Development of the energy derivative market in India

Aug 12, 2005 02:00 AM

The Confederation of Indian Industry (CII) has undertaken an initiative "Development of Energy Derivative Market in India" with the support of the UK's Global Opportunities Fund Climate Change and Energy Programme.
Under the initiative, CII would study various aspects of energy derivative market and suggest suitable regulatory, policy and financial framework.

CII is in the process of forming an "Energy Derivative Consultative Group" representing experts from all major related fields to deliberate on these issues. The group will meet regularly in the project duration.
Energy security is one of the prime concerns India faces today. Both the economy and individual energy intensive businesses face the risk of irregular fuel supply and fluctuations in prices. The government aspires to secure the aggregate supply of energy from various sources to meet the Indian economy's total energy demand. But individual businesses are more concerned with price fluctuations and securing assured supplies of their fuel of choice.

Today, several oil-intensive industrial units and businesses face tremendous uncertainty about their energy bills due to short-term fluctuations in fuel prices. On the other hand, energy companies (particularly the oil companies) also face uncertainties in the receipt of revenues.
While it is generally accepted that there is an upward trend in the prices of oil and many other energy sources, what Indian companies on both the demand and the supply side are more concerned with is short-term volatility of prices. As is the case in several developed countries, institutionalisation of an energy derivative market through instruments like futures, options or contracts in various energy products would reduce the price and supply risk of energy commodities for several businesses in India.

Along with the risk mitigation benefit, an energy derivative market will have numerous other advantages. It will increase market efficiency in the sector, better match price with the value of underlying assets, reduce price volatility in the spot markets and will serve as signal to participants to enable them to switch between fuels.
If and when established, the Indian energy derivative market will be comparable to other well-known international energy derivative exchanges like the International Petroleum Exchange in London and the New York Mercantile Exchange.

Though electricity, carbon certificates and natural gas will all have a place in the Indian energy derivative market, crude oil is likely to be the dominant commodity in all respects.
With the institutionalisation of energy derivatives, efficiency of the entire energy sector is expected to improve significantly. After a series of adverse reports on oil price hikes, the Indian Industry finally has something to cheer about.

Source: KeralaNext
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