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					</table><p>The recent <a href="https://www.mercomindia.com/mcx-to-start-electricity-futures-trading-from-july-10-2025" target="_blank" rel="noopener">launch</a> of electricity derivatives by the Multi Commodity Exchange of India (MCX) and the National Stock Exchange (<a href="https://www.nseindia.com/" target="_blank" rel="noopener">NSE</a>) is a long-awaited reform, with a history spanning over 15 years.</p>
<p>In 2010, an attempt to launch electricity derivatives led to a significant legal dispute between key regulatory bodies, the Central Electricity Regulatory Commission (CERC) and the Securities and Exchange Board of India (SEBI). Consequently, the CERC&#8217;s Power Market Regulations 2010 completely prohibited the use of financial derivatives. The primary reason for this was that power sector reforms were in their early stages, and with electricity being an essential commodity, policymakers were cautious about potential misadventures in such a market.</p>
<p>However, times have significantly changed. Both regulators reached a consensus in 2020, and further approval from the Supreme Court in 2021 paved the way for the introduction of electricity derivatives.</p>
<p>The current outcome is that any contracts involving the physical delivery of electricity will be regulated by CERC, while all other contracts will be regulated by SEBI.</p>
<p>The launch of electricity derivatives is an important initiative for power sector stakeholders, including independent power producers, distribution companies, and bulk electricity offtakers.</p>
<p>Before we delve into use cases, let&#8217;s understand two very important parameters of electricity markets:</p>
<ul>
<li>Electricity is simply the movement of electrons. It cannot be stored (unless very expensive storage is involved), hoarded, or stockpiled. Hence, electricity prices are purely a function of demand and supply on a 15-minute block basis. This is the only commodity where speculation or price manipulation is extraordinarily difficult.</li>
</ul>
<ul>
<li>Electricity prices in India are subject to unprecedented volatility. While electricity prices in markets are highly subdued during solar hours (generally in the range of ₹2 (~$0.023)/kWh-₹3 (~$0.035)/kWh, prices can touch peaks (even as high as ₹8 (~$0.093)/kWh-₹10 (~$0.12)/kWh on the same day during peak timings or even at night nowadays. Such volatility in an essential commodity is highly undesirable.</li>
</ul>
<p>Electricity derivatives provide a very important instrument to counter this volatility. For example, when financial investors are able to square off their position at a higher rate based on the 24-hour cycle, they will be willing to pay a high price for electricity derivatives during solar hours, effectively lifting the price of physical power during those hours.</p>
<p>Similarly, during peak times, when they are squaring off their positions for a profit, they will be willing to sell the contract at a lower rate than physical power, which will bring down the price during peak hours.</p>
<p>Accordingly, when derivative markets are deep enough, it will significantly impact physical power prices, ultimately benefiting the sector.</p>
<p>With this understanding, let&#8217;s look at broad use cases for various stakeholders in the electricity markets:<strong> </strong></p>
<p><strong>Independent Power Producers (IPPs)</strong></p>
<p>For many years, IPPs have been exploring ways to finance merchant projects. However, financing for such projects is difficult as lenders are concerned about long-term revenue visibility (given price volatility). Many bulk electricity offtakers with net-zero targets have similar concerns.</p>
<p>Recently, CERC <a href="https://www.mercomindia.com/cerc-releases-draft-virtual-power-purchase-agreement-guidelines">issued</a> draft guidelines for the Virtual Power Purchase Framework. These contracts essentially shift (partially or fully) the market risk for sustainability offtakers. Electricity derivatives provide them with a much-needed instrument to hedge their market positions.</p>
