NSE is the second exchange to be approved for trading in electricity futures.

India's National Stock Exchange became the second exchange this week to receive regulatory approval for electricity futures contracts. Experts say that this could help struggling utilities improve their financial situation.

Last week, the Securities and Exchange Board of India gave a similar approval to the Multi Commodity Exchange of India.

A futures contract allows the buyer to purchase power at a set price at a future date.

Indian utilities currently rely on power purchase agreements (PPAs), which can last up to 25-years, for their baseload needs. They also supplement this with short-term purchases via power exchanges, for the peak demand.

According to the Indian government, distribution companies (discoms), which are responsible for electricity supply in India, owe about $9.5 billion due to unpaid dues. This is due to expensive long-term purchases of power, subsidies, and losses caused by poor infrastructure.

Ashutosh Padelkar is a Senior Associate with Aurora Energy Research. He said, "There's a clear incentive to look for shorter-term contracts and not commit yourself to a contract of 25 years."

Power derivatives are traded globally on CME Group and Euronext as well as the Intercontinental Exchange, European Energy Exchange and other exchanges.

Discoms can now plan dynamically their procurement using forward curves. Sanjeev AGGARWAL, Chairman of Hexa Climate Solutions, said that this can optimize costs, prevent overcontracting and improve demand forecasting.

A forward price curve can be used to predict the electricity price expected in the future.

Discoms sell solar surplus currently at low daytime rates, but now can use derivatives to pre-agreed higher prices during that period. The contracts allow them to buy electricity during non-solar times at lower rates. Spot prices usually rise in these hours.

Aditya Malpani is a senior director with AMPIN Energy Transition, a power producer. She said that even power producers could hedge using the forward curve by taking opposing positions on the derivatives markets. (Reporting and editing by Sethuraman N; Leroy Leo).

(source: Reuters)