Commodity

“A basic good used in commerce that is interchangeable

with other commodities of the same type”

Characteristics
• Product should be essentially uniform across producers
• Often used as inputs in production of other goods and services,
i.e. large scale utility
• To be traded on an Exchange, a commodity must meet specified
minimum standards, known as Basis Grade

Eg: Grains, Gold, Oil, Natural Gas, Foreign Currencies, Electricity etc.
Complete Market Products

Physical Markets + Financial Markets

Spot Derivatives
Immediate Delivery Risk Mgmt. tools for product/time/place

• Futures
+ • Options
• CfD
Forward
Delivery at some point in future
Electricity, a unique commodity

Flow Laws of Physics Interdependencies Speed of Light

(Non storable)

Congestion Scheduling &

Imbalances Ancillary Services
Management Dispatch

Because of This commodity Production & SO Schedules Contracts

complications in Travels as per laws Consumption of in advance and mingles
Production & of physics which are electricity is energy in real-time by
Delivery systems, unique to itself. We cant dependent on Dispatching Generation
mismatches will Tell electricity where ancillary services to meet demand
always exist in supply to go or not to overload which make the
& consumption as a route/line. One transmission system
against contracted transaction of electricity Work, such as
Power. System can affect any or all Operating Reserves,
Operator manages other transactions for Reactive Power, etc.
these imbalances delivery.
Can Electricity Markets be designed to meet standard
economic theory?
 Electricity is a flow, rather than a stock
 Cannot be metered perfectly
 Storing potential energy is expensive
 Stochastic ‘retail demand’ is too costly to moderate via spot prices
and devices for continuous control and metering
 Flows on transmission lines are constrained continuously by
operational limits and environmental factors. Imbalances can injure or
destabilize transmission links, electrical systems require continuous balancing of demand
and supply
 Ramping rates of generators are limited

Electricity Markets are inherently incomplete and imperfectly

competitive
Limitations in Metering & Control
Consequent market imperfections

 Owing to limitations in Metering & Control of electricity,

compromise adopted universally is that for most retail customers
the timing and quantity of power used is priced imperfectly (flat
tariffs) w.r.t wholesale tariffs
 Hence, Consumers (especially retail) have ‘unrestricted right’ with
few exceptions, to draw electricity from the grid
 This requires strenuous efforts on the
– supply side to provide energy,
– transmission to meet expected demand, and
– supplemented by reserves to meet contingencies
Transformation of Vertically Integrated to
Liberalised Markets
 From early 80s to late 90s, the process of privatisation of state enterprises and
liberalisation of markets was underway in infrastructure industries (Telecom,
Water, Gas, Electricity, Transport, etc)
For Electricity, this shift was justified
by
diminished economies of scale in Generation
to
expose cross-subsidies and to improve efficiency via better pricing and incentives for
greater variety of products and services
as
privatization and liberalization seen as necessary to overcome organizational inertia, and to
attract private investment to serve rapidly growing demand arising from economic
expansion
through
separation of the public good embodied in the infrastructure network, such as electricity or
gas transmission and rail lines, from the associated commodity or service
Designs for Spot Electricity Market
“Power Markets are actually ‘sequences of markets’ from the pre-
commitment of plants at Day(s) Ahead to real-time balancing of actual
injections and withdrawals; via the allocation of transmission capacity
and the necessary management of unforeseen congestions.”
Evolution of Global Electricity Markets by Sioshansi, 2013.

Vertical or Wholesale or Retail

Pool or Exchange

Single or Multiple

Auction or Continuous

Uniform or Pay-as-bid

Implicit or Explicit
Consolidated Overview…
Nord Pool PJM AEMO IEX
Participation Voluntary for DAM Compulsory for Real Time Compulsory for DAM Voluntary

DA spot, hour-ahead, DA spot, real-time balancing,

DA spot, Short term forwards DAM, TAM
Market Offerings forward, futures, options capacity credit markets

Double Sided
Closed, Open
Bidding Type Double Sided Double Sided Double Sided
Auction &
Continuous

