Indian Energy Exchange (IEX) has been waiting for the report of a committee formed by SEBI and CERC to evolve a framework for trading in energy derivatives. Once the framework is in place, India’s premier energy exchange intends to launch a derivative product, a source in the company told businessline.
IEX would have launched derivatives trading long ago, but for a bickering between the electricity regulator, CERC, and the market regulator, SEBI, over who should oversee trading in energy derivatives.
The issue went right up to the Supreme Court, which ruled in October 2021 that cash settled trades would be overseen by SEBI, while CERC would have the jurisdiction over those that are for physical delivery of energy.
However, even after nearly two years, IEX is yet to get the regulatory approval for launching the derivatives products, which the company says, would “provide hedging opportunity and lead to lower volatility in prices, thereby increasing liquidity in the spot market.”
When the apex court came out with its judgment, it was widely expected that IEX would be able to quickly launch the derivative products. Writing in this newspaper in December 2021, Aakanksha Joshi and Pranaav Gupta, lawyers with the law firm Economic Laws Practice, had concluded their article saying, “As the matter was disposed of by the Supreme Court on October 6, 2021, the introduction of term ahead market and green term ahead electricity contracts seems only a short while away.”
Contracts for difference
IEX also intends to introduce ‘contracts for difference’, which it lists under ‘future opportunities’, but this product also cannot be launched unless the regulators approve.
Contracts for difference, or CFD, are useful for renewable energy generators. Under the market-based CFD mechanism, the price is guaranteed to the electricity generator in terms of a ‘strike price’. If the discovered market price is higher than the strike price, the generator pays the difference to a pool maintained by a government entity. If the market prices are lower than the strike price, the generator is paid the difference out of the pool.