Electricity Derivatives – The Revolution in Indian Power

Published on: July 11, 2025

India’s electricity market is experiencing significant growth, with generation increasing by 5.4% from April to December in the current fiscal year (FY25*) compared to the same period last year. This growth is driven by higher demand during both summer and winter. While thermal power remains the largest contributor, renewable energy, including small hydro, is growing at a faster rate, indicating a shift towards sustainable sources.

The Indian Electricity Market

India’s power generation reached 1378.42 billion units (BU) from April to December FY25*, up from 1307 BU in the previous year. One Billion Units (BU) is equivalent to one Million Mega Watt Hours (MWh).

Here is a breakdown of the electricity generation mix for FY25* (April-December):

• Thermal: 1,016 BU (3.6% year-on-year change)
• Renewable energy including small hydro: 188 BU (10% year-on-year change)
• Hydro (Large): 125 BU (9.3% year-on-year change)
• Nuclear: 43 BU (18.6% year-on-year change)
• Import by Bhutan: 5 BU (12% year-on-year change)
• All India Total: 1,378 BU (5.4% year-on-year change)

This data highlights a significant increase in electricity demand and a growing contribution from renewable sources.

Understanding the Electricity Value Chain

The Indian electricity value chain involves several key players:

• Generators: Produce electricity and make supply offers.
• Load Despatch Centre: Manages the declared power capacity and schedule from generators, and requisitions/schedules power for distribution companies, trading companies/and power exchanges.
• Trading Companies / Power Exchanges: Facilitate the trading of power and provide schedules for traded power to the Load Despatch Centre.
• Distribution Companies (Discoms): Receive electricity from generators and the Load Despatch Centre, and distribute it to small and large consumers.
• Small and Large Consumers: The end-users of electricity.

This intricate network ensures the flow of electricity from generation to consumption, along with contractual arrangements and information flow.

The Rise of Electricity Derivatives: Managing Volatility and Risk

The growth of the short-term electricity market in India, with a CAGR of 14% between FY18 and FY24, and exchanges accounting for 55% of this market, underscores the need for effective risk management tools. The shift from long-term Power Purchase Agreements (PPAs) to shorter tenors also contributes to increased price volatility. Annualised volatility in the spot market has been notable, with 27% in 2022 and 2023, and 19% in 2024.

Why Electricity Derivatives?

Electricity derivatives serve several crucial utilities:

• Manage Price Volatility: Mitigate risks associated with fluctuating electricity prices.
• Asset Portfolio Optimisation: Improve the efficiency of power generation and consumption assets.
• Stabilising Budgets and Cash Flows: Provide predictability in financial planning.
• Protect Profitability Margins & Opportunity Cost: Safeguard earnings and capitalise on market opportunities.
• Creditworthiness: Enhance financial stability and reliability.

Participants in Electricity Derivatives

Various entities participate in electricity derivatives to manage risk and provide liquidity:

• Transfer of Risk:
  • Power Generators
  • Power Trading Licensees
  • Discoms
  • Industrial consumers
  • Commercial Consumers
  • Risk Managers
• Risk Takers/Liquidity Providers:
  • Financial Investors
  • Algo Traders and HFTs (High-Frequency Traders)
  • Retail Brokers and Financial Institutions
  • Proprietary Desks
  • Funds

Day Ahead Market (DAM) and Price Discovery

The Day Ahead Market (DAM) is a physical electricity trading market where participants can buy and sell electricity for the following day. It operates on a double-sided closed auction bidding process. Bids can be entered for 96 blocks of 15 minutes each. The intersection of aggregate supply and demand curves determines the Market Clearing Price (MCP) and Market Clearing Volume (MCV), maximising volume. Congestion management is also in place, with market splitting and the determination of Area Clearing Price (ACP) for specific areas.