Elbas: Intra-day auction Bid quantity can be changed till

Adjustment Market market gate closure
-- Not available

Real-time / Counter trade Balancing Market

Purchase of ancillary UI charge for
Balancing market services & reserve capacity deviations

Pricing Rule Zonal Pricing Nodal Pricing Zonal Pricing Zonal Pricing

Pricing Type Ex-ante Ex-post Ex-post Ex-ante

FTRs, Bilateral OTC, Multi- Bilateral OTC, Derivatives on

Risk Management Forwards, futures, options
settlement, virtual bidding Sydney Exchange
Bilateral OTC

Congestion Area splitting

Security constrained economic Locational signals for
Area splitting
Management dispatch transmission

Transmission Included in zonal price Included in LMP

To be purchased by To be purchased by
Losses generators participants
 Power Procurement options
Procurement Pros Cons
Contracts
Long Term • Escape volatility of short term and spot • Capacity + Energy
markets • Falling short term prices may make costly
• Meets base load requirements contracts obsolete and sunk
• Transmission availability
Medium Term • Escape volatility of short term and spot • Transmission availability after LT
markets • Only to meet fixed seasonal or
• Meets intermediary load requirements, intermediary load requirements
help escape long term commitment for
such requirements

Short Bilateral • No long term commitment • Costlier than PX Spot

Term • Flexible response to demand • Congestion
• Priority over PX, unless Spot • Regulatory risks
PX Spot • No long term commitment • Volatile
• Price transparency • Congestion
• Flexible response to demand • Regulatory risks
UI/DSM • Realtime load balance • Volatility
• Penalties
Reforms to Introduce Retail Competition

Present Structure Proposed Structure

State & Private Generators State & Private Generators

Power Ex Traders Power Ex Traders

PX + TR

PX + TR
DISCOM SUPPLIER

Consumer Consumer Consumer Consumer

(≥1MW) (<1MW) (≥1MW) (<1MW)

Transmission Transm’n , Dist’n

(non trading entity) (non trading entities)
Power Exchange?
Organised Marketplace

Handles… On-line Delivery…

 Bidding Voluntary •Spot

 Delivery •Intra-Day
National •Day-ahead
 Money Standardized •Forward
 Risks Contracts •Weeks
Automated
Central
Counterparty
Power Exchange facilitates
 Price Transparency
– Ability to know the price of electricity now and in the
future (up to 15-18 months)
 Risk Management
– Manage price/ delivery risk
– Secure and Regulated market
 Guaranteed performance of trades
– Credit tracking mechanism
– Default Mitigation mechanism
 Lower Transaction Cost
 Flexibility
– Term of delivery
– Time of Closure
 Access to a wider/ larger market spectrum
Power Exchange Functions

TRADING BROADCAST

Easy Access LIQUIDITY

CLEARING Anonymous
Transparent
Reliable
DELIVERY SETTLEMENT
Secure

Price
POWER EXCHANGE References
IEX Market Segments

Day-Ahead • Delivery for next day

Market • Price discovery: Closed , Double-sided Auction
since June,08

Intraday Market & Day- • Intraday: For Delivery within the same day
Ahead Contingency • Day Ahead Contingency: Another window for next day
Round the clock since Jul’15 • Gate closure : 3 hours

Term-Ahead Contracts since • For delivery up to 11 days

Sep,09 • Daily Contracts, Weekly Contracts

Renewable Energy • Green Attributes as Certificates

Certificates • Sellers : RE generators not under feed in tariffs
since Feb,11 • Buyers: Obligated entities; 1MWh equivalent to 1 REC

Energy Saving Certificates • 1 Ecert= 1 Mtoe( Metric Tonne Oil Equivalent)

since 27 Sep’17 • Trading Session on every Tuesday of the Week
• Trading time 1300 hrs to 1500 hrs
Auction Continuous
Key statistics: Electricity & REC Market

ELECTRICITY REC
Market Share
(FY16-17) 95% 63%

State
Utilities
29 States I 5 UTs 17 States I 5 UTs

Generators 417 843

Industrial 3945 2,458

Consumers

Average Daily >100,000 MWh >1 Crore RECs

Volume Highest : 172,447 MWh Highest: 12,87,814 RECs

IEX Data as on 31 DEC, 2017

Bid Matching

Open/Closed
Continuous Trading
Auction

Orders accumulated during

order accumulation phase (no Price-time priority based
matching) continuous matching

