Indian Energy Exchange Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Volumes hit by supply, not demand: Electricity volumes fell only 2% YoY, but overall volumes dropped 12% YoY as high coal prices choked off industrial buyers and REC volumes normalized from an exceptional prior-year quarter.
• IGX is the breakout story: Gas exchange volumes surged 568% YoY after the government allowed domestic ceiling-price gas trading, and PAT grew 1,437% YoY; management calls the gas opportunity "as big as what we are doing in the power sector."
• High clearing prices are starving the buy-side mix: Non-SEB industrial volume collapsed to just 10% of the total, down from 30-40% historically, because prices above Rs 12/unit make optimization uneconomical for open-access consumers.
• The margin call is a one-time regulatory catalyst: A CERC order on transaction charges is reserved; management is confident the cap will be set at INR 0.02/unit, which would lock in a durable fee structure.
• What to watch next quarter: Whether e-auction coal prices cool enough after the summer to bring industrial buyers back, the CERC transaction charge order, and the launch of ESCerts trading this month.

The Volume Mix: Who Bought, Who Left

• DISCOMs dominated the buy-side: With clearing prices high, only distribution companies' must-run demand reached the exchange; states also became net sellers during off-peak hours, with DISCOM sell share moving from 30-40% historically to 65% this quarter as they offloaded surplus PPA power.
• Industrial and open-access consumers vanished: Non-SEB volume dropped drastically to only 10% of the total because high prices removed the arbitrage that makes exchange procurement attractive versus own generation or bilateral contracts. Demand is waiting on the sidelines for prices to come down.
• TAM volumes swelled at the expense of DAM: Supply-side constraints pushed many DISCOMs into the term-ahead market to secure assured availability, temporarily shifting share away from the day-ahead market. Management expects this regulatory-arbitrage-driven shift to reverse once GNA regulations are fully implemented before FY23-end.
• Long-duration contracts are live but idle: All three exchanges now offer contracts up to three months, but high discovered prices have made it difficult for DISCOMs to commit, so volumes remain insignificant. IEX is talking to regulators to extend delivery up to 11 months.

Goel: "Now with high clearing price, it is only the demand of the distribution company which is coming to the market. And optimization opportunities reduced to significant extent. And that is why there is slight dip in the volume."

The Coal Price Overhang

• The root cause: Power demand grew an unprecedented 10% this year, colliding with elevated international coal prices and ~20 GW of imported coal-based capacity running at only 30-40% PLF, which piled pressure onto domestic coal-based plants.
• E-auction coal remains punitive: Despite government increasing PPA coal supply and domestic PLF rising 6-7%, e-auction coal availability is still low and prices sit at 240-250% of the administered price.
• The timeline for relief: Management sees March through May as high-demand months with no hydro or wind support, keeping pressure on coal-based plants; only after August-September does it expect e-auction prices to cool meaningfully. Imported coal prices are already declining 4-5% per month.
• The FY24 bet: The government has set a 100 crore tonne coal production target for FY24; if met, management expects lower clearing prices, returning optimization opportunities for DISCOMs and open-access consumers, and better exchange volumes.

Goel: "Maybe after August, September, this will come down because March, April, May are high demand periods. And during this time even hydro and wind support is also not available. So there is going to be a lot of pressure on the coal-based power plants. But after that, I think the situation should improve."

IGX: The Gas Exchange Breakout

• The quarter that changed the narrative: IGX volumes grew 568% YoY and PAT grew 1,437% YoY, with most of the nine-month profit of Rs 16 crores arriving in Q3 alone. The trigger was the government permitting domestic ceiling-price gas trading on the exchange for the first time.
• Who is supplying: Reliance and ONGC are the anchor sellers, finding the exchange platform more flexible and efficient than bilateral arrangements. Seven new members joined during the quarter, including RIL, BP Exploration (Alpha), and Vedanta Limited. LNG trading was negligible because international prices remained prohibitive.
• The structural opportunity: The government aims to increase gas's share of the energy basket from 6.3% to 15% over the next 7-8 years, backed by large infrastructure build-out in LNG terminals and pipelines. Management sees the gas exchange opportunity as comparable in scale to IEX's power exchange business.
• What unlocks the next leg: LNG price normalization and production from recently auctioned marginal fields with no price ceiling, both of which would bring new sellers to the platform.

