Electricity futures
Also written Monthly Electricity Futures
Exchange-traded, cash-settled contracts that let participants lock in a price for round-the-clock electricity delivery over a month, up to three months ahead, without any physical delivery obligation.
In plain language
Electricity cannot be stored the way grain or metal can. It has to be generated and used at almost the same moment. That makes it impossible to run an "accredited warehouse" for power the way exchanges do for gold or wheat.
So Indian exchanges built electricity futures as purely financial contracts. A buyer or seller fixes today what a month of round-the-clock power will effectively cost, and the contract settles entirely in cash — no wires are laid, no power is physically moved through the exchange.
How it works
Monthly Electricity Futures are exchange-traded, standardised, cash-settled contracts covering 28, 30 or 31 days of round-the-clock (RTC) electricity delivery — the equivalent of 24x7 supply for the month — and can be traded up to three months ahead of that delivery month.
Three features the workbook flags as central: no physical delivery is required, since every contract is cash-settled; no transmission scheduling is needed, because unconstrained market prices are used for settlement rather than actual grid dispatch; and the contract runs alongside the physical electricity market as a complementary financial hedging tool, not as part of physical trading or delivery.
A worked example
A captive power consumer — say, a cement plant in Gujarat — expects its electricity costs to rise over the coming quarter due to summer peak demand. In April, it buys Monthly Electricity Futures for the 31-day July delivery month, locking in an effective RTC price of Rs 6.50 per unit (kWh) (illustrative) for its expected consumption of 10,00,000 units, a notional value of about Rs 65,00,000.
If spot power prices in July average Rs 7.20 per unit, the futures position pays out roughly Rs 7,00,000 in cash, offsetting the higher price the plant actually pays its physical power supplier. If spot prices instead average below Rs 6.50, the futures position loses by the same logic, but the plant's actual power bill is correspondingly lower — the futures leg and the physical leg move in opposite directions by design, which is the whole point of the hedge.
At no stage does the exchange arrange for any unit of electricity to be physically delivered to the cement plant through the futures contract itself; only cash changes hands.
Why NISM asks about it
Chapter 1, section 1.3.1, introduces electricity futures as an example of the "energy" commodity category, and is one of the newer product types the paper tests candidates on knowing exists. Expect a question on the tenor (28/30/31 days, up to three months ahead) and on the fact that these contracts are always cash-settled with no transmission scheduling.
Common exam traps
- Electricity futures are always cash-settled. There is no physical delivery variant, unlike gold or agricultural commodities.
- RTC means round-the-clock — the full 24x7 supply for the month, not a peak-hours-only contract.
- The contract runs alongside, not as part of, the physical electricity market — it is a separate financial hedging instrument, not a substitute for actual power procurement.
Check yourself
1.Which of the following would the workbook classify as FINANCIAL futures rather than commodity futures?
- a)Currency futures, bond (interest rate) futures and stock or equity index futures
- b)Crude oil, natural gas and electricity futures
- c)Gold, silver and copper futures
- d)Guar seed, cotton and turmeric futures
Show the answer
Answer: (a) Currency futures, bond (interest rate) futures and stock or equity index futures
"Futures contracts on CURRENCY RATES (currency futures), INTEREST RATES (bond futures) and EQUITY PRICES (stock or equity index futures) are known as FINANCIAL FUTURES, as distinct from COMMODITY FUTURES (futures on crude oil, metals, agriculture products, etc.)."
Why the other options are wrong: (b), (c) and (d) are all commodity futures. They cover chapter 1's four groups:
- Energy: crude oil, natural gas, electricity
- Bullion and metals: gold, silver, copper
- Agriculture: guar seed, cotton, turmeric
⚠️ Don't be misled by "financially settled". Electricity futures are cash-settled, but they are still commodity futures. The classification depends on the underlying, not on how the contract settles.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- CommodityUnder Indian commodity derivatives law, any tangible good other than actionable claims, money and securities — sold in large, uniform quantities and approved by the government and SEBI for futures trading.
- Compulsory deliveryA delivery logic under which every position still open at expiry must give or take physical delivery — neither side can elect to settle in cash.
- Soft and hard commoditiesThe basic split of the commodity universe: softs are perishable agricultural produce that is grown, hards are natural resources that are mined or processed.
- Both optionsA commodity futures settlement type in which physical delivery happens only if both the buyer and seller agree to it — if either declines, the open position is cash-settled at the Due Date Rate instead.
- FPI participation in commoditiesHow foreign money reached Indian commodity derivatives — hedging by eligible foreign entities from October 2018, the FPI route without underlying exposure from 2022, and direct market access from May 2023.
- Monsoon proxyUsing an agricultural commodity index future as a stand-in for a bet on the monsoon — buy it for a deficit monsoon, short it for a good one — which the workbook offers as an approximation only.