Extensions of term-ahead contracts

Recently, distribution companies (discoms) have sought to achieve short-term flexibility in their power purchase contracts. Short-term fluctuations in demand and supply, as well as in tariffs have made it important to optimise long-term contracts in a way that does not lead to adverse financial outcomes for the discoms. Against this backdrop, extending the duration of term-ahead contracts (TAC) and green term-ahead contracts (GTAC) may bring relief to discoms, enhancing market efficiency and meeting the evolving needs of stakeholders.

Energy is traded in India through various contract types, such as day-ahead contracts, intra-day contracts and real-time contracts, each providing distinct timeframes. The term-ahead segment has previously offered limited options, with weekly and daily contracts giving a maximum duration of 11 days initially. This limitation prompted discoms to seek alternative means to short-term contracts for securing power supply, reducing costs and mitigating the risks associated with spot price volatility and transmission availability.

Recognising the demand for longer-duration contracts, power exchanges proposed the introduction of delivery-based monthly contracts, encompassing calendar months or their combinations on a rolling basis. This solution opened new opportunities for market participants, including discoms, small consumers and surplus power sellers to enter into long-term contracts with enhanced payment security mechanisms.

An earlier proposal to extend TACs and GTACs beyond the then-existing 11-day period had received favourable feedback from stakeholders, who perceived it as an opportunity to diversify trading options and extend market participation beyond short-term horizons. However, concerns had been raised regarding the potential fragmentation of liquidity and overlapping delivery periods, which could impact market efficiency and price discovery mechanisms.

The regulatory landscape of energy derivatives and forward contracts had also been subject to scrutiny, with the Ministry of Power setting up a committee to examine the technical, operational, and legal feasibility of such instruments. The committee recommended delineating the jurisdictions of the Central Electricity Regulatory Commission (CERC) and the Securities and Exchange Board of India (SEBI), with the CERC regulating physical delivery-based forward contracts and the SEBI overseeing financial derivatives.

In the light of these developments, the CERC evaluated the proposed contracts by power exchanges, affirming its regulatory authority over physical delivery-based forward contracts and non-transferable specific delivery contracts. Approval was granted for the introduction of monthly contracts, fortnightly contracts, any-day contracts, and any-day single-sided contracts, with modifications to timelines and duration limits allowed for up to three months.

Recently, power exchanges have again petitioned the CERC to approve the extension of the TAC and GTAC up to 11 months from the existing three. Power exchanges want to align the TACs and GTACs with the provisions of the Central Electricity Regulatory Commission (Connectivity and General Network Access to the Inter-State Transmission System) Regulations, 2022. This will synchronise contract durations with the maximum duration of the temporary general network access available.

This further transition towards longer-duration contracts is not without its challenges. The potential fragmentation of liquidity and the overlapping of delivery periods give rise to concerns regarding market efficiency and fair competition between power exchanges and over-the-counter players. Standardisation and harmonisation of contract structures are imperative to maintain market integrity and facilitate seamless trading experiences for all participants.

While extending the TAC and GTAC durations promises increased market liquidity and the fulfilment of diverse consumer needs, regulatory vigilance and stakeholder engagement remain critical to meeting emerging challenges and ensuring the sustainable growth of India’s energy trading landscape. As the CERC considers the proposed contracts and invites stakeholder feedback, the evolution of energy markets towards greater efficiency and resilience remains a shared endeavour and goal for all industry participants.

Abhishek Tripathi is the managing partner and Rahul Bangia is an associate at Sarthak Advocates