Electricity Derivatives: A Milestone for India’s Power Market

Today, the Indian electricity markets feature only Spot markets, no futures. Here are some scenarios:  

Mr. Aakash is a power generator. His company operates a 500 MW thermal and renewable hybrid plant in central India. About 80 percent of his output is tied up in long-term power purchase agreements (PPAs) with various state distribution companies. The remaining 20 percent is sold on merchant markets, often through spot exchanges or bilateral short-term deals. 

Every year, he faces the same challenge: the 20 percent merchant power gives him the chance to earn extra, but it exposes him to risk. Spot prices swing. Grid congestion delays delivery. Buyers back out. Banks ask questions about revenue variability. There is no visibility beyond next week. Every budgeting exercise feels like guesswork. 

In Mumbai, a power-trading company that supplies commercial and industrial customers under open access arrangements faces another challenge. Its retail model depends on margin visibility. When day-ahead market prices spike, power cost overshoots fixed contract terms. Hedging tools don’t exist. Customers expect fixed bills; regulators limit passthroughs. The company manages volatility without control. 

Meanwhile, a major aluminum component exporter in eastern India, supplying to European EV markets, consumes more than 300 MWh daily. Power is more than 35 percent of their production cost. Every Re 1 fluctuation affects international pricing. Without price certainty, they cannot bid confidently for multi-quarter export contracts. 

And in Delhi, a proprietary trader, active in equities and commodities, watches the volatility in real-time electricity markets. He sees patterns, but no product to express them. Electricity is the last untapped data-rich commodity, but it’s inaccessible because derivatives don’t exist. 

These aren’t abstract inefficiencies. These are barriers to scale, stability, and investment. They all share one thing: they operate in a market without electricity futures. 

The Reality of India’s Electricity Market 

India’s electricity generation crossed 1,730 billion units (BU) in FY 2024 (as shown in the graph). Around 1550 BU of this is covered through long-term arrangements. The remaining 180 BU moves through the short-term market: day-ahead, term-ahead, real-time and bilateral OTC trades. Spot exchanges like IEX, PXIL and HPX capture around 5 percent of total volume. 

This 5 percent carries disproportionate volatility. It is the slice where prices are not fixed. Where demand forecasting, grid balancing and weather risk meet pricing decisions. For generators, this is revenue uncertainty. For distribution companies (discoms), it is cost volatility. For financiers, it is risk with no hedge.  

India’s physical electricity market is wide. But its financial risk management layer is still missing.  

Figure 166: Annual trend of total electricity generation in India

  

Why an Electricity Futures Market is Needed  

Globally Proven. Domestically Delayed. Legally Resolved. In global electricity markets (as shown in the figure below), financial derivatives play a central role. In the European Union, EEX and other exchanges trade  more than 12,000 BU of electricity futures annually, more than four times the actual generation. In the United States, electricity derivatives markets total in excess of 3,000 BU, helping hedge risks across generation portfolios, transmission bottlenecks and consumer obligations. 

Figure 167: Market size of electricity derivatives across major regions

 

India took its first formal step in 2016, when electricity was notified as a tradable commodity under the Securities Contracts (Regulation) Act (SCRA). But regulatory jurisdiction quickly became contested. While the Central Electricity Regulatory Commission (CERC) claimed all electricity contracts should be under its control, the Securities and Exchange Board of India (SEBI) argued that financial  instruments belonged within the securities market. 

A decisive shift came in October 2021, when the Supreme Court of India ruled that: 

• CERC will regulate physical delivery contracts, and 
• SEBI will regulate electricity derivatives, including futures and options. 

This cleared the way for structured derivatives to enter India’s power market. 

Why Electricity Derivatives are Needed  

The core utility of financial derivatives is to hedge against the business risk emanating from frequent price changes. Ideally speaking, all active players in physical markets (generators, retailers, traders, large commercial and industrial buyers) should hedge their physical position in financial derivatives to safeguard themselves from frequent price changes. 

To make a net zero energy transition where distributed, intermittent sources of power generation such as solar and wind will contribute more than 50 percent of installed power capacity by 2030, it is imperative to launch electricity derivatives to assist power-market participants to hedge their capex risk.  

Though initiated in 2003, power sector reforms are not complete until the retail side of business is made fully elastic and responsive to everyday price change owing to various socio economics, geopolitics and technical factors.  

Giving power to only suppliers to influence the prices and isolating the last mile of customers due to poorly designed market forces cannot last long. Content and carriage separation in the distribution side of business will allow entry of more retailers (pure service companies) and encourage demand side elasticity. Until that happens, fully cash-settled electricity futures markets (derivatives) would enable key participants to engage and apply their expertise in discovering future electricity prices. 

The availability of the electricity derivative market is a must-have feature for these pure retailers and also commercial and industrial customers to have an impact on determining the electricity prices without having ownership of physical generating or transmission assets. The balance among buyers and sellers must be restored to bring market equilibrium to a fast-changing prosumers world. 

Launch of Electricity Derivatives Products in a Gradual, Calibrated and Coordinated Manner 

Learning from other countries’ experiences, India should follow a calibrated approach while launching electricity derivatives.  Furthermore, in this early phase, the spot and future markets must evolve in a coordinated way to avert any early crisis.  The development of the derivatives markets will require sufficient players, extra liquidity and an ecosystem that’s supportive for trading.  

