In a landmark move to deepen power markets and provide effective price risk hedging tools, the Securities and Exchange Board of India (SEBI) has granted regulatory approval to the Multi Commodity Exchange (MCX) and the National Stock Exchange (NSE) to launch monthly base load electricity derivatives. These contracts will allow generators, distribution companies and large consumers to hedge against price volatility and manage risks more efficiently. By enabling better price discovery and risk mitigation, derivatives are expected to enhance overall market efficiency. The introduction of electricity futures is a key step towards strengthening India’s power market framework, attracting capital across the electricity value chain, and enabling greater investor confidence.
According to Praveena Rai, managing director (MD) and chief executive officer (CEO), MCX, “The introduction of electricity deriva-tives marks a pivotal development in India’s commodities ecosystem. These contracts will offer participants a reliable, transparent and regulated platform to manage power price risks, which are becoming more dynamic due to renewables and market-based reforms. With India’s growing focus on renewable energy and open access power markets, electricity derivatives can serve as a vital bridge between the physical and financial sectors.”
The introduction of electricity derivatives in India has been a long journey. A decade-long regulatory stalemate over the jurisdiction of electricity derivatives was resolved in 2021, when the Central Electricity Regulatory Commission (CERC) and SEBI issued a joint framework that clearly delineated their roles – SEBI would regulate financial products on commodity exchanges, and the CERC would oversee physical delivery-based contracts.
Operating procedures at MCX and NSE for electricity derivatives
The MCX and NSE are expected to commence electricity trading in the coming weeks. To foster liquidity and deepen participation in the newly launched electricity futures market, the two exchanges have outlined operational mechanisms. The MCX has introduced the Liquidity Enhancement Scheme (LES) in electricity (monthly base load) futures contracts to encourage active participation and market development. Market makers registered under the LES will be eligible for monthly incentives, based on the fulfilment of committed quote obligations. The eligibility criteria for market makers under the LES include a minimum of three years’ experience in the commodities or securities market, including experience across group companies. Prior experience in trading or market-making is preferable. Applicants must also have a minimum net worth of Rs 50 million and a minimum manpower strength of 10 employees, which may include personnel across group companies. The electricity futures on the MCX will have a trading unit of 50 MWh, with the maximum order size capped at 50 times the trading unit. Each contract would be launched three months prior to expiry, and trading would begin from the first business day of the launch month, with a total contract duration of four months. The tick size has been set at Re 1 per MWh. On the expiry day, trading in the contract would close prior to the dissemination of the spot price, which is determined based on the unconstrained market clearing price (UMCP) of the corresponding day-ahead market (DAM) on the Indian Energy Exchange (IEX).
To encourage early adoption, the NSE has announced a six-month waiver of transaction fees on electricity futures trade post-launch, applicable to all participants. The waiver will be effective until December 31, 2025. To put this into perspective, the typical transaction fee is expected to be Rs 170-Rs 200 per Rs 10 million transaction. Other key features of the NSE’s electricity futures contracts are monthly contracts available year-round, with each contract commencing on the first business day of the month and expiring one day before month end. Each contract has a lot size of 50 MWh, equivalent to 50,000 units of electricity, and is cash-settled based on the difference between the futures and spot prices. The price benchmark is derived from a 30-day weighted average of spot prices across the IEX, Hindustan Power Exchange, and HPL Electric and Power Limited. Following the launch of the monthly electricity futures contract, NSE plans to launch quarterly and annual contracts as well.
Ashish Kumar Chauhan, MD and CEO, NSE, notes that the approval for derivatives is only the beginning of a broader electricity derivatives ecosystem. He adds that plans are under way to gradually introduce contracts for difference and other long-duration electricity derivatives such as quarterly and annual contracts, subject to regulatory approvals.
New market dynamics
Electricity derivatives are set to transform India’s power sector by offering market participants a robust tool to hedge against price volatility, enhancing cost protection for buyers and revenue predictability for sellers. Historically, India’s electricity market has depended primarily on long-term PPAs of up to 25 years to meet baseload requirements, complemented by short-term procurement from the power exchanges to manage peak demand. Derivatives offer a flexible hedge between long-term contracts and volatile spot markets by decoupling price certainty from physical supply contracts and enabling participants to respond flexibly to market conditions. The derivatives market also addresses the issue of fragmented pricing and exchange-driven spot volatility in the power sector. Electricity futures will allow utilities, industries and clean energy developers to manage price risks more effectively, thereby promoting energy price stability, better investment planning and market efficiency.
Discoms have historically witnessed unpaid dues and poor financial performance, which is, in part, attributable to inflexible PPAs, subsidised tariffs and technical losses. With electricity derivatives, discoms can adopt more dynamic and responsive procurement strategies. Instead of selling extra solar power at low prices during the day, discoms can use futures to lock in better rates. They can also fix prices in advance to avoid paying more during evening or non-solar hours.
Power producers, too, can offset revenue risk by taking hedge positions in the derivatives market, ensuring more stable cash flows and reducing dependence on rigid long-term contracts. With renewables comprising close to 40 per cent of installed capacity, managing intermittency has become critical. Electricity futures offer a financial hedge, enabling clean energy players to lock in returns and de-risk project revenues, thereby accelerating capacity additions and attracting investment.
For India’s fast growing commercial and industrial segment, electricity futures introduce a mechanism to manage power cost volatility, supporting more predictable operational and financial planning. From an investor perspective, these contracts open up access to energy-linked, tradable financial instruments aligned with India’s transition to a net zero economy by 2070.
Opportunities ahead
According to the NSE, India’s electricity derivatives market is projected to scale to $174 billion-$475 billion, with growing interest from generators, discoms and large consumers in adopting structured hedging solutions. Benchmarked against global markets, electricity derivatives in India could reach an annual volume of 8,000 billion units.
NITI Aayog suggests that India’s net zero target will require more than $250 billion annually in energy investments through 2047. With renewables expected to contribute over 50 per cent of installed capacity by 2030, a deep and liquid electricity derivatives market is essential to mobilise long-term climate capital from domestic and global investors.
That said, to ensure fair and transparent operations, it is crucial to implement strong checks and balances to prevent price manipulation. Without adequate safeguards, the market risks being distorted by speculative trading rather than reflecting genuine supply-demand dynamics. Stronger oversight, transparent capacity reporting and close coordination between SEBI and the CERC are necessary to encourage meaningful participation from discoms, generators and large consumers.
To conclude, the regulatory approval and imminent launch of electricity derivatives on the MCX and NSE mark a watershed moment in India’s power sector. By enabling stakeholders to manage price volatility and adapt to a renewable-driven energy landscape, electricity futures is poised to become a cornerstone of India’s evolving energy economy, supporting market efficiency, investor confidence and sustainable sector growth.
Priyanka Kwatra
