Indian Energy Exchange Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Volume growth despite DAM squeeze: Total volume rose 10% YoY to 23.4 BU, but the flagship DAM segment fell 21% as coal shortages and high input costs choked sell-side liquidity.
• High clearing prices are the double-edged sword: DAM prices averaged Rs. 7.7/unit, boosting revenue but crushing price-sensitive open access volumes and masking the underlying supply stress.
• New products are live, but adoption is a waiting game: Longer duration contracts launched in June, yet no transactions have materialized because generator ask prices remain too high for discoms.
• Competition has arrived, and IEX is refusing to compete on price: HPX commenced operations in July; IEX held ~85% market share in Q1 and insists it will maintain fees and compete on value, not discounts.
• What to watch next quarter: Whether sell-side liquidity actually improves after September as management promises, whether the Late Payment Surcharge Rules unlock meaningful unrequisitioned power, and whether HPX expands beyond its current DAC-only offering.

The DAM Squeeze: Supply, Prices, and the Shift to Other Segments

• DAM volume fell on a supply shock, not demand weakness: Purchase bids were ~25.9 BU against sell bids of only 17.3 BU, a gap driven by domestic coal being diverted to PPA-based plants, e-auction coal prices rising 400%, and imported coal and gas becoming uneconomical for generation.
• High prices pushed buyers to alternative segments: RTM volume grew 34.5% YoY to 6.2 BU, and TAM volume surged 127% YoY to 3.1 BU as discoms sought assured power on a weekly or daily basis when DAM prices were hitting the Rs. 12 price cap.
• Open access volumes collapsed: The share of open access fell to ~4% from ~12% in Q1 FY22 because elevated prices made the market uneconomical for industrial consumers; captive volumes held at ~6%.
• Sell-side composition shifted toward generators: Discom sell bids fell to 46% from 56% YoY as they had high own-demand and less surplus, while generator share rose to 54%, though generators quoted high prices reflecting e-auction coal variable costs of Rs. 5+/unit and imported coal costs of Rs. 8+/unit.
• PLF hit a 10-year high: Q1 plant load factor reached ~59% versus 54% last year, signaling that existing thermal capacity was running hard despite the coal supply constraints.

Satyanarayan Goel: "I'm 100% sure that the supply situation will improve, and you will see good liquidity on exchange platform."

New Product Launches: Ambition Meets Price Reality

• Longer duration contracts went live but sit empty: CERC approved Term Ahead Contracts for trading up to 3 months on 7th June, and IEX launched daily and monthly contracts on 27th June. Despite strong interest and a couple of reverse auctions, no transactions have materialized because generator quotes of Rs. 6-8/unit are too high for discoms who expect prices to fall.
• Gross bidding is next in the pipeline: A petition is filed with CERC, hearings are complete, and the order is reserved; management expects approval in the next couple of months and says it is ready to launch in FY23. Differentiated pricing for gross versus net bidding is under consideration, pending regulatory approval.
• Ancillary and capacity markets are further out: Ancillary market regulations are issued but await grid code finalization, which may take 2-3 months. The capacity market remains at the concept stage and depends on the new electricity policy still under approval.
• Derivatives may unlock longer-duration liquidity: A joint working group is expected to approve derivative contracts in the next 2-3 months, which management believes will help build volume in longer duration contracts by giving participants price visibility.
• Payment risk on new contracts is dismissed by history: Management draws a parallel to the 2008 DAM launch, when discom financial health was worse but they still made advance payments because they found value in exchange transactions.

Satyanarayan Goel: "In 2008 when we started our day ahead market at that time also, the financial health of the distribution companies was infact worse than what it is today and at that time also nobody was comfortable that distribution companies will make advance payment, but they did it because they found value in the exchange transactions."

Competition: HPX Enters, IEX Holds the Line on Price

• HPX launched with a narrow footprint: Hindustan Power Exchange commenced operations on 6th July with only the Day Ahead Contingency market; it has not yet launched DAM or RTM equivalents. Management declined to comment on competitive threats until those products are live and performing.
• IEX held ~85% market share in Q1 and 89% in July: Management attributes retention to liquidity depth, participant base, robust pricing, and customer-centric technology rather than transaction fee competition.
• The pricing war is one-sided so far: HPX offered a 21-day complete fee waiver followed by 10-20% discounts for 1-2 months; its base fee is Rs. 0.02 per side. IEX stated it has no plan to offer incentives or discounts in the electricity market and will maintain current transaction fees.
• TAM is the only segment where competition has gained any traction: Because TAM uses price matching rather than price discovery, all exchanges are at par, and some competitors used promotional schemes to capture volume.
• Technology is the chosen competitive moat: IEX launched a web-based bidding platform, web-based financial reconciliation, API for automated bidding in integrated DAM and REC markets, and auto carry-forward of bids between segments during the quarter.

