Indian Energy Exchange Limited (IEX) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Indian Energy Exchange Q2 FY '22 Investor Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jateen Doshi from Axis Securities. Thank you, and over to you, sir.

Thank you, [indiscernible]. Good afternoon, ladies and gentlemen. On behalf of Axis Capital, I'm pleased to welcome you all for the Indian Energy Exchange Q2 FY '22 Earnings Conference Call. We have with us the management team of IEX, which is represented by Mr. Satyanarayan Goel, Chairman and Managing Director; Mr. Vineet Harlalka, Chief Financial Officer; Mr. Rohit Bajaj, Head of Business Development; and Ms. Aparna Garg, Lead Investor Relations. Now we will begin the opening -- begin with the opening remarks from the management followed by an interactive Q&A session. Over to you, sir. Thank you.

Good afternoon, friends. I am Satyanarayan Goel from IEX. I welcome you all to the quarter 2 FY '22 earnings call. Present with me today are Mr. Vineet Harlalka, our CFO and Company Secretary; Mr. Rohit Bajaj, Head Business Development; Mr. Amit Kumar, Head Market Operations; Mr. Sangh Gautam, CTO; Mr. Samir Prakash who is Head HR; Ms. Shruti Bhatia, Head Market Communication; Mr. Indranil looking after new initiatives; and Mr. Joginder Behra who is heading the Regulatory Affairs Division. We seem to have almost overcome the COVID-19 pandemic. So there has been a significant uptick in the pace of vaccination. Yesterday, we achieved a landmark figure of 100 billion vaccination in the country. I think it is 100 crores. The economy, industry and retail activities are using fast. There has been a fair resurgence in economic activities leading to a rapid increase in the demand for power. Recently, the exchange power market has been seeing constraints on supply side. And we all are reading about the media articles regarding high prices and limitation of the sell-side liquidity on the exchange. It is important to understand the fundamentals behind all these news articles. In H1 this year, there was a 14% increase in the power consumption in the country with respect to last year. Monsoon affected the domestic coal production and supply. There is increase in the price imported coal. The prevailing price of $120 per tonne for 4200 [indiscernible] coal is almost 5x more than what it was 1 year back, $25 per tonne. And at $125 per tonne, that variable cost will be almost about INR 9 to INR 10. In case of LNG also, there has been very, very high price increase, almost 10x. Now the LNG prices are almost about $30 per MMBTU. And about a year back, it was just about $3 per MMBTU. With $30 per MMBTU, the variable cost will be more than INR 25. So with imported -- I mean, generation on imported coal and LNG has reduced significantly. And as a result of that, there is more pressure on the domestic coal. And this phenomena is not only in India. Countries across the global drove also have been experiencing similar situation leading to an unparalleled increase in the price of energy and power as well as rise in price of other commodities. Government of India has already undertaken initiatives several to ease the situation, including an increase in domestic production of coal, increased coal supply to the power plants, blending of 10% imported coal with domestic coal and restarting some of the imported based power plants. More recently, with these initiatives by the government, and the widespread rains, which reduced electricity demand in the country, the prices on the exchange have started to come down. And today, it is almost about 1/3 of what it was a week back. The exchange market continues to work uninterrupted, facilitating the distribution utilities and industries in addressing that increased power demand in the most flexible, competitive, transparent and efficient manner. I will now talk about recent developments of IEX. On 17th October 2021, IEX received CERC approval to commence the Green Day Ahead contract as a part of the integrated Day-Ahead market. Under the integrated Day-Ahead market, that change will allow the market participants to submit bids together with [indiscernible] as we were doing in the DAM market. And thereafter, the clearance will take place in a sequential manner, renewable energy bids will be cleared first in accordance with the must run setup of renewable followed by conventional segments. IEX will also allow these market participants to -- market participants an option to transfer the unselected bids from the renewable to the conventional segment. Furthering our customer-centric initiatives, we have launched value-added services, VAS, for the renewable engine generators. The renewable energy generators who was keen to avail the services such as generation forecasting, qualified coordinating agency services and analytics solutions, et cetera, can reach out to the best-in-class service providers and banners like IEX at a very competitive price. We have already onboarded Climate Connect as our firsthand panel service provider. We look forward to welcoming other service providers who are keen to associate with us in this journey. Let me now share with you an overall economic and industry update. After reaching a manufacturing PMI of 48.1 in June 2021, India's manufacturing activities expanded for the third straight month in September to 53.7 highlighting a strong expansion in overall business conditions. Even on the services side, we witnessed an increase in activities leading to expansion of services PMI to 55.2in September 2021 as compared to 41.2 in June 2021. On power sector front, the rising economic activities led to an increase in overall power demand. The all-India electricity consumption increased 10% year-on-year from 334 BU in quarter 2 of FY '21 to 366 BU in quarter 2 of FY '22. In this quarter, highest-ever peak demand of 25 gigawatts was registered in the month of July. This was July or August? July, yes. The industrial states such as Gujarat, Maharashtra, Andhra Pradesh and Tamil Nadu were the key contributors of this