Corporate File

IEX: Charged up for growth

M. Ramesh | | Updated on: Aug 29, 2021
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The first energy exchange exerts a vice-like grip on the market

Rarely do you come across a company that has over 92 per cent market share. The Indian Energy Exchange (IEX) has that rare honour and it’s still in the early stage of business.

When Financial Technologies (India) Ltd floated IEX in 2008 (now it has fully exited), the country’s first energy exchange was in the bluest of oceans — its only competitor, Power Exchange of India Ltd, would surface months later. A dozen years down the line, IEX still has a vice-like grip over the energy market — which, in India, means electricity market. And now, the company’s fortunes look set due to both external and internal reasons.

A widening market

First, the external. In India, where the energy markets are still evolving, volumes are still extremely low — cueing fast growth. In a country that consumes 1.3 trillion kWhr of electricity a year, just 6 per cent is traded over the exchange. Most of the electricity is sold by generators to buyers through long-term power purchase agreements (PPAs) that typically spread over 25 years.

Though the market will grow on its own, there is additional propulsion in the form of the government’s whip. The National Electricity Policy, 2021, vows to increase the share of the spot market to 25 per cent.

That’s a huge pie for IEX to sink its teeth in. After all, there are only two players to share the spoils (a third — Pranurja — has been in the making for over a year).

Towards this end, the government has proposed ‘market-based economic dispatch’, or MBED. Under this, all power supply will be routed through the market; any difference between the market price and the price agreed under the PPAs will be squared-up offline between the buyer and the seller. The idea is to deepen the market as well as to provide a clear market-based price signal.

Long-term contracts

Another driver is the longer-term contracts and ‘derivatives trading’ in energy.

Today, if you are a buyer of electricity (say, a factory), and wish to buy from the market, you can do so only for a period up to the next 11 days. Nor are forward contracts allowed — yet.

These had got stuck in a tussle over jurisdiction — who should oversee these, SEBI or Forward Markets Commission? The matter has since been resolved (SEBI for cash-settled trades and FMC where electricity is supplied), but the Supreme Court has to formally approve this — which is pending for about a year-and-a-half.

Whenever longer-term contracts — say, for three or six months — and derivatives are allowed, more players will jump to the exchanges. IEX’s blue ocean will hence get bigger.

Another external issue is that of trading in renewable energy certificates (REC), which is also stuck in the courts. This is not a big part of IEX’s business, but a revenue-earner, nevertheless. RECs are tradable instruments given to renewable energy generators who settle for a less-than-premium for their electricity, for which sacrifice they get the RECs that they can sell in market (IEX or PXIL).

The buyers of RECs are the ‘obligated entities’— utilities and industries like cement and steel, who have a Renewable Purchase Obligation to meet. The court case is over whether the abolition of a minimum (floor) price for the RECs by the Central Electricity Regulatory Commission is valid or not. When this is decided, one way or the other, REC trading will resume, meaning more earnings for IEX.

Internal moves that are powering IEX ahead are a launch of a slew of products. One was the ‘real time market’, where you can offer to buy or sell power after one hour, as opposed to the popular ‘day-ahead market’ (DAM), where you offer to buy or sell power the following day, or over the next few days (Term-ahead market, TAM). The RTM has been a success beyond IEX’s expectations — in the 7 months of the year, nearly 10 billion kWhr passed through the RTM. That is ₹40 crore, because IEX gets two paise on either side of the trade.

New products

In August 2020, it launched another product — Green Term Ahead Market (G-TAM) — an exclusive channel for renewable energy. G-TAM has so far traded 2.74 billion units, with an average price of ₹3.48 a kWhr for solar and ₹4.06 for non-solar. Now, these are dream prices for generators. Over time, when the G-TAM develops a track-record, financiers could fund ‘merchant capacities’ of wind and solar — all the electricity would be sold only through the markets, for better prices.

Apart from RTM and G-TAM, IEX also floated a subsidiary last year, the Indian Gas Exchange, for trading in natural gas. This is picking up too, as more supply hubs are being added.

In 2020-21, IEX earned ₹356.23 crore, and made a net profit of ₹205.43 crore (58 per cent of revenues) and paid total dividend of ₹4 for each share of ₹1; for Q1 of FY22, the numbers were ₹103 crore and ₹62 crore, respectively, earning ₹1.41 a share. On the NSE on Friday, the IEX share closed at ₹436.

The only negative is perhaps that the government wants to bring in a ‘market coupling’ mechanism — a common price clearing for both the exchanges. IEX opposes this as it fears diminution in its market share. But it may not matter much because the pie itself is growing.

M Ramesh

Published on August 29, 2021

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