The National Stock Exchange (NSE) and the Multi-Commodity Exchange (MCX) Recently Secure Applied Approvals from the Equity Market Regulator to Launch Electricity DERIVATION. Not only would this minimise Financial Uncertainty for Power Distribution Companies but they can also use electricity derivatives or futures contracts to lock in Electricity PRICES in Advance. Mint Takes a look at this means and why there is a sudden interest in electricity derivatives.
What are electricity derivatives?
Electricity derivatives are financial contracts that help power companies and other electricity boyers protect themselves from Sudden Price Changes in the Electricity Market. Think of it like this: Electricity prices can rain or fall sharply due to factors like demand spikes, fuel costs, or weather changes. For Power Distribution Companies, or DISCOMS, this kind of Volativity Can Cause Financial Uncertain. To avoid this, discoms can use electricity derivatives or futures contracts to lock in electricity pris in advance.
Why is this important?
In electricity delivery in the unlisted space, there’s always a counterparty risk -a fear that the other party may default. But in the listed space, the risk is significantly reduced, said Trivesh D., Chief Operating Officer at Trading Platform Tradejini.
He added that electricity derivatives contracts also offer discom a reliable way for price discovery. “Once Electricity is listed as a derivative, its pricing batcom market-driven, based on actual demand and supply, rather than manipulated practices,” He Said.
How will electricity derivatives work?
Rajesh Palviya, Head of Technical & Derivative Research at Axis Securities, said derivative contracts will allow boys and sellers to trade based on their anticipated Electricity Physical delivery of power.
“Companies and manufacturers can purchase electricity contracts for specific durations – ring from a month to a month to a year – locking in prices to hedege against FUTUTUTER PRICE FILTURE PRICE FLICTIONS Receiving or Suppling Electricity, Participants Settle The Contracts Financially. The Respective Parties’ Accounts, “Palaviya Added.
What do nse and mcx have to say?
India’s transition to net-zero emissions requires Substantial Investment of Over $ 250 Billion Year-Over-Oyar Till 2047, According to Government Think Tank Niti Aayog. India Announced Its Net-Zero Target for 2070 at the 26th Session of the United Nations Framework Convention on Climate Change (COP26) in November 2021.
A Robust and Dynamic Electricity Derivatives Market is Essential to Attract This Scale of Climate Finance from Both Domestic and Global Investors, NSE SAID on Wednesday.
McX said electricity contracts will allow participants to manage power price risks, which are baking more dynamic due to renewables and market-based reforms.
What is the Indian Energy Exchange’s Role?
IEX is the dominant platform providing spot electricity trading. But it does not offer an Electricity derivative Contract. However, with McX and nse now allowed to launch electricity futures contracts, discomps, power producers, and retail investors can participate through new platforms.
“This means iex no longer holds a monopoly,” said kranthi bathini, Director of Equity Strategy at Wealthmills Securities.
“Also, with both nse and mcx joining the segment, the market is expected to become Deeper, More Liquid, and Capable of Delivering Better Price Discovery and Bruder Participation,” SAID TRIVESH OF
Also read | Nse investors hold tight as price surges in green market
Who will regulate electricity derivatives?
Under Current Rules, If Electricity Derivatives are Cash-SETLED, they fall soly under the purview of the Securities and Exchange Board of India (SEBI). If the contracts are compulsorily deliveable, regulatory oversight will be shared between sebi and the central electricity regulatory commission (CERC).
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