By Juan Rios on 23/07/2025
Topics: Electricity, Risk management, Energy Markets
India consumes over 1500 TWh of electricity annually, making it the world’s third-largest consumer. This month marks a significant shift as the country launches not one, but two electricity futures markets – a development that will reshape how electricity is traded.
India’s electricity market remains heavily regulated. Distribution companies (discoms) set prices annually after their cost-recovery proposals get regulatory approval, leaving consumers with limited risk management options. Your choices were essentially to install rooftop solar, access the Open Access (OA) scheme through the Indian Electricity Exchange (IEX) spot market, or sign renewable energy PPAs. That was pretty much it.
The numbers tell the story: while European energy exchanges handle 50% of transactions, India’s exchanges only cover 8% of total consumption as of 2025. Much of the electricity is traded via long-term PPAs between generators and discoms. Additionally, discoms need long-term price certainty, which the spot market doesn’t provide. For consumers, spot prices aren’t always better than state tariffs and can come with additional non-commodity costs. This is because discoms have successfully lobbied regulators to maintain certain tariffs for OA consumers, with the goal of keeping their market share over these consumers.
In July, both the Multi Commodity Exchange (MCE) and the National Stock Exchange of India (NSE) received approval to launch their own electricity futures, with inaugural trading on 10 July and 14 July respectively.
This shift comes as India pushes towards its 500 GW renewable energy capacity target by 2030. For industrial consumers especially, it opens up new ways to hedge against electricity price volatility. In other words; ways to manage electricity costs by locking in a price for future months.
Right now, 90% of electricity trades happen through long-term bilateral agreements between discoms and generators. Moreover, these discoms handle 55% of India's electricity consumption, with most heavily in debt – about 9.5 billion USD according to government figures. They’re caught between bilateral agreements, volatile profit margins, and spot purchases for unpredictable peak demand thanks to increasingly erratic weather conditions.
But it's not just discoms that will benefit. Independent Power Producers (IPPs) will use futures to seek revenue certainty as renewable energy integration increases. Industrial consumers with open access – those with 100kW solar systems, which grant them the ability to access the spot market – particularly in Maharashtra, Rajasthan, Gujarat, and Karnataka, can finally implement hedging strategies to optimize electricity procurement costs.
Futures will initially be available for the current month and three months ahead, eventually expanding to all 12 calendar months, enabling price discovery across seasonal patterns. NSE plans to launch quarterly and annual contracts after the launch of the monthly electricity futures contract.
The basics: Monthly tranches start at a minimum of 50 MWh and cap at 2500 MWh with cash settlement. Futures prices will be based on 30-day volume-weighted average prices from India’s three exchanges: IEX, Hindustan Power Exchange, and PXIL Day-Ahead Market.
For reference, cash settlement involves a financial payment based on the difference between the contract price and the market price, while physical settlement involves the actual transfer of electricity.
Let me walk you through a simple example:
Consumer A uses 1,000 MWh per month
To hedge 500 MWh for September, Consumer A needs:
Financial impact per month
Whether this makes sense depends on what actually happens in September:
As shown above, these hedges are purely financial and settled against the spot price of the month that was hedged. It’s important to note that these hedges and their result will be a separate cost or credit on the electricity invoice from your discom. They also require risk management tools to assess when to make a hedge.
Industrial users that meet the Open Access criteria will be able to access this market via brokers, which will purchase futures on their behalf. Assessing whether this is a risk management tool you want to explore will require a detailed review of your energy procurement strategy as well as internal discussions about the costs and benefits this may bring. Those customers who have already signed PPAs are used to buying spot via Open Access, and are looking for additional ways to hedge against future price volatility, should consider hedging as the next step in their risk management journey.
A major hurdle will be liquidity – you need enough buyers and sellers actively trading for efficient price discovery. We’ve seen similar markets develop for years in countries like Singapore and Japan, but liquidity remains an issue.
Hedging electricity futures comes with its risks:
Cost of trading and price risk. Brokerage fees, margin requirements, and trading spreads need to be assessed as part of the costs of hedging.
Cash settlement creates disconnects. Since electricity futures settle in cash rather than physical power, speculative trading can push derivative prices away from actual electricity costs. Your hedge might lock in 4,500 INR/MWh while actual spot power is available at 4,000 INR/MWh, meaning your hedge locks in an inflated price.
Regional price differences. Futures track national exchange prices, but your actual costs depend on local market conditions. If IEX averages 4,000 INR/MWh but your state's spot market trades at 3,500 INR/MWh due to surplus generation, you’re automatically losing 500 INR/MWh regardless of market movements.
Volume estimation is crucial. Hedge too little and you're exposed when prices surge. Hedge too much and you're wasting money. For a 1,000 MWh monthly consumer, a 100 MWh estimation error leaves 10% of consumption vulnerable to price spikes or costs you 4,00,000 INR in unnecessary hedging costs.
Compared to other markets that have undergone electricity market deregulation, India is still in very early stages. Utilities still dominate the market, and there is no indication whether the retail side will be deregulated any time soon. This means that it will be some time before these hedging services are integrated as part of utilities’ contract offerings. In countries like Japan, for instance, that have deregulated electricity markets, the utilities and retailers have not adopted futures hedging as part of their offerings to customers. What these futures markets bring is options for the electricity supply chain to manage electricity price risk.
India's electricity futures launch is significant – it introduces market-based risk management tools that address urgent commercial needs while supporting the country’s long-term energy transition objectives. Industrial users now have portfolio diversification beyond traditional PPA-spot market combinations and can hedge against price spikes during peak production periods.
More importantly though, industrial users in India now need to think strategically about energy procurement, combining tariffs, spot exposure, and futures hedging, while managing the growing need for PPAs. It's more complex, but the tools are finally available.
If you wish to discuss this further, reach out to our APAC Lead Partner, Juan Rios.
