In October 2021 Supreme Court allowed power exchanges to launch forward contracts, regulated by CERC and financial derivatives to be regulated by SEBI.
Forward contracts are different from ready delivery contracts that are currently available on the power exchanges in that the final delivery can take place after 11 days. This enables power exchanges to offer monthly and seasonal contracts which will greatly benefit DISCOMs and C & I consumers.
The judgement also allows for the launch of financial derivatives such as futures. Financial derivatives, unlike forwards do not translate to physical delivery of power and are transferable. Thus they are an effective instrument for hedging risk and can be an important input, among others, to assess electricity price. However such contracts are new and the market segment is relatively small, launch of such contracts must be approached with caution such as the prices discovered in this speculative market do not form the basis for regulatory decision making and investing in the power sector.Further, significant clarity should be provided on jurisdiction, sharing of information and communication between regulators before these contracts are launched.
This article discusses many of these challenges and opportunities in the context of this judgement.
A version of this article in the Moneycontrol on 8th November 2021.