Orders matched after closure

of order accumulation period
Orders are used for calculation
common price i.e. Equilibrium
Price.
All successful orders matched
at Equilibrium Price.
The highest Buy order &
lowest Sell order gets the
priority
If the prices are same then
priority is given to the time
of the order
 Contract Characteristics
TERM AHEAD MARKET

Contract Day Ahead Intraday Day Ahead Daily Weekly

Characteristic Market Contracts Contingency Contracts Contracts

0400 -2400 Hrs From 4th day to

Delivery Next day For next day For next week
same day next 7 days

Continuous Continuous Continuous

Auction Type Closed Auction Open Auction
trading trading trading

Block of Hours Block of Hours

Contracts 15 min Hourly Hourly
(Fixed) (Fixed)

Trade All Days; 1000- All days; All Days; All Days; Wed & Thurs;
Availability 1200 0030-2000 1500-2300 1200-1500 1200-1600

Financial Pay-In- D-1; Pay Pay in: T+1 Pay in: T+1 Pay-In: D-1 Pay Pay-In: D-1 Pay
Settlement Out – D+1 Pay out: T+1 Pay out: T+2 Out: D+1 Out: D+1

T = Trade
Key statistics: Electricity & REC Market

ELECTRICITY REC
Market Share
(FY17-18) 97% 57.6%

State
Utilities
29 States I 5 UTs 17 States I 5 UTs

Generators 483 709

Industrial 4058 2,754

Consumers

Average Daily >120,000 MWh >2 Crore RECs

Volume Highest : 208 ,423 MWh Highest: 32,39,142 RECs

IEX Data as on 28 FEB, 2018

Open Access: What a consumer pays
Charges

PoC charges
• Inter-State Transmission charges payable by the open access consumer

Transmission Charges or STU Charges

• Payable to the state transmission utility for the use of the transmission system for availing power
through open access.

Wheeling charges
• Charge to the Discom for conveyance of electricity through open access as determined by the SERCs

Cross Subsidy Surcharge

• Subsidising open access consumer has to pay a cross subsidy surcharge to the Discom.

Others
• Additional Charges, if any
• NLDC application fee, scheduling and operating charges, SLDC Charges
• IEX transaction charges/Trading Margin
Open Access: What a consumer pays
Losses

• An open access consumer has to bear in kind the following losses as defined by the
relevant regulations

Point of connection (PoC) loss

• Inter-State transmission system loss

Transmission loss or state loss

• Consumer to absorb apportioned energy losses in the

transmission system as per the relevant regulations

Wheeling loss

• Technical losses in the distribution system determined at

various voltage level by the state commissions.
IEX - DAM Product Description [1/2]

• Bidding
- Double sided Closed Auction
• Order Types:
– 15-min block or Portfolio Orders
• Min 15 Min
• Different Price-Quantity Pairs
• Partial Execution Possible
– Block Orders
• Relational Block Bid
• Any 15-min block or series of 15-min blocks during the same day
– Customized block bid allowed
• Order Characteristics
– SLDC Clearance should be ≥ 0.1 MW (Subject to state regulations issued by
concerned SLDC)
– Minimum Order quantity cannot be less than 0.1 MW
– Minimum volume step: 0.1 MW
– Minimum price step: Rs 1 per MWh ( 0.1p/kWh)
 IEX - DAM Product Description [2/2]

 Trading Availability
– Every Calendar Day

 Firm commitment to purchase or sell

 Order Entry / revise /cancel

– Entry of orders on D-1 from 10:00 hrs to 12:00 hrs
related to Delivery Day (D day)

 Delivery Point
– Periphery of Regional Transmission System in which the grid-connected entity,
is located
Features of Day Ahead Market

Closed double-sided anonymous auction for each 15-

min time block for the following day

Intersection between the aggregated sale and purchase

curves defines the market clearing price (MCP)

