IEX (Indian Energy Exchange Limited) is India’s First & foremost National Power Exchange.
It is an Electronic Power Trading Platform. Central Electricity Regulatory Commission (CERC) regulates the company. IEX began its operations in June 2008. In fact, Indian Energy Exchange started with a view to develop the Power Trading in India & to provide an Electronic platform to the various participants in Power Market, comprising – State Electricity Board, Power producers, Power Traders and Open Access Consumers (both Industrial & Commercial).
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- Journey of IEX
- Shareholding Pattern
- Executive Management
- Products Categorization
- Power Industry & Power Trading in India
- Revenue Segments
- Customer Network
- Key Operational Parameters
- Technology Cost
- Launch of Indian Gas Exchange
- Key Financial Parameters
- Valuation of IEX
- Growth Opportunities & Risks/Concerns
IEX is one of the 2 Power Exchanges in India that facilitate efficient Price discovery. The company offers an online platform to trade in a variety of Products – Day-Ahead Market, Term-Ahead Market, Real Time Market, Green Term-Ahead Market, Renewable Energy Certificates and Energy Saving Certificates.
Promoters of IEX
Financial Technologies (India) Ltd (“FTIL”) (now known as 63 Moons Technologies Ltd) and PTC India Financial Services Ltd (“PFS”) initially promoted IEX. Then, pursuant to divestment by them, they currently hold no Equity Shares in the company.
Sellers & Buyers on IEX
Sellers of Power on the Exchange include Independent Power Producers, Power Plants, Distribution Companies as well as Government Power Generation Companies.
Buyers of Power include Distribution Companies as well as Industrial, Commercial and Institutional Power Consumers. The company provides them with a Transparent & Neutral platform for trading of Electricity.
(A) Journey of IEX
(B) Shareholding Pattern
IEX doesn’t have any Promoter. Thus, Institutional investors own the company.
(C) Executive Management of IEX
(i) Mr. Satyanarayan Goel – Non-Executive Chairman and Current M.D. & CEO
IEX appointed Mr. Satyanarayan Goel as the Non-Executive Chairman with effect from 21 July 2019. He also served the Company as the MD & CEO from 21 June 2014 till 20 July 2019. Mr Goel holds a Bachelor’s degree in Electrical Engineering from Regional Engineering College, Rourkela & also a Master’s degree in Business Administration from the Faculty of Management Studies, New Delhi.
Mr. Satyanarayan holds Professional experience of 40 years in various areas of Power Sector. Before joining IEX, he worked as the Director of Marketing & Operations at PTC India. Prior to working with PTC, he worked with NTPC Ltd for 29 years & retired as an Executive Director.
Mr. Goel associates with IEX since 16 October 2012, appointed as a Nominee Director of IEX for PTC India Financial Services Ltd. Also, he is currently active in various reform Initiatives of Government of India – Enactment of Electricity Act, 2003, Tariff Based Bidding Guidelines, Tariff Policy, National Electricity Policy, Open Access, etc. Age of Mr. Goel is 65 years.
In addition, on 24 August 2020, IEX gave Mr Goel charge of Managing Director & CEO of the Company, for an interim period after the resignation of Mr. Rajiv Srivastava, Former MD & CEO of IEX.
(ii) Mr. Rajiv Srivastava – Former M.D. & CEO
Mr. Rajiv Srivastava is the Former MD & CEO of IEX. He holds a Bachelor’s degree of Engineering (Hons.) from Birla Institute of Technology & Science, Pilani, Rajasthan and a Post Graduate Diploma in Business Management from the University of Delhi. He became M.D. & CEO of IEX in June 2019. Prior to this role, he worked as Chief Operating Officer (COO) and Head of Sales Strategy & Operations for HP Inc- Asia Pacific & Japan Region from May 2017 to March 2019. Also, between July 2011 and April 2017 Mr. Rajiv held the position of MD of HP Inc.
Before joining HP Inc, he worked for about 4 years in Microsoft India as General Manager, Enterprise & Partner Group. Previously, he also worked with HCL, Escorts as well as Yamaha Motorcycle Ltd. He holds vast experience of about 35 Years. Age of Mr. Rajiv is 55 Years. Mr. Rajiv resigned from the post of MD & CEO on 24th August, 2020 due to some personal issues. Then after his resignation, Mr Satyanarayan Goel is the MD & CEO of the Company, for an interim period.
(D) Product Categorization
(i) Day-Ahead Market (DAM)
Day-Ahead-Market (DAM) is for trading in physical delivery of Electricity from Midnight to 24 hours ahead. The company launched this segment in June, 2008.