<p>For example, say a sustainability offtaker executes a VPPA for 100 MW at a strike price of ₹3 (~$0.035)/kWh. With electricity derivatives, the offtaker can essentially hedge the entire market risk by taking a short position for 100 MW in derivatives at ₹3 (~$0.035)/kWh.</p>
<p>The following table illustrates the broad framework for such a transaction: <a href="https://mercomindia.s3.ap-south-1.amazonaws.com/wp-content/uploads/2025/07/electricity-deriv-1.png"><img loading="lazy" decoding="async" class="aligncenter wp-image-81992 size-full" src="https://mercomindia.s3.ap-south-1.amazonaws.com/wp-content/uploads/2025/07/electricity-deriv-1.png" alt="" width="751" height="244" srcset="https://mercomindia.s3.ap-south-1.amazonaws.com/wp-content/uploads/2025/07/electricity-deriv-1.png 751w, https://mercomindia.s3.ap-south-1.amazonaws.com/wp-content/uploads/2025/07/electricity-deriv-1-300x97.png 300w, https://mercomindia.s3.ap-south-1.amazonaws.com/wp-content/uploads/2025/07/electricity-deriv-1-650x211.png 650w, https://mercomindia.s3.ap-south-1.amazonaws.com/wp-content/uploads/2025/07/electricity-deriv-1-624x203.png 624w, https://mercomindia.s3.ap-south-1.amazonaws.com/wp-content/uploads/2025/07/electricity-deriv-1-600x195.png 600w" sizes="(max-width: 751px) 100vw, 751px" /></a></p>
<p>By taking the opposite position in the derivative market, an IPP or offtaker is essentially able to nullify any market risks in the contract.<strong> </strong></p>
<p><strong>Distribution Companies (DISCOMs)</strong></p>
<p>DISCOMs act as both sellers and buyers in physical power markets; however, they are price takers without any ability to influence the price. Especially during solar hours, most DISCOMs offload electricity at whatever prices the market is willing to pay, and then become net buyers during peak and nighttime hours.</p>
<p>This results in significant losses to the public as the cost is passed through to ordinary electricity users.</p>
<p>However, with electricity derivatives, DISCOMs may enter into block deals with a financial investor to mitigate price risks. For instance, a DISCOM  has a surplus of 100 MW during the daytime, which it intends to sell at ₹3 (~$0.035)/kWh, and becomes a net purchaser of 100 MW during peak time, which it intends to purchase at ₹6 (~$0.070/kWh. Simultaneously, a financial investor believes that daytime power should be ₹3.50 (~$0.041)/kWh and peak time power should be ₹5.50 (~$0.064)/kWh. This DISCOM may enter into a block deal for an equivalent amount of derivatives, for instance, at a rate of ₹3.25 (~$0.038)/kWh during the daytime and ₹5.75 (~$0.067)/kWh during peak time. This will enable both parties to gain ₹0.25 (~$0.0029/kWh.</p>
<p><strong>Bulk Electricity Offtakers</strong></p>
<p>Currently, most bulk electricity offtakers face a significant challenge in obtaining visibility into electricity volume clearance when purchasing electricity from exchanges. While bid or breakeven prices are known, volume clearances are subject to demand and supply during each 15-minute block. When the price discovered is higher than the bid price, volumes are not cleared, and the offtaker purchases the shortfall quantity from the DISCOM. If the price discovered is lower than the bid price, the difference is the net profit for the offtaker.</p>
<p>Using financial derivatives, bulk electricity offtakers may largely target monthly savings. They can take a buy position based on uncleared volume from the start of the month, with the premise that notional losses for uncleared volume are made good through profits made in the derivative market. The above provides a broad overview of the potential uses of derivatives. As the derivatives market deepens, a new wave of innovations is likely to drive the development of many new products. These innovations ultimately reduce price volatility and provide a stable market framework for all stakeholders in the sector.</p>
<p><strong>The views and analysis presented in this article are solely those of the author.</strong></p>
<p>(<em>The author </em><em>Aditya Malpani is Senior Director &amp; Regional Head &#8211; West, AMPIN Energy Transition</em>)</p>


