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

Ladies and gentlemen, good day, and welcome to the Indian Energy Exchange Q3 FY '24 Results Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumit Kishore from Axis Capital Limited. Thank you, and over to you, sir.

Thank you, Manoja. Good evening, ladies and gentlemen. On behalf of Axis Capital, I'm pleased to welcome you all for the IEX Q3 FY '24 Earnings Conference Call. We have with us the management team of IEX led by Mr. SN Goel, Chairman and Managing Director. We will begin with the opening remarks from Mr. Goel, followed by an interactive Q&A session. Over to you, sir.

Good evening, friends. I welcome you all to the IEX earnings call for quarter 3 FY '24. With me today on this call are Mr. Rohit Bajaj, Executive Director of Business Development and Strategy; Mr. Vineet Harlalka, our CFO and Company Secretary; Mr. Amit Kumar, Head of Operations and Technology; Ms. Aparna Garg, Head of Investor Relations and Communications; and Mr. Aditya Wali. Friends, the Indian economy continues to be the world's fastest-growing major economy with the aspirations to become the third largest within this decade. According to the first advanced estimate released by the National Statistical Office, the economy is expected to grow at 7.3% in the current fiscal, which helped -- which is helped by government spending and a pickup in manufacturing. This is slightly faster than 7.2% growth, which was recorded in the last year, '22-'23. Coming to economic indicators, India's manufacturing PMI for Q3 FY '24 came in at 55.5%. Manufacturing has remained expansionary on the back of increased private consumption and capital expenditures. Services activity also continued to expand with the services PMI for quarter 3 FY '24 coming at 56.8%. The services index has remained above 50% for nearly 30 months at a stretch, the longest such trend since August 2021 -- 2011. On the power sector front, peak power demand remained at high of 221 gigawatt in October before declining towards the end of the quarter. This was after a record high of 240 gigawatts in September recorded this year. Electricity consumption during quarter 3 '24 recorded at around 380 billion units, saw an increase of 10% on a year-on-year basis. States like Uttar Pradesh, Maharashtra, Gujarat, Madhya Pradesh, Karnataka and Tamil Nadu remain drivers of the surge in demand in power. According to the CEA estimates, electricity consumption is expected to continue to increase at a CAGR of 6% to 7% over the next 8 to 10 years. Looking at trends in demand and its expectation in the coming years, recently in November, Honorable Minister of Power, Sri. R. K. Singhji, spoke about the need for thermal capacity addition to meet the increasing peak load in the country. The minister was of the view that due to increasing electricity demand in the country and the prevailing demand-supply situation, the required thermal capacity required will be about 283 gigawatt by 2032. And against this, today, we have installed capacity of 214 gigawatt. Already 27 gigawatt of thermal capacity is under construction, and government has decided to add another 50 gigawatt of new thermal capacity that will help in meeting the growing demand of power. It has been also proposed to add a good part of this capacity for sales to the market as sellers will be able to get adequate return by selling to the exchanges, and capacity addition can be done faster without the need of PPA. The minister also mentioned that huge amount of funds will be necessary to create such capacity, and it is believed that REC and PFC will finance a large part of this. Additionally, the minister noted that country's requirement for 24/7 availability of power requires a double engine that is renewable as well as thermal capacity. With 180 gigawatts of renewable installed capacity, India remains on track at its target to achieve 50% of the capacity from non-fossil fuel sources by 2030. In addition to this, 140 gigawatt of green energy capacity is under tendering and implementation. And this is all about the government target of 50 gigawatt of RE capacity that government is planning to add every year till 2030. To enable power integration, the NEP projects -- the NEP has projected a storage capacity requirement of 74 gigawatts by 2032, consisting of pump storage of 27 gigawatt capacity and battery based storage of 47 gigawatts. Recently, under the government's Viability Gap Funding plan, the SECI has awarded India's first pilot project of 500 megawatt battery storage system, wherein 40% capacity is open capacity for sale to the market through the exchange to meet the peak-hour demand. Additionally, there