*Image credit World Bank Group
On the day of MAHALAYA, the long pending matter between SEBI and CERC regarding regulatory jurisdiction of Electricity Derivatives has finally got resolved with the Supreme Court favorably disposing of the matter in terms of the agreement reached upon by SEBI and CERC.
Ministry of power took the initiative of resolving the jurisdictional issue between SEBI and CERC with regard to various forms of contracts in electricity for Efficient Regulation of Electricity Derivatives by constituting a committee on 26th October, 2018, under the Chairmanship of the Additional Secretary, Ministry of Power with representatives from Department of Economic Affairs (Ministry of Finance), Central Electricity Authority, Central Electricity Regulatory Commission (CERC), Power System Operation Corporation Limited (POSOCO), Security Exchange Board of India (SEBI), Indian Energy Exchange, Power Exchange of India Limited and Multi Commodity Exchange to examine the technical, operational and legal framework for electricity derivatives and to give recommendation in this regard.
Committee submitted its report on 30.10.2019 with the following recommendations:
1. All Ready Delivery Contracts and Non-Transferable Specific Delivery (NTSD) Contracts as defined in the Securities Contracts (Regulation) Act, 1956 (SCRA) in electricity, entered into by members of the power exchanges, registered under CERC (Power Market) Regulations, 2010, shall be regulated by CERC subject to the following conditions, namely:-
i. the contracts are settled only by physical delivery without netting;
ii. the rights and liabilities of parties to the contracts are not transferable;
iii. no such contract is performed either wholly or in part by any means whatsoever, as a result of which the actual delivery of electricity covered by the contract or payment of the full price therefor is dispensed with;
iv. no circular trading shall be allowed and the rights and liabilities of parties to the specific delivery contracts shall not be transferred or rolled over by any other means whatsoever;
v. the trading shall be done only by authorised grid connected entities or trading licensees on behalf of grid connected entities, as participants;
vi. the contracts can be annulled or curtailed, without any transfer of positions, due to constraints in the transmission system or any other technical reasons, as per the principles laid down by CERC in this regard. However, once annulled, same contract cannot be reopened or renewed in any manner to carry forward the same transaction.
vii. all information or returns relating to the trade, as and when asked for, shall be provided to CERC, who shall monitor the performance of the contracts entered into on the power exchanges.
2. Commodity Derivatives in electricity other than Non Transferable Specific Delivery (NTSD) Contracts as defined in SCRA shall fall under the regulatory purview of SEBI.
3. The Central Government reserves the right to impose additional conditions from time to time as it may deem necessary.
4. A Joint Working Group between SEBI and CERC shall be constituted with Terms of Reference as agreed in the Report of the Committee.
Based on the recommendations of the Committee both SEBI and CERC have come to an agreement that CERC will regulate all the physical delivery based forward contracts whereas the financial derivatives will be regulated by SEBI. Ministry of power issued suitable order on 10.07.2020.
This has opened the gate for introduction of longer duration delivery-based contracts in the power exchanges which has been currently restricted to only 11 days due to the pendency of the case. This will enable the Discoms and other large consumers to plan their short term power procurement more efficiently. Similarly, the commodity exchanges viz. MCX etc. can now introduce financial products viz. Electricity futures etc. which will enable the Discoms and other large consumers to effectively hedge their risks of power procurement. This is a significant development and has the potential to change the landscape of the power market in the country. This will bring newer products in the power/commodity exchanges and attract increased participation from Genco, Discoms, large consumers etc. which will eventually deepen the power market.
This will further deepen the power market from the present level of approx. 5.5% of the volume to the targeted volume of 25% by 2024-25.