Features of DAM
- Trading of 15-Minute Contracts.
- Participants enter bids for sale or purchase of power for delivery on the following day. (T+1 day).
- Double-sided closed anonymous Bidding process.
- Types of bids –
- Portfolio Orders/Single Bids: 15-Minute Bids for different Price and Quantity pairs. Partial execution of the bids is possible.
- Block Orders/Block Bids: Relational block bid for 15-minute block for the same day. No partial execution is possible i.e. either selection of the the entire order or rejection of the entire order.
- Clearance from State Load Dispatch Centre (SLDC) by buyers and sellers, on the basis of availability of Network as well as Tariff Meters Availability.
- The minimum allowable Quantity bought and sold is 0.1 MW and with minimum price increment of Re 1.0 per MWh.
- Market Clearing Price (MCP) and Market Clearing Volume (MCV) determined for each Block of 15-Minutes as a function of Demand and Supply which is common for the select Buyers and Sellers.
- Market Splitting as well as Area Clearing Price (ACP) specific to an area manage the Congestion.
- Post confirmation by the National Load Development Centre (NLDC), participants as well as and Regional Load Development Centers (RLDC) get the final Results for Electricity delivery on the Next Day.
DAM Trading Process
(ii) Term-Ahead-Market (TAM)
IEX launched Term-Ahead Market (TAM) in September 2009. Contracts under TAM cover a range for buying/selling Electricity for up to 11 days ahead. Thus, it enables the participants to purchase Electricity to manage their Electricity Portfolio for different durations.
Types of TAM Contracts
- Day-Ahead Contingency Contracts – Twenty-four Hourly Contracts available for trading on Day-Ahead basis i.e. 24 Contracts of one hour each for delivery on the Next Day.
- Intra-Day Contracts – Region specific 20 hourly contracts that facilitate delivery on the same day. The contracts trade on a Daily basis through continuous trading process.
- Daily Contracts – Region specific contracts, available for trading on a rolling basis i.e. everyday Eight daily contracts of the following week will be available to the Members for trading. The delivery of contracts shall begin 2 days after the trading day till T+10.
- Weekly Contracts – Region specific Contracts. Trading in such contracts is done through Double-sided Open Auction on every Wednesday, Thursday and Friday of the Month. Delivery Period commences from Next Week i.e. Monday to Sunday.
TAM Trading Process
(iii) Renewable Energy Certificates (RECs)
Trading of Renewable Energy Certificate (REC) on the Exchange commenced in February 2011. One REC (Renewable Energy Certificate) represents 1 MWh of energy generated from renewable sources. Obligated Entities like Distribution Licensees, Captive Power Plants and Open Access Consumers require to meet Renewable purchase obligations by purchasing Renewable Energy, either by Renewable Energy Generators or by purchasing RECs.
RECs are Market-based Instruments, classified into Solar RECs as well as Non-solar RECs. These contracts are traded on the last Wednesday of a Month.
Under the REC Mechanism, a Generator can generate Electricity through the Renewable Resources in any part of the Country. For the Electricity part, the Generator receives the cost equivalent to that from any conventional source. While the environment attribute/Green attribute is sold through the Exchanges at the market determined Price. Then, any Obligated Entity can purchase these RECs to meet its Renewable Purchase Obligation (RPO) compliance.
(iv) Energy Saving Certificates (ESCert)
The Company commenced trading of ESCerts on September 26, 2017. As per the Regulations, CERC permits ESCerts trade only through the Power Exchanges. In fact, this Market-based Instrument was created under the Perform Achieve Trade (PAT) Scheme of the Ministry of Power, Government of India. Therefore, it requires consumers in Energy-intensive Industries and Sectors to reduce their Energy Consumption in accordance with specific Targets.
Consumers achieving reductions above their Targets are issued Energy Saving Certificates, in order to trade on the Exchange. On the other hand, Consumers, who are unable to meet their Targets in accordance with the PAT Scheme, will have to buy the ESCerts to offset their shortfall. Consumers achieving reductions above their targets can either Bank their ESCerts for the next compliance period or sell them on the Exchange.
(v) Real-Time Market
The Real-Time Market is a new Market segment by IEX. The company launched it on 1st June 2020. This segment features a new Auction Session every half an hour with Power delivery after 4 time Blocks or an hour after the gate closure of the Auction.
(vi) Green Term-Ahead Market (G-TAM)
IEX recently launched another Market Segment – ‘Green Term-Ahead Market’ for trading in Renewable Energy after seeking the approval of Central Electricity Regulatory Commission (CERC). The Matching Mechanism for Green-Intraday, Green-DAC and Green-Daily contracts is Continuous/Spot Trading whereas for Green-Weekly Contracts Double-sided Open Auction process to be followed.
