India’s power sector has witnessed several policy developments in recent years, driven by the need to modernise electricity markets, scale up renewable energy integration and align the energy system with the country’s climate goals. By enhancing transparency in short-term markets, laying the groundwork for carbon trading and electricity derivatives, and promoting battery storage and renewables uptake by commercial and industrial customers, policymakers are reshaping power markets and attracting new investments.
This transformation is driven by a growing recognition that existing market mechanisms – largely designed for a fossil-dominated, centrally despatched grid – must be reconfigured to support a decentralised, clean and flexible energy future. To this end, over the past few months, the Central Electricity Regulatory Commission (CERC), the Ministry of Power (MoP) and the Securities and Exchange Board of India (SEBI) have issued several landmark guidelines and frameworks. While some policy updates are in draft stages, their potential impact on the sector is immense. Renewable Watch tracks five key policy developments in the sector…
Carbon Credit Trading Scheme
The MoP has introduced the draft Carbon Credit Trading Scheme (CCTS), laying the foundation for India’s national carbon market. The scheme is designed to support both voluntary and compliance-based carbon trading mechanisms and reflects a broader ambition to align India’s emissions trajectory with its global climate obligations. Under the proposed structure, a multi-tiered governance framework has been established to ensure regulatory coherence and robust market functioning.
The Indian Carbon Market Governing Board will be chaired by the Secretary, Ministry of Environment, Forest and Climate Change. The board will also include senior officials from the ministries of power, finance, new and renewable energy, steel, coal, and petroleum and natural gas, bringing cross-sectoral expertise into regulatory decision-making. The Bureau of Energy Efficiency will serve as the market administrator and will be responsible for developing methodologies for project registration, setting compliance targets, accrediting verification agencies, recommending fees, and issuing carbon credit certificates (CCCs) based on verified emissions reductions. Grid Controller of India Limited will serve as the market registry, responsible for entity registration, secure data storage, transaction record-keeping and IT platform development. Meanwhile, the CERC will oversee carbon trading activities, including approving exchange participation, monitoring trading frequency, and ensuring market integrity.
Under the CCTS framework, obligated entities that exceed their emission reduction targets will earn CCCs, which can then be traded with other participants to help meet compliance requirements. The scheme also provides for voluntary trading by entities not mandated under the compliance market, though priority will be given to domestic buyers to ensure alignment with India’s Nationally Determined Contributions. The draft also outlines mechanisms for setting floor and forbearance prices, managing certificate validity,and approving voluntary projects.
India’s voluntary carbon market is expected to launch shortly, while the compliance market is anticipated to become operational within two to three years. Notably, the country’s existing Perform, Achieve and Trade scheme is likely to be integrated into the compliance market framework. Power exchanges are already preparing for this transition. For instance, Indian Energy Exchange has launched the International Carbon Exchange Private Limited to facilitate voluntary trading of carbon credits.
As India moves towards building a robust carbon trading ecosystem, the CCTS is expected to play a critical role in catalysing low-carbon investment, incentivising cleaner technologies and enabling Indian industries to contribute meaningfully to global climate goals. While success will depend on rigorous monitoring and enforcement, the carbon market offers India a powerful lever for cost-effective emissions control and global climate engagement.
Electricity derivatives market
In a landmark move to expand power markets and provide effective price risk hedging tools, SEBI has approved the introduction of electricity derivatives on the Multi Commodity Exchange (MCX) and the National Stock Exchange (NSE). These financial instruments are aimed at helping discoms, generators and large commercial consumers hedge against electricity price volatility, thereby improving price discovery and increasing market participation.
At the MCX, the newly launched contracts will have a trading unit of 50 MWh, with a maximum order size capped at 2,500 MWh (50 times the trading unit). Contracts will be launched three months before expiry and traded for four months. Prices will be settled based on the Indian Energy Exchange’s (IEX) day-ahead market price. To promote participation, the MCX has launched a liquidity enhancement scheme to incentivise market makers who meet minimum net worth and experience requirements.
The NSE has introduced monthly electricity futures, offering a six-month waiver on transaction fees to encourage early adoption. These cash-settled contracts are benchmarked to a 30-day weighted average of spot prices across the IEX, Hindustan Power Exchange and HPL Electric and Power Limited. Monthly contracts will begin on the first business day of each month and expire one day before the end of the month. The NSE also plans to introduce quarterly and annual electricity futures, pending regulatory approval.
Electricity derivatives provide a crucial risk mitigation tool. Discoms can use them to hedge against peak-time price spikes, while renewable energy generators can lock in stable returns in the face of volatile markets. Commercial and industrial consumers benefit from predictable energy costs, supporting more efficient budget planning. With trading volumes projected to reach as high as 8,000 billion units annually and market potential valued between $174 billion and $475 billion, according to the NSE, electricity derivatives are poised to become a significant segment of the energy market.
Overall, the regulatory approval and imminent launch of electricity derivatives on the MCX and NSE mark a watershed moment for India’s power sector. By enabling stakeholders to manage price volatility and adapt to a renewables-driven energy landscape, electricity futures are poised to support market efficiency, investment confidence and sustainable sector growth. However, regulatory oversight will be key to preventing speculative excesses and ensuring that trading activity remains aligned with real-world energy demand.
Virtual power purchase agreements
The CERC has issued draft guidelines for virtual power purchase agreements (VPPAs), providing a new financial mechanism for commercial and industrial consumers to achieve their renewable energy targets. VPPAs enable companies to invest in green energy without physically taking delivery of power, offering a flexible and scalable procurement model.
Under a VPPA, the renewable energy generator sells electricity in the open market at the prevailing rate. The financial settlement between the generator and the consumer is based on the difference between the market price and the agreed VPPA price. If the market price exceeds the VPPA price, the generator pays the difference to the consumer. Conversely, if the market price is lower, the consumer pays the generator. This arrangement provides a hedge against power price volatility and allows for long-term cost predictability.
Designated consumers can enter into long-term VPPAs either directly, through traders, or via over-the-counter platforms registered with the CERC. The renewable energy projects involved must be registered under the REC Regulations, 2022 or any future amendments. Notably, the renewable energy certificates generated through such arrangements will be transferred to the consumer and can be used to meet renewable consumption obligations (RCOs), although they cannot be traded. Disputes arising from VPPAs are to be mutually resolved by the involved parties. VPPAs are particularly relevant in the context of amendments to the Energy Conservation Act, which introduced RCOs for designated consumers. They also offer a practical solution for corporates that face limitations in accessing green power physically due to grid constraints.
Overall, although VPPAs are still in the early stages of adoption in India, they hold significant potential for corporates aiming to decarbonise operations, support renewable energy deployment and protect against future electricity price volatility. For renewable energy developers, VPPAs open up access to a wider pool of customers beyond discoms. As India moves towards a more market-driven power sector and enhances its focus on green energy and decarbonisation, VPPAs are poised to become increasingly relevant. For VPPAs to succeed in the country, it is essential to not only implement robust guidelines but also address potential challenges such as over-invoicing and ensure transparency in the awarding and implementation of VPPAs.
Policy updates on ESS
The MoP has proposed amendments to Rule 18 of the Electricity Rules, 2005. The draft amendments recognise energy storage systems (ESSs) as integral components of generation, transmission and distribution systems. Entities eligible to develop and operate ESSs include generating companies, discoms, transmission licensees, system operators, consumers and independent storage service providers. To address the legal and operational classification of ESSs, the draft amendment states that an ESS will assume the legal status of its owner. For example, if a generating company owns the storage system, it will be treated as a generation asset. However, the draft introduces a distinction in the case of non-co-located ESSs. If an ESS is not located at the site of the associated generation asset, distribution licensee, or consumer, it will still carry the owner’s legal identity, but will be treated as a separate storage entity for scheduling, despatch and related regulatory purposes. To encourage innovation and new business models, the draft allows ESS developers to monetise capacity through leasing or sale. This enables models such as storage-as-a-service and shared infrastructure, unlocking new revenue streams and investment opportunities.