13 Bid area defined

Congestion Management through market splitting and

determining Area Clearing Price (ACP) specific to an
area S3

Bid types: Portfolio Orders or Block Orders

Minimum bid=Re.1 for 0.1MWh 13 Bid Areas
Minimum Price & Volume Step = 0.1p * 0.1 MWh
Auctioned Day-Ahead Market

• Nation-wide, on-line, automated

P • Double-sided closed auction system
Supply • 15.min block day-ahead contracts (MWh)
• Physical delivery based
Buyer’s Surplus
P*
• Central counter party: IEX
Seller’s Surplus
• Equilibrium price for 15 min time block
(Rs./MWh)
Demand
• 15 min block volumes/prices published
Q* Q
• Pool based (collective) scheduling of
traded power by NLDC (POSOCO)
P* - Cleared Price
Q* Cleared/Traded Volume
DAM trading process

Review corridor and

Bidding Matching Result Confirmation Scheduling
funds availability

10:00 am to 12:00 pm to 1:00 pm to 3:00 pm 5:30 pm 6:00 pm

12:00 pm 1:00 pm 2:00 pm

Bids for 15- MCP Corridor Final ACV and Collective Final Schedule
min each &MCV availability ACP transaction sent to RLDC
or block calculated and funds calculated. confirmation for
bids can be verified Market by NLDC incorporation
placed splitting if
congestion
Area Prices @ IEX
Different Prices due to Congestion

NR: Rs
3.38/KWh
ROI: Rs
2.47/KWh

MCP: Rs
2.49/KWh
Time Block: 08:45-09:00
for
Delivery Date: 16 Mar 2017

SR: Rs 3.51
KWh
Transmission Congestion

• Transmission Congestion is arguably the biggest bottleneck for

development of power market

• Major Congested corridors :

• ER  NR & WRNR link in Summers
• ER  SR & WR  SR link almost all the year
• W3 Export
• S2 Import
Bid Types in DAM

• Bids for each 15 min • Block Bid for any 15

can be entered min
• Varying price and • Mother or child bid
quantum pairs • No circular links
• Allow partial execution • No partial execution

Single/Portfolio
Block Bid
Bid
 Linked Block Bid
Single hour block bid:
 Possibility to save single hour block bid.

Linked Block Bid:

 A member may link different block bids; condition of selection of linked block bid (child
block bid) will depend upon the selection criteria of “linked to” (mother block bid)
block bid.

Rules for bid linking :

 A bid (child- bid A) can only be linked to one other bid (mother- bid B).
 Bid A and bid B can span any set of hours independently of each other.
 Bid A and bid B can have any bid price independently of each other.
Salient Features of REC Mechanism
Participation Voluntary
REC Denomination 1 REC = 1 MWh
Validity 1095 Days after issuance*
Categories 1. Solar REC 2. Non-Solar REC
Trading Platform Power Exchanges only
Banking/Borrowing Not Allowed
Transfer Type Single transfer only , repeated trade of the same certificate is not possible

Solar RECs *Floor Price: Rs 1,000 /MWh

*Forbearance Price: Rs 2,400/MWh
Non Solar RECs Floor Price: Rs 1,000/MWh
Forbearance Price: Rs 3,000/MWh
Penalty for Non-compliance ‘Forbearance’ Price (Maximum Price)
Price Guarantee Through ‘Floor’ Price (Minimum Price)

*Vide CERC Order dated: 30 Mar’17 which is presently under stay by Supreme Court Order dated 08.05.2017
Trading at IEX

Trading Day Last Wednesday of every Month

Market Clearing Closed Double Sided Auction

Trading Time 1300-1500 Hrs

Verification by Central agency for Valid REC by
By 1530 Hrs cleared seller at IEX
By 1600 Hrs Central agency confirms REC

By 1630 Hrs IEX finalizes trade

By 1700 Hrs Buyer & Sellers informed to Central Agency

By 1800 Hrs Invoice raised (proof of REC trade)

PAT
Perform Achieve and Trade (PAT)

A market based mechanism to enhance cost effectiveness of

improvements in energy efficiency in energy-intensive large
industries and facilities, through certification of energy savings that
could be traded