To track the electricity spot price from IEX, you can visit their official market data page

Factors Influencing Electricity Prices

Several key factors impact electricity prices:

• Fuel Costs: Prices of gas and coal significantly influence generation costs.
• Seasonality / Weather Conditions: Demand rises in summer due to air conditioning, leading to higher prices as utilities use more expensive generation sources. Seasonality analysis indicates a rising trend in September-October and April-May.
• Transmission Constraints: Limitations in transmission infrastructure can affect supply and prices.
• Renewables Supply: The availability of renewable energy sources impacts the overall supply mix and pricing.
• Consumer Demand: Seasonal and festival demand patterns influence consumption.
• Power Plant Shutdowns / Outages: Disruptions in generation capacity can lead to price spikes.
• Industrial Demand: High industrial activity can increase overall electricity demand.

MCX Electricity Futures Contract Specifications

The Multi Commodity Exchange (MCX) offers electricity futures contracts with specific features:

• Contract Start Day: 1st business day of the launch month, with contracts launched 3 months prior to expiry.
• Last Day of Trading: Business day immediately preceding the last calendar day of the expiry month. If it’s a holiday, the preceding business day.
• Contract Duration: Four-month trading period.
• Price Quote Basis: Rs. per MWh (excluding taxes and levies).
• Trading Unit: 50 MWh.
• Tick Size: Rs. 1 per MWh (Profit/Loss Per Tick: Rs 50).
• Initial Margin: Minimum 10% or based on SPAN, whichever is higher.
• Maximum Allowable Open Position:
  • Individual clients: 3 lakh MWh or 5% of market-wide open position, whichever is higher.
  • Member collectively for all clients: 30 lakh MWh or 20% of market-wide position, whichever is higher
• Due Date Rate (DDR): Based on the Volume Weighted Average of the DAM-UMCPs (Unconstrained Market Clearing Price) of the Indian Energy Exchange (IEX) for all calendar days of the expiry month.
• Settlement: Cash settled.

For example, the DDR for the September 2025 contract was Rs. 5,101/MWh, calculated as the sum of (Volume X MCP) divided by the sum of Volume from September 1st to September 30th, 2025.

Global Perspectives on Electricity Futures

Electricity futures markets are well-established globally, with key exchanges and contract types:

• UK/Europe:
  • Spot Exchange/Market: EPEX SPOT / Nord Pool (for Nordic Futures).
  • Futures Exchange: The European Energy Exchange (EEX).
  • Types of Contracts: Baseload and Peak load futures for German, French, Italian, Nordic, and Austrian markets.
  • Futures Settlement Mechanism: Spot market index (Average) as determined by EPEX Spot.
• Australia:
  • Spot Exchange/Market: Australian Energy Market Operator (AEMO).
  • Futures Exchange: The Australian Securities Exchange (ASX).
  • Types of Contracts: New South Wales, Victorian, Queensland, South Australian base and peak load futures contracts.
  • Futures Settlement Mechanism: Arithmetic average of the Wholesale Electricity Pool Market spot prices.

The BENCHMARK – Electricity Futures Trading in the European Energy Exchange (EEX)

The European Energy Exchange (EEX) has played a significant role in the development of electricity derivatives. EEX offers various power derivatives, including baseload and peak load futures for several European countries like Germany, France, Italy, the Nordic regions, and Austria.

The volumes on EEX’s European Power Derivatives have shown substantial growth over the years, indicating increasing participation and maturity of the market. For instance, the power derivatives volumes on EEX grew from 5,185 million MWh in 2023 to 8,438 million MWh in 2024. This growth highlights the increasing reliance on futures contracts for hedging and trading in the European electricity market.

Market participants on EEX are diverse and include power utilities (energy producers/consumers), commodity trading firms, and financial institutions (investment banks, asset managers, funds), all with different motivations for trading, such as hedging, speculation, arbitrage, and market access services.

Analyse & Trade MCX Electricity with Definedge Securities!

With a Definedge Securities trading account, you can trade in MCX Electricity futures. This offers an opportunity to participate in the growing Indian electricity derivatives market and manage your exposure to price volatility.