In a draft power market regulations circulated for seeking suggestions from stakeholders, the regulator has said for derivative markets to function correctly, it is essential that the price discovery process in the spot market is robust so that the derivative market can use the spot market price benchmark.
Besides, the role of power exchange would transform from acting as price signal for investments to the dual role of providing price signal as well as acting as risk transfer platform. The present trend globally is to promote exchange traded contracts (in all types of markets), since the robust risk management of exchanges takes care of any systemic risk issues.
CERC said derivative markets cannot be viewed in isolation as the larger purpose of derivatives is to provide participants of the power sectors with services such as price risk management and hedging, the forward price curve to show the demand-supply situation in the long term and as a platform for risk transfer between participants of different risk profile. Besides, CERC clarified that in case of power markets, electricity derivatives would have concurrence jurisdiction of CERC and Forward Market Commission.
According to CERC, it has attempted to make the regulations forward looking by introducing concept of derivatives contracts, financial settled exchange traded derivatives and other innovative contracts like capacity and ancillary services contracts. However, derivatives would be introduced from a date to be notified when the supply deficit scenarios ebbs and sufficient liquidity gathers in day ahead market.
Further, CERC said the power exchanges can introduce any innovation in the price discovery methodology as long as it sticks to the principle of social welfare maximisation. Currently, Indian Energy Exchange, which clocks daily turnover of 16,000 megawatt hours in day ahead market, has launched on September 15 day-ahead contingency, intra-day, daily and weekly contracts in the term ahead contracts. On the other hand, Power Exchange India, with a daily turnover of 1,500 to 2,500 mwh in the day ahead market, has also introduced weekly and day ahead contingency products in the term ahead contracts.
On prudential norms, the net worth requirement for power exchanges is Rs 25 crore in addition turnover based Settlement Guarantee Fund has been introduced. However, the net worth requirement would reduce to Rs 5 crore once the clearing function is hived off to a separate clearing corporation.