Hello, I would like to get the informed opinion of experts in finance and Islam. I am a power analyst, and part of my job involves a trading component. I work for a large French energy group that owns a fleet of power plants that produce electricity. Previously I was not deeply engaged in the religion to question what is halal or haram.
Just to briefly explain: The electricity market operates across different timeframes: intraday, day-ahead, and long-term. Unlike other commodities, electricity cannot be stored efficiently, which necessitates various market mechanisms to balance supply and demand. The intraday market allows participants to trade electricity within the same day, providing flexibility to address real-time fluctuations and unexpected changes in supply or demand. The day-ahead market involves trading electricity for delivery the following day, enabling market participants to plan and schedule their production or consumption more accurately. Long-term markets, including forward contracts, enable participants to secure prices and hedge against future price volatility, ensuring financial stability and predictability for both producers and consumers. These markets collectively ensure a stable and reliable electricity supply by allowing adjustments over different timescales to meet the continuous and immediate nature of electricity demand.
My job is to sell production either on the spot market or the long-term market. I have many questions about Sharia compliance concerning the long-term market, as the spot market is built around the merit order, which does not involve any riba (usury), speculation, or uncertainty. In the long-term market, we work only with forwards without riba. The price is fixed between the two parties, payment is made at the time of the transaction, and delivery is agreed upon at a later date.
The questions I have are as follows:
- Deferred Delivery:
- Is having a deferment between the transaction date and the delivery date permissible? Given that I represent the producer, we do not engage in speculation. It is a simple hedge that allows us to secure long-term purchases and finance the production costs of the asset, and it is genuinely calculated in this manner.
- Market Quotations:
- When I hedge, I ask my counterparty for a quotation, which relies on Bloomberg prices that may involve riba, as the time value or opportunity cost is included in the forward pricing. Is it permissible that the price we agree upon is based on market quotations? Given that I have a target price for each plant calculated based on the costs and constraints of each plant, and I only ask for a quotation once market prices align with my target. Also, I specify that the transaction with my counterparty is at a fixed price without riba or anything.
- Gas Swap:
- In the transaction, there is also a gas swap, as we use gas to produce electricity. The swap also does not involve any interest; there is a real delivery of gas behind it, but it remains a financial contract. Specifically, it is a swap between a fixed-price supply contract (what we get delivered) and a floating leg that protects us against market fluctuations, as the electricity production will occur in the future and the gas price is not yet known. We either receive the gas and get paid the price difference between the fixed contract and the price at the time of delivery, or we get the gas delivered and pay the difference. Is this halal or haram?
Our job is simply to sell electricity without losing money and to generate an energy margin to remunerate the power plants. There is no specualtion, market views…