 Covers 478 designated consumers in 8 sectors

 All DCs consume about 165 mtoe energy
 National Target = 6.6 mtoe at the end of 1st PAT Cycle (2012-15)
India’s INDC at COP 21, Paris

India’s Mitigation Strategies to Combat Climate Change

1) Clean & Efficient Energy Systems

2) Enhancing Energy Efficiency in Industries – PAT Scheme

3) Developing Climate Resilient Urban Centers

4) Promoting waste to wealth conversion

5) Safe, smart and sustainable green transportation network

6) Planned afforestation

7) Abatement of pollution

8) Citizens and Private sector contribution to combating climate change

ESCerts Mechanism
Start 2012
Compliance Mandatory
Obligated Entities Energy intensive industries from 8 sectors, 478 in total

Target 6.6 Mtoe for1st cycle, allocated on SEC basis for each plant

Mechanism Market based Cap and Trade

Banking Allowed till next cycle

Denomination of ESCert 1 metric TOE

Issuance Ex-post based on Energy Audit (80% issuance for intra-cycle, every
year)
Cycle span 3 yrs (2012-15 for 1st Cycle)

Market Place Multiple Power Exchanges, regulated by CERC

Trading Regulator CERC
Administrator & Scheme R’tor BEE
Central Registry POSOCO
Penalty As per Section-26(1A) of EC Act, 2001, to be decided by SDA
Development of Power Market

Advantages of an Organized Power Market

 Market Participants can efficiently manage their portfolios by choosing different
products available under long term , medium term and short term duration.
 Provides an exit route for PPAs.
 Efficient Market provides transparency and which may lead to easy financing .
 Markets are driven by the force of economies i.e. demand and supply and hence the
prices are derived.
 Market Participants e.g. DISCOMS may reap benefits of real time balancing.
 Typically lower unit pricing compared to standard electricity supply contracts.
 Derivative products may provide an avenue to hedge against spot-price volatility

35
Missing Blocks (1/2)

• Ancillary Services
 Ancillary Services for frequency control are a necessity for the huge Indian
power system.
 Market based Mechanisms for Frequency Control Ancillary Services help to
procure ancillary services at optimum cost, maximizing the global welfare.
 Proposed Ancillary Mechanism 2015 largely involves URS, to start with
• Demand Response
 Demand-side response may prove as a appreciation to power management
in supply deficit situation like ours
• Derivative Products:
 Electricity Derivative (hedge) products allow managing the risk associated
with purchasing electricity off the spot (wholesale) market. Hedge contracts
can shield your expected electricity costs from unpredictable shifts in the
spot market.
Why Derivatives:- Issues in Present Indian Wholesale Market Design

– Spot prices in DAM have dropped to the lowest due to over supply, as against OTC Short
Term and Long term contracts, over the past one year. But Prices in a spot market tend to
change quickly due to demand, supply situations and transmission constrained.
– In spite of low prices in DAM, share of Long Term market remained unchanged from
periods of shortage i.e. FY 2010
– Buyers, especially Discoms are under severe financial stress, are tied up in Long Term
Forward Contracts (PPAs) with inability to exit the costly physical contracts to avail cheap
power
– Arbitrage between ‘Forward’ market and ‘Spot’ market is nonexistent
– Forward markets are not liquid, owing to segregated auctions with limited participation
– Discoms have no liquid alternative market, forcing them to rely on 25 year Long Term PPAs
for resource adequacy. Coupled with this is the impossibility to forecast demand for 25
years ahead and payment rigidity of capacity charges
Common Derivatives

1) Futures
• Exchange traded
• Essentially financial

2) Forwards
• Over the counter (OTC)
• Physicals

3) Swaps
• OTC
• Financials

4) Options
• Exchange traded or OTC
• Physical or financial
 1) Forwards (OTC Contracts)

 Obligation to buy or sell a fixed amount of electricity at a pre-specified contract price(the

forward price), at certain time in the future (called maturity or expiration time)

 Electricity forwards are custom tailored supply contracts between a buyer and a seller,
– Buyer is obligated to take power and Seller is obligated to supply

