India set for electricity futures trading as NSE becomes 2nd exchange to get nod

India’s National Stock Exchange on Wednesday became the second exchange in a week to secure regulatory approval to launch electricity futures contracts, a move experts say could help struggling power utilities improve their finances.

The Multi Commodity Exchange of India (MCX) received a similar approval last week from the Securities and Exchange Board of India (SEBI).

A futures contract will allow the purchaser to secure power at a fixed price at a later time.

Currently, Indian utilities rely heavily on long-term power purchase agreements (PPAs) spanning up to 25 years for baseload requirements, supplemented with short-term purchases through power exchanges for peak demand.

Distribution companies (discoms) in India owed about $9.5 billion in unpaid dues, according to the government, driven by expensive long-term power purchases, subsidised supply, and electricity losses due to poor infrastructure.

“There is clearly an incentive from now on to not lock yourself into a 25-year contract and rather look at shorter terms,” said Ashutosh Padelkar, Senior Associate at Aurora Energy Research.

Globally, power derivatives are traded on CME Group, Euronext, the Intercontinental Exchange and European Energy Exchange, among others.

“Discoms will gain the ability to use forward curves to plan procurement more dynamically… This can help optimize costs, avoid overcontracting, and improve demand forecasting,” said Sanjeev Aggarwal, chairman of Hexa Climate Solutions.

A forward price curve helps in predicting the expected electricity price in the future.

Discoms currently sell solar surplus at low daytime prices, but can now use derivatives to sell at pre-agreed higher rates during that period. They can also buy electricity at lower prices during non-solar hours using the contracts, when spot prices typically surge.

Even power producers can hedge by taking opposite positions in the derivative markets using the forward price curve, said Aditya Malpani, a senior director at power producer AMPIN Energy Transition.