Satyanarayan Goel: "We don't want to get into this. We will continue to maintain our transaction fees, what we have been charging. And I think the values, which we provide to the participants, we will continue to work on that and I'm sure that will help us in retaining our market share."

Regulatory Tailwinds: Late Payment Rules and Green Open Access

• Late Payment Surcharge Rules could unlock significant DAM supply: Discoms must now intimate their power drawl schedule by 10am, and if they default 30 days after notice, GENCOs can sell 100% of the unrequisitioned power on exchanges. Even 2-3% of the ~80,000 MW central generating station capacity would translate to nearly 20 BU of additional volume.
• Green Energy Open Access Rules lower the barrier for renewables: Consumers with 100 kW+ contracted demand are now eligible for green open access with no additional surcharge and cross-subsidy surcharges capped at 50% for 12 years from COD.
• CERC connectivity regulations streamline transmission access: The new General Network Access regulations and draft ISTS charges sharing rules aim to simplify transmission access and avoid duplication of charges in collective transactions, which could reduce friction for exchange-based trades.
• REC fungibility is now in place: CERC issued terms making renewable energy certificates fungible irrespective of technology type, broadening the market.
• MBED is dead, and with it the near-term market coupling risk: Management stated there has been no discussion on MBED for 7-8 months, most states are not in favor, and it does not think it will be implemented. Market coupling, which would only make sense alongside MBED, is therefore not an active concern.

Satyanarayan Goel: "I haven't heard this topic in the market from the last 7-8 months. This story is over. Nobody is talking about it now."

Gas Exchange and Carbon Market: Optionality for the Medium Term

• IGX turned profitable despite hostile conditions: IGX traded 0.47 crore MMBtu with a record number of trades and posted a profit of Rs. 1.15 crore versus a loss of Rs. 1.52 crore in Q1 FY22, even as gas prices stayed at \$30-35/MMBtu and LNG imports remained low.
• The gas opportunity is price-dependent and enormous: Management believes that if gas prices return to \$6-7/MMBtu, the gas exchange opportunity is as large as the electricity exchange. IGX also received PNGRB approval during the quarter to commence domestic gas trading.
• Carbon market design is underway, with clarity expected by fiscal year-end: The government has appointed a consultant for market design through BEE; RECs and ESCerts are planned for conversion into carbon credits, and a mandatory carbon market is planned. IEX intends to be first to launch when the opportunity arises.
• Exchange exclusivity in carbon is not guaranteed: Management declined to say whether carbon trading will be exclusive to exchanges or open to OTC markets, noting it depends on the government's market design choices.

Satyanarayan Goel: "I personally believe that if the gas prices come down to \$6-7 which used to remain earlier, then the opportunity for the gas exchange is as big as what we are doing in the electricity exchange."

Financials and Capital Allocation

• Revenue and profit grew in line with volumes: Consolidated revenue rose 10% YoY to Rs. 113.4 crore and PAT rose 11% YoY to Rs. 69.1 crore.
• Other expenses rose on CSR timing: Consolidated other expenses increased ~Rs. 2.7 crore YoY, almost entirely because CSR expenses of ~Rs. 2.5 crore were booked entirely in Q1 this year versus being spread across quarters last year.
• Cash float swelled on higher prices: Cash and equivalents rose to ~Rs. 1,250 crore because the sharp increase in DAM clearing prices drove a sudden increase in pay-in, creating a temporary float ahead of payout obligations.
• Employee expenses declined on deconsolidation: The YoY decline partly reflects that IGX manpower costs of ~Rs. 1.5 crore are no longer consolidated, as IGX is now an associate company.
• Surplus deployment is under consideration: After paying a dividend of ~Rs. 90 crore from shareholders' money of ~Rs. 670 crore, ~Rs. 570 crore remains; management stated it can look for investment options.

Guidance & Commitments

Key Metrics