growth. As of September 2021, the installed power capacity at 389 gigawatts saw 4.2% year-on-year growth. The renewable energy capacity increased 101.5 gigawatts from an earlier figure 89.2 gigawatts in the fiscal year 2020, seeing about 13.8% year-on-year growth. The fastest growth in renewable capacity underlines the energy transition that has been underway and an increased impetus on building a decarbonized and sustainable energy economy. On the policy and regulatory front, the 10-year long funding jurisdictional conflict related to power market between CERC and SEBI has been finally resolved by the honorable Supreme Court, paving way for introduction of the much-awaited long-duration contracts on power exchanges and derivatives -- electricity derivatives on the commodity exchanges. CERC has issued draft Deviation Settlement Mechanism, and under this, now the DSM charges are to be linked with -- on the block-wise price discovered on the exchange. This will further expand and deepen the real-time market. MBED is expected to go live through exchanges from 1st April 2022 with [ NTPC ] generation capacity as per the press release issued by Ministry of Power. The Ministry of Power issued the draft rules for promoting renewable energy through open access, driving consumers with contracted demand load of 100-kilowatt and above as eligible for green energy open access. All these initiatives will lead to further deepening of power market in the country. The Indian Gas Exchange has been seeing an uptick in volumes as well as participation. During the quarter, Indian Gas Exchange traded almost about 10 lakh MMBTU of gas, and cumulative so far, Iex sustained more than 15 lakh MMBTU of gas. And cumulating so far, IGX has traded more than 15 lakh MMBTU of gas. Good thing is we are seeing business on gas exchange increasing every month. And in the second quarter of FY '22, we did highest volume of almost about 8 lakh MMBTU. As part of our customer-centric initiatives, in the IGX we lost the Day Ahead contract also very recently. Ministry of Petroleum and Natural Gas, vide its office memorandum dated 19th August 2021, has provided an additional mechanism to domestic gas producers who have been granted pricing and marketing freedom to trade on gas exchanges. Accordingly, the domestic gas projects may sell quantity of gas up to 500 MMSCM or 10% of the annual production, whichever is higher, to the gas exchanges. And I'm sure this notification will provide availability of cheaper gas on the exchange platform and probably further deepen this gas market on the IEX platform. On a stand-alone basis, revenue for the quarter increased by 52.6% from INR 79.4 crores in quarter 2 of FY '21 to INR 121 crores in quarter 2 FY '22. Profit after tax grew by 67.3% on a year-to-year basis with a margin of 64.5%. The Board of Directors have considered issuing 2 bonus shares for each equity share. During the quarter, electricity volumes on the exchange grew by 58% on year-to-year basis, with 25.9 BU volumes traded versus 16.5 BU in quarter 2 of FY '21. During the first half of FY '22, IEX traded a volume of 47.2 BU, which is almost about 6.7% of the total generation in the country, implying a robust growth of 50.6% on a year-to-year basis. The growth in volume was driven by substantial increase in electricity consumption as well as preference by the distribution utilities to meet their short-term supply requirements in a competitive and flexible manner through IEX. The real-time market continued to be one of the fastest-growing market segments on the exchange, witnessing a growth of 125% on a year-to-year basis. And during this quarter, 5.3 billion units of volume was traded in the RTM market. RTM contributed almost 20% of the overall volume, which was traded on the exchange platform. The consistent growth of real-time market is an indication of growing reliance of the distribution utilities and industries to achieve active power supply balancing in the real-time market in the most efficient manner. The Green Term Ahead Market is also now almost 1 year old. We started this on 21st of August. And so far, we have cumulatively achieved a volume of 3.5 BU in this market. And in the second quarter of FY '22, the cumulative trade was 1.7 BU. This market has seen a considerable increase in the participant base and more and more number of utilities and C&I consumers are participating in this market to meet their energy demand and also the RPO application. We are gearing forward -- we are gearing towards the launch of ESCerts and integrated Day Ahead market. And what I understand now that these 2 markets will start from 26th of October this month. Honorable Minister is going to launch the ESCerts market today and GTAM market will be launched on Monday, and trading will start from 26th October. And we are also now gearing up for launching the long duration contract. We have already filed our petition with CERC. REC hearing was held on 21st October. And I think the last hearing is going to happen on 28th October, and thereafter order is expected in the month of November. Later this year, we may also see introduction of exchange-based ancillary markets. In the backdrop of several initiatives I have touched upon today, combined with several policy and regulatory enablers, the power markets will have a much greater role to play. Besides, there is a huge opportunity on the gas front, coupled with diversification initiatives, which we are assessing, we are very bullish on the growth prospects of the company. With India's power consumption expected to grow at 8% to 9% during FY 2022, we expect a significant growth for the exchange market. We are continuously innovating, strengthening and advancing our technology initiatives. We believe that energy markets have a pivotal role to play in transforming India's energy economy, and we are committed to play a proactive role in facilitating the much-needed efficiency, competitiveness and sustainability in the energy ecosystem. Thank you, everyone. And now we can start the question answer session.

