The IUP Journal of Applied Economics
Application of Monsoon Derivatives in Indian Hydroelectricity Sector: A Case-Based Analysis

Article Details
Pub. Date : Oct, 2022
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE021022
Author Name : Mahuya Basu and Tanupa Chakraborty
Availability : YES
Subject/Domain : Economics
Download Format : PDF Format
No. of Pages : 20



Hydroelectricity is one of the most important sources of renewable power, making it an integral part of emissionless power generation plan for many developing economies, including India. But hydropower firms based on rain-fed rivers in Indian plains and plateaus are highly monsoon-dependent for their generation. The primary objective of this study is to explore the intensity of the risk of fluctuating monsoon rain and securitization of that risk through financial instruments for Indian hydroelectricity sector. The paper analyzes the applicability and efficiency of a designed monsoon derivative in mitigating the monsoon risk of a representative hydroelectricity firm, namely, Damodar Valley Corporation (DVC). The study suggests the use of a weather option contract based on the accumulated monsoon rainfall of the river basin in mitigating the risk. The parameters of such an instrument are estimated and a pricing mechanism is suggested through fitting parametric distribution to the rain data and using a Gaussian copula to capture the interdependencies of rainfall in various locations of the catchment area of the river basin during the monsoon season. The study reveals that the firm can successfully hedge the rainfall risk through financial derivatives and attain a superior position vis-a-vis risk-return.


Energy is one of the most important contributors to developing economic infrastructure. Uninterrupted and adequate supply of power is a critical component for growth of both agriculture and industry. With concerns over the contributions of carbon emissions to global climate change and coal-fired power stations being identified as a major source of emissions, most governments have been analyzing future energy plans that place less reliance on fossil fuel and more on alternative energy sources. Hydropower is a renewable, economic and major non-polluting source of energy. Moreover, its quick starting and stopping facility and load variation flexibility have made it an obvious choice for meeting peak demand. Besides, its marginal cost of generation is almost zero and free of inflation, but the same also reduces