A regulatory vacuum created by a long-drawn turf war between the Forward Markets Commission (FMC) and Central Electricity Regulatory Commission (CERC) has hit India’s fledgling power-trading market badly by thwarting the futures segment. While state electricity boards and open-access bulk buyers of electricity are keen to clinch forward contracts to hedge against volatility of supply and price in the free (not governed by power purchase agreements) market, the FMC and CERC can’t decide who between them will regulate futures trade in electricity and under what terms.
While the Supreme Court is hearing the dispute, the trading volume under whatever forward contracts that are now allowed has dipped sharply. In FY14, just 345 million units of power was traded in the term-ahead market (TAM), 62% less than the TAM volume in FY11, as per data from Indian Energy Exchange (IEX), which accounts for 96% of exchange-traded electricity market in the country.
The decline in TAM trade is when the day-ahead market (DAM) volume has seen a significant increase, 145% between FY11 and FY14.
TAM, pertinently, offers only a semblance of futures trade given that the physical transaction has to take place in a maximum of seven days from the signing of the contract, whereas participants would want to clinch deals for much longer terms in advance to reduce the risk of price volatility and factoring in their demand projections.
Untied power — free-market power outside the power purchase agreements — accounts for only 12% of the total power consumed in the country and within the free market, barely 40% of the deals are done through power exchanges, with the remaining being bilateral deals.
“TAM, in comparison to the day-ahead market, does not have liquidity that it had the potentially to have, had there been no such limitation in duration of contracts (of a maximum of 11 days). We believe there is big potential for growth if there are enabling provisions to allow the power trade to offer monthly, quarterly, yearly or even longer duration contracts,” said Shruti Bhatia, vice-president, policy, Indian Energy Exchange.
Power exchanges were barred from trading electricity beyond 11 days as the turf war between FMC and CERC erupted in 2009 over who should regulate exchanges trading electricity in long-term future contracts. Under Section 14A of the Forward Contracts Regulation Act (FCRA), any contract for delivery beyond 11 days needs certification of registration from the FMC. The ministry of consumer affairs brought electricity under the purview of the FCRA by issuing a notification in 2006. While the CERC is mandated to regulate the electricity market under the Electricity Act, 2003, the power to supervise long-term future contracts in commodity trading lies with the FMC. Sources said while the FMC is undecided on whether to allow futures trade in the power sector, the CERC says that futures contracts of longer durations could be introduced with the condition that actual delivery must take place.
Experts believe that apart from reducing volatility and bringing depth, introduction of non-transferable instruments will also provide better pricing signals for market participants. Both power generators and distribution companies should benefit from delivery-based futures contracts.
“Hedging leads to cash flow certainty and reduces the cost of debt for companies. The central government should de-notify electricity under Section 15 of the FCRA so that the electricity market is regulated with a unified and calibrated approach solely by a sector regulator,” the CERC had earlier told the power ministry.
“For the lack of a long-term visibility and price-risk management, buyers and sellers today do not find TAM as an attractive option,” Bhatia added. The CERC-FMC dispute is pending with the apex court since July 2011.
DAM is a physical electricity trading market for deliveries for 15-minute time blocks in 24 hours of the next day starting midnight. TAM provides a range of products allowing participants to buy or sell electricity for contracts beyond the day-ahead market, besides intra-day contracts and practically, the deals can’t be signed more than a week in advance.