India's power market heads for structural reset; IEX, futures to realign

Economic Times

2 days ago

ETMarkets.com The sharp drop in the stock price of Indian Energy Exchange (IEX) in late July - almost 30% in a single trading session - reflected the market's collective reaction to CERC's decision: formal implementation of market coupling by January 2026.The move aims to unify price discovery across Indian power exchanges - breaking IEX's dominance and potentially transforming the electricity trading ecosystem. For investors, regulators and market participants, this signals an opportunity to restructure and redefine the purpose of the power derivatives market.
Under the new framework, all Day-Ahead Market (DAM) orders from India's three exchanges - IEX, PXIL and HPX - will be funnelled into a centralised algorithm managed by a Market Coupling Operator (MCO), a rotating role among exchanges. The result: a single uniform clearing price per time slot across all exchanges, enabling a unified price discovery process. A first for India, the concept is inspired by European practice. In the EU, Nord Pool and EPEX Spot operate within a connected power market, using a common algorithm (Euphemia) to produce a single clearing price. After coupling, derivatives volumes increased by 20-25% across key hubs, volatility decreased and liquidity improved.
India's electricity futures market, launched days before the coupling announcement, is in a difficult position. MCX and NSE rushed to launch trading in electricity derivatives, benchmarked to DAM prices of IEX and PXIL, respectively. However, with three different DAM prices, these derivatives faced the challenge of basis risk divergence. Had the coupling been implemented before the launch of futures, the market would have benefited from a single, transparent reference rate from the start. Instead, India's derivatives market now faces a temporary mismatch between reference benchmarks. Until January 2026, traders may encounter changing benchmarks mid- cycle, which could hinder participation and complicate risk management.Regulatory clarity on benchmark formation and spot market functioning should precede the launch or scaling of derivative products. India's electricity futures market is nascent, while the underlying reference price is transforming. This creates short-term friction. To adapt, exchanges may need to revise existing contracts post-coupling - listing new series, retiring legacy ones, and aligning valuation and margining norms with the unified benchmark. A transitional roadmap issued by Sebi and CERC would help ease market adaptation and reduce uncertainty.Once the spot price stabilises, the case for launching additional futures (and, possibly, options) contracts - such as quarterly, seasonal and peak-load indexed series - will strengthen. Liquidity that was historically concentrated on one platform can now be distributed more evenly across exchanges.Market coupling will harmonise the reference DAM price across platforms, resolving the current issue of dual benchmarks in the electricity futures segment. While this structural shift is necessary, it must be carefully sequenced and communicated.For IEX, losing its exclusive price discovery status marks a turning point in its business model. PXIL and HPX, meanwhile, are positioned to grow if they improve their service efficiency. Now, innovation - not exclusivity - will set exchanges apart in a tighter, tech-driven market.The European experience in coupling revealed a pattern: first, consolidation in the spot market, followed by a surge in derivatives innovation. Germany and the Nordics, after coupling, introduced new products that addressed not only time but also geography and risk type. Importantly, they built trust by aligning regulation, standardising contracts and clearing services. Both Indian regulators should consider aligning their rules on margining, position limits and disclosure. Without this coordination, regulatory arbitrage or ambiguity could stall growth.With MCO role rotating, CERC must establish a supervisory system to ensure the consistent operation of the algorithm. Euphemia is centrally managed with regulatory oversight to ensure uniformity across Nord Pool and EPEX Spot. CERC needs to adopt a similar structure - possibly with audit rights, transparency reports and version control of the algorithm - so that the turn of each exchange as MCO follows the same operational principles. This will help keep the coupled DAM truly unified, preserving the integrity of both spot and derivative markets.India's decision to connect the power markets aligns us with global standards. However, the true success of this evolution depends on how effectively we build the supporting layers. For electricity futures to develop, the market needs confidence in the reference rate, smooth product transitions and an innovation-driven approach. Sebi and CERC can now enhance their newly established collaboration and shape an investor-friendly electricity market together.The futures market may have been launched before the foundational elements were in place. But now that market coupling is a likely reality, the blueprint for India's integrated power market is within reach. What we need next is precise execution and cooperative governance.
Nair is former director, National Institute of Securities Markets, and Shunmugam is partner, MCQube. (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.) Elevate your knowledge and leadership skills at a cost cheaper than your daily tea. Berlin to Bharuch: The Borosil journey after the China hit in Europe
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