Types of G-TAM Contracts
- Intra-Day Contracts
- Day-Ahead Contingency Contracts (DAC)
- Daily Contracts
- Weekly Contracts
(E) Power Industry & Power Trading in India
Power Purchases under Indian Electricity Market
(i) Market Segments
India’s Electricity Market is dominated by long-term power purchases (under LT PPAs), which account for ~90% of Electricity generated. Thus, Short Term market account for around 10% of the Power purchases. Supply disruption, load variations as well as price arbitrage opportunities currently drive the need for an Short Term Market (~10% share). Also, the size of India’s short-term power market declined by 8 BU from 145 billion units in fiscal year 2019 to 137 billion units in fiscal year 2020.
(ii) Transactions Under Short-Term Market
For FY20, Of the Total Short-Term Market, bilateral both Trader & Direct Transactions constituted 42.4% (excluding volumes traded on exchange) followed by the power exchanges at 41.2% (including DAM & TAM) and Deviation Settlement Mechanism (DSM) transactions at 16.5%.
(iii) Market Share of IEX
Within ST, power exchanges have almost doubled their market share to ~40% from <20% over last 10 years. Moreover, ~97% of the traded volumes of electricity contracts in the day-ahead market (DAM) and term-ahead market (TAM) are collectively conducted over IEX.
PXIL, which accounts for less than 5% market share, is its only other competitor. IEX also enjoys an early-mover advantage and strong brand recognition among the Energy market participants. Bilateral trader contracts are generally longer duration contracts, typically >1 month. Banking is a direct arrangement between the DISCOMs, largely to match seasonal differences. DSM, on the other hand, is a frequency regulation enforced by the grid operator and is not a desired form of short-term trade.
(F) Revenue Segments
MCX derives its revenue from Transaction Fees, Annual Subscription Fees as well as Admission, Processing & Transfer Fees. Transaction Fees contributed 92.69%, Annual Subscription Fees contributed 7.04%, and Admission, Processing & Transfer Fees 0.18% to the Total Revenue of the Exchange for FY20.
(G) Customer Network
As on 31 March 2020, IEX Customer Network includes 6700+ Registered Participants. The participants include 50+ Distribution Companies, 500+ Electricity Generators, 4200+ Industrial Participants, 1700+ Renewable Energy Generators & Obligated Entities and 100+ Energy Saving Certificates (ESCert) Entities.
(i) Industrial Participants
More than 4200+ Industrial Participants across India representing varied industry sectors such as Textiles, Metals, Chemicals, Automobiles, Cement etc., are the major Participants on IEX.
(ii) State-wise Registered Participants
(H) Operational Parameters
(i) Transaction Fees
Revenue of IEX is majorly derived from Transaction Fees. Transaction Fees charged by IEX is based on the Volume of Transactions by the Members or Clients of Trader through the Exchange. Thus, Transaction Fees earned by IEX increases with increase in the Volume of Transactions entered into the Exchange.
(ii) Sale Bids, Buy Bids, Final Cleared Volume & MCP
In Day-Market Contracts, multiple Buy Bids and Sales Bids are placed by Buyers as well as Sellers through Double-sided closed anonymous Bidding Process. Final Cleared Volume is obtained, when Buying Bids and Selling Bids are matched as a function of Demand and Supply. In FY20, Total Buy Bids are 58,863 MUs, Sell Bids are 1,11,389 MUs and Annual Final Cleared Volume is 49,112.
For Electricity Market, Market Clearing Price (MCP) is the Price obtained at the point of Intersection of aggregated Supply and Demand curves. In other words, MCP is determined as a function of Demand and Supply which is common for the selected Buyers and Sellers.
Average Market Clearing Price in a Fiscal Year increases due to comparative increase in Buy Bids and decrease in Sell Bids on the Exchange. In FY20, Average MCP is 3.01 Rs. Per Unit.
(iii) Volume Lost Due To ‘Congestion’
Congestion occurs due to Transmission constraints. It is a situation where the Demand for Transmission Capacity exceeds the Transmission Network Capabilities, which might lead to a violation of Network Security, Thermal, Voltage and Stability Limits. Therefore, Congestion situation may occur at any location in the Interconnected Network.
Due to the Congestion, Electricity Volumes are lost as they remain untraded because of lack of Transmission Capacity to deliver Electricity. Over the years, reduction in Transmission Congestion has been observed, as a result Volume lost due to Congestion has also Decreased. Thus, this shows the fulfilment of Increased Demand for Transmission Capacity by increasing the Transmission Network Capabilities.
