Future of Futures in Indian Power Market 

India's power sector is in the midst of a transformative evolution. As the country pivots toward decarbonization, decentralization, and digitalization, the traditional structure of long-term power procurement is beginning to give way to more dynamic, short-term, and market-driven mechanisms. Central to this change is the development of forward and derivative markets in electricity—key instruments that enable risk management, price discovery, and operational flexibility. However, progress has been cautious, particularly around the tenors of contracts, with both physical forward contracts and financial derivatives being restricted to three months.

This blog delves into the current state of India’s forward power markets and derivatives, examines the rationale behind the limitations on contract duration, evaluates the implications of diverging tenors, and outlines the path forward for a robust and efficient power futures market.

Status of the Forward Market: Non-Transferable Specific Delivery (NTSD) Contracts

Forward contracts in the power sector—commonly known as NTSD (Non-Transferable Specific Delivery) contracts—are physical delivery agreements traded on power exchanges like IEX and PXIL. These contracts allow buyers (usually DISCOMs or large consumers) and sellers (generators or traders) to lock in electricity prices for a future period, helping them hedge against price volatility and plan procurement effectively.

Currently, NTSD contracts are available for durations of up to three months. These are part of the Term-Ahead Market (TAM) and include daily, weekly, and monthly contracts. While power exchange(s) have applied to the Central Electricity Regulatory Commission (CERC) for extending the tenor up to 11 months, approvals have been pending for over two years.

This is surprising, given that the transmission access framework—specifically the T-GNA (Transmission-General Network Access) mechanism—already permits open access bookings for up to 11 months. In theory, this should make longer-tenor contracts feasible from an operational standpoint. However, regulatory caution, particularly regarding liquidity, price discovery, and jurisdictional boundaries, has stalled progress.

Financial Derivatives in Power: A Market Still in Waiting

Unlike NTSDs, financial derivatives in electricity are yet to be operationalized in India. These instruments, such as electricity futures and options, are cash-settled based on underlying indices like the Day-Ahead Market (DAM) prices. Unlike physical contracts, derivatives do not involve actual delivery of power but are purely financial instruments aimed at managing price risk.

Recognizing the need for regulatory coordination following the Hon’ble Supreme Court’s order clarifying the respective jurisdictions of CERC and SEBI, a Joint Working Group (JWG) comprising representatives from both bodies was constituted to develop a coherent framework for forward markets and derivative trading in electricity. While the Term-Ahead Market (TAM)—comprising forward contracts with tenors of up to three months—has been operational on power exchanges for several years, financial derivatives in electricity are yet to be introduced. In its latest recommendation issued in February 2025, the JWG is said to have proposed limiting financial power derivatives to a maximum tenor of three months, mirroring the existing tenor of TAM contracts. This approach is intended to ensure consistency across market instruments and serve as a cautious initial step to facilitate market participation, build confidence, and monitor trading behavior before considering longer-duration products.

Notably, as of today, two exchanges—MCX and NSE—are reported to have applied to SEBI for launching power derivative trading. Meanwhile, IEX, the largest power trading exchange, will have to wait until it meets the regulatory requirement of a minimum net worth of Rs. 100 crore to be eligible for launching derivatives.

Why Is TAM(NTSD) Limited to 3 Months Despite 11-Month T-GNA?

This dis-connect between available transmission access and NTSD tenor reflects a complex interplay of regulatory, operational, and market dynamics.

1. Market Depth Concerns:

The most frequently cited concern is the limited liquidity beyond the day-ahead and real-time markets. In FY 2024–25, of the approximately 1,800 TWh of electricity transacted nationwide, only about 140 TWh—or 7.8%—was traded through power exchanges. This shallow level of participation significantly constrains market depth, making price discovery for longer-tenor contracts unreliable. As a result, the risk of price manipulation, non-competitive bidding, or suboptimal contracting decisions increases, especially in the absence of robust hedging and surveillance mechanisms.

2. Counterparty Risk: NTSDs do not involve central clearing, making them vulnerable to default, especially over longer periods. Regulators prefer short-term commitments that can be settled quickly.

3. Avoiding Regulatory Arbitrage: Longer-tenor NTSDs could inadvertently be used as financial instruments, circumventing SEBI's regulatory purview. Keeping tenors short limits such misuse.

4. Participant Readiness: Many buyers, especially DISCOMs, may not yet be equipped with the forecasting and financial tools to effectively manage long-duration power procurement in a market-based environment.

Why JWG Recommended 3-Month Limit for Both NTSD and Derivatives

The Joint Working Group's is said to have recommended to maintain uniformity in the tenor of both NTSD and financial derivatives stems from the need to prevent cross-market regulatory arbitrage and ensure orderly market development. This makes sense for the following reasons:

1. Consistent Market Signals: Aligning tenors ensures that both physical and financial markets operate within the same planning horizon, reducing confusion and supporting coordinated hedging.

