Indian Energy Exchange (IEX)

Developing Green Markets and role of IEX

As of today, most of the renewable energy capacity in India is tied up under long-term PPA contracts. This model is not flexible and there is a need to reduce the tenure of long-term PPAs and gradually move towards more market-based models. It is the time to adopt and implement market products like pool-based CFD mechanism for revenue sustainability to the RE Generators and allow virtual PPAs where corporates can procure green attributes while providing certainty in the cash flows of RE Developers. All such enablers must be backed by financial markets instruments for enabling adequate capacity financing.

In Europe, countries like Denmark, Finland and Sweden with a rich share of renewables in their energy mix, channel ALL their green electricity through exchanges. Going forward, green markets in India should also introduce suitable products which have been proven to be beneficial for renewable markets across the globe.

Lets look at the best practices across globe.

Contract for Differences (CfDs)

Imagine you have a solar power plant, and you want to sell the electricity it generates on a power exchange like the Indian Energy Exchange (IEX). However, the price of electricity on the exchange can fluctuate throughout the day based on supply and demand.

Here’s where a CFD comes into play:

1. What is a Contract for Difference (CFD)?: A CFD is like a special agreement between you (the seller) and a buyer, let’s say a company or another individual. In this agreement, you both agree to exchange the difference in the price of electricity at two specific points in time.

2. Example: Let’s say you enter into a CFD with a company that wants to buy electricity from your solar power plant. The CFD agreement specifies that you will sell them electricity at a fixed price, let’s say ₹5,000 per megawatt-hour (MWh), for the next month.

3. Actual Market Price: However, the actual price of electricity on the power exchange can vary from day to day. Sometimes it may go up, and sometimes it may go down.

4. How it Works: At the end of the month, you and the company will compare the fixed price of ₹5,000 per MWh agreed upon in the CFD with the average market price of electricity on the exchange during that month. Let’s say the average market price turned out to be ₹4,500 per MWh.

5. Settlement: In this case, the company will pay you the difference between the fixed price in the CFD (₹5,000) and the actual market price (₹4,500) for each MWh of electricity they bought from you. So, they will pay you an additional ₹500 per MWh for each unit of electricity they purchased from your solar power plant.

6. Benefit for Both Parties: The CFD allows you to have more predictable revenue because you know you will receive a certain price for your electricity, regardless of how the market price fluctuates. On the other hand, the company buying from you benefits because they are protected from sudden price spikes in the market, ensuring they pay a stable, pre-agreed price.

In summary, a CFD market in the context of renewable energy power trading provides a way for both sellers (power generators) and buyers (companies or consumers) to hedge against price fluctuations, making the process more stable and predictable for both parties involved.

Contracts for Differences (CFDs) can be beneficial for power exchanges like the Indian Energy Exchange (IEX) in several ways:

1. Increased Trading Volume: CFDs provide additional opportunities for trading on the power exchange. They attract more participants, including renewable energy generators and buyers, who may not want to be exposed to the volatility of real-time market prices. This increased trading volume leads to higher liquidity on the exchange, making it more attractive to other market participants as well.

2. Risk Management: CFDs help manage risk for both buyers and sellers. For renewable energy generators, CFDs offer a way to secure a fixed price for their power output, protecting them from potential price fluctuations in the spot market. For buyers, CFDs provide a hedge against unexpected price spikes, ensuring they pay a predictable price for electricity.

3. Market Stability: By offering CFDs, power exchanges like IEX can create a more stable market environment. CFDs help reduce price volatility and provide greater certainty to market participants, making it easier for them to plan and manage their energy purchases or sales.

4. Product Diversification: Introducing CFDs as a market product diversifies the offerings on the exchange. A broader range of products attracts a more diverse set of participants, enhancing the overall competitiveness and attractiveness of the exchange.

5. Market Attraction: Power exchanges that offer CFDs can attract international investors and market participants who are familiar with such financial instruments. This can increase the exchange’s profile and help in establishing it as a reliable platform for power trading in the global energy market.

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