is a government push towards green hydrogen mission. The push for green hydrogen of 5 million tonnes per annum by 2030 alone would require 125 gigawatt of green energy. On the fuel side, during the quarter, India's coal production increased by a robust 13.1% on a year-on-year basis. And the production level was at to -- almost about 256 million tonnes. Coal dispatched to the power sector increased by 11.7% on a year-on-year basis to 203.5 million tonnes. E-auction coal premium has continued to decline since the beginning of this financial year. The coal premium under Shakti B8 auction has come down to almost about 40% now. Coal inventory as on 31st December 2023, stood at 13 days. The imported coal prices have also come down for 4,200 GAR coal. Last year, the prices were almost about $90. It has come down to $58 per tonne. Another good thing is imported gas prices have also reduced significantly. Last year, imported gas prices were in the range of $20 per tonne -- $20 per MMBtu. Now they have come down to almost about $9 per MMBtu. And if the prices come down to $7 to $8 per MMBtu, the variable cost using the gas will be only about INR 6 to INR 7. And I'm sure almost 11,000, 12,000 megawatts of the gas base capacity, which is available in the country, that can be put to bar for meeting the peak-hour demand. We are now witnessing a scenario wherein there is no fuel shortage. On the exchange, the improved supply side scenario has resulted in increased sell liquidity since November. Sell bids in collective auctions increased by 25% on a year-on-year basis in November and 18% in December. This led to easing of prices on the exchange. The average market clearing price in the DAM market was INR 5 per unit compared with INR 5.88 per unit in quarter 2 of this year. On the regulatory and policy front, the regulatory and policy environment continues to be conducive for power market development. Let us now talk about their noteworthy regulatory updates and policy initiatives for the sector. CERC has implemented the Indian Electricity Grid Code, the Sharing of Interstate Transmission Charges Regulations and long-awaited GNA Regulations from 1st of October 2023. The salient features of these regulations are, which are market friendly, the long-standing anomaly in transmission charge between collective and bilateral transactions has been corrected now. With this, during the quarter, we witnessed a reduction in volume in our Day-Ahead Contingency Market and consequently witnessed an increase in volume in the Day-Ahead Market. Volume in the BSE market in quarter 1, while 2 billion units, in quarter 2, it was 2.6 billion units. It has now reduced to nearly 0.4 billion units and transactions have not shifted to the DAM -- in the DAM segment. At nearly 15 billion units in quarter 3 volume for DAM, this was higher by 17.5% as compared to quarter 1 and 30% as compared to quarter 2 of this year. This trend is expected to continue in the future also. Under GNA regulations, transmission charges in collective transactions will be applicable only for the buy quantum in excess of their GNA. Buyers will be able to utilize GNA optimally by buying power in the DAM and RTM market. Under IEGC, generators with long-term PPAs will be able to sell their URS power, not requisitioned by the beneficiaries in the Day-Ahead Market without the consent of the buyers. Similarly, in efforts to bring URS power in the market, Ministry of Power has proposed amendment of late payment surcharge rules, which mandates generators to offer URS power in the market. These rules also provide for penalty in terms of reduced fixed charges to GENCOs if they fail to offer URS power in the market. This will improve sell-side liquidity in exchange platform. Generators are now allowed to purchase in the DAM and RTM market to meet their supply obligations in case of shutdown or the forced outage. Interstate transmission charges and losses will now be only applicable from buyers. This will provide a level playing field for all generators irrespective of their location and will facilitate competition on the exchange platform. These regulations will also facilitate energy transition in a big way by providing flexibility to thermal generators to replace their brown power with green power, introduction of RE aggregators and connectivity to RE generating capacity of 50 megawatt and above. This will deepen green market at the exchange in future. Additionally, Ministry of Power extended the time period for Section 11 directive to imported coal-based power plants up to 30th June 2024 to enable supply from imported coal-based power plants in the system and to counter anticipated surge in