Indian Energy Exchange Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Supply pain drove a volume decline: Total FY23 volume fell 5% YoY as high coal and gas prices choked sell-side liquidity, though management sees that pressure now reversing.
• Prices spiked, then started cooling: DAM prices rose 36% in FY23 on war-linked fuel costs and record heat, but e-auction coal premiums and imported fuel prices have since fallen sharply, setting up a more competitive Q1.
• The regulatory unlock is real and imminent: GNA implementation, expected August 1, 2023, should eliminate the arbitrage that has pulled ~9–10 BU of annual volume out of the day-ahead market and into DAC, restoring IEX's effective monopoly.
• New products are live but need liquidity: The High Price DAM, term-ahead market and ancillary market (from June 1) are operational, yet management's near-term focus is on building volume in these products rather than launching more.
• What to watch next quarter: Whether GNA goes live on schedule and the promised 9–10 BU of DAC volume shifts back to DAM, whether e-auction coal supply to IPPs actually improves in June/July as guided, and the pace of volume recovery in the newly launched High Price DAM.

The Supply-Side Squeeze and Its Unwinding

• What broke volumes: FY23 volume fell 5% YoY because sell-side liquidity dried up. E-auction coal availability dropped over 50% to 5.3 Cr tonnes and traded at a ~260% premium to notified price, while imported coal and LNG gas prices stayed elevated through the Russia-Ukraine war.
• What is now reversing: By April 2023 the e-auction coal premium had fallen to ~137%, imported coal was down 33% to ~$95/tonne, and gas had dropped over 100% to ~$10/MMBTU by May. Coal production rose 14.7% and inventory improved to 14 days from 11 days last year.
• The June/July supply bet: Management expects better supply of coal at lower e-auction prices to reach IPPs in June/July, with the e-auction quantum in April already significantly higher and priced reasonably. Wind and hydro generation are also expected to improve sell-side liquidity.
• Price outlook: With coal production targeted 12% higher than last year and electricity demand growth expected at only 5–6%, management sees lower clearing prices ahead, which should increase optimization potential for Discoms and open-access consumers and support better volumes.

Goel: "I am very happy to say that Government has finally accepted this concept. So that is one thing which is a big achievement."

GNA and the DAC-to-DAM Volume Shift

• The arbitrage that distorted the market: Volume shifted to the Day-Ahead Contingency market in 2021 due to a transmission pricing regulation arbitrage. Before RTM existed, DAC had negligible volume, and with RTM now highly liquid, management argues DAC has no standalone purpose.
• The GNA fix: General Network Access regulation is expected effective August 1, 2023, with the Grid Code to be issued imminently and NLDC needing roughly two months to develop procedures. Once implemented, the transmission pricing arbitrage disappears.
• The volume at stake: Management expects about 9–10 BU to shift back from DAC to DAM this year, and at least 12 BU out of 40 BU next year. IEX holds practically 100% share in DAM and RTM, so this shift directly recaptures volume lost to competitors who were active in DAC.
• DAC market share context: IEX has better share in DAC than other exchanges due to customer relationships, but other exchanges have been offering transaction fee incentives. Once the arbitrage ends, management sees no reason for transactions to remain in DAC.

Goel: "I mean this is a market distortion, shifting volume from the DAM market and in DAC market as I told you all three exchanges are equally active so that will definitely lead to loss of share."

New Market Launches and Product Pipeline

• High Price Day-Ahead Market: Launched March 9, 2023, with first trade on April 15. Enables high variable cost generators (gas, imported coal, battery storage) to participate at ₹0–₹20/unit. Volume has been low so far because April and May were cooler months with demand 1% lower and clearing prices 40% lower.
• Term-Ahead Market: Launched with delivery up to 90 days, alongside green monthly contracts and green hydro contracts during the year.
• Ancillary market: Starting June 1, 2023. IEX can charge up to Rs.0.02 in transaction fees but does not intend to charge because the scope of work is limited to collecting bids and sending them to NLDC. Management gave a range of 2–3,000 MW for demand but noted the full-year average is much lower.
• Long-duration contracts: Management is planning at least 5 BU this year, having already done 1 BU in two months, and at the current run-rate expects more than 6 BU, up from 1.6 BU in eight months last year.
• Product focus shift: After launching many products in the last two years, management's priority is now bringing liquidity and awareness to existing products rather than launching new ones immediately.

Goel: "In the last two years we have launched so many products, so it is time that we bring liquidity to these products and bring awareness about these products so that participants do participate in these things."

Regulatory and Policy Developments

• CfD acceptance: The Government accepted the Contract for Differences concept after IEX worked on it for three years. Contracts have already been signed for 1,050 MW gas-based capacity from Torrent and 4,000 MW from NTPC for selling through the market under CfD, which should provide good liquidity during high-demand periods.
• Expert group recommendations: A Ministry of Power group proposed mandating RE sources to participate in markets, additional RE through CfD, financial products for hedging price volatility, a market-based mechanism for secondary reserve, and a pilot for RE targets within a year with 1,000 MW initial capacity.
• MBED timeline: Management sees implementation as complicated and requiring stakeholder consultation, with the Government treating it as part of a long-term renewable integration plan. Management stated it is "not in the next 5 years."
• Coal allocation notification: The notification was applicable up to May 31, 2023, and nothing happened in the last two months. The PUSH portal also saw no traction after the initial Muhurat transaction.
• Transaction fee stability: Management sees no further challenge on transaction fees, arguing the regulator is more concerned about market development and that reducing fees would create entry barriers and make other exchanges financially unviable.

Goel: "I think looking at what has happened in the last two to three years regulatory is more concerned about development of the market. And looking at the roadmap of the expert group also, the Government is concerned about deepening this market."

IGX and Non-Power Businesses

• IGX gas exchange: Generated 5.09 Cr MMBTU, up 319% YoY, with 2,355 trades, up 400% YoY, driven by participation of major domestic gas producers and increased participant numbers. Profitability rose from ₹1.75 Cr to ₹28 Cr.
• Gas market ambition: Management aims to help build a vibrant gas market in India, enabling a doubling of natural gas share in the energy mix. Gas prices are likely to fall further, with the cost of gas-based generation expected to drop below Rs.10.
• Carbon-neutral certification: IEX was certified as India's first carbon-neutral power exchange using market-based tradable instruments for carbon offsets.

Cost Structure and Capital Allocation

• Employee cost reduction: Fell from ₹41 Cr to ₹34.5 Cr because IGX costs were consolidated in IEX for nine months last year (IGX became an associate on January 17, 2022) and a higher profit last year led to a variable pay provision that was not repeated.
• Other income increase: Rose due to shifting investments from short-term to long-term products (target maturity funds, MLDs, FDs) and parking funds in higher-yielding products during the liquidity crunch and higher interest rate environment.
• Shareholder returns: Board approved a buyback of equity shares from the open market for ₹98 Cr, completed January to March 2023, and announced a final dividend of ₹1 per share.
• Technology and process upgrades: Web-based bidding launched for G-DAM, DAM, monthly and any-day single-sided reverse auction products, plus web-based financial reconciliation, data insights for bidding decisions, automated financial limit allocation, and API market data access. Integration with the National Open Access Registry of GRID India was also completed.

Guidance & Commitments

Key Metrics