High Margin Requirements Will Discourage Undue Speculation In Electricity Futures: SEBI Chief Pandey

A high initial-margin requirement will discourage 'undue speculation' in the newly launched electricity futures segment, SEBI chief Tuhin Kanta Pandey said on Friday. Speaking at a ceremony to launch the electricity futures segment at NSE, Pandey added that in case of higher volatilities, additional margins may also be imposed.

"Electricity has been categorised as a high-volatile commodity, thereby attracting a high initial-margin requirement. This will discourage undue speculative activity," he said.

"Additional margins may be imposed in times of heightened volatility," he added.

The capital markets regulator and power regulator Central Electricity Regulatory Commission have followed a consultative and data-driven approach to design the contract specifications and risk management norms to ensure that electricity derivatives remain tools for hedging, rather than undue speculation, he said.

Electricity derivatives, starting with monthly futures, will provide market participants a transparent and regulated platform to hedge against price volatility, as per Pandey.

These contracts will complement physical power trading by adding a layer of financial flexibility, he said, adding the derivatives will help participants plan more effectively by managing price uncertainty, mitigate revenue risks, and attract investments in the power sector.

Stating that countries in Europe and Americas have developed electricity futures, Pandey said the primary participants in this market are power generators, distribution companies, discoms, power exchanges and consumers, and traders.

Eventually, institutional investors will also get interested in the market, he added.

Listing out the advantages of such a facility, Pandey said power generators may now be able to lock in the selling price of their future output which can ensure them continuing to expand their infrastructure to meet India's growing power demands, they will enable discoms to procure electricity at predictable prices and reduce their losses, and industrial consumers can shield themselves from volatile input costs.

Speaking at the same event, CERC chairman Jishnu Barua said a joint working group comprising of officials from SEBI and CERC has come up with the necessary rules over the last two and half years and called the launch as a significant milestone ushering in a new era of reform in India's power sector.