[Operator Instructions] The first question is from the line of Mohit Kumar from DAM Capital.

Congratulations on a very, very excellent quarter. Sir, 2 questions. The first is a Market-Based Economic Dispatch, which the government wants to implement from 1st April 2022. The related question is whether it is feasible, given the time line, to adhere to 1st April 2022? And secondly, how does this change business for us? Do you think this long-term volume will increase at the expense of short-term volume? And the second question is, where are we in the process of launching long-duration contract? And what kind of products you are likely to begin with?

Yes. First on MBED. Government of India has already issued a press release and which indicates that the MBEDs will be implemented from 1st April. It also indicates that before this, CERC will align the regulations and mock drill will be carried out to ensure that the system runs smoothly. So CERC first have to align the regulations and that is the important thing to be done. As far as we are concerned, we are ready to launch it. We have done all necessary developments and we are working with CERC also to start this as soon as possible. On long-duration contracts, we have already filed our petition with CERC. Now after resolution of this dispute, I'm sure CERC will take up the petition for approval. And once the petition is approved, then we will launch these contracts also. These contracts are basically for fortnightly, monthly, quarterly and yearly contracts for result less than 1 year. Hope that clarifies your question.

The line for the current artificial has dropped off. We'll move on to the next question. That is from the line of Devansh Nigotia from SIMPL.

Sir, regarding MBED if you can help us understand what do you believe are the challenges in terms of implementation because prima facie, it looks like a lot of changes have to be made right from the generator to discom and for PFC and REC to actually fund the discom for this whole process. So what is our overall view in terms of the bottlenecks which are currently there?

Yes. As I have always said that implementation of MBED is as complicated as implementation of GST. So there are a lot of things to be done. But once government directions are in place, I'm sure everybody will act fast on this to ensure implementation by 1st April. And I would not like to comment anything beyond that.

Okay. And in case of long-duration contracts, since you're saying that you are expecting the order in November. So then after the order has come, how prepared are we in terms of launching the product?

We have worked on all technological developments of that. We are ready to launch these contracts. So the day we get the approval, and based on the approval, if there is some -- changes are to be done, we will do that. And I think within 15 days, we will be able to launch the contracts after CERC approval.

Okay. And in case of Day-Ahead market, I mean we have, in the last 1.5, 2 years, we have seen that prices on the exchange have been very high. They have been very low. But the shift from bilateral to Day-Ahead market seems to be consistent every quarter or on a monthly basis. So structurally, what has changed in the last 1.5, 2 years over here because when we look at previous 8 to 10 years, that shift has not happened with this pace. So what are the things that have really changed in the last 1.5 years?

See the shift is a gradual process. It was happening earlier also. So if you see share of the bilateral transactions, it was slowly going down. But in the last 1.5 years, that shift has happened at a much faster rate now. And one of the reason is that during the COVID time, nobody was sure about what kind of demand will happen, what kind of demand increase will happen. So they did not get into any bilateral contracts. They -- and when the demand started increasing, they started with participating on the exchange platform. And good thing is that there was a lot of liquidity in the exchange. They got power, they got power at competitive rates. And that led to the confidence building. And now they are more comfortable in purchasing power through the exchange. I'll tell you a couple of cases. Telangana, that demand increases from July up to March. And every year, they used to buy power under the bilateral market. And in some of the years, because of the heavy rain, the demand is to pass, they used to back down, take less power under the bilateral contract. There used to be contractual complications in that. And last year, they did not buy anything under the bilateral market. They bought from the exchange platform, and that led to significant savings by them. And now they are comfortable. This year, again, they are not getting into the bilateral contracts. So I think same is the case with many of the distribution companies. That is why this shift has accelerated now.

And in case of RD.

Sorry to interrupt, Mr. Nigotia. We would request that you return to the question queue for the participants waiting for their turn. [Operator Instructions] The next question is from the line of Rahul Modi from ICICI Securities.

Sir, can you explain how will be the payment security mechanism for the long-duration contracts? Whether it will be LCs or how will it be on a revolving basis?

For the long duration contract also, we will accept LCs also, but then we will ensure that the payments are made before the delivery. We get the payment before the delivery at the top.

On a daily basis?

Yes, yes. On daily basis. Contract can be for a month or for a quarter. But the payment should happen on daily basis. Because if we ask payment in advance for the full month, it is going to be too large amount. So we will ensure payments on daily basis.

And if in case there is a missed out payment, then you have the power to regulate? Who has the authority to regulate?

We have authority to regulate. It's a part of the contract.

Okay. And sir, who is the counterparty in this? Are we a part of the counterparty?

Yes, yes. Exchange in all cases is a counterparty to all the transactions.

Okay. So in case there is a situation where party A buying 100 megawatts and Party B due to some issues not able to sell that 100 and is selling 90, that 10 whose liability will it be?

See there is a DSM mechanism for such events. If party A is to sell 100 megawatts, they are selling 90 megawatts, they will have to pay 10 -- DSM for 10 megawatts.

Okay. So nothing comes on to us.

No. No. I mean, we have designed the contract in such a manner that exchange -- there is no obligation on exchange.

That's great. Sir, secondly, sir, obviously, with your experience in the power market, so what exactly in the last 2 months, what we've kind of seen was quite unprecedented in terms of pricing going high. We saw, obviously, governments also changing stand where they've encouraged people to move out of older contracts, but then suddenly seeing the prices at INR 20 and disruption in the generation market, they advised that we should again come back to old PPAs and revisit. So from a outsider standpoint, how do we look at it? Because now that you rightfully mentioned that there was a big cost saving in the last 2 years when a state like Telangana purchased X amount of units through the [ bilateral ] market to meet the long-term demands, which are there for years to come and will be years to come. The suppliers are obviously limited in the system. And they know that if a particular demand is coming, then obviously, there can be a big play in the market that can happen, which may not reflect truly on the demand supply dynamics, which happened in the last 2 months where we saw prices going up to INR 20, where a lot of discoms also played into the market and selling power on the exchange at more than INR 15. How do we balance that, sir, as a system, is my question to you.

