1. January 23, 2004 Electricity risk management

2. Isolated markets Long term auctions Bilateral arrangements Daily auctions Paper Development of electricity markets

3. Exchange Traded Instruments Standardised Contracts Physical Delivery / Cash Settled Margin Requirements Basis Risk (Product, Location, Time) Regulated Markets No Counter-party Risk Liquidity ( NYMEX ClearPort ® )

4. Over-The-Counter Principal-to-principal contracts Cash-settled Customised Contracts Credit & Counterparty Risk Greater flexibility (Product, Location, Time) Liquidity Issues

5. Global electricity exchanges NYMEX Nordic Power Exchange Australian Stock Exchange (ASX) Energy Exchange Austria (EXAA) European Energy Exchange (EEX) Watt Exchange Amsterdam Power Exchange (APX)

6. Futures Futures contracts are firm commitments to make or accept delivery of a specified quantity and quality of a commodity during a specific month in future at a price agreed Most liquid market Governed and insured market Participation in market gains and losses Basis risk Margin Calls Relatively low transaction costs

7. Hedging through futures XYZ Steel Limited Power Consumption : 30 million units a month Currently procuring power from a Discom ABC at average price of “UI” in Western region Cost of electricity unknown for next month XYZ Steel Limited Power Consumption : 30 million units a month Currently procuring power from a Discom ABC at average price of “UI” in Western region Cost of electricity unknown for next month Futures quoting at Rs. 3.50 per unit Contract size : 1 million units Purchases 30 electricity futures Futures quoting at Rs. 3.50 per unit Contract size : 1 million units Purchases 30 electricity futures Price moves up Price moves down

8. Options The buyer of an option has the right, but not the obligation to buy or sell an agreed amount of a commodity at an agreed price call option gives the buyer right to buy the underlying commodity at the strike price put option gives the buyer right to sell the underlying commodity at the strike price American/ European/Asian

9. Hedging through options XYZ Steel Limited Power Consumption : 30 million units a month Currently procuring power from a Discom ABC at average price of “UI” in Western region Cost of electricity unknown for the next month XYZ Steel Limited Power Consumption : 30 million units a month Currently procuring power from a Discom ABC at average price of “UI” in Western region Cost of electricity unknown for the next month Call options Strike 3.50 unit Premium 20 paise per unit Contract size : 1 million units Purchases 30 call electricity options Call options Strike 3.50 unit Premium 20 paise per unit Contract size : 1 million units Purchases 30 call electricity options ` ` Price moves up Price moves down

10. Options Know the limit on costs up front Relatively low transaction costs More like pure insurance Openly traded and visible market No subsequent cash outlays Governed and insured market

11. Spark Contracts Simultaneous purchase and sale of electricity and natural gas futures contracts Margin hedging strategy S = {S power – (S gas * h / 1000)} S = spark spread per MWh S power = price of power sold S gas = price of gas purchased H = heat rate ( Btu/kWH)

12. Swaps Agreement between parties whereby a specified floating price is exchanged for fixed price over a specified period of time OTC against Exchange Traded Cash-flow linked to floating rate benchmark ( Platts Assessment / Closing Future prices at NYMEX) Average Price over a period of time With or without margin Flexiblity (Product, Location, Time)

13. Mechanics of electricity swap Electricity Producer Swap Counterparty Electricity Consumer Physical Electricity Market Sell Floating Buy Floating Floating Fixed Selling Fixed Buying Fixed

14. Choice of trading instrument Nature of underlying Upfront premium Margins Time horizon for hedging Transaction costs Unwinding of contract Accounting & taxation issues Risk management systems

15. Thank you