2. Preventing Arbitrage: Different tenors could allow entities to choose markets based on compliance ease rather than economic efficiency. This could blur the boundary between financial and physical contracts.

3. Ease of Monitoring: Uniformity allows regulators to jointly observe and analyze market trends, risks, and behaviors without additional complexity.

4. Gradual Market Maturity: A common initial tenor acts as a sandbox to build confidence, test participant behavior, and identify design improvements before expanding scope.

What If Tenors of NTSD and Derivatives are mis-aligned?

While aligned tenors offer simplicity and ease of regulatory coordination, mandating them indefinitely could constrain the natural evolution and diversification of the power market. If NTSD (physical forward contracts) and financial derivatives are allowed to have different tenors, both risks and opportunities would emerge.

On the risk side, there is the possibility of regulatory arbitrage, where participants might exploit longer-tenor NTSDs for speculative purposes, effectively bypassing the regulatory safeguards applicable to financial derivatives governed by SEBI. This could lead to product confusion, as physical contracts begin to mimic financial behavior without adhering to financial market compliance. Additionally, monitoring challenges could arise, making it more difficult for CERC and SEBI to conduct joint oversight, especially if the product structures and durations are not harmonized.

Example- 🧩 Step-by-Step Arbitrage Strategy

🔹 Step 1: Spot the Regulatory Loophole of mis-aligned tenors

SEBI allows power derivatives (e.g., futures) for up to 3 months only — with mandatory margining, position limits, reporting, and risk surveillance.

CERC allows NTSD contracts (physical forward contracts) potentially up to 11 months, with no mark-to-market, no daily margins, minimal disclosure, and no central clearing.

🔹 Step 2: Exploit the Loophole

A participant (say, a trader or financial speculator) wants to bet on future electricity prices over the next 6 to 9 months.

They cannot do this in the SEBI-regulated derivative market due to the 3-month limit.

So, they enter into a long-tenor NTSD contract (e.g., 9 months) on a power exchange or bilaterally, claiming it’s for physical delivery.

In reality, they have no intent to take or give physical delivery of electricity.

🔹 Step 3: Exit or Settle Financially

Before the delivery window, they may:

Offset the position by selling the same volume at a different price (back-to-back contract).

Transfer risk off-market through informal arrangements.

Let the contract expire, exploiting weak enforcement on physical delivery.

This mimics financial trading, but outside SEBI's oversight.

However, such divergence also opens up important opportunities. Product specialization can be achieved, where different tenors serve distinct market needs—DISCOMs might prefer longer NTSD contracts for procurement planning and tariff stability, whereas short-term derivatives can serve traders looking to manage price volatility. This structure supports better risk management by enabling participants to create layered hedging strategies, combining long-term physical coverage with short-term financial flexibility. Over time, this variety can drive market depth development, attracting a broader set of participants and liquidity into the system.

Therefore, while tenor alignment is a prudent strategy for the initial rollout of forward and derivative markets, enabling longer-tenor NTSDs alongside shorter financial derivatives in the future—under well-defined boundaries and enforcement mechanisms—could significantly enhance the maturity and robustness of India’s power market.

Best Way Forward: Balancing Caution and Progress

India stands at a pivotal juncture in electricity market reform. The forward and derivatives markets have immense potential, but their success will depend on smart regulation, stakeholder readiness, and iterative policy design.

1. Approve 11-Month TAM/NTSD Contracts on Pilot Basis

- Allow 6 to 11-month NTSD contracts with volume caps or participant eligibility criteria.

- Monitor participation, price formation, and settlement reliability.

2. Launch Financial Derivatives for 3 Months

- Start with DAM-indexed futures and explore options later.

- Use commodity exchanges and clearinghouses for risk mitigation.

3. Define Clear Distinctions Between TAM/NTSDs and Derivatives

- Enforce delivery obligations and penalties for NTSDs.

- Ensure only financially settled contracts qualify as derivatives.

4. Build Institutional Capacity

- Train DISCOMs and large consumers on hedging strategies.

- Enable access to analytics and forecasting tools.

5. Develop Reference Indices

- Create robust DAM or average price indices across regions to support contract settlement.

6. Harmonize Regulatory Coordination

- CERC and SEBI should build a real-time data-sharing and joint monitoring mechanism.

7. Encourage Market Makers

- Allow aggregators or financial institutions to participate as liquidity providers.

Conclusion

The future of futures (derivatives) in the power market is promising, but it must be approached with precision. The current 3-month cap on both NTSD and derivatives is a prudent starting point, designed to mitigate risks and ensure clarity. However, to meet the growing needs of a dynamic power system and deepen the market, India must eventually move beyond uniform tenor restrictions.

A well-calibrated regulatory framework, combined with market readiness and product diversity, will be key to unlocking the full potential of electricity futures. If executed well, the power market of the future will not just be about delivering electrons but managing risk, enabling choice, and fostering resilience.