Let us not go to the [indiscernible] extent to the situation. This kind of price increase this time it is quite high, mainly because of the very high increase in the imported coal price and very high increase in the LNG price. So as a result of that, almost about 15,000 to 20,000 megawatts of capacity is not available. So there is a lot of pressure on the domestic coal and domestic coal ramp-up cannot happen at a rate of 10%, 15%. And particularly, during the monsoon season, we have open cast mines and the mines are also flooding, so coal production also gets affected. And which is not that, which is happening for the first time. If you see 2018 also, in the month of October, there was price increase. So after monsoon, in the month of September, October, when the climate -- weather is also hot and humid, agricultural load is there at peak, price increase happens. But then right from the month of November, you'll see every year, the price starts going down. And you will see now also the price has -- prices are down in the last 6, 7 days, the price is hovering around INR 5, INR 6, around this number. And in November, I'm sure the prices will be down to less than INR 4 again. So it does not mean that if the prices have increased for a month, then you will start saving in the long-term contracts.

Sir, I take your point. My only question was that what has happened is that a lot of capacities have become redundant in the system because if you're not buying capacities under contract, then you are not incentivized enough to run them. If you're not running them, then obviously, there will be a supply crunch in the medium to long term. And if that is the case, then obviously, the prices may sustainably be high than what we've seen today.

I think the kind of demand increase which is happening in the country, all that capacities which is standard today, I'm sure that we will put to use. And market prices will give a signal for the true capacity against that.

The next question is from the line of Kunal Thanvi from Banyan Tree Advisors.

Congratulations on the setup. So broadly, I had 2 things. First was, again, on the MBED understand Ministry of Power has come out with draft. And also they have come out with a deadline of '22. So wanted to understand in the draft, there is talk about possible reduction in the charges that an exchange would charge for it because there is a comparison between the global market, wherein the power globally have already lower charge compared to what we charge in India. Wanted to understand that in the global market is that given there are some other charges apart from the transaction charges that they charge, which is at all be the price cut for us, we can also charge that is question number one. Question number 2 was the long-duration contracts like -- across the expectation has been that the bilateral market -- a large part of bilateral market could come from long-dating contact, and do we also see that some part of long-term power demand can also come on the NDC? And also, any color on our arrangement fee arrangement with MCX?

Any arrangement on -- with?

Fee arrangement with MCX.

Okay -- As far as MBED is concerned, I think charges, et cetera, what you are referring is was there in the discussion paper. But then this is under the domain of CRC, they will have to decide about the detailed procedures and issues, if I mean, regarding the production charge. So as and when CRCs take up this matter, will see. We will take up will discuss with them. And it will be as per the CRC order. Implementation of bid that also will be dependent on realigning of regulations by CRC. Lot of work has to be done in that area. I mean we are concerned. We are ready. And we are working with CRC to ensure that it is implemented from 1st of April because as far as we are concerned, we see a lot of opportunities if it can be that implemented from 1st of April. Around the long version contracts, as I told you, we have already filed our petition with CRC. We are awaiting approval from CRC, as and when we get the approval we will launch the long version contracts. Initially, I mean, we are definitely looking for diverting bilateral transactions on the exchange platform. So that shift may happen gradually, but definitely, it is going to happen. With MCX. MCX Is going to launch derivatives, its derivatives. And for settlement of the derivatives, you will need a price. And they intend to use our price. So for using our price, we have agreements with them.

Sure. So that's not like can we throw some light on the fee arrangement that we would have with them?

We already have agreements with them. They will be using our refresh price, and we'll be getting some revenue share out of that revenue with they get from electricity derivatives.

Sure. And just 1 follow-up on the price thing. So globally, like have you seen extended when they charge for other value-added services also apart from the transaction charges? And is there any scope that we can also going ahead, say, 3, 4, 5 years down the time charge for the value-added services that we intend to give to the things.

There is no standard system of charging fees and annual fees and membership fees for different exchanges. Everybody's charge is depending on the conditions in their countries. So and we also have started charging this based on the conditions which are prevalent in India. I don't make any international benchmark with respect to the charge.

The next question is from the line of Swarnim Maheshwari from Edelweiss.

Congratulations for a very good set of numbers. So just 2 questions. First, I just wanted to understand your thoughts over here. So firstly, is it possible to implement it without price coupling and it kind of decreased the purpose of single pricing in [indiscernible] versus you could have multiple prices on [indiscernible]?

It is possible to implement ambition, and that is what government release also says that even with the discussion paper, which was released by government that also said that phase one of the plan is being implemented along that coupling. Also, if you see 99% of the transaction fee collecting market are happening on the exchange space now. So it -- What is the problem? In case of MBED, also, the same format will take place.

So I think the whole point is when you actually go for MBED, and you are going from 100 to 400 BU. I think your ROE will be like around 4x from here. And we don't see any entity actually using those phenomenal profits. So with a highly regulated framework. So -- that was the point that the reason to our tax is really.

I think regulator is there, they will take care of all those things. In terms of normal profit or anything.

No, no, I understand. Correct. Sir, the second thing is what is the profit which you are making? INR 202, what is the profit that [indiscernible] is making?

[indiscernible] the profit? Look at the value we are providing. You should be more concerned about that.

Got it. Sir, secondly, now we will be moving to the mechanism of step scheduling to the exchange, and this would incur some additional costs with respect to our brokerage. Now of course, the overall saving cost that was in [indiscernible] on implementation and MBED is about 3% to 4%. But MBED implement it on the exchanges about 1.5% to 2% might be actually kind of by the brokerage. So do you think that there is a possibility that in future that the transaction fees might actually start coming down, otherwise, this actually defeats the purpose of MBED again.