demand in the upcoming summer months. The Ministry of Coal has amended the Shakti policy in November to allow power plants, including power generators without PPA to sell power of the -- in all segments of the power exchange. Earlier, it was only limited to the DAM market. Now they can sell power in all segments, in DAM, RTM and the TAM market. The CERC issued its order for increasing the frequency of REC trading on power exchangers twice a month, earlier it was once in a month only. And have allowed fungibility of different types of RECs. Consequently, with the added flexibility and increased frequency of trading, liquidity has increased in the REC market. And because of renewal of REC-based price, REC prices have come down. Earlier, the base price was INR 1,000, so transactions were happening at INR 1,000. Now with the removal of the base price, the REC transactions are now -- last transactions were at INR 360 per REC, significant reduction. And as a result of that, REC volumes also increased on the exchange platform. It was 65% higher in quarter 3 in comparison to last year. CEA has finalized the phasing plan for thermal plants to bring their technical minimum operations up to 40%, which is currently at 55%. This move will help in adding more RE capacity and efficient integration with the grid. Ministry of Power has provided repowering of life extension for wind power projects, allowing such generators to supply excess power on power exchange. All these measures will lead to a further improvement in sell liquidity on the exchange, leading to a decline in power prices. This is expected to present an opportunity for DISCOMs and commercial and industrial consumers to optimize their power procurement costs. Strengths. During the quarter, IEX undertook significant initiatives. We are honored to be a part of the groundbreaking Green Credit Program launched by the honorable Prime Minister during the recently concluded COP28. Our wholly owned subsidiary, International Carbon Exchange was engaged for the development of Green Credit Program registry, trading platform and web portal. On our core business, we are awaiting approval from CERC on our petition for extending the term ahead contracts from 90 days to 11 months to provide better opportunity for our DISCOMs. In terms of business performance, IEX achieved 28.3 billion units of trader volume across all segments during quarter 3 of FY '24, growing 16.8% on a year-on-year basis. This volume includes 25.9 billion units of conventional power and 0.4 billion units from the green market segment. The exchange also traded 20.3 lakh certificates, which is -- during the quarter. Our gas exchange, IGX has celebrated its third anniversary in December and has since inception cumulatively traded more than 900 lakhs MMBtu in gas volumes. During the quarter, due to wide variation in demand and supply of gas, IGX stated volume declined 65% on year-on-year basis to 84 lakh MMBtu. However, on a 9-month basis, IGX volume was down only by 7% from April to December. The profit after tax for IGX for 9-month period increased by 14% from INR 16.3 crores in 9 months of FY '23 to INR 18.6 crores in 9 months of FY '24. As gas prices continued the downward trend, volume at IGX will pick up in the going forward. And I'm sure in this summer month and with operation of gas-based plants, our gas exchange will have better opportunities. Let me now summarize the financial performance of the company for this quarter. On a stand-alone basis, the company recorded a PAT growth of 25.5%, increasing from INR 71.2 crores in quarter 3 of FY '23 to INR 89.3 crores in quarter 3 of FY '24. On a consolidated basis, revenue for quarter 3 of FY '24 increased by 20.3% on year-on-year basis to INR 141.2 crores from INR 117.4 crores in quarter 3 of FY '23. Consolidated PAT during the quarter came to INR 91.8 crores, higher by 18.9% on a year-on-year basis. For fiscal year 2024, the Board of Directors of the company have announced an interim dividend of 1% equivalent to 100% of the face value of the equity shares. With improving coal production and inventory and easing coal and gas prices, we expect rationalization of power price on the exchange and volumes to further improve in the coming few months. As India looks to add -- looks forward to add 20 gigawatt thermal capacity in this financial year, thermal generation will increase by almost about 10%. This will lead to increased sell liquidity on the exchange with the CEA expectation of power demand to soar above 256 gigawatt in FY '25 and improve sell side liquidity. I am sure exchange volumes will continue to increase. Thank you, friends. And now we can have question and answers.