Goel: "I always say that opportunity for the gas exchange is as big as what we are doing in the power sector."

New Market Segments: Green, Carbon, and High-Price

• REC volumes collapsed 68% YoY because Q3 FY22 had an exceptional 38.3 lakh units of pent-up demand released after a 16-month APTEL stay on trading. New regulations implemented in December removed the floor price and made RECs fungible, which management expects will increase liquidity going forward.
• Green market ambition: Management expects the green market to reach roughly 10% of total exchange volume next year, driven by large renewable capacity additions.
• ESCerts trading is imminent: CERC has defined the floor price at 10% of one metric tonne of oil equivalent, and trading is expected to begin this month (January 2023).
• International Carbon Exchange incorporated: The wholly owned subsidiary was set up in Q3, targeting the voluntary carbon market. Management intends to source credits from India, Southeast Asia, and Africa to sell to European and American buyers with ESG commitments, but cautions the first one or two years could be difficult.
• High-Price DAM petition filed: IEX has asked CERC to create a separate market segment for generators with variable costs above Rs 12/unit, expecting approval by February 2023.

Goel: "What we understand is that the opportunity size is quite big. But first one or two years could be difficult for us."

Regulatory Catalysts and the Transaction Fee Order

• Transaction charges order reserved: CERC held a hearing in December and has reserved its order. Management believes it made a convincing case that INR 0.02/unit is the right number, consistent with the cap already specified in regulations.
• The prize is durable: These approvals are effectively one-time; the trading margin was notified in 2010 and revised only once, in 2020, after a decade. Once set, the fee cap is expected to remain in place for a long period.
• GNA regulations partially live: Notified in October 2022, with the Grid Code in draft stage; full implementation is expected before FY23-end. This will remove the regulatory arbitrage that temporarily shifted volume from DAM to TAM.
• DSM regulations linked to exchange prices: The new Deviation Settlement Mechanism rules tie DSM charges to time-block-wise exchange prices, which management expects will discourage DISCOMs from over-drawing and push more volume into the real-time market.
• Power derivatives nearing launch: SEBI-regulated exchanges (NSE and MCX) are working on contracts; a joint working group is in advanced stages and derivative contracts could arrive in the next one to two months.

Goel: "So, until order is issued, it is very difficult to say what is going to be the final order. But looking at what happened during the hearing, we made our case and we convinced the Commission that INR 2 paisa is the right number which they have also fixed in the regulations. And probably that should happen."

The Long-Duration Opportunity

• A large addressable pool exists: Nearly 5,000 crore units of transactions happen annually in less-than-one-year bilateral contracts through trading companies. IEX is confident of capturing a large share by offering a superior value proposition.
• The exchange edge: Daily payment to generators is the "big USP"; generators are willing to sell at lower prices on the exchange because they are assured of payment, whereas DEEP bilateral contracts often pay one month after supply. The platform also offers flexible auction timing and efficient scheduling.
• The bottleneck is price, not structure: High clearing prices have made it difficult for DISCOMs to enter 3-6 month contracts, so current volumes in this segment are not meaningful. Management declined to disclose market share, saying the percentage will be meaningful only when volumes increase.
• Regulatory push for 11-month delivery: IEX is in discussions with regulators to extend contract delivery periods up to 11 months, which would broaden the product's appeal.

Goel: "We pay to the generators on a daily basis. So that is a big USP of the Exchange. Generators are willing to sell power on the Exchange at a price lower also because they are assured of the payment. In case of DEEP contracts, they are not assured of the payment. They in fact get payment one month after they have supplied power in many cases."

Guidance & Commitments

Key Metrics