India is on the cusp of major reforms in power sector. Hints of that are pouring in every day now. In the latest and first of its kind, India has decided to set up a power exchange for electricity trading and the platform will be ready by the end of 2007.

The exchange is meant for streamlining power trading in the country, which is in a mess at present. At present, electricity is traded bilaterally at mutually agreed rates in India. A power exchange for electricity trading would help streamline power trading along with standardising electricity as a tradable product, a power ministry official revealed.

He said the exchange would also provide a payment security mechanism to buyers and sellers. The recently released draft of India's first integrated energy policy suggested the creation of a power exchange.

A power exchange, just like stock and commodity bourses, acts as a platform for buying, selling and trading of electricity. No such exchange exists in India now.

The Central Electricity Regulatory Commission also issued guidelines for setting up and operation of the power exchange.

According to officials, the CERC will allow operational freedom to the exchanges within an overall regulatory framework. National Thermal Power Corporation, Vidyut Vyapar Nigam Ltd., National Commodity and Derivatives Exchange Ltd and Power Trading Corporation of India have shown interest in setting up the power exchange.

Energy trade is a big conundrum for several countries in the world. In America, lawmakers are now looking to have a better understanding of the regulation of energy trading. In fact, lawmakers in US feel that more studies were needed to ensure fairness and transparency in energy trade.

The recent boom in energy trading, which critics partly blame for higher prices, has led to oil prices that more accurately reflect the balance between supply and demand.

The Commodity Futures Trading Commission said in a study said daily energy trading more than doubled for near-term contracts expiring within three months, and trading in contracts expiring in three years or more rose by more than 260 per cent.

These markets have experienced greater participation from nearly every type of trader, the study said. This rise in oil trading contributes significantly to improved price efficiency - the degree to which the price of a commodity reflects accurate market information.

Increased participation by both commercial and non-commercial traders can enhance market quality in commodity markets, the study said.

Last year, US Senate investigators studying the issue said energy trading by banks and speculators is partly to blame for rising oil and gas prices that have led to massive profits for oil companies.