New Delhi, August 11: Electricity will now be traded as other commodities with forward contracts and exchange derivatives as the government issued an order allowing this, an expert said this move of power contracting can transform in India.
The power ministry issued the order on July 10 following consultation with the Solicitor General on a ten-year span between the power regulator Central Electricity Regulatory Commission (CERC) and the Indian Securities & Exchange Board (Sebi). Earlier the two regulators had agreed to settle the issue mutually. The order is subject to a Supreme Court verdict that is due to hear the case on August 28.
Sources said long-term contracts based on delivery are likely to be traded on power exchanges within the jurisdiction of the CERC, while the derivative contracts are likely to be traded on commodity exchanges under Sebi.
Experts said power distribution firms (discomments) would have flexibility in long-term contracting. Trading on power exchanges is currently limited to 11 days while long-term discom contracting is done through tendering.
Once derivatives are introduced on the exchange of commodities, the discoms will be able to reduce their power procurement costs and hedge risks.
A senior official in the government said the move would change the sector in the long run by expanding the markets with a variety of goods. Most Western markets have moved to derivatives and spot trading, with only a few countries still seeing bilateral power trading in the long term. Subject to Supreme Court order, derivatives trading and long-term delivery trading are likely to start in six months, he said.
Rajesh K Mediratta, director-strategy and regulatory affairs at Indian Energy Exchange Ltd, welcomed the office memorandum (OM) by the ministry of power. “It is a landmark move, which has potential to change the landscape of power contracting in the country and the power markets will be able to leapfrog to the next level of growth,” he said.
“Specifically, the OM will pave the way for introduction of long duration delivery-based contracts on the power exchanges under the jurisdiction of the CERC. The derivatives contracts, as and when introduced, will be under the jurisdiction of Sebi. With this development, we at IEX, will be able to design long duration contracts and move forward with the approval process in CERC,” he said.
In India, 90% of electricity transactions are through long-term contracts, 4.6% through electricity bursaries, 3.72% through bilateral trade, and 2% through demand supply control steps such as the use of reliable equipment and energy optimisation. About 36 percent of the 10 percent short-term transactions are through bilateral trade, which can change with the new order.
Prabhajit Kumar Sarkar, MD & CEO of Power Exchange India Ltd (PXIL), said the power ministry’s steps to clarify the CERC and Sebi jurisdictional ambits are commendable and would further develop the power market.
“The power markets would therefore soon get the benefits of transparent and efficient price discovery for longer tenure contracts on the same lines as the much shorter-term contracts being transacted on power exchanges. Electricity derivative contracts would also soon become available to market participants for managing their portfolio risks,” he said.
Sarkar said the order clarifies that the respective regulators may take the necessary steps to implement them, subject to the orders which the Supreme Court may pass in the matter.
