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Home News Power Sector News Multi-Commodity Exchange launches future trading of electricity

Multi-Commodity Exchange launches future trading of electricity

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Multi Commodity ExchangeDespite bad experience of price increase of commodities through future trading, Multi Commodity Exchange has launched futures trading in electricity for the first time in India on 09-01-2009.  Financial Technologies India Ltd, the biggest stakeholder in MCX, is also the promoter of Indian Energy Exchange, which trades spot electricity. Left parties  already opposed future trading , saying speculators are driving up prices and fanning inflation.

FUTURES trading in most commodities was prohibited in India under the provisions of the Forward Contract Regulation Act, 1952 since the early days of development planning. While the prohibition was progressively lifted for many commodities in the post-liberalization period, essential commodities like wheat, rice (non-basmati), pulses, edible oils , sugar and electricity continued to remain outside its purview. It was in 2003 that the BJP led NDA government lifted all prohibition on futures trading and even allowed online trading of essential commodities in newly established commodity exchanges.

MCX received the approval from market regulator Forward Markets Commission for launching weekly and monthly electricity contracts. The exchange will launch eight weekly contracts and four monthly contracts. The first trade was executed in the March monthly contract at Rs 7,300 a MWh.

The exchange recorded a turnover of Rs 6,828 crore in the first half of the trading session up to 5 p.m. “The response was poor as many traders were not aware of the launch. We expect the product to pick up as it is a unique product in India,” said an analyst.  The contract trading unit will be 1MWx24 hours with tick size as Rs 1 per MWh. The delivery will be optional for both buyers and sellers and due date rate will be the average of daily system prices of day-ahead market of Indian Energy Exchange (IEX) for delivery during the contract week/month. It will be traded from Monday to Saturday between 10 a.m. and 11.55 p.m., except Saturdays which will be from 10 a.m. to 2 p.m. At any point of time 8 weekly contracts and 4 calendar month contracts will be available for trading.

Mr Joseph Massey, Managing Director, MCX, said, “With the launch of electricity futures, MCX has further diversified its basket of energy products after crude oil, furnace oil, natural gas and aviation turbine fuel. Now the industry will be able to mange price risk on energy-related raw material or output better on MCX, which already accounts for 98 per cent of the entire energy-related futures market.” The large number of participants, including inter-state generating stations, distribution licensees, state generating stations, captive power plants and independent power producers, electricity traders and others, are exposed to price risk due to uncertain demand and supply and volatile prices. The launch of electricity futures will smoothen the price curve in the medium to long run that will help the market participants to facilitate price discovery and take an informed decision looking at the futures prices, said Mr Massey.

Large players with deep pockets used to benefit by exploiting arbitrage opportunities between different market segments.These traders buy from spot markets and hoard them while simultaneously hedging the price-risk by selling futures contracts. This practice is popularly known as 'badla' financing.The stocks held under 'badla' are immune to price volatility. Many times demand from such financiers becomes a significant portion of overall demand and skews demand-supply scenarios.



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