Again, I told you a regulator will have to take a view on this. They will have to see what kind of values customers will be able to get by implementing that rate, kind of savings will this happen? What is the job which will have to be done by the exchanges? What kind of fees is to be given to them. I think we have a regulator. And they will look into all of this. And purpose of MBED is not only 5% or 10% reduction in the cost. Purpose of MBED is also to subdue the power in the most optimal manner, utilization of resources in the most efficient manner, and also going forward, integration of renewables with the conventional power and efficient member. So objective content is quite large. Let us not emit that to 5% cost savings.

So in the discussion you said actually up that, of course, one of the objective is to achieve those cost savings. But you did mention the other point as well taken asset that you need to should be power efficiently, then we have renewable also coming into footprint. So I will take your answer over there.

The next question is from the line of [indiscernible] from JK Capital Management.

Am I audible?

Yes, yes, please.

Yes, sure. So my question is on your -- 1 of the slides, I think it's slide #32 or something -- 32, I think, you were talking about the total capacity likely to phase out by March 2027, which is 41 gigawatts that gives you additional 100 BU opportunity for the exchange. -- right now with 9,000 MU per month, your current volumes are around 100 BU per annum. So it is like this additional opportunity is doubling your market. But what is this market exactly?

Are you referring to the investor presentation?

Yes. In your investor presentation, slide #32, phasing out of plants, total capacity likely to phase out by March 2027 is 41 gigawatts incremental 100 BU opportunity for the exchange. So your current volume is 100 BU. And is this you're saying is an ad-on. So what is this exactly?

Today, we have power plants having -- generating -- having capacities of 60 megawatts, 100 megawatts, 150, 200 megawatt. These units are inefficient units consuming more core for generating 1 unit of electricity. And these units are also quite old. They are also not meeting the environmental standards in many of the cases. So Government of India has decided to phase out these old units and the capacity is around 35 to 40 gigawatts. These at 80% utilization level, these units should generate something about 300 BU. But since these units are old, the limits presently are generating about 100 BU, 150 BU. So if these units are phased out, then there is an opportunity of. Because they are today generating and supplying their power to distribution companies if they are phased out, then that power will come to the market, that demand should come to the market. So that is the opportunity size. Out of this, how much we will be able to get on exchange rate from that will not work out with time.

And 1 more question on the follow-up side. You have in Slide #33, you were talking about the second bullet where the government is going to deepen the power markets by increasing the spot market to 25% by the year 2023, '24, -- This 25% spot market, what exactly is this? Because right now, 87% is the PPE. Remaining 13%, you have bilateral, then you have the exchange and then you have the deviation settlement mechanism. So this 25% is the exchange, which is now like 6.5% to 7%, which is your market share? What are they trying to do? Is it like -- because some of the numbers I want to understand from a birdseye view which 1 to add and how the long-term PPE is going down from 87% to what percentage, something like that.

This statement is from draft national electricity policy which was issued by the government of India recently. This draft policy says that the share of the spot market should be increased to 25% by the year 2. They are not behind the spot market in that draft, but spot market invariably is that they have market short duration exchange transaction, that is a spot market. and which is today 6%, 7%. So the intent of the government, what we see from this is to increase this 6%, 7% to 25% in the next 3, 4 years. But even going by the short-term market, which is at 12%, increasing back to 25% in the next 2, 3 years, 3, 4 years, that also is a big multiply.

No, yes, exactly. That's what I'm asking. I mean the short-term market is all 13%, which going to 25% itself is a great deal. -- in this -- after this gap, I'm not saying that this is an achievable target or an unmissable target. I'm not commenting on that. But as per this draft, 25% would be the stock market -- spot market on top of which you have the bilateral and the deviation settlement mechanism, et cetera, et cetera. And bilateral you will benefit hugely because of the long duration contract. So net-net, if we assume the opportunity for the exchange down the line like 3, 4 years down the line, it is like nearly, what, 30%. If you add everything -- if you add all the components, as per this proposal.

That is what it should be. If you want to have high renewable capacity in the country, it is necessarily that exchange transaction should increase versus the deepening of market then only we will be able to address the variability in the renewable generation. If you look at countries, open countries where you have high renewable generation capacities, exchange transactions are almost about 60% of the total investor. So in India, we want to go with 450 gigawatts of renewable capacity in the country. I think we need to have market size of 30%, 40%. And I think the statement in the drop each policy is also keeping that in.

The next question is from the line of Aniket Mittal from SBI Mutual Fund.

So the first question is actually on the directors market. Like you rightly said, there's a very clear emphasis on increasing the spot market in the country. But with that, there also needs to be some sort of a mechanism in place to hedge the risk in the spot market business. And I think it's been about a year now since the fine licensing agreement with et MCX also have gone and signed a technology agreement talking with X. So just understanding from a feasibility perspective, -- When do you take -- can you actually launch a derivative market in India?

Yes. Just the electricity derivatives we lost by the commodity exchanges. And what we understand that MCX has already signed contract approval with SEBI. But if you have seen that joint working group minutes based on which this litigation has been resolved, one of the recommendation is that there should be a joint working group consisting of representative of SEBI, CRC, Ministry of Power and Ministry of Economic Affairs. And these joint working groups are to decide what kind of contracts would be allowed in the derivative market. and what kind contracts would be allowed by CRC. So that it should not have any adverse impact on the spot market of the entry. So I think the joint working group within is expected shortly after that, they have to decide about that and then thereafter, say, we will give the approval. And then MCX will be able to start this very contract. So I will not be able to say anything about the time line, but then this is the process, and this process has to happen.