[Operator Instructions] The first question is from the line of Mohit Kumar from ICICI Securities.

Congratulation on a good quarter. So my first question is, sir, on the new GNA regulation that kick in from October, I guess. Sir, have you seen the -- have you gained any market share after the new GNA regulation kicking in? And can you please quantify market share in Q3 FY '24?

Yes, our market share for quarter 3 has definitely improved because if you were to compare with quarter 1 and quarter 2, as I told you that DAC volumes have reduced. If you take all the 3 exchanges together, then also there is a significant reduction in the trading volume in the DAC. And that quantum has shifted to the DAM market and RTM market.

Is it possible to quantify the market share?

Yes. Mr. Rohit?

Yes. So in the month of November and December, November, our overall market share was 91%. December, it increased -- further increased to 95%. If I talk about quarter as a whole, it is a little below 90%, about 87%, 88%. So we have seen significant improvement -- I'm talking about total, including certificates.

Including certificates.

Yes. So if I talk about electricity, in December, it is 97% -- 96%. So that way we have seen significant improvement in the market share with the correction of movement from DAC and movement from DAC to DAM markets.

Sir, my second question is on the surplus. You said that the gas-based power plants can sell into exchanges. Sir, this has been in talks for the last few years. Has there been any change in the particular quarter in some -- in the sense, the government has come out with a new regulation, new notification, which believe -- which you believe can increase the liquidity on the exchanges because of this particular -- can you please comment on that?

Your question is not clear. Can you please repeat?

I'll come back. Sir, the un-requisitioned surplus, which you mentioned, sir, this has been in talks in the sense that the government came out with the first regulation maybe couple of years back, and it never helped us. So what has changed in this partial quarter?

I got your point. See, earlier -- as per the earlier systems and processes, the consent of beneficiary was required by a generator for offering the power on the exchange platform. Now, under the GNA and the new electricity grid code, the consent of beneficiary is not required. So a generating company, if the URS power is there, they can build that power on the exchange platform without obtaining the consent of the beneficiary. So this is a significant change in the electric grid code itself. Further to this, Government of India also has now issued a draft rule wherein they have said that the generating company must offer that power on the exchange platform. And if they fail to offer that power on the exchange, they fail to bid -- submit sell bid of that, that quantum is not being counted to our sell fixed cost recovery. I mean maybe for the DC computation, which will impact their fixed cost recovery. So because Government of India wants that, that liquidity in the market should improve. These rules are going to be finalized maybe within this month. And already, we have started seeing volumes from the generating companies, the URS power getting bidded on the exchange platform. So the sell side liquidity has improved because of that.

The next question is from the line of Guy Spier from Aquamarine Capital.

Can you hear me?

Yes, I can hear you.

I think the whole of India should be grateful for the extraordinary work that India Energy Exchange is doing in facilitating the provision of electricity to the whole of India. And I think you're an amazing team. I wanted to get your update on the comments procedure for the Central Electricity Regulatory Commission, where they are in their discussions with the Power Ministry. And if the Power Ministry eventually takes a decision on market coupling, when they will -- when your best estimate is of when they will take it? And I would imagine that if they decide to go there, there's going to have to be a lot of discussions on exactly how to implement it and what the market procedures will be and even which contracts they might start working with first. I can't imagine they would do it all at once. So I'd love to get your take on where that is, where your discussions are and how you see it unfolding from here.

Yes. First of all, thank you very much for complimenting. And with regard to market coupling, let me first tell you the events which have happened. I think in the first week of June, there was a letter from Ministry of Power for implementing market coupling to CERC. CERC issued their discussion paper in the month of August, and they invited suggestions on that. And almost about 127 persons submitted their suggestions, comments. And in that also, what we find is that more than 70% persons, they were not in favor of coupling. If you look at -- all these comments are hosted on the CERC website, you can have a look at yourself. All imminent persons of the sector, experts of the sector, they have opined that market coupling will not bring any value in the market. And the need of hour is basically to improve more liquidity in the market. At the present arrangement, there are 3 exchanges. These 3 exchangers are competing with each other, so if you do the coupling, it will stifle the competition and innovation and still. So based on the comments received, I am sure -- there are a few comments where the alternate options were suggested. So what we understand is that CERC is now also exploring, analyzing the alternate options given in some of the suggestions. And maybe at the appropriate time, they will take a view on that, whether there is any merit in implementing market coupling or not. So I will not be able to give you any timeframe, and CERC will take a view on that. After CERC takes a view on that, then also the process is quite long because they will come out with a draft. They will discuss on paper again on the new concept and then take comments on that. They may come out with the draft regulations, finalization of the regulations, development of software and laying down the settlement mechanism. I mean, doing the mock drill for that. So it's a long-drawn process.

And I would also, just to confirm, I would imagine that developing that new system, if it ever comes about, would be with the involvement of the existing market players to ensure that there is -- that energy continues to be traded smoothly, so you would be closely involved in the development of that system.

Yes, yes. I mean, whatever is done by CERC that is in a transparent manner and with the involvement of all participants.

Thank you for your great work. You're a great Indian institution, and I'm proud to be associated with you, as you know.

The next question is from the line of Ankit Kanodia from Smart Sync.

