Transcript Document
CERC Hearing on Power Exchange Presentation by NCDEX 19 December, 2006 Role of Markets and Exchange 2 Role of Spot Market Actual transfer of assets for capital between actual users Present demand-supply matching leads to price discovery Commodity spot markets require physical infrastructure to transfer / store goods Price Discovery Process Auctions for spot markets Real time Order matching 3 Role of Futures Market Risk transfer platform from actual users to traders /speculators Helps hedger concentrate on core activity Long term price signals helps Entrepreneurs, Corporate managers in Investment / capital expenditure decisions Locking price of future production & hedging input costs- credit enhancement Risk Mitigation - Cost of Capital reduced No forwards market without robust spot price discovery 4 Role of an Exchange Anonymous auction platform Price Discovery by matching of demand-supply Neutrality - conflict of interest avoided Transparent real time, pan-geographic price dissemination Benchmark reference price Liquidity to participants Thermometer of underlying sector temperature 5 Role of an Exchange Standardized specifications - contract structure Standard margining system Eliminates credit rating Risk Management in a volatile market Robust Clearing & Settlement systems - counter party credit risk absorbed Fair,Safe, orderly market - rigorous financial standards and surveillance procedures 6 Products in Energy Markets Petroleum products Crude oil, Gasoline, Gasoil, Heating Oil Natural Gas Electricity Coal Synthetics – spark spreads, crack spreads , Weather Index Energy Indices 7 Market Development Futures Exchange OTC Markets Market Maturity Auction markets Multiple buyers & sellers Time To be an energy hub all these markets are required 8 Importance of Forward Curve and Liquidity Forward Curve allows producers and consumers to get long term price signals For capital intensive projects long term price signals is important to financial closure Liquidity reduces credit risk of the contract Allows the risk of the system to be transferred out of the power sector Socially optimal to transfer risk from risk averse to entities with high risk appetite 9 Electronic Commodity Trading—Indian experience Well established robust futures market Electricity trading is unique but still follows the laws of supply and demand Log normal price behavior Credit risk issues are central to successful design of Indian power market 10 Exchange Architecture SPAN Trading System Risk management PRISM Clearing& Settlement Linkage to Warehouse Linkage to Clearing bank Technology Linkage to Depositories VSAT Trading Terminal Leased line internet Trading Terminal Trading Terminal 11 Thank You 12