The National Stock Exchange (NSE) plans to launch quarterly and yearly electricity futures contracts within 3-6 months of the launch of cash-settled monthly contracts, which are expected to be announced in the next couple of weeks.
The stock exchange will also explore contract for difference (CfD) as the next addition to enable renewable projects to achieve stable revenue over years, Cfd is a financial contract that allows traders to speculate on the price movement of an asset without actually owning it.
SEBI’s nod for electricity derivatives
Earlier this month, the bourse received the Securities and Exchange Board of India’s (SEBI) approval to launch electricity derivatives, which are financial instruments whose value is derived from the price of electricity and helps producers, distributors, and traders to hedge or speculate in case of volatility.
In electricity futures, participants can lock in the price of electricity today for a specified future month. While no physical power is delivered, it can help discoms hedge peak season rates, generators to secure merchant revenue, and industries to fix input power costs, said Harish Ahuja, Head of sustainability, power/carbon, markets, listing at NSE.
The monthly contract will start on the first business day of every month and expire a day before the month ends as the future price of electricity is known a day before, said Ahuja at a media briefing on Wednesday.
The lot size of the monthly electricity futures contract will be 50 MWh, which is equivalent to 50,000 units of electricity. These contracts will be available up to four months ahead—the current month and three subsequent months—and trade from 9 am to 11.30 pm or 11:55 am.
The contracts are cash-settled based on the market index price — similar to most such global contracts. Buyers can benefit if the spot prices rise above their futures purchase price as it offsets the actual electricity cost. Trading will be conducted on the stock exchange and will be benchmarked against the volume weighted average of the Power Exchange India’s unconstrained market clearing price for the entire month.
Ahuja doesn’t expect the electricity derivatives market to turn into a speculative product as even globally the power derivative market is usually three times the spot market, unlike equity derivatives which is almost 100x the size of the cash market.