Just 1 question only on the how do you see, let's say, the short-term market panning out in the next 1 year or so as traditional, like you said, we do our about 3 years back in 2018 -- And at that point in time, that tends to cause the discounts a bit. So we had then some amount of pilot schemes coming up and a lot of discount started rushing a bit to actually pay up certain contracts? Because you can't keep on burning at more than INR 5, more than INR 6 on a daily basis. So I think over the past 1 year, we've gained around 1.5% share from bilateral. Do you think some of that can actually then go towards the bilateral in the coming months?

So far, only 1 pilot project has happened and that too for 2,000 megawatts. And the demand is increasing every year at a rate of 7% to 8% now. economy has to grow at a rate of 9% to 10%. Our demand has grown at a rate of 9%. -- that has to happen, the demand is going to grow at a rate of 15,000, 16,000 megawatts per year. I don't think a pilot of 2,000 megawatts would be really a big concern for us. I mean a kind of transaction that [indiscernible] but there is still a lot of opportunity for that [indiscernible].

Maybe just 1 last question, if I wanted a data point. if I look at your second quarter volumes, could you tell me who are the top 3 buyers on the exchange for this quarter? And what is the cumulative contribution to your overall volumes?

I can tell you. In fact, participation was there by most of the states. And the states where the demand has increased like Gujrat, Maharashtra, Punjab, Haryana, Rajasthan, Tamil Nadu, Andhra Pradesh. All these states are active by selecting platform. All of them, depending on the demand, the varying power.

So can you -- would it be possible to quantify that as we are the top 3 buyers in their contribution to overall volume?

I don't think so. But I can tell you 1 thing that is at 7 states, which I told you, the demand increase -- significant demand increase has taken place in these states, and they were large parts on exchange base.

The next question is from the line of Apoorva Bahadur from Investec.

Sir, wanted to understand I think you mentioned that you're seeing capacity addition should be plan, I mean, in the system. Given that almost 40-odd gigawatts will be retiring and I think roughly adding 30 gigawatts in terms of new coal capacity. So 2 questions here. Firstly, where do you see this capacity is happening, so mostly in renewables or in thermal assets? And secondly, in case there are currently -- seen sort of reducing capacity on a net basis -- Do you see the long-term prices on exchanges going up sustainably?

I understand what is already going on for construction and commissioning of about 40,000 megawatt capacity, which is in the state sector and in the center sector. So whatever capacity will be retired almost same kind of capacities under construction connecting. So there is not going to be any shortfall in the installed capacity. Further, in addition to this, we are also working on the renewable capacity addition. So -- and on this side, I don't see any challenge.

This 20,000 megawatts of [indiscernible] capacity also available. We have the [indiscernible] the utilization is extremely low. So we expect as the demand will grow, the utilization of this capacity will also grow. And this is open capacity. They are free to sell in any area of the market.

Okay. Got it, sir. And secondly, sir, on the sorry for harping on this again, basically on the MBED side of things. Now essentially, as I understand, and please correct me if I'm wrong, but under the MBED, price discovery won't happen on the exchange essentially the scheduling function. So in such a scenario, And I know you said that regulator will take a call cost, but what would be a fair sort of a remuneration for the exchange, which will basically get to the scheduling function or just sort of lending platform and technology for got some supplier point?

Phase I of MBED, exchanges will do what they are doing today. The entire from some of big collection price discovery, ruling, financial contact settlement and physical settlement will be done by the exchanges.

Okay. So the price is to also happen on for MBED?

Yes.

And won't be based on the variable cost of this.

Phase I, yes.

And post the Phase I as an overall an overall implementation level?

At the implementation of Phase I, they will see what are the implications, what kind of benefits countries driving out of that and what should be done for Phase II, whether we should last for Phase II or not, I think the all of that will be taken up after implementation.

Okay. Got it, sir. and then, sir, in that case, say, for example, in case of Phase I, probably NDCC will sort of become a market maker given that it will be driving the bulk of the capacity -- so what incentives is it there for indication to be on IEX? Because what I wanted to know, since the market probably can drive price discovery on any of the exchanges. If you could just elaborate on this and so on like?

Number one, if you have seen the paper, it is not NTPC alone, it is talking about interstate generating stations. So when you say interstate generating stations, it is NTPC, NLC, HDFC, MidCo, HSBC, BNL, all these companies. Plus the private sector companies also which are interstate generating companies like Adani, Tata, Sasan and then you have inter state generation in the private sector also. So GMR -- I mean all these companies. All these plants are interstate generating plants.

Right. The same thing purchase, right? I mean and typically would obviously we have the highest capacity among these or even if you are a government company?

Generator -- any generator or distribution company will like to participate on an exchange platform, which has demonstrated its capability to run this generation. I mean nobody can take risk with the exchange or a platform, which has not proven. I mean in last 13 years, at least we have demonstrated that, that we are capable of generating such a product.

Fair enough.

And if you think you are comfortable in going with other exchange. We think so, right?

Thank you. The next question is from the line of Noel from Ashika Group.

Yes. Actually, most of my questions have been answered by now. But just 1 last question. So this is regarding the very high volume that we have seen in August and September. And so far, we are also seeing higher volumes for the month of October. So is it -- would it be fair to assume that these higher volumes would persist in terms of market share gains going forward as well?

Yes, definitely. That is what we think so. What we are aiming for.

But just one, but there will be some portion of it that would be seasonal in nature because of the because of the various power shortages that were there. So that would be, I think, a minor portion or that would be like 50-50, I mean what would be the percentage of that.

If you look at our quarterly volumes variable quarter 2 is the highest volume. But quarter 3 and 4 are also reasonably good volumes, where it is not very significant.