 Electricity forward prices are:

– Based on forward (long-term) expectations
– Stable behavior
– Long-term forwards have low volatility, short-term forwards may have high volatility
– Correlation with fuels
– In India, long term Forwards called ‘PPA’ with >7 year offtake & levelised tariff are in vogue
Risks in Forward Market?
Example
• Forward Contract Entered in Jan’17 for Delivery in June 17

100 MW Sell in Forward Market

Generator Discom
@ Rate Rs 4/kWh

• Two types of Credit Risk

i) Replacement Risk:- Before Start of Delivery if any counterparty defaults. For ex. If Buyer
B defaults on March 17 to take power from Seller S, then Seller has to enter in a new
contract at current market price, which will be generally at low price say @Rs. 3/u with a
new counterparty. So Replacement Risk=(4-3)*Contract Volume
ii) Settlement Risk:- If the electricity is delivered but buyer defaults to make payment, this
creates settlement risk which has generally several times higher risk than replacement
risk=4*Contract Volume. In addition to this delay in payment also comes in settlement risk

Credit risk exposure is defined as the sum of the settlement and the replacement risk.
 2) Futures

 Traded on organized Exchanges

 Majority of electricity futures contracts are settled by financial payments (cash
settlement) rather than physical delivery, which lower the transaction costs.
 Futures contracts are highly standardized:
– Contract specifications, Trading locations, Transaction requirements,
Settlement procedures.
 Main difference between Futures and Forwards is the quantity of power to be
delivered.
 Delivery quantity specified in electricity futures contracts is often significantly smaller
than that in forward contracts

• Pros
Market consensus; Price transparency
Trading liquidity; Reduced transaction and monitoring costs
• Cons
Only Standardized Contracts tradable, no customization possible.
 Hedging with Futures

• Generator hedges 100 MW load in Futures Market

• Sells Futures Contract at a future price in Jan ‘17 @ Rs 4/kWh which settles
at spot market price
• Scenario 1:- Avg. spot market price during delivery period say Rs 3/kWh
Sell at Spot Mkt (DAM)
Generator PX
Avg Spot price Rs 3/kWh Spot
Payment =
+Sell price in Futures Earnings of Genco:
-Buy at Settlem./Spot Price Spot Mkt 3
= 4-3 = Rs 1/kWh
Futures 1
Futures 4
• Scenario 2:- Avg. spot market price during delivery period say Rs 5/kWh
Sell at Spot Mkt (DAM)
Generator PX
Avg Spot price Rs 5/kWh Spot
Payment = Earnings of Genco:
+Sell price in Futures
-Buy at Settlem./Spot Price
Spot Mkt 5
= 4-5 = Rs -1/kWh Futures -1
Futures 4
Situation of Seller at various Spot Price

Hedged Seller Spot Market

2

1
Gain/Loss
0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6
High Profit Zone
Spot Price
-1

-2

-3

When Spot Price is low then Futures seems profitable since it hedges price risk but
at higher spot price the seller is getting same price. There is no prospect for greater profit.
Solution is Option Contracts!!

The Seller through a put option—is provided a way to have higher profits at high spot prices
while still being protected against low prices by paying an insurance premium.
 Options
 Not new!
 Optionality needed to react to fluctuations in consumption, transmission
interruption or plant outages
 Power plants or gas storage provided flexibility to balance system
 Now; optimise profit against market prices
 Many options on daily or hourly basis can be seen as type of power plant
– Virtual power plant
Option works like Insurance contract

Buyer of Option Seller of Option

is the insured is the insurer
Risk is removed Risk is added to
from the portfolio the portfolio

Pays premium Collects premium

Options

 Buyer has the right but not the obligation to buy or sell the asset at the
previously agreed price.
 Seller has the obligation to deliver or take.
 Similar to insurance
– buyer pays premium every year
– insurance pays any damages
 Call: gives the option holder the right to buy at a predetermined price
 Put: gives the holder the right to sell at a predetermined price

