Regulating Price Manipulation in Electricity Derivatives 

SEBI’s recent decision to allow monthly electricity futures trading on the Multi Commodity Exchange (MCX) is an important step forward for India’s power market. This move can help make the market more liquid, improve how prices are set, and offer better tools for power companies and large consumers to manage price risks. By creating a formal and regulated setup for electricity futures, SEBI is helping physical and financial markets work more closely together—something that’s key to building a modern, competitive power system.

However, this also brings attention to a major challenge. The Day-Ahead Market (DAM), which is used as the price reference for these futures, only covers a small portion—less than 3.5%—of India’s total electricity trade. Most electricity (over 92%) is still traded through long-term contracts or private deals, not on exchanges. Because of this, the DAM is a very thin market and can be easily influenced by strategic bidding. Even small shifts in DAM trading can move the Market Clearing Price, which would then affect the much larger futures market tied to it.

This creates a risk that the futures market could be manipulated. To avoid this, strong checks are needed—like better market monitoring, limits on positions, transparent reporting of available capacity, and close coordination between SEBI and CERC. Since this new market will attract not only genuine users who want to hedge their risks but also speculators and arbitrage traders who add liquidity, it’s realistic to expect that most generators and discoms—who are not active in the exchange-traded segment today—will enter mainly as speculators, not hedgers. In other words, this is likely to become a speculators' market, not one driven by real risk-management needs.

Potential Manipulators and Methods

Actor                                        Method to Rig MCP                                         Motivation

Big Generator                        Inject artificial high/low bids                         Gain in futures market

Trader                                       Withhold to increase volatility                 Directional futures gain

Collusive PX participants  Coordinate bids to shift MCP                           Shared profit

Discom with flexibility        Reallocating demand to bilateral            Indirect arbitrage

Rigging Methods with Illustrative Examples

1.      Deliberate Withholding of Volume in DAM and selling OTC/bilaterally

A generator holding long futures, schedules only part of its capacity in DAM. This reduces PX supply and raises MCP. The withheld power is sold either in RTM or bilaterally. In a thinly traded market like, the Day-Ahead Market (DAM), participants with significant exposure in electricity derivatives can strategically lose money in the physical market to gain disproportionately in the financial market. By deliberately withholding low-price bids or reducing supply in DAM, a participant can artificially tighten the market, thereby pushing up the Market Clearing Price (MCP). Although this may result in a notional or real loss in the DAM—such as forgoing sales or accepting lower dispatch volumes—the inflated MCP directly benefits any long position in futures contracts settled on that price. Given the small volumes needed to influence DAM prices and the potentially large notional value of derivative positions, this strategy allows riggers to leverage minor physical market sacrifices for substantial financial market gains, effectively converting a local distortion into a profitable arbitrage opportunity. Such behavior, if left unchecked, undermines both price integrity and market confidence.

In electricity futures settled on the monthly weighted average Market Clearing Price (MCP) of the Day-Ahead Market (DAM), a single day’s manipulation may have limited effect. However, participants with large financial exposure can strategically withhold from volume from DAM on select days and/ or selected time blocks—particularly when liquidity is low— and sell it OTC/bilaterally to influence the average MCP over the contract period.

For Example, assume a lot size of 1000 MW continuous base-load position for 30 days = 1000*24*30/ 1000

= 720 GWh/month

Step-by-Step Strategy

1. Hold a long position in electricity futures

   • Example: 720 GWh of notional exposure in a monthly futures contract.

2. Identify low-volume or high-impact days

   • Weekends, holidays, or peak hours with lower PX participation.

3. Withhold bids from DAM on selected days

   • Reduce or eliminate low-price bids (e.g., 1000 MW), artificially tightening the supply curve.

4. Resulting effect

   • DAM MCP rises by ₹0.20–₹0.30/kWh for the day.

   • If repeated over 4–5 days, the monthly average MCP could rise by ₹0.04–₹0.05/kWh.

