Futures trading in electricity based on actual delivery is set to commence soon, with the Forward Markets Commission (FMC) agreeing to keep Power Exchange of India and India Energy Exchange out of its regulatory control. Futures trading, analysts reckon, would help reduce the volatility in the short-term power market by adding to the depth of the market.
Futures trading in power hasn?t thrived in India because of a turf war between regulators ? the FMC and Central Electricity Regulatory Commission (CERC) ? with both wanting to regulate this activity.
?The FMC has agreed to drop its objection to the CERC regulating the operational power exchanges. We have requested the ministry of consumer affairs to notify the exemption (from FMC purview for power exchanges) soon,? Union power secretary P Uma Shankar told FE.
Apart from reducing volatility, introduction of this non-transferable instrument will also provide better pricing signals for market participants. Both power generators and discoms should benefit from delivery-based futures contracts.
?With future trading, the power market will get depth,? said Charudatta Palekar, senior manager, energy, utilities and mining, PricewaterhouseCoopers.
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 under the Forward Contracts Regulation Act (FCRA), 1952. This led to a legal battle between the two over power futures.
The FMC, which has challenged the electricity regulator?s authority to supervise the power futures market in court, has agreed to relent after a long negotiation with the power ministry, brokered by the Cabinet secretariat
The Cabinet secretariat got into the act after the Bombay High Court ruled in 2011 that neither the FMC nor the CERC have the sole and exclusive jurisdiction to regulate the power market, leaving the legal imbroglio unresolved.
Under Section 14A of the 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. Currently, power traded through exchanges accounts for just 2% of the total electricity sold in the country. ?The forward contracts will help market participants to hedge and undertake price risk management. Hedging leads to cash flow certainty and thus reduces the cost of debt for companies as bankers are assured of debt servicing.
The central government should denotify 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 has said in reply to a reference received from the power ministry over the issue.