Indian Energy Exchange Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Volume growth accelerates on price collapse: DAM prices fell 34% YoY to INR5.17/unit, driving 11% DAM and 16% RTM volume growth; July volumes surged nearly 20%, and management targets at least 15% growth by year-end.
• Regulatory tailwinds are stacking up: The new Grid Code lets generators sell URS power on exchanges without buyer consent, and transmission charge reforms remove a key disadvantage versus bilateral trades, both expected from October.
• Market coupling is the unresolved overhang: The government has asked CERC to examine coupling, and management openly questions whether an exchange that does not discover price can still be called an exchange, while conceding it has no answer on what the investment incentive would be.
• New market building blocks are taking shape: A CfD pilot for 1,000 MW of RE capacity is targeted this year, the domestic carbon credit scheme has been notified, and IEX plans to launch a voluntary carbon market within FY24.
• What to watch next quarter: Whether the Grid Code goes live on October 1 as expected, any CERC move on market coupling, and the pace of volume growth as the monsoon and cooler weather ease supply constraints.

Volume & Price Dynamics

• Demand was muted by weather, not structural weakness: Electricity consumption grew only 1.8% YoY as ambient temperatures stayed lower than anticipated; peak demand reached 223 GW in June against a projected 229 GW.
• Supply-side improvement crushed prices: Coal production rose 8.6% YoY, e-auction premiums halved to ~50%, imported coal prices dropped 37% YoY to USD 54/tonne, and LNG fell 46% to \$12.1/MMBTU. Average coal inventory improved to 14 days from 9 days a year ago.
• Lower prices drove volume growth across segments: DAM grew 11% YoY and RTM grew 16% YoY, with RTM proving its relevance for distribution utilities and industries balancing demand and supply in real time.
• July momentum suggests acceleration: July volumes are running nearly 20% ahead YoY, and management expects at least 15% volume growth by FY24 year-end, though it cautions the outcome depends on demand, supply and coal availability.
• Long-duration contracts are gaining traction: Volumes in the segment matched last year's full Q1 performance in Q1 FY24 alone, and management expects more than 500 crore units this year as participants gradually shift from bilateral to exchange transactions.

Regulatory Catalysts

• Grid Code unlocks URS power for exchanges: Generators must now submit day-ahead schedules, and any un-requisitioned surplus (URS) power can be sold on the DAM without beneficiary consent. No PPA amendment is required because the Grid Code supersedes all PPAs. Implementation is expected from October 1, pending NLDC procedural finalization and software changes.

Goel: "Now, generator will have to give the schedule on day ahead basis and based on that, all beneficiaries will have to give the schedule on a day ahead basis. And whatever URS power is left, that power now can be sold by generator in the Day Ahead Market without taking consent of the beneficiary. This is a very, very important new change which has been introduced."

• Transmission charge reform levels the playing field: The new sharing regulation removes the anomaly between collective and bilateral transactions; sellers will not pay transmission charges, and collective transaction charges will be calculated post-facto based on General Network Access. This goes live alongside the Grid Code.
• CERC retained the transaction fee at up to INR0.02 per kWh on either side, and aligned DSM rates with other segments to eliminate arbitrage opportunities.
• Term-ahead market may extend to one year: IEX is exploring an extension from the current 90-day limit to provide better optimization opportunities for discoms.

Market Coupling: The Existential Question

• The government has asked CERC to examine coupling: A Ministry of Power letter in May 2023 requested CERC to look into market coupling for the Indian power sector, and a June 2nd letter asked CERC to initiate stakeholder discussions. CERC will conduct a detailed analysis.
• Management argues there is no case for coupling today: With exchange transactions at just 6-7% of total power volume and a voluntary market structure, management contends the preconditions for coupling do not exist.
• The price discovery dilemma is unresolved: Under the Power Market Regulations, exchanges are defined by their price discovery role. Management openly questions what an exchange becomes if it no longer discovers price, and when asked what incentive individual exchanges would have to invest in new products under a coupled regime, the answer was direct: "You asked a very relevant question, but I have no answer to that."

Goel: "In the current scenario where in India we have voluntary market and the transactions through the Exchange is just about 6%, 7%, there is no case for the market coupling."

• Current operations continue undisrupted: Management expressed confidence that CERC will examine all aspects, including the objective of coupling in the current market framework, before taking any next step.

New Market Development

• CfD pilot targets 1,000 MW this year: A nodal agency will issue a tender for RE capacity at a fixed price under a 15-year PPA. All activities are expected to conclude within this year, with a further 4,000-5,000 MW targeted next year, part of a broader 5,000 MW RE capacity development concept.
• Domestic carbon market scheme notified: The Ministry of Power has notified India's first regulated carbon market and formed a National Steering Committee. Trading of carbon credits will take place shortly through exchanges, though the scheme does not include voluntary carbon trading. BEE is still working on detailed procedures, including sector identification and compliance parameters.
• IEX plans voluntary carbon market launch within FY24: Software development and market analysis are underway. Management declined to estimate margins, saying it needs one to two years of market operation first.
• Capacity and derivatives markets are on the horizon: A capacity market framework is still too early to discuss, while derivatives will be introduced on SEBI-regulated exchanges with IEX actively working with the regulator, though no timeline can be given.
• TRAS market segment commenced on June 1, 2023, covering Day Ahead Ancillary Services and Real Time Market Ancillary Services.

IGX: Gas Exchange

• Volumes fell on improved long-term supply: IGX volume declined 9% YoY because cooling gas prices led to increased domestic production, and GAIL's long-term contract suppliers, who had been diverting gas to higher-priced European markets, began supplying India including backlog quantities. Enough gas is now available under long-term and medium-term contracts, reducing spot market demand.
• Profitability improved despite the volume drop: IGX profit rose to INR3.43 crore from INR1.15 crore a year ago. Last year's full-year profit was about INR28 crore. Q1 was weak, but July has been much better, and management expects things to pick up in subsequent quarters.
• Lower gas prices should eventually help: Management expects that as gas prices stay low, imports and market transactions will increase, reversing the current dynamic where cheap long-term supply cannibalizes the spot market.

Goel: "I am sure about one thing that gas exchanges, as I have always mentioned, that will definitely do as good as IEX."

Financials & Cost Structure

• Other expenses spiked on one-time items: Q1 included approximately INR7 crore of full-year CSR obligation booked upfront and costs for IEX's 15-year celebration event. The normalized quarterly run-rate going forward is INR5-7.5 crore.
• Other income jumped 40% YoY and was flat QoQ. Management expects it to remain at similar levels this year, but notes a significant RBI rate cut would bring it down.
• Product launches and capacity building continue: IEX Academy launched in June to create skilled power market professionals through customized certification courses. The Power Price Index (PowerX), India's first electricity price index based on weighted average DAM and RTM prices, and EnergX, a web-based bidding platform with API-based automated bidding, were also launched.

Guidance & Commitments

Key Metrics