5. Profit in futures

   • On 720 GWh exposure, a ₹0.05/kWh uplift yields ₹36 lakh in additional settlement gains, while the cost of withholding remains comparatively small.

Why It Works

• DAM is thinly traded (~3.5% of total electricity volume), so small shifts in volume can move prices.

• The opportunity cost of physical withholding (not offering in DAM) is often far less than the gain from financial settlement.

• Repeating the tactic on just a few days is sufficient to move the monthly weighted average.

2.      Artificial Bidding Patterns

Submitting excessively high buy bids for small volumes inflates the MCP disproportionately. Futures settle at inflated levels. However, this has limited impact unless liquidity is low, or volumes are strategically timed.

3.      Coordinated Collusion

Rigging Method Description:
Two parties—typically a generator and a trader—collude to manipulate the supply-demand balance on the power exchange (PX). One profits from the distorted Market Clearing Price (MCP) in the futures market, while the other is compensated through bilateral arrangements. Such strategies are particularly feasible for vertically integrated power companies that have in-house trading arms, enabling coordinated scheduling and market participation. Almost all major power companies have such in-house trading arms.

 Hypothetical Rigging Scenario

A trader holding a long position in electricity futures seeks to profit by artificially inflating the DAM MCP. This is achieved through coordinated action with a generator to simulate scarcity.

Step-by-Step Dynamics

Step 1: Market Setup

Average DAM MCP: ₹4.50/kWh

Daily DAM volume: ~410 GWh

Futures settlement benchmark: DAM MCP

Step 2: Generator A enters a long futures position

·        A 1 GW contract held over a full day (24 hours):

·   1 GW×24 hours=24,000 MWh =24 GWh

·   Over 10 days, this gives 240 GWh exposure.

·   If the MCP rises by ₹0.50/kWh, then:

·   240 GWh×₹0.50/kWh=₹120,000,000=₹12crore

·   So, a ₹0.50/kWh MCP jump = ₹12 crore profit in futures settlement

Step 3: Trader B manipulates the demand curve

·       Trader B removes 10 GWh of low-price bids that would normally clear at ₹4.50/kWh

·       This reduces visible demand tightening the market

Step 4: Generator A bids high

·       Generator A offers supply at ₹5.50/kWh

·       Due to lack of competition from low-price bids, this sets a higher MCP (~₹5.10/kWh)

Step 5: Trader B shifts to bilateral sale

·       Trader B, instead of bidding on PX, sells 10 GWh bilaterally at ₹4.75/kWh

·       This is below the inflated MCP but above the generator’s actual cost

Financial Outcome

·       Generator A: Gains ₹12 crore in futures settlement

·       Trader B: Faces ₹25 lakh opportunity cost on bilateral sale but is reimbursed through side payments or shared gains

Real-World Impact

Consumers and Discoms pay inflated spot prices despite no real scarcity

The integrity of price discovery on PX is compromised

Futures settlement becomes a vehicle for rent-seeking

4.      Shifting Volume to RTM- taking advantage of gate closure rules

The gate closure for the Day-Ahead Market (DAM), which determines the derivative settlement price, is 12:00 noon on the day prior to delivery (D–1). In contrast, the Real-Time Market (RTM) allows bidding until just one hour before each delivery time block. This creates an opportunity for participants to withhold volume from the PX DAM and subsequently reschedule it in the RTM at potentially higher prices—thereby distorting both the spot market (PX) and the settlement price of derivatives linked to DAM MCP.

Withholding Bids in DAM, Selling in RTM: A Manipulation Tactic- How it works:

1.      Day-Ahead Market (DAM)

·                 Participant (e.g., Generator or Trader) does NOT submit or withdraws bids from DAM, reducing available supply.

·                 This artificial scarcity causes the MCP in DAM to rise.

·                 If the DAM MCP is used as a benchmark for electricity futures settlement, this benefits anyone with a long futures position.

