Traditionally, India’s electricity procurement has relied heavily on long-term, physically settled power purchase agreements (PPAs), under which distribution companies (discoms) commit to buying electricity from generators. While these contracts have played a vital role in enabling capacity addition and providing revenue certainty, they are associated with inefficiencies in despatch and limited responsiveness to real-time market conditions. India’s decentralised and largely bilateral contracting structure can constrain optimal scheduling and capacity utilisation across the system.
In this context, new contractual frameworks, financially settled contracts (FSCs), are emerging as a compelling solution. FSCs can support investment in new generation capacity, and they can align operational incentives with market-based prices, stimulating India’s competitive wholesale market.
FSCs operate through financial flows linked to market prices, allowing generators to sell power in the market while hedging revenue risk through agreed strike prices. By decoupling financial arrangements from physical despatch, FSCs enable more efficient market outcomes while preserving the revenue certainty required for project financing.
Instruments such as contracts for difference (CfDs), call options, forwards and futures are central to this approach. Under a CfD structure, for example, buyers and sellers agree on a strike price, with payments flowing between them depending on the difference between that price and the market clearing price. This ensures that both parties effectively hedge against price volatility, while generators retain strong incentives to respond to real-time market conditions.
The potential benefits of such a transition are significant. Evidence suggests that FSCs can improve system efficiency by aligning generator behaviour with market price signals, leading to more optimal despatch and lower overall system costs. Modelling indicates that shifting from traditional PPAs to financially settled instruments could deliver savings of several percentage points in procurement costs while also enhancing reliability and strengthening incentives for generator availability during periods of scarcity.
FSCs can play a pivotal role in integrating higher shares of renewable energy. As variable renewable generation increases, the need for flexibility, efficient balancing and accurate price signals becomes more acute. Financial contracts allow market participants to manage price risk without distorting operational decisions, thereby supporting the integration of renewables while maintaining system stability.
India is already seeing early signs of this transition. The emergence of virtual power purchase agreements for large consumers, the introduction of electricity derivatives markets and the launch of the MNRE’s CfD pilot with SECI signal growing acceptance of financial instruments in the sector. However, scaling up the use of FSCs will require the addressing of regulatory uncertainties, the development of standardised contract structures and the assurance of a level playing field within existing frameworks for resource adequacy and procurement.
Against this backdrop, Power Line magazine is hosting a webinar on “Transforming India’s Power Market: The Promise of Financially Settled Contracts”, in association with the Regulatory Assistance Project. The webinar will bring together leading experts to explore these issues in depth. It will feature insights from experts in electricity market regulation, and examine opportunities, challenges and practical pathways for implementing FSCs in India’s evolving power market.
