NSE to introduce liquidity enhancement scheme for electricity futures

Mumbai, June 28, 2025 — In a move aimed at strengthening India's nascent electricity futures market, the National Stock Exchange (NSE) has announced the introduction of a Liquidity Enhancement Scheme (LES) for electricity futures. The initiative, scheduled to begin in July 2025, seeks to improve market depth, tighten bid-ask spreads, and attract wider participation from institutional and retail investors alike.

The scheme will be applicable to electricity futures contracts traded on NSE’s Commodity Derivatives Segment and will be implemented in consultation with the Securities and Exchange Board of India (SEBI). This initiative reflects growing regulatory and market focus on promoting energy derivatives as critical tools for hedging and price discovery in the evolving power ecosystem.

Understanding the Liquidity Enhancement Scheme

Liquidity Enhancement Schemes are structured incentive programs that offer financial rewards to market participants—typically designated market makers or large-volume traders—who contribute to enhancing liquidity in specific products. Under the upcoming LES for electricity futures, the NSE is expected to provide incentives based on order-book presence, trade execution volumes, and order-to-trade ratios.

NSE officials, while confirming the development, highlighted that the LES will be time-bound and subject to regulatory oversight. A spokesperson for NSE stated:

“The LES for electricity futures aims to stimulate active participation and build a robust market structure for power derivatives in India. A liquid and vibrant futures market is crucial for managing price risk in the electricity sector, which is inherently volatile and seasonal.”

Market Context: Power Trading and Derivatives in India

Electricity trading in India has traditionally been dominated by physical contracts and bilateral agreements, with spot and day-ahead markets operated by Indian Energy Exchange (IEX) and Power Exchange India Ltd (PXIL) seeing active participation. However, electricity futures—a more recent entrant in India’s commodity markets—have witnessed sluggish growth due to low volumes and limited awareness.

Introduced on NSE and MCX in 2020 following regulatory approvals, electricity futures contracts are standardized instruments allowing buyers and sellers to lock in future electricity prices. Despite their potential, these instruments have suffered from a liquidity drought, making price discovery difficult.

Ramesh Iyer, Head of Commodities Research at Motilal Oswal Financial Services, commented:

“The LES could be a game-changer for electricity futures. One of the biggest hurdles for participation has been the absence of deep order books. If NSE can bridge that gap with market makers and sustained liquidity, the segment could gain meaningful traction, especially among commercial power users and distribution companies.”

Incentives to Attract Broader Participation

Sources close to the development indicate that incentives under the scheme could range from transaction fee waivers to direct cash rewards based on performance metrics. The scheme is likely to focus on a few benchmark contracts initially—possibly those with hourly and daily durations—and gradually expand based on market response.

Participation from state electricity boards, industrial power consumers, and renewable energy companies is also being encouraged. With India’s energy demand expected to grow at a CAGR of 6% through 2030, the need for sophisticated hedging tools like electricity futures is becoming increasingly vital.

Ankit Maheshwari, Managing Director at Energy Advisory Group, said:

“Renewable energy integration is creating variability in electricity supply, and that’s increasing price uncertainty. Futures can help players hedge against such fluctuations, and liquidity enhancement is the missing piece that can unlock this market’s potential.”

Regulatory Support and Competitive Landscape

SEBI has in recent years encouraged the growth of commodity derivatives beyond traditional assets like metals and agri-commodities. The regulator’s green light for LES underscores its commitment to fostering innovation and risk management tools in the energy sector.

The NSE’s initiative is likely to trigger competitive responses from rival exchanges, particularly MCX, which has also listed electricity futures but seen muted interest. Industry experts believe that a successful LES by NSE could pave the way for further derivative instruments, including options on electricity futures and contracts tied to renewable energy indices.

Investor Outlook: Opportunities and Risks

For institutional investors and corporates, the LES could translate into improved spreads, faster execution, and more reliable price benchmarks. For retail investors, though participation may remain limited due to the product's complexity, the scheme’s success could eventually lead to simplified energy derivatives tailored to their needs.

However, analysts caution that liquidity alone may not be enough. Education, infrastructure readiness, and regulatory clarity will be essential to ensure long-term market development.

Kriti Sharma, Senior Energy Analyst at CRISIL, noted:

“LES is a great catalyst, but sustainable liquidity comes from a larger ecosystem—better forecasting models, stronger clearing mechanisms, and training for power sector stakeholders. NSE must work holistically.”

Powering the Future of Energy Hedging

The NSE’s Liquidity Enhancement Scheme for electricity futures represents a strategic push to deepen India’s energy markets and foster price stability in a critical sector. With appropriate regulatory backing, stakeholder education, and robust incentives, the LES could transform electricity futures from a niche offering into a mainstream risk management tool.

As India marches toward a future powered increasingly by renewables, volatility in electricity prices is likely to rise. Futures contracts—backed by real liquidity—could be the key to managing that risk efficiently and transparently.