2.      Real-Time Market (RTM) / Intraday or Bilateral Market

·                 The same capacity is offered later in the RTM or sold bilaterally.

·                 Because supply was withheld earlier, RTM prices also may spike due to last-minute shortages.

·                 The seller may also profit more in RTM because prices tend to be more volatile and sometimes higher than DAM.

 Illustrative Example-moving from DAM to RTM taking advantage of Gate Closure timings

Action                                                                         Impact

a) Trader doesn’t bid 100 MW in DAM                              MCP increases by ₹0.30/kWh

b) Same 100 MW is sold in RTM at ₹6.00/kWh                  Earns more than typical DAM price (~₹4.50–5.00/kWh)

c) If the trader also holds a long futures position, he profits twice: 

→ Higher futures settlement →  Better RTM realization   Double rent-seeking

5.  End-of-Interval Spiking

 End-of-interval spiking is a market manipulation strategy where a participant submits artificially high (or low) price bids with small volume just before the bidding window closes, typically in the last few minutes or seconds.

This tactic is aimed at distorting the final Market Clearing Price (MCP) or volume-weighted average price (VWAP) used for financial settlement—especially in:

Day-Ahead Market (DAM): final bid submissions close at 12:00 PM.

Real-Time Market (RTM): each block closes 1 hour before delivery.

Strategic bidding during the final 15 minutes of PX bidding window skews MCP when liquidity is lowest. Low liquidity near closure: Many players place bids early. Late stages often have fewer bids, so price elasticity drops.

No time to counteract: Other market participants can’t respond to spiking bids due to imminent gate closure.

Small volume can shift MCP/VWAP: If the cleared volume is small near the margin, even a 10–20 MW abnormal bid can skew the clearing price.

Is it illegal to withhold bids?

·       Technically, not illegal unless proven manipulative .

·       But this is considered “strategic physical withholding”, which:

·       Distorts price discovery

·       Undermines market confidence

·       Exploits regulatory arbitrage between physical and financial markets

Market Integrity Risks:

·       Other PX participants face distorted prices.

·       Retail consumers and discoms pay higher clearing prices.

·       Futures market becomes a tool of transfer of wealth from genuine hedgers to manipulators.

Impact of ₹10/kWh Price Cap on Electricity Derivatives

The imposition of a ₹10/kWh price cap on the Day-Ahead Market (DAM) acts as a natural ceiling for electricity futures contracts that are settled based on DAM Market Clearing Prices (MCP). While this cap provides a safeguard against extreme price volatility, it also constrains the upside potential for financial participants holding long futures positions. In high-demand or stressed grid conditions—where MCPs could have surged beyond ₹10/kWh in an un-capped market—this ceiling limits speculative gains and acts as a deterrent to deliberate market manipulation aimed at inflating spot prices. However, it also introduces basis risk, where actual market scarcity is not fully reflected in futures settlements, potentially distorting price signals for hedging and investment decisions. In essence, the cap offers stability at the cost of market completeness, creating a trade-off between consumer protection and the fidelity of derivative instruments.

Detection and Prevention:

To safeguard market integrity, a combination of real-time surveillance, regulatory enforcement, and structural reforms is essential. Advanced monitoring tools should be deployed to detect correlated bidding patterns, such as synchronized offer withdrawals or price movements between entities like Generator A and Trader B. Anti-collusion provisions under CERC and SEBI frameworks must be strictly enforced, ensuring that coordinated behavior is identified and penalized. AI/ML-based surveillance systems can provide real-time alerts by flagging abnormal price spikes that deviate from expected supply-demand trends. Additionally, ring-fencing physical market participants from financial derivatives traders is critical to prevent self-dealing and cross-leveraging, ensuring that no single entity can manipulate both the physical MCP and the financial settlement it anchors

Possible Countermeasures

Ensuring the integrity of India’s electricity markets—both physical and financial—requires a coordinated and proactive regulatory approach. Surveillance mechanisms must be capable of detecting correlated bidding patterns, such as synchronized offers and withdrawals between entities like Generator A and Trader B, which may indicate collusive behaviour. This is vital for the effective enforcement of anti-manipulation norms under the jurisdiction of CERC and SEBI.