In FY20, a total of 196 Million Units were lost due to Congestion while in the last year 538 Million Units were lost.
(iv) Product-wise Growth in Annual Volumes Since Inception
Moreover, average MCP in FY09 amounted to Rs. 7.29 per unit which is now Rs. 3.01 per unit. In addition, in its initial year i.e. FY09, IEX held 0.5% share of total power generation which is now around 4%.
(I) Technology Cost
IEX is a Technology-led Energy Marketplace. Thus, technology cost is a key component of IEX’s Business Operations. Therefore, the company continues to invest to ensure cutting-edge Technology. In FY17, technology cost of the company amounted to 11% of the Revenue. This is because, in the Month of May-2017, IEX acquired exclusive rights to the source code (together with modification rights) for the trading software from 63 Moons along with the transfer of 22 employees of 63 Moons to the Company for an aggregate consideration of Rs.130.68 crore pursuant to the Perpetual License Agreement.
(J) Group Structure of IEX
IEX holds only one Subsidiary –“Indian Gas Exchange”.
Indian Gas Exchange
The company is a wholly-owned Subsidiary of IEX incorporated on 06 November, 2019. It is a first Nationwide online delivery-based Natural Gas Trading Platform in order to encourage Gas Trading in the Country. The entity started its operations on 15 June, 2020 & during the first 15 days of launch, IGX traded 9600 MMBTU of Gas.
Currently IGX is 100% owned by IEX but the same shall dilute with entry of new investors. GAIL issued expression of interest for them to invest 26% equity.
Key Features of IGX
- IGX facilitates Automated trading where multiple Buyers and sellers can trade for Physical Delivery of Natural Gas.
- IGX will allow Buyers and Sellers of Natural Gas to trade through the Spot Gas Contracts and Forward Gas Contracts.
- Spot Gas Contracts – Contracts for Purchase or Sale of Gas for instant Delivery on a specific Spot Date.
- Forward Gas Contracts – A Forward Gas Contract is a customized contract between two parties to buy or sell Gas at a specified Price on a Future Date.
- Domestically produced Natural Gas will not be bought and sold on the Exchange. This is because the Government decides the price of domestic Natural Gas.
- Thus, only imported Liquified Natural Gas (LNG) will be Regasified and sold to Buyers through the Exchange.
- There are Three Hubs (Delivery Points) at where Buyers and Sellers put their Bids –
- Dahej and Hazira in Gujarat.
- Kakinada in Andhra Pradesh.
- Moreover, products offered on IGX Platform include Daily Contract, Weekly Contract, Week Day Contract, Fortnightly Contract, Monthly Contract.
(K) Financial Parameters
(i) Net Sales
(ii) Profit After Tax
(iii) Free Cash Flow
(vi) PAT Margin
(vii) EBITDA Margin
The Company is Debt-Free. The Profits of the Company grew at 28.18% CAGR over last 10 years. On the other hand, Net Sales of the Company grew at 24.48% CAGR. Also, the company has been maintaining healthy ROCE over the past 10 years.
- Market Cap of IEX as on 23 October 2020 amounts to Rs. 5,839.85 crore.
- Cash & Investments as on 30 September 2020 amount to Rs. 638 crore.
- Trailing P/E = 33.61
- EV/EBITDA = 23.84
- Thus, Earnings Yield = 4%
- In addition, Earnings Growth of IEX is good. At CAGR 28.18% over last 10 years. Year on year also PAT
- Stable ROCE over last 10 years.
(i) Government Initiatives
The various initiatives undertaken by the Government to increase in demand for Electricity such as 24*7 Power for all, Saubhagya, UDAY, Deendayal Upadhyaya Gram Jyoti Yojana, Power Development Scheme, shift towards Green Energy, 100% FDI in the Power Sector are a few progressive steps that will shape the Energy Industry and will robust the Demand of the consumers for the Electricity.
Under Make in India, the government is working to attract global companies to produce solar PV, Lithium Batteries, Solar Charging Infrastructure and other Advanced Technologies in India in order to strengthen Innovation efforts in a broad range of Energy Technology areas.
The Ministry of Power amended the methodology of Coal allocation under the SHAKTI Scheme, which allows Generators to participate in the Coal linkage auction even if they sell Power on the Day-Ahead Market on the Power Exchanges as well as on the DEEP platform.
(ii) Dominant Position in the Market
There are two Operational Power Exchanges in India for the trading of electricity products one is IEX. Another is Power Exchange India Limited (PXIL). IEX enjoys a dominant Position in the Exchange Market with the majority of the Market Share i.e. 95%. Therefore, PXIL is the only Competitor of IEX in the Market. PXIL commenced operations at the same time as IEX but failed to gain the Market Share. IEX enjoys the advantage of strong Brand Recognition, superior Technology Platform, better Price Discovery as well as higher Customer Participation.