 Strike price-Price for which underlying commodity can be bought or sold

 Value option contract is relative to strike price
 Hedging with Options
• Generator hedges 100 MW load in Options Market
• Buy a put contract in Jan ‘17 at a strike price of Rs 4/kWh by paying a premium @ Rs. 0.5/kWhr
• Scenario 1:- Avg. spot market price during delivery period Rs 3/kWh. Hence Exercise Option.
Sell at Spot Mkt (DAM) PX
Generator
Spot
Avg Spot price Rs 3/kWh
Payment =
+Strike price in options
-Buy at Settlem./Spot Price Earnings of Genco:
Options Spot Mkt 3
- Premium paid
= 4-3-0.5 = Rs 0.5/kWh Options 0.5
3.5
• Scenario 2:- Avg. spot market price during delivery period Rs 6/kWh, Option not exercised

Sell at Spot Mkt (DAM)

Generator PX
Avg Spot price Rs 6/kWh Spot
Payment = Earnings of Genco:
- Premium paid Spot Mkt 6
= - Rs 0.5/kWh Futures -0.5
Futures 5.5
Situation of Seller at various Spot Price

3
Hedged Seller

2 Spot Market

Gain/Loss 1

0
0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6
High Profit Zone
-1

-2

-3

When Spot Price is low then Options are profitable since it hedges price risk and even
at higher spot price the seller is getting spot price-premium. There is prospect for greater
profit but at cost of premium.
Application: Example-1

 Participant: Open Access Consumer

 Power portfolio: 10 MW load, with Discom charging industrial tariff @ Rs
8000/MWh. PX spot market (DAM) prices are in the range of Rs 2000/MWh to
Rs 3500/MWh, with landed cost in the range Rs 7000/MWh to Rs 8500/MWh.
Contingency power is charged @ Rs 12000/MWh by Discom.

Derivative Trading Strategy:

• Purchase Futures contract say @ Rs 2500/MWh and lock the price of electricity
w.r.t spot market (Alternatively, Swap contract would fulfill the requirement) .
Bidding in DAM could be placed with upper threshold of Rs 12000/MWh
Application: Example-2

 Participant: Generator
 Power portfolio: 1000 MW capacity, with technical minimum of 500 MW. FC is
Rs 1500/MWh @ Technical Minimum (50% PLF) and VC is Rs 1800/MWh (Rs
4500/MWh below technical minimum).

Derivative Trading Strategy:

• Sell Futures contract for 1000 MW say @ Rs 3300/MWh (if available, based on
Forward Curve) and lock the price of electricity w.r.t spot market (Alternatively,
Swap contract would fulfill the requirement)
• Trade the entire 1000 MW power on PX DAM and receive the market determined
price from PX. To ensure schedule for technical minimum quantum, the generator
places bid at ‘0’ price for 500MW to ensure selection and receives the cleared PX
price and price difference with the futures contract is settled separately.
• Alternatively, Options could be procured at a relevant strike price, in place of
Futures
 51

Recent Policy and Regulatory Developments

 CERC linking DSM penalty prices with IEX

– CERC linked deviation penalty prices to IEX prices and additional penalty for continued
deviation.
 Cross border trade guidelines issued by MoP and Regulations by CERC
– MoP issued cross border import-export guidelines allowing transactions through Power
Exchange
– CERC final regulations released
 Committee Report on Long term contracts and electricity derivatives
– Joint committee reached agreement for jurisdiction of delivery based long duration
contracts with CERC and electricity derivatives to be regulated by SEBI.
 52

Recent Policy and Regulatory Developments

 CERC regulation on National Open Access Registry (NOAR)

– NOAR will act as single point interface for all the stakeholders, to
streamline STOA applications to ISTS; owned and operated by NLDC.

 Cabinet approval on high power committee recommendations for coal

allocation
– “All such power plants … which do not have PPAs, shall be allowed Coal linkage
……provided further that the power generated through that linkage is sold in
Day Ahead Market (DAM) through power exchanges”

 Real Time market – Staff paper by CERC

– Double side auctions with uniform MCP conducted once in every hour for
delivery in four 15-min blocks/hour – will enable volume shift from
unorganized market to RTM