This will require premeditated action on the policy and regulatory front, by CERC in the spot market and SEBI in the financial markets.  

The depth of power markets worldwide and the best practices being adopted by different countries to  enhance market development is ultimately reflected in the liquidity and trading volumes of their electricity derivatives contacts. 

For volume to increase in India, a financially settled future market is a must to give buyers and sellers the option to hedge their exposures. For a financially settled market to thrive, a large volume of power needs to go through the day ahead spot market. Typically, in European markets the volume of the financially settled transaction is three to four times the volume of actual physical power consumed in the country (market churn). 

The Journey of a Thousand Miles Begins With One Step 

In February 2025, SEBI invited proposals from exchanges to launch electricity futures. Like other asset classes, the infrastructure for this market needs to be operationally resilient, have an active presence across assets for collateral fungibility, strong surveillance systems and a robust, well-capitalised clearing corporation1 for counterparty risk protection and guaranteed settlement.  

What Futures Actually Offer 

Electricity futures are standardised, cash-settled contracts that allow participants agree on a price today for a unit of electricity delivered or settled in the future. They do not require physical delivery. They do not need transmission scheduling. They sit alongside the physical market, not inside it. The value is simple: price visibility in advance. 

Table 63: Benefits to the power ecosystem after the launch of electricity futures

Electricity derivatives allow each player to focus on their strength - generation, consumption, financing, trading - without being held hostage to price volatility. 

A Market that Plans, Not Reacts 

At present, India’s power market operates in silos - one part delivering electrons, another part reacting to their price. With futures, the financial and physical markets finally speak to each other. 

Generators can split their portfolios. Buyers can forecast energy budgets. Banks can model returns. And the market moves from firefighting to forward planning. In the financially settled power derivatives market, the following next steps are proposed:  

Gradual Launch of Relevant Products 

• Starting with simpler and high-liquidity products like monthly (one to four months ahead). 
• Subsequently, quarterly and (one to seven quarters ahead) and yearly (one to four years ahead)  
• Later, launching more complex products such as options, weather derivatives etc. 

Calibrated Process 

• Pegging the contract prices to day-ahead/intraday process from physical power exchange would further enhance credibility of both markets. 
• Appointing market makers to drive volumes and not restricting entry of financial institutions/other liquidity providers to the market. 

Coordinated Process 

• Premeditated actions on the policy and regulatory front by the CERC in the spot market and SEBI in the financial markets is necessary. 
• Creating an Enabling Environment.
• Robust and cheap trading platform. 
• Reducing cost of information. 
• Providing regulatory clarity. 

Future – After Introduction of Electricity Futures in India  

Back to the Electricity Market Participants 

• Mr. Aakash now sells 80 percent of his power through long-term PPAs, just as before. But for the remaining 20 percent he takes a position on NSE’s electricity futures market. He secures a price of INR5.15/unit for the following month, 15 days in advance. He sells the rest on spot, knowing his base income is protected. His loan officer sees consistent revenue. His operations head enjoys certainty in dispatch planning. He is not betting. He is planning. 
• At the power-trading company, the retail supply team tracks forward curves daily. By mid-March, they buy futures contracts for the summer months at predictable rates. Their commercial customers now receive standardised “fixed electricity rate” offers with optional price caps, backed by financial positions. Regulatory filings are streamlined. Billing is stable. The company no longer operates defensively; it prices proactively. 
• In eastern India, the aluminum exporter syncs production planning with energy cost forecasts. Futures contracts bought two months in advance lock electricity prices for each export cycle. Pricing bids to European automakers now include power cost certainty. This has helped the firm win 18-month fixed-price contracts, something that was previously too risky. Electricity, once a source of unpredictability, is now a competitive advantage. 
• The Delhi-based trader has finally entered the electricity market, not through wires or licenses, but through futures. He trades demand patterns ahead of heatwaves, monetises spread between day-ahead and monthly contracts, and uses market volatility to build a new strategy book. Electricity is now an asset class, and his screen is no longer missing India’s largest commodity.

Each player now participates differently — but each does so with visibility, protection, and planning. The market has evolved from firefighting to forecasting. 

Challenges During the Initial Phase of Electricity Futures: Real but Surmountable 

• Liquidity is likely to be thin at the start; markets need volume to attract volume. Early adoption will require patient ecosystem building, supported by committed players and price transparency. 
• Retail protectionism might slow product evolution. Regulators, rightly cautious of systemic risk, may initially restrict access to sophisticated participants. But long-term inclusion, with safeguards, is key to broadening use. 
• Price discovery with limited participants will take time. Realistic signals emerge only when the market reflects diverse intents: hedgers, buyers, sellers and arbitrageurs. A narrow user base risks signaling distortion.

The Electricity Market India Needs 

Futures are not a luxury for advanced markets. They are the missing piece in any system that wants to be efficient, fair and stable. Electricity is too important, too volatile and too exposed to operate without financial risk tools. 

In conclusion, it is imperative to launch electricity derivatives to give more depth and meaning to the power market reforms initiated with the implementation of the Electricity Act 2003. The reforms are not complete until the retail side of business is made fully elastic and responsive to everyday price change. The power balance between buyers and sellers must be restored to bring market equilibrium  to a fast-changing prosumers world. 

With the launching of electricity futures, India lays the foundation for a new layer of planning - one that doesn’t change how electricity is generated or consumed, but transforms how it is managed, financed and trusted.