The government has also extended the waiver of interstate transmission system (ISTS) charges for ESS projects co-located with renewable energy and commissioned by June 30, 2028. Meanwhile, BESSs that are co-located with renewable energy projects and commissioned by June 30, 2028 will be eligible for full ISTS charge exemption, provided the power is consumed outside the host state. However, pumped storage projects awarded after June 30, 2028 and co-located BESSs commissioned beyond that date will not be eligible for the waiver. Non-co-located ESSs will not benefit from this waiver and will remain subject to existing regulatory norms.
By clearly defining the ownership structure, legal status and commercial use of storage systems, alongside incentivising co-located storage systems with cost waivers, the MoP is improving both operational clarity and financial viability. These policy developments are intended to drive the adoption of ESSs as a mainstream, investable asset class. Going forward, storage will be critical for grid stability, renewable energy integration and the reliability of India’s clean energy transition.
CERC power market regulations
The CERC recently issued an order to reform key aspects of the short-term electricity market, particularly addressing concerns related to price distortions in day-ahead contingency (DAC) contracts. Originally intended for last-minute grid balancing, DAC prices began diverging from the day-ahead market, starting in October 2023. Both stakeholders and the MoP flagged this issue, highlighting the misuse of DAC contracts as an alternative price discovery route, distorting market efficiency.
To address these concerns, the CERC directed power exchanges to discontinue user-defined time slots in term-ahead market (TAM) contracts. These include green TAM and high-price TAM contracts, which must now conform to pre-specified slots such as round-the-clock, peak/off-peak, and solar/non-solar hours, pending participant consultation and regulatory approval. For any-day single-sided contracts, the regulator introduced defined bidding timelines to improve transparency and structure, a move supported by sellers looking for more streamlined bidding processes.
To curb speculative or overlapping buyer participation, power exchanges must now secure declarations from buyers and implement a non-refundable auction initiation fee. These changes are aimed at encouraging more genuine and orderly participation. Although the CERC had initially considered withdrawing intra-day contracts due to low liquidity and the availability of real-time markets, stakeholders argued for their retention, citing better volume assurance and operational flexibility, particularly for green and high-cost generators. As a result, the CERC allowed their continuation with certain conditions, including alignment with delivery timelines and the use of continuous matching. However, Power Exchange India Limited (PXIL) must discontinue intra-day dynamic contracts to ensure standardisation across the market.
A key structural change involves replacing the existing continuous matching process for DAC contracts with a uniform price step auction mechanism. This is in response to concerns raised by the Central Electricity Authority about limited competition and potential manipulation under the current system. Although some stakeholders raised concerns about delays in bid finalisation due to aggregation, the CERC maintained that the shift to auction-based pricing would ensure greater transparency and reliability. Power exchanges are now required to submit implementation plans, and PXIL must discontinue DAC dynamic contracts.
To further improve transparency, the CERC mandated the publication of detailed data on the number and volume of buy and sell bids across all contingency and TAM contracts. These changes collectively reinforce the CERC’s commitment to developing a transparent, standardised and well-regulated short-term power market that supports fair price discovery and operational integrity.
The new rules represent a tightening of market structures, curbing misuse and promoting a level playing field. Looking ahead, these changes are expected to increase market confidence and enhance the credibility of short-term price signals, critical for deeper market integration.
The way forward
India’s energy transition is entering a new phase, characterised by deeper renewable energy penetration, greater decentralisation, and a growing need for financial and regulatory certainty. The recent policy and regulatory updates reflect a deliberate strategy to deepen power markets, with an emphasis on flexibility, transparent price discovery and increased competition. By addressing key gaps in price discovery, risk hedging, carbon valuation and clean energy procurement, these measures are positioning India for a more efficient, decentralised, and decarbonised grid.
While many of these reforms are still in the early stages of implementation, and some remain in draft stages, their potential impact is far-reaching. Their success will depend on robust execution, responsive market design and continuous stakeholder engagement. If implemented effectively, these initiatives will not only enhance grid reliability and investor confidence but also keep India on track to meet its 2030 target of 500 GW of non-fossil capacity and its 2070 net zero emissions goal.
