CERC Approves Introduction of Forward Contracts at the Indian Energy Exchange

The Central Electricity Regulatory Commission (CERC) recently directed the Indian Energy Exchange (IEX) to make changes in its software before the commencement of the physical delivery-based forward contracts and to align its business rules per the procedure for scheduling bilateral transactions.

The Commission also directed the Power System Operation Corporation (POSOCO) to submit a report within three months from the introduction of the forward contracts after seeking feedback from the power exchanges.

The Indian Energy Exchange (IEX) had filed a petition seeking approval to introduce additional term-ahead and green term-ahead contracts beyond T+11 days (T indicating zero-day of trading).

Background


IEX offers day-ahead contracts, intraday contracts, day-ahead contingency contracts, real-time contracts, and term-ahead contracts to trade electricity. Under the term-ahead segment, weekly and daily contracts are offered for up to 11 days.

In December 2020, IEX  launched daily and weekly green contracts on its green market trading platform. The platform has four contracts and allows traders to purchase energy on the same day or up to 11 days in advance.

The endeavor of the distribution companies (DISCOMs) has been to arrive at a judicious mix of long-term and short-term contracts that could optimize their power procurement costs.

IEX proposed introducing delivery-based monthly contracts to be made available for calendar months or a combination thereof on a rolling basis, both in conventional and renewable energy segments of the term-ahead market. It also proposed that the fortnightly contracts should be available for blocks of 15 days of calendar months starting from the 1st or 16th of a month on a rolling basis.

IEX also suggested modifying the delivery and trading timeline of the daily and weekly contracts to make them available beyond 11 days.

In its submission, the power exchange proposed a revision in schedules per the procedure of bilateral transactions. It submitted that the cancellation of trade or schedule revisions beyond the permitted variation would be considered default and penalized.

IEX added that as a part of the risk management mechanism, it would collect ‘Initial Margin’ at the time of bidding and then ‘Additional Margin’ before the scheduling application is made to the load despatch center.

The stakeholders gave positive feedback on the proposal for introducing the additional term-ahead contracts and green term-ahead contracts beyond 11 days. They felt that the introduction of multiple contracts and their overlapping might cause a market liquidity loss.

Some stakeholders also suggested that reverse auction bidding for renewable power in any day single-sided contracts can be carried out based on renewable generators’ percentage per block commitment to address the intermittency and non-uniform nature of renewable power.

Commission’s analysis

The Commission observed that any new segment in a market should be introduced gradually. The petitioner had proposed multiple contracts to be introduced on its exchange platform. Considering that initially, this market may have low liquidity, the petitioner’s proposed contracts may have overlapping effects, further impacting the volume per contract.

The Commission approved the petitioner’s proposal to introduce monthly contracts, existing daily contracts, and weekly contracts with modified timelines for pre-specified time blocks notified to the market participants well in advance. It also approved any day single-sided contracts.

However, the Commission didn’t approve the fortnightly contracts, any day contracts, and variants in the weekly contracts.

The Commission noted that for any day single-sided contracts, the petitioner had proposed reverse auction wherein the buyer would specify its requirement in terms of quantum in MW and duration. Such contracts at the exchange will facilitate the discovery of competitive prices and provide counterparty risk management by ensuring timely payment on the day close to delivery.

The central regulator approved the contracts for the maximum duration of three months.

CERC also approved delivery duration for these contracts as T+2 to T+90 days for daily contracts, TW+1 to TW+12 for weekly contracts, TM+1 to TM+3 months for monthly contracts, and T+2 to T+90 days for any day single-sided contracts, wherein T denotes the zero-day of trading, TW denotes the zero-week of trading and TM denotes the zero-month of trading.

The petitioner had proposed up to 15% downward variation in the contracted quantity (MWh), excluding variations due to force majeure. The Commission directed the power exchange that the contracts can be annulled or curtailed, without any transfer of positions, due to constraints in the transmission system or force majeure. However, this would be subject to validation by the system operator and the default mechanism of the exchange.

IEX traded 642 million units (MU) of renewable energy in May 2022, a 91% month-over-month (MoM) increase compared to 336 MU traded in April. The exchange traded 7.59 billion units (BU) of energy during the month. The day-ahead power market saw prices dropping from ₹10.06 (~$0.13)/kWh in April to ₹6.76 (~$0.087)/kWh.

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