Electricity derivatives to offer more certainty of power offtake for renewable investors

The sale of power in the futures market will benefit renewable energy developers and distribution companies.
The introduction of derivatives to India’s short-term power market will make it easier for renewable project developers to enter into offtake arrangements with the state-owned distribution companies (discoms), finds a new briefing note from the Institute for Energy Economics and Financial Analysis (IEEFA).
“The launch of new financial instruments will enable developers to hedge their off-taker risk without requiring the signing of long-term contracts with discoms for the financial closure of projects,” says author Vibhuti Garg, Energy Economist, Lead India at IEEFA.
Long-term contracts between power producers and discoms – usually 25-year power purchase agreements (PPAs) – comprise 88 percent of electricity transactions in India. In IEEFA’s view, PPAs provide investors with a certainty of offtake of power over a long duration and de-risk them from price volatility.
However, Solar Energy Corporation of India (SECI) currently has 15-16 gigawatts of auctioned capacity waiting to be signed by discoms, and this backlog of unsigned PPAs is now impacting the development of new renewable energy projects.
Discoms are struggling with huge financial losses and have become increasingly reluctant to enter long-term PPAs with renewable energy developers due to the discovery of record low renewable tariffs – a very positive deflationary trend that saw solar tariffs in India dip to a new low of ₹1.99/kWh at the end of 2020.
“The sale of power in the futures market will provide flexibility and certainty of supply for both discoms and developers. It will also help develop the price signal needed to incentivise supply into peak demand periods, which is the key to enabling battery deployments and demand response management,” says Garg.

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