and Exchange Board of India (SEBI) has granted in-principle approval for the launch of electricity futures contracts. The NSE management confirmed the development in a post-results conference call.

“We have the in-principle approval.  The terms of the contract are still being discussed with the regulators. There is a lot of capacity building that is required to be undertaken for the launch of this product,” an exchange official said on the call.

The NSE management also detailed the prospects of the product, saying that power derivatives are amongst the largest markets in the world.  As and when the market develops, they will be able to allow buyers, sellers, and producers to meet their requirements.

NSE has an advantage in this market due to its advanced technology as compared to many other players, the official said.  Also, it is well prepared in terms of other requirements, such as a large pool of settlement guarantee funds, which are required for a derivatives market of this type to function.

The NSE management also said that regulators in India are keen on short-term contracts, possibly half-yearly or even monthly. But in other countries, yearly contracts are popular. The details are still being finalised.

Moneycontrol had reported on April 15 that NSE and MCX had applied for electricity futures in March this year.

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The proposed electricity futures contracts will be financial derivatives, settled in cash. 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.

In February, SEBI informed exchanges and stakeholders of its agreement with the Central Electricity Regulatory Commission (CERC) on the introduction of electricity derivatives. It asked exchanges wishing to launch electricity derivatives to apply by the contract specifications agreed upon by SEBI and CERC.

While exchanges have welcomed the initiative,   industry insiders believe the real growth will come with the 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 many years.

The issue of electricity trading had led to a turf war between SEBI and the electricity regulator CERC. 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.