Indian Exchanges Seek SEBI Approval for E-Futures, Paving Way for Electricity Derivatives – EQ
Major Exchanges Propose Launch of Electricity Derivatives to SEBI
The National Stock Exchange (NSE) and Multi Commodity Exchange (MCX) have officially submitted proposals to the Securities and Exchange Board of India (SEBI) seeking approval for launching electricity derivative contracts. The proposal, which was submitted last month, marks a significant step towards introducing financial electricity derivatives in India. Industry insiders suggest that other exchanges might follow suit, depending on the response from SEBI to the initial proposals.
The primary focus of these contracts would be on monthly futures, which will be cash-settled. If the initial contracts gain traction, exchanges could expand to additional contract tenures. The proposed electricity derivatives would primarily serve electricity distribution companies and large power consumers, allowing them to hedge against fluctuating electricity purchase prices. This would help stabilize costs in the volatile electricity market and provide more predictability for stakeholders in the power sector.
Highlights:
- SE and MCX have submitted proposals for electricity derivatives to SEBI.
- Initial focus on monthly cash-settled contracts.
- The aim is to offer hedging tools for electricity distributors and large consumers.
Role of the Indian Energy Exchange (IEX) and the Regulatory Landscape
While IEX is a dominant player in spot electricity trading, it is unlikely to apply for a license to trade electricity derivatives directly. This is due to regulatory challenges, as IEX would need to secure a stock exchange license from SEBI, which requires a minimum net worth of Rs 100 crore. The regulatory burden of obtaining this license makes it difficult for spot exchanges like IEX to invest heavily in developing derivative markets.
However, industry sources suggest that IEX and PXIL may collaborate with exchanges like MCX and NSE. Instead of launching their own derivatives, these exchanges could share their spot rates with the futures exchanges, which would use them as reference prices for electricity derivative contracts.
Highlights:
- IEX may not apply for a stock exchange license for derivatives.
- Potential collaboration with MCX and NSE to provide reference spot rates for derivatives.
SEBI and CERC’s Regulatory Agreement Paves the Way
In February, SEBI and the Central Electricity Regulatory Commission (CERC) reached a significant regulatory agreement. This cleared the way for exchanges to launch electricity derivatives, provided they submit proposals in accordance with the agreed-upon contract specifications. According to a joint working group of both regulators, the focus will initially be on futures contracts.
Although the approval process is well underway for futures contracts, industry experts believe that the real growth will come from the eventual launch of Contracts for Difference (CfD) — long-term agreements between electricity producers and distributors, offering a fixed price to hedge against volatility. However, CfD contracts are still under study, and gaining approval for them could take years.
Highlights
- SEBI and CERC’s agreement clears the way for electricity derivatives.
- Initial focus on futures contracts, with CfD contracts anticipated in the long term.
- Approval for CfDs could take years, as regulators continue to study the proposal.
Global Context: Electricity Derivatives Already Established Abroad
Globally, electricity derivatives have been a part of financial markets for decades. Countries like Norway, Germany, and France introduced electricity futures between 1996 and 2004, while Singapore launched them in 2015. Despite this global trend, India has been slow to adopt such contracts, largely due to a regulatory turf war between SEBI and CERC. This conflict resulted in a lengthy legal battle, which was finally settled in 2021 by the Supreme Court. The court ruled that CERC would regulate physical delivery-based forward contracts, while SEBI would oversee financial electricity derivatives.
Highlights
- Norway, Germany, France, and Singapore have had electricity derivatives for decades.
- India’s delayed adoption due to a regulatory dispute, resolved in 2021.
- SEBI will oversee financial derivatives, while CERC will handle physical contracts.