Quarter 2 is good valuation. But every quarter, we will find some very good months. And all in all, you can see on an apple basis, is it happens making sure it's not very bad.

The next question is from the line of Aman Madrecha from Augma Entire Research Private Limited.

Yes. So I had on questions like currently, if you look at the balance sheet, you have around INR 1,000 crores of cash in investments. So what are we planning to do with this? Are you planning to investing some other revenues? Or are we looking to increase the dividend payout, -- Like what is stance on the cash balance on book?

I'll request my colleague, Mr. Vineet Harlalka, to respond to this question.

Yes. Thank you. We look at the company as a surplus of the cash flow, but it is mainly because of the clearing float and margin. and which is the kind of liabilities and more of a cash use. But if you look at the shareholders fund, it will be tune of around INR 450 crores. So we are exploring one of the diversification opportunities and company has been paying a good amount of resin in the past also. And considering that the company will continue to reward the shareholder dividend also and continuing retain the liquidity amount of the cash as required for diversification and looking for the other growth opportunity.

And sir, I also wanted to understand and take derivatives coming into picture -- So will there be any effect on the volumes in IA or can test that and would be taking prices as a service from IS?

Can you repeat the question, please?

Asking a entering into derivative contracts for electricity. So can we expect the volumes on IS to deteriorate because as we have seen derivatives often become a larger market in each and every segment. So can we expect the volumes to deteriorate or the volume should remain staying on the upper increase?

Volumes will never increase because the elevated contracts are financially settled contracts, and delivery has to happen under those contracts. As per the contract, that delivery will happen on the IEX platform. That is number one. Number two, when there are derivates, there are few market participants who are not participating on the exchange platform, the fall of the price volatility. Now those participants will have the option of hedging their position in the derivative market. and taking delivery in the spot market. So invariably, what we have seen when you have derivative market, the deepening of the spot market happens. The volume in the spot market increases. And at this price, government was also concerned about introducing this derivatives in the market and government took the initiative of resolving this jurisdictional issue.

So in this derivative market, the contracts will be settled, right? There will be delivery of electricity? They would not be just financially settled?

So that delivery will happen on the IEX platform. And they cannot do delivery of power because delivery of power is regulated by CRC. It has to be done as far the CRC regulations. So as per the contract, any delivery resulting out of the derivative contracts will happen on IEX platform.

So like with the derivatives, can we expect more price fluctuation because given that there will be derivatives, so there would be price fluctuations on the platforms like master wallet-less.

I'm not clear about your question.

So I'm asking the derivatives in picture going forward, can we expect price -- the price validating the DAM or TAM markets to increase.

No, no, no, right? -- volatility, in fact, when we have derivatives, there is more stability in the price.

And sir, I just wanted to understand more on the IEX. When can we expect IEX to materially start contributing to the revenue or profitability?

Yes, as I told you, IEX is doing volume increase every month, the volume trade volume is increasing, but because of the high price of gas in the international market, unfortunately, the import of cash has reduced, the availability of cash in the market has reduced. So that has impacted our projections. we were expecting in the fourth quarter of this year, we should achieve breakeven but maybe it might get structured by 1 or 2 quarters.

Okay. And sir, can you just give you some data on like what is the transition charge on the IEX?

IEX transaction charges are INR 4 per MMBTu.

The next question is from the line of Nitesh Agarwal from UTI AMC.

My first question is, so when you look at renewables, most of the capacities get built up with 25 years PPA. So do you think the addressable market for exchanges for renewables would be restricted largely for the load balancing or there would be more volumes coming up out there?

When -- in 2008, when we started IEX, at that time, almost 100% of their power nose capacity was tied -- But then slowly, we started having merchant capacity in the market also. And then the distribution companies, when they have surplus power, they started selling on the platform. Similarly in the renewable also, we have just after this one market. And on 26th of October, we will be starting the GDN market. So I think when we start these products in the market, now the generators will have another option of selling that renewable power. What we have seen in the last 1 year in the GTA market, price discover on the exchange platform is much, much higher than the price which they are getting under compete. So I'm sure there are going to be generators who will set up merchant capacity. And volume in this market will again slowly start increasing. I'm not expecting that the volume increase in that green market will happen immediately in the next 1 or 2 years. meta time, but yes.

And my second question is continuation with an earlier participant's question. So on the price coupling where are we in terms of regulation? Can you help us understand, is there a clarity from the regulator side, whether this will be implemented and if you buy one?

The regulator price, there is no mention about price coupling anywhere. You have said in the regulator also that it be considered an necessary. So I don't think there is any discussion on this. And even in the Phase I press release given by the Ministry of Power for Implementation of Phase I of MBED. They are also not [indiscernible]. After implementation of Phase I, then they will see how effective this was should we go ahead with Phase II or not, I think these are issues which will be subsequently done.

Thank you. We'll move on to the next question. That is from the line of Ankush Agarwal from Search Capital.

Just 1 quick question. So could you highlight like what would be the difference for someone to trade on the exchange to a power trade like PTC and not direct -- And like what are we doing to bridge this gap?

Can you repeat the question, please? I can't hear you.

Yes. So what according to you will be the difference for someone who trade on the power expense not directly customer but through a broker like a PTC?

I'm still not clear.

Yes. So PTC, they have like 30%, 40% of the exchange points, right? A lot of DISCOMs and power on paper used to put base on the exact, right?

Yes.

So what, according to you, what are the reasons why these companies are going to exchange to PTC and not directly to the exchange?

