What Are Electricity Futures and How Can it Reduce Volatility in the Spot Market? | Explained

In a move to revolutionise India's power trading landscape, the Securities and Exchange Board of India (SEBI) recently gave the greenlight for the launch of electricity futures on both the National Stock Exchange (NSE) and the Multi Commodity Exchange (MCX). With power demand hitting new highs each year and renewables making the market more complex, the entry of electricity futures is expected to offer better planning, lower risk, and more transparent price discovery for producers, buyers, and investors.

What exactly are electricity futures?

Electricity futures are financial contracts that let buyers and sellers agree on a fixed price for power that will be delivered in the future, although in practice, no electricity changes hands. Instead, the contracts are settled in cash, based on how actual market prices compare to the agreed futures price over a given period.

They’re quoted in Rupees per megawatt-hour (₹/MWh), with 1 MWh equal to 1,000 units of electricity. For instance, if a contract is signed at ₹6 per unit and the average spot price turns out to be ₹6.50, the buyer receives the difference as profit. If prices fall, the seller gains instead.

How will this work on the NSE?

The NSE is introducing monthly contracts that will cover the full base load for each month, available up to four months in advance. Each contract represents 50 MWh of electricity. Trading will take place on business days between 9:00 AM and 11:30 or 11:55 PM.

The contracts are benchmarked to prices on Power Exchange India Ltd (PXIL), and will be cleared by NSE Clearing Ltd, a SEBI-approved clearing corporation.

How are electricity futures different from IEX spot market?

The Indian Energy Exchange (IEX) is currently India’s most widely used electricity market platform, but it operates purely in the physical spot market, offering day-ahead and real-time delivery contracts. In simple terms, IEX helps with the buying and selling of power that’s physically delivered within 24 hours or even immediately, making it ideal for short-term needs.

Electricity futures, on the other hand, are financial contracts, not tied to actual physical delivery. Instead of trading electricity itself, participants trade on price expectations. Futures are cash-settled and help in planning weeks or months in advance, making them suitable for longer-term risk management.

Another key difference lies in regulation. IEX operates under the purview of the Central Electricity Regulatory Commission (CERC), while NSE’s electricity futures fall under SEBI’s financial market regulations.

In essence, IEX helps you meet immediate power needs, while electricity futures help you plan ahead and manage price risk before it hits your balance sheet.

Why are these contracts needed?

Electricity prices in India’s spot market are highly sensitive to sudden changes such as plant breakdowns, transmission issues, or unplanned demand surges. These events can cause price spikes that only last a few hours but create significant financial burden, especially for discoms that rely on spot market purchases.

Futures contracts help smooth out that volatility by using monthly average prices for settlement. This ensures short-lived surges don’t have an outsized impact. In addition, NSE has designed a margin system that monitors specific high-volatility trading hours. If prices look artificially high or erratic during those slots, additional margin is required, limiting excessive speculation. NSE officials also held a clear view of the product not being developed for speculative frenzy.

Who can participate?

The contracts are open to a wide range of participants including independent power producers (IPPs), discoms, energy traders, corporates with large power needs, financial institutions, and SEBI-registered brokers. Even financial players like mutual funds can get involved through approved channels.

What's in it for discoms and producers?

For discoms that often buy power in bulk from the spot market, electricity futures offer a way to cap procurement costs in advance. That means more predictable budgeting and reduced exposure to unpredictable spikes during peak demand periods, such as summer or festive seasons.

IPPs, on the other hand, can use these contracts to lock in minimum selling prices for their power, which helps with revenue forecasting and lowers reliance on long-term Power Purchase Agreements (PPAs).

What's ahead?

While both MCX and NSE received approvals from SEBI, the former hasn’t shared its official launch date yet. As for NSE, Chief of Business Development Officer, Sriram Krishnan said the exchange will announce the official launch date within the next two to three weeks.