(iii) Rapid Urbanization
Rapid pace of urbanization also leads to development of Power Industry. In fact, 17 out of 20 World’s fastest-growing Cities are in India. The Per Capita Consumption of Electricity in India doubled since the year 2000 and is expected to continue the momentum till 2025 and beyond. This will facilitate the Growth in consumer demand for Electricity and thus, will create multiple Opportunities for the company as well.
(iv) Forging Alliances
IEX continues to have strategic Alliances with leading International Exchanges. For instance, the company has alliances with European Power Exchanges, PJM Technologies Inc, Japan Electric Power Exchange and Membership with Association of Power Exchanges for exploring more Knowledge sharing opportunities.
(v) Launching New Products
Since its inception, IEX has launched various products segments like Term-Ahead Market, Renewable Energy Certificates and Energy Saving Certificates. The Company recently launched Real Time Market as well as Green Term-Ahead Market. Real-Time Market enables the participants to deliver power within only a few hours of bidding. Therefore, reducing the gate closure time. On the other hand, Green energy term ahead market will enable the participants to fulfill their Renewable Energy requirements. With the launch of these New products, the company has opportunities to grow its Volumes as well as capture more Market Share in the coming years.
(vi) Entry into Long-duration Contracts
The company also plans to launch Long-duration Contracts. Currently, IEX offers the contracts upto 11 days. Long-duration Contracts will involve contracts for the period up to 365 days. Firstly, it will involve the Physical Delivery of Power which will be regulated by CERC. Secondly, it will involve Financially settled Derivatives contracts regulated by SEBI. Thus, this would allow IEX to enter the Bilateral Market and and will help to grab new opportunities. The company is waiting for the approval of CERC. Thus, the company hopes to launch Long-Duration Contracts in Q-3 this year.
(vii) Indian Gas Exchange – Unlocking New Opportunities In The Gas Market
In addition to new products launch, IEX recently acquired wholly owned Subsidiary named ‘Indian Gas Exchange’ facilitating trading of Gas in India. It is the first Nationwide Online Delivery-based Natural Gas Trading Platform.
(viii) Increase in Cost Optimization by Open Access Consumers
The competitive price discovered at the exchanges brings significant saving to large industrial as well as commercial Open Access Consumers. Thus, the exchange plays a significant role in facilitating open access transactions in the country. Consumers opting for open access are required to pay network usage charges, losses, and other open access charges such as cross-subsidy surcharge and additional surcharge. The exchange platform gives an opportunity to the open access consumers to optimize their power procurement cost by purchasing competitively priced and save their overall cost spent on electricity.
Removal of existing procedural as well as tariff barriers can make open access hugely attractive for the consumers as well as the Exchange.
(i) Regulatory Risk
IEX regulates under the framework of CERC. IEX follows the regulations of CERC. Thus, any change in these Regulations will directly effect the operations of the company. Also the Transaction Fees charged by IEX are set by the CERC and only it can change or modify the Fees for trading on Power Exchange. This poses a risk for the company’s revenue in case the regulatory decides to lower the Transaction Fees.
(ii) Technology Risk
Technology is a key component of Business Operations of IEX and is crucial to the success of Exchange. There is always a risk for the company of using of obsolete Technology. Also, there is risk of threat to Data Security. Thus, these factors could affect the operations of the Company.
(iii) Market Risk
The company may also face threat of decline in its Revenue if it fails to maintain or grow electricity Contract Volumes according to the Demand of Electricity prevails in the Market.
(iv) New Players Entry
Currently IEX holds monopoly share in the Power Exchange Market. But rise of existing player in newer Products can impact the Market Share and competition can arise with a new player entering the market. The Central Electricity Regulatory Commission (CERC) also recently approved setting up of a third Power Exchange Platform in the country, floated by PTC India along with BSE Investments and ICICI Bank.
(v) Change in Regulations
CERC’s draft on Power Market Regulations (2020) suggests a possible structure of price coupling, governed by a market coupling operator that would aggregate the bids placed across the exchanges and discover a uniform price. As a result, this will increase competition intensity. Thus, may impact the Fee Income.
(vi) Slow Market Growth Over Last 10 Years
The share of Short Term Market in total Power generated in India remained 10-11% over last 10% years. Thus, expansion of the ST Market is slow. Although share of Power Exchanges expanded during the years. Expansion of the ST Market is also necessary to deepen the Exchange Market.
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References: Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.
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