Number one, the share of PTC on Power Exchange out of the total transitions, what we do is almost about 20%. It's not 30%, 40%, it's about 20%. Number two, there are a couple of state distribution companies to PTC and some of the industrial premiums also are participating through PTC. PTC also has a long-term contract with some of the generators. They are selling their powers on exchange platform. So these participants have their own reasons for participating for PTC. In addition to this, we also have some of the trade members also like Tata Power Trading Company, Manikaran et cetera, who are doing transactions on behalf of some of the clients. And then we have many distribution companies and who are directly doing transactions from exchange platform who are our cooperating members.

So the reason for asking this question was since PTC is for example by 20% of the volumes, right? And if PTC is coming out with its own exchange, and if PTC is 20% of volumes and they are the decision makers, speculates 20% of the volume. After doing that is that someone would be will PTC will try to ship this volume to some other exchange?

I'll give you 1 example. When you participate when you purchase shares from Zerusa platform or on ICG platform, there is an option that you will do purchase from BFC or NFC. Would you talk about that? You decide or that platform decides about it?

So that's a good analogy, but I'll give you my perspective...

Traders are only doing these transactions on behalf of the client. For a generator, it is more important to sell that power. If that power is not sold, that opportunity is lost forever. Power is a perishable commodity. So power is generated, it's important to sell the power. Similarly for a distribution company or industrial consumers, it is important to get the power. If the power is -- he has not been able to get the power, industry will have to reduce the production and distribution company will have to do the load shedding. So these parties will like to do that trade on exchange platform where they have the comfort that yes, they will be able to sell or purchase the power. So I think it is they who decide about it.

So it is...

I can purchase share on a particular extent based on the liquidity on the exchange. It's a common phenomena.

Correct. So what we're saying is the discounts and the consumers with the discount and power producers decide which exchange to place the order? And it's not PTC who decides it?

Yes, yes. Definitely, definitely.

We'll move on to the next question. That is from the line of Jateen Doshi from Axis Capital.

So I've got a few bookkeeping questions. So first question is on the -- what was the share of open access volume in the quarter?

This is about 15% to about 20% -- less than 20%.

Sorry, 20%, okay?

Less than 20%.

And Sir, 2 more questions. On the other expenses. So we have seen a sequential decline in other expenses and also on the employee cost, which went up sequentially. So what was the reason for decreasing the other expense and increase in employee and can be the run rate going forward?

Cost optimization during COVID time. That is one reason. As far as the cost direction is concerned, I'll request my colleague, Mr. Vineet Harlalka to respond in detail about it.

During the quarter, the other expenses are mainly because of the CSR. In The quarter 1, there were around 2 process expenses, efficiency expenses in the company income, which was not there. Otherwise, all the other costs are more or less same. So that was the only major significant difference in the quarter 1 and quarter 2. And if you compare to the September quarter of the previous year, yes, because of the COVID lockdown was there and all the work-from-home that was the one factor that were limited there. And on the manpower cost, the increase is mainly because if you can recall during the quarter 1 consumer call to be clarified. So there was some reversal of the variable proportion amount were there during that quarter. So some provision in difference was there. So that was onetime impact given on that number. But if you look at the overall number, we are in this side of it. These are the numbers which we are going to submit. It will continue.

We'll move on to the next question. That is from the line of Gokul Maheshwari from Orica Capital.

Sir, in your opening comments, you had mentioned about some changes in the DSM regulations in terms of price benchmarking. Can you help us in terms of understanding in detail how this regulation will help the RTM gain share from DSM over time?

See present DSM mechanism is that there is an average price which of the day which is taken. And that average price of the day is linked with the frequency. And since frequency is almost constant hovering between INR 49.95 to INR 50, INR 50.05. So the DSM price is also very close to the average clearing price of the day. But average clearing price is the average price of the day. during evening ours, the price is higher during morning hours the prices higher during the day and the price is lower. So what we have seen during the morning -- hello?

Yes. Sir, please go ahead.

Yes. So what we have seen is that when the demand is more, the market clearing price is high price is lower and there is a condense to overdraw. That is why now CRC is linking the DSM price to that block-wise price discovered on the exchange platform. So in the evening hours, even the price discovered from 7 -- to the 715 block, if the price is INR 8 and the DSM price also is going to be more than INR 8. There is going to be a multiplier on this price. So in the graph, they have indicated 110% of the discovered price. But many of the participants have commented that this price would be higher than this because then only to let the lead trend. So that is how the team price is going to be linked with the each block, and it is going to be higher than that market clearing price forcing distribution companies to plan and purchase in the RTM market.

And is this around the corner? In the sense this implementation is going to happen soon?

Pardon?

Is this implementation expected to happen soon, this change in regulation?

Yes. This is a draft of discussions they have issued. They have invited comments. I think comments are also submitted by all the parties that bid is over. So CRC may take up this issue in the month of November and then thereafter.

Today is the last date.

Yes, thereafter, the order should come. Hopefully by end of this year or in the month of January, this would get implemented.

Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Jateen Doshi for his closing comments.

Yes. Thank you, everyone, for participating in the call. We thank the management for giving us this opportunity. I would now hand over to the management for their closing remarks. Thank you.

Thank you very much for participating in this earnings call. I must say that energy markets have a key role to play in building India as a sustainable energy economy. With the opportunities that lie ahead of us. We are very excited about the prospects of the company. And we had a great interaction today, and I look forward to similar impact in the next quarter also.

Thank you.

Thank you. Ladies and gentlemen, on behalf of Axis Capital Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.