To enhance transparency and responsiveness, real-time alert systems leveraging AI and machine learning should be deployed to flag price spikes that deviate from supply-volume fundamentals. Such tools will help detect market manipulation early and support corrective action.

Given the increasing overlap between physical trading on power exchanges (PXs) and financial positions in electricity derivatives, strict ring-fencing must be implemented to prevent cross-leveraging and self-dealing by entities with dual exposure. This separation should be enforced under the joint oversight of SEBI and the Ministry of Power (MoP).

In parallel, regulatory safeguards are essential to ensure the robustness and integrity of the market reference price used in electricity derivatives. CERC and power exchanges must strengthen surveillance to detect abnormal bidding patterns and volume distortions in real time. SEBI, on its part, should mandate a minimum liquidity threshold before allowing the Day-Ahead Market’s Market Clearing Price (DAM MCP) to be used for derivative settlements, thereby enhancing price credibility.

To further reinforce the reference price framework, three key measures are necessary. First, only market segments with adequate and consistent traded volumes should be included, reducing volatility and the potential for manipulation. Second, a composite index—such as a weighted average of DAM MCP and RTM MCP—can better reflect actual market conditions and dilute distortions in any one segment. Third, the methodology should address periods of low liquidity or erratic bidding behavior—such as weekends, holidays, and end-of-interval spikes—by either excluding them or applying lower weightings.

Additionally, SEBI must prescribe clear position limits and margin norms to curb speculative excesses and mitigate systemic risk. To effectively oversee this evolving market landscape, a joint SEBI–CERC oversight committee is crucial. Such an integrated structure would facilitate coordinated cross-market surveillance, strengthen regulatory enforcement, and uphold the credibility of India’s emerging electricity derivatives market.

Regulatory Measures Needed

To safeguard the integrity of price discovery and deter strategic withholding in India’s electricity markets, a set of operational safeguards must be institutionalized. One critical measure is the conduct of bid and offtake consistency audits across the Day-Ahead Market (DAM) and Real-Time Market (RTM), which can reveal suspicious scheduling shifts intended to manipulate the Market Clearing Price (MCP).

Mandatory disclosure of capacity not offered in the DAM is equally important. This transparency measure enables regulators to monitor deliberate withholding strategies that could distort market outcomes. Furthermore, linking participation in power exchanges to a generator’s declared availability ensures consistency between market offers and actual physical capacity, thereby preserving grid reliability and supporting robust system planning.

Real-time monitoring by the Market Surveillance Committee under the Central Electricity Regulatory Commission (CERC) is essential to detect anomalous market behaviour as it unfolds. Such proactive oversight enables swift regulatory intervention, reinforces fairness in market operations, and sustains trust among participants in both the physical and financial segments of the electricity ecosystem.

Conclusion

As India deepens its power markets and introduces electricity derivatives, ensuring the integrity of price discovery on power exchanges becomes increasingly critical—especially given the thin volume of spot market transactions (only ~7% of total electricity transacted). This limited liquidity makes the Market Clearing Price (MCP) highly susceptible to manipulation through coordinated collusion, strategic withholding, and last-minute bidding distortions. Such practices not only distort the DAM price but also compromise the fairness of futures settlement linked to it. A robust framework combining real-time surveillance, strict enforcement, transparency in capacity disclosure, and structural safeguards—such as ring-fencing physical and financial participants and imposing position limits—is essential. An integrated oversight mechanism between CERC and SEBI is vital to monitor and manage cross-market behavior. Together, these measures will ensure that both spot and financial electricity markets evolve in a transparent, efficient, and manipulation-resistant manner—supporting India’s long-term energy security and transition goals.