Electricity Derivatives: A Gamechanger for Indian Power Market Stakeholders


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					</table><p>The Multi Commodity Exchange of India (<a href="https://www.mcxindia.com/" target="_blank" rel="noopener">MCX</a>) has secured approval from the Securities and Exchange Board of India (<a href="https://www.sebi.gov.in/" target="_blank" rel="noopener">SEBI</a>) to introduce electricity derivatives.</p>
<p>These financial instruments derive their value from electricity prices and are primarily used for hedging, speculation, or arbitrage. They enable power producers, distributors, and large consumers to manage risks associated with electricity price volatility. Instead of physical delivery, any gains or losses from price fluctuations are settled in cash, making the contracts purely financial.</p>
<p>According to Praveena Rai, MD and CEO at MCX, the launch of electricity derivatives is a significant milestone for India’s commodities landscape. She noted that these contracts will offer market participants a transparent, reliable, and regulated platform to manage the increasing price volatility in the power sector. The rising share of renewables and the shift toward market-based mechanisms are making electricity prices more dynamic, and derivatives can act as a crucial link between physical electricity markets and financial risk management.</p>
<p>Historically, India’s power sector has relied on long-term power purchase agreements (PPA) to mitigate price volatility. These contracts, often lasting 25 years, offer price stability but lack adaptability, as they do not reflect changing supply and demand conditions. As a result, stakeholders have limited flexibility in responding to market dynamics.</p>
<p>Meanwhile, the short-term power market, facilitated by power exchanges, has become increasingly unpredictable. Prices recently <a href="https://www.mercomindia.com/real-time-power-prices-on-crashes" target="_blank" rel="noopener">plummeted</a> due to surplus solar generation. The markets have also spiked to regulatory caps during peak demand hours. This unpredictability poses risks for both generators and consumers.</p>
<p>Electricity derivatives offer a potential solution to these challenges. Power generators can use them to hedge against price drops when selling in spot markets. At the same time, large industrial consumers can manage their electricity procurement costs more effectively by capping their exposure. Additionally, introducing these contracts allows traders and financial institutions to treat electricity like any other commodity, integrating it into investment portfolios with defined and measurable risk profiles.</p>
<p>Globally, electricity derivatives have played a crucial role in mitigating power market volatility across mature economies. In the U.S., exchanges such as the New York Mercantile Exchange and the Intercontinental Exchange (ICE) trade futures and options tied to major regional transmission organizations. In Europe, the European Energy Exchange handles a wide range of electricity derivatives, offering financial and physical settlement mechanisms. The UK’s power contracts are traded on ICE and Nord Pool N2EX, while the Australian Energy Securities Exchange offers baseload and peak load futures tailored to the National Electricity Market.</p>
<p>There has been a regulatory <a href="https://www.mercomindia.com/cerc-releases-draft-virtual-power-purchase-agreement-guidelines" target="_blank" rel="noopener">movement</a> to promote virtual PPAs as more commercial and industrial entities seek to meet their net-zero targets without needing the physical connection to a renewable energy project, especially those with distributed operations and leased facilities.</p>


MCX Gets SEBI Nod to Trade Electricity Derivatives

<p>The Multi-Commodity Exchange of India (<a href="https://www.mcxindia.com/" target="_blank" rel="noopener noreferrer">MCX</a>) announced that it has entered into a licensing agreement with the Indian Energy Exchange (<a href="https://www.iexindia.com/" target="_blank" rel="noopener noreferrer">IEX</a>) to launch electricity derivatives in the country.</p>
<p>Derivatives refer to financial instruments like bonds, stocks, and commodities that are traded based on the value of their underlying assets, which in this case would be electricity.</p>
<p>“The launch of electricity derivatives shall provide an effective risk management avenue and help the value chain participants to hedge price risks and protect their revenue margins. With this, India shall also join a select group of developed countries that offer electricity derivatives on an exchange platform,” said the press statement.</p>
<p>MCX stated that the electricity derivatives would be linked to spot electricity prices of IEX on the MCX trading platform. The agreement requires mandatory approvals from the central government and concerned regulators, it added.</p>
<p>According to MCX, it is India’s first listed electronic exchange platform that introduces commodity options in the country. Commodities such as energy, metal, and bullion are traded on the platform.</p>
<p>Electricity trading has caught the attention of the markets off late.</p>
<p>In August 2020, the Central Electricity Regulatory Commission <a href="https://mercomindia.com/cerc-approves-introduction-green-term/" target="_blank" rel="noopener noreferrer">approved</a> the introduction of the ‘Green Term-Ahead Market’ (GTAM) contracts on the Indian Energy Exchange, adding that it would provide an avenue for short-term trading of renewable energy.  This market now offers the trade of intraday and day-ahead contracts in both the solar and non-solar segments.GTAM has witnessed an encouraging response since its <a href="https://mercomindia.com/cerc-approves-introduction-green-term/" target="_blank" rel="noopener noreferrer">launch</a> and had <a href="https://mercomindia.com/green-term-ahead-market-trades-three-million-units/" target="_blank" rel="noopener noreferrer">registered</a> trade of three million units in the 11 trading days in August.</p>
<p>Mercom then <a href="https://mercomindia.com/trading-renewable-energy-certificates-postponed/">reported</a> that the Appellate Tribunal for Electricity (<a href="http://www.aptel.gov.in/" target="_blank" rel="noopener noreferrer">APTEL</a>) issued an order postponing the trading of renewable energy certificates scheduled for July 29 by four weeks in a hearing for an appeal by the Green Energy Association against the CERC on July 24, 2020. The matter is still pending, and power traders are in limbo.</p>


MCX and IEX Sign Licensing Agreement to Launch Electricity Derivatives in India

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