My question is again related to market coupling, but just slightly on a different route. So in our call, we have been very clear that if the market coupling comes in, it would lead to a death of innovation in the market, right, in the exchange market. So -- but we see some of our competitors celebrating market coupling. So can you throw some light as to how can market coupling be beneficial for one player and not beneficial for others?

See the point is I will always tell the side of the story which suits me. And same thing is true for the other exchanges also. That is why there is a regulator. Regulatory is independent body. They will take a view considering what is good for the sector. And that is why they issued the staff paper. And in the staff paper, if you see, the suggestions received are not only from these 3 exchanges, the suggestions received are 124. There are other 124 participants who have made comments on that. And these include sector experts. You can say they're members of the CERC, ex-members of the CERC, ex-member -- Chairpersons of CERC, Central Electricity Authority, ex-members of the Appellate Tribunal, ex-secretaries of the Government of India. I mean ex-regulatory commission -- State Electricity Regulatory Commission Chairmans and maybe from IIT and IIMs and NGOs. So all those persons gave that comments on that. Please have a look at those comments. You yourself will be convinced that market coupling probably will not add any value. But anyhow, we have to leave it to the regulator, they have to decide about it. It is their prerogative to decide what is to be done in the market. But I can only tell you that implementation of the market coupling is a major change in the market design. So I'm sure regulator will take a view considering all aspects, and then, implementation of that also is a long-drawn process.

Got it. Thank you so much for the detailed answer. My second and last question would be related to the international carbon exchange, which we are planning. Can you give us some color as to where we are in that? And how do we see that shaping up in the next couple of years? Any qualitative and quantitative details you would like to throw up?

Yes. In the carbon -- in terms of carbon exchange, I think we are still working on that because the transactions are basically mainly with the Indian sellers and international buyers. So these are going to be -- I mean, dollar-rupee transactions, and it is difficult to facilitate these kind of transactions on exchange platform. So we are now exploring the option with the Gift City to launch this exchange from the Gift City so that we can do dollar-dollar transaction. And we had a couple of interactions with the Gift City officials. And they are also very supportive of this. Let's see if it materializes in the next couple of months.

Okay. So maybe in FY '25, we can expect some transaction flow, some notable transaction?

We are desperately working on that, and we intend to launch that as soon as possible.

The next question is from the line of Nikhil Abhyankar from ICICI Securities.

Sir, in your initial remarks, you mentioned about the fungibility of REC. So can you please explain what exactly you mean by that?

Yes. Earlier in the case of REC, the RPO obligation was separate for the solar, separate for the wind, separate for the hydro, all those things are separately specified. And as a result of that, some states -- I mean, the inventory for the -- inventory for solar was higher, wind was lower. So there were problems in that. But now with the fungibility -- after creating fungibility, all RECs are in one category, and there is a multiplier effect based on the technology. So now the obligated entities can buy that REC to meet the requirement. There is no -- all the obligations are again combined together. So they can -- I mean, that has basically increased liquidity in the sell-side and also made it simpler for that distribution companies to meet their obligation.

Understood. And sir, would you be able to also mention what will be the industry-wide, like the system-wide inventory level for RECs as of, say, on December?

Pardon?

The system-wide inventory level of RECs.

Yes. Inventory is very, very high in the market now. It's almost about 2.5 -- more than 2.5 crores RECs are there in the market. See, now there is a mechanism that even distribution companies, if they have renewable power at their disposal, which is more than their RPO obligation, they also can get RECs. So as a result of that, there are distribution companies like Karnataka, Telangana, Andhra Pradesh, Himachal Pradesh, they also have RECs. And then the generators, REC renewable generators. So the combined REC volume is quite significantly high.

Okay. And sir, last question, what were the long-term volumes in Q3, long duration TAM, basically?

Rohit?

So in Q3, this volume is about 3 billion units. Nowadays, every month, we are doing close to 1 billion unit trade in longer duration contract. So total in 9 months, we have done close to 7 billion units, which have picked up in the later months. And if I compare it with the last year, last year total, in complete year itself, we did about 2 billion units. So there is a massive increase in LDC volume.

Okay, sir. And should we expect that in Q4, ahead of the summer season, this volume can really spike because most of the DISCOMs would like to do requisition power for the next -- for the summer season?