One thing’s for clear: India’s power sector is in a state of flux. The proposed move to implement ‘market-coupling’ has casted a shadow over Indian Energy Exchange. Stock price has tanked almost 18% in the last two trading sessions. There are some who rush in to catch the falling knives and there are some who are looking at revisiting the business and fundamentals. We fall in the second camp.
This blog is written in light of the recent developments. But if you’re like us and want to deep dive on the business of IEX, we have done a comprehensive 2 hour explainer video on the same. If you’re our MissioN SMILE member then you can watch it for free. However, don’t worry if you’re not a member yet, we’ve got you covered with a special discount! For a limited time, you can unlock this incredible video for just Rs.299 instead of the original price of Rs.999. Don’t miss out on this amazing opportunity, click the link below to access the video:
https://missionsmile.smartsyncservices.com/learn/IEX
Here’s our take on what is ‘market-coupling’ and how it is going to impact IEX:
Market-Coupling
It is a process that aims to bring together bids from various power exchanges and find a single price for buying and selling electricity.
Currently, each exchange has its own price discovery method. With market coupling, all the exchanges will become platforms where bids are submitted, and a single price will be determined for everyone. CERC thinks this will help create a more unified and efficient electricity market.
The Impact
Presently, IEX holds a dominant position in the spot market, accounting for approximately 94 percent of transactions. However, with the implementation of the market coupling mechanism, orders from various power exchanges will be combined and processed through a single algorithm.
This change is expected to diminish IEX’s monopoly and allow the new companies to gain market share as the bidders won’t have any reason to choose IEX anymore. As a result, IEX’s trading volumes are likely to be significantly impacted.Furthermore, concerns have been raised that this mechanism could stifle innovation within IEX..
And this is the reason the stock price is in a free-fall the last two days.
The management of IEX believes that there are consultations yet to happen and the implementation of the ‘market-coupling’ will take a few years.
The Competitor’s View
First, let’s see what the competitor has to say. According to Naveen Singh, Head-Business Development at HPX. Hindustan Power Exchange (HPX), the implementation of market coupling will establish a uniform price across the power markets in the country, replacing the current practice of three different prices discovered by the exchanges.
He believes that this move will break the monopoly held by the Indian Energy Exchange (IEX) and introduce more competition and innovation.
Post this move, Singh expressed confidence in his company, HPX, and its readiness to adapt to this change. He believes that HPX could achieve a 35 percent market share within the next 10 months, indicating a strong diversification of the power market landscape. Singh emphasized that the market share will depend on the service levels offered by each exchange, highlighting the opportunity for all operational exchanges to gain market share.
Well, if the competitors are confident of gaining market share post this announcement of implementing ‘market coupling’, IEX is bound to take a hit.
However, we have a counter view on this.
Our View
Sure, it is a moving movie and developments are always fluid in the market. The market has already taken this uncertainty as a risk, as it usually does. But as of today our view is that of the management view – volumes will go up and the implementation of Market-coupling will take 2-3 years.
And even if it is implemented and the market share of IEX is eaten away by the competitors, we believe that the market opportunity is so huge (The government reforms are only pointing in that direction) , that IEX will continue to do well.
Moreover, in the last year a lot of volumes have moved from the Day Ahead Market to Day Ahead Contingency Market on other exchanges because of the arbitrage. However, there is a government regulation to be enforced in August 2023 which will take away any arbitrage. This move will again drive back the volumes on IEX and help them in clawing back the lost market share.
Here’s our co-founder, Ankit Kanodia who recently featured on ET Now Live, sharing his view on the situation.
Views On Energy Stocks And More With Ankit Kanodia | Stock News
Also, still there are a couple of aces under the beaten down exchange’s sleeves that not many are talking about.
New Initiatives: Indian Gas Exchange (IGX) & Carbon Exchange
IEX aims to replicate its technological prowess and strong success in the power exchange market in the areas of Gas, Coal, and Carbon Trading.
Indian Gas Exchange
In fact, in May 2022, IEX launched the Indian Gas Exchange in collaboration with strategic partners such as Gail, ONGC, Adani Gas, Indian Oil, and Torrent Gas. This platform facilitates the trading of physical gas on IGX, and currently, there are 40 registered members up from 31 in FY22. These numbers are expected to increase with the growing demand for gas in the future.
Financials
In the fiscal year 2022-23, IGX, the Indian Gas Exchange, experienced significant growth. Gas volumes traded reached nearly 50.9 million MMBtu, representing a remarkable 319% year-on-year increase.
The number of trades executed during this period also rose by 432% to a total of 2,355. Moreover, IGX’s profitability saw a notable surge, with profits for FY23 amounting to Rs 28 crore, a significant rise from Rs 1.75 crore in FY22.
Key Drivers of IGX’s Growth:
Indian Carbon Exchange
IEX, the Indian Energy Exchange, established a wholly owned subsidiary called ICX in December 2022 to facilitate the voluntary carbon market. This move serves as their second diversification initiative following the successful launch of IGX in 2020.
The exchange platform will allow participants to buy and sell carbon credits transparently and competitively, helping large corporations meet their ESG requirements. Currently, most carbon credits are traded bilaterally, with only 20-25% through exchanges.
However, the trading volume is expected to increase three to four times by 2030, reaching almost 1,500-2,000 million carbon credit units globally. India alone is projected to sell around 200 million carbon credits, with a demand of approximately 120-130 million from Indian corporations.
The key point to note here is IEX is also exploring opportunities in the international carbon market.
We should see the money coming in from this segment in the current financial year.
Loading: Coal Exchange
The Ministry of Coal has appointed consultants for finalizing the framework for coal exchange in India and IEX is working with them to explore options for setting up Coal Exchange soon. This could act as another trigger for its growth in an era where India’s energy requirement is only going to increase.
Closing
The implementation of market coupling has undoubtedly stirred up the power market landscape, challenging the long-standing monopoly of IEX. As the industry adapts to this new paradigm, the future remains uncertain and intriguing. Will IEX be able to reinvent itself and maintain its dominance, or will new players emerge and reshape the market dynamics? Only time will tell. One thing is certain though – the introduction of market coupling has brought forth an era of increased competition, innovation, and possibilities.
SEBI Disclosure: We have been holding the shares of IEX for 3 years and recommended it to our clients as well. We are watching the current updates closely. As of now we have not changed our position and view on the stock.
Once again, if you’re interested in understanding the business further and you’re our MissioN SMILE member then you can watch our MissioN SMILE webinar on IEX for free.
However, don’t worry if you’re not a member yet, we’ve got you covered with a special discount! For a limited time, you can unlock this incredible video for just Rs.299 instead of the original price of Rs.999. Don’t miss out on this amazing opportunity, click the link below to access the video:
