Mumbai: The Multi Commodity Exchange of India Ltd (MCX), the Mumbai-based commodity exchange, which recently launched the country’s first electricity exchange, is also gearing up to introduce the country’s first carbon credit exchange. Joseph Massey, the exchange’s deputy managing director, spoke about how the initiatives will impact the Indian energy markets. Edited excerpts.
How will the electricity exchange work?
Today, the power trade is a bilateral trade. The buyers contact the traders or the generators directly. And if you can’t reach a generator or a trader, you draw excess power from the grid and pay UI (unscheduled interchange) charges. As electricity demand in the country grows, selling power is not the issue; the issue is the price at which you sell. Our short-term market could be about 20% with the long-term being 80%. That is where an exchange comes in. All that sellers or buyers need to do is list their availability or requirement at the exchange and they can be assured of getting the best price.
Exchange initiative: MCX deputy managing director Joseph Massey.
How will the pricing be decided?
Both the sellers and buyers will indicate the price to sell or buy. The system will generate the best price matches, called market clearing price. Initially, we are launching only the day-ahead contracts.
What will be impact on energy markets in the long-term?
Once the exchange is operational, the capacity of the system to handle transactions is much greater. Suddenly, the market becomes nationally accessible. Even if I don’t know an intermediary, I can see the buy and sell price for my power. Because of these factors, people scale up business more. Both in the stock and the commodity markets, we saw this, when the markets moved from physical to electronic trading—the volumes went up 10 times. We expect that with enhanced capacity, the electricity market could be around Rs1.8 trillion. Of that we expect around 20-25% to be exchange traded.
It’s been almost two years since talks began about the carbon credit exchange. What is the update?
We got the contracts almost two years ago, but the issue was regulation. The regulator took time, but now we are very close to the proposal being cleared. Once the regulatory framework is in place, the whole thing should be in place in two months. And now that we have also got permission to trade in electricity, it completes our energy basket. We already trade in crude and natural gas.
How do you see the global markets in carbon credits expanding?
It is difficult to tell how big the industry will be, but sooner or later, every country is going to have norms for carbon credit trading. One of the first countries we expect to do this, apart from Europe, is the US. India and China are the largest producers of carbon credits. India has an advantage over China as the first mover. As we upgrade our manufacturing, there will be a growing demand for consumption of these credits domestically.