Indian Energy Exchange (IEX)

Stock Opportunities
373

Companies tend to buy power from IEX for their charging stations.

374

IEX is only an exchange, it doesn’t have the distribution network. Distribution companies are a separate entity in power infrastructure. The distribution companies buy from the exchange and supply it to homes, factories even for future charging stations.
The electric mobility will help IEX because the consumption of electricity will increase drastically and it inturn will increase volumes on the IEX.

3 Likes
375

I am sure EV will increase consumption of electricity. Any exchange revenue is governed by value of transactions done.

Globally, the cost of electricity reduces with time as technology improves, renewables come into picture and also if we talk EV - the fuel dependency will go away, demand for fossil fuel will decrease so cost of fossil fuel may decrease which in turn would drastically reduce the cost of electricity produced from fossil fuel powered power plants.

Above dynamics may tend to balance the excess traded units of electricity as cost of per unit would decrease - so the turnover of the exchange does not increase as much as it would had it been simply dependent on volumes alone.

Point is - I don’t know the dynamics and how this complex electricity thing would pan out, but I dont see exponential rise of turnover if it depends on both volume and price per unit. (Provided price per unit today is suppressed because of subsidy - again I am not sure and one more variable to track)

376

I don’t think electricity per unit cost will come down that much, if the fossil fuel consumption comes down (though crude is life time low, tax on fuel is what saved indian economy during pandemic to a large extent ), government will tax electricity , IEX is going to make money based on units of consumption which is going to go up, the way things are shaping up at the moment , we will be setting more industries which will in turn drive the consumption.

377

This is untrue. It might intuitively seem like it should come down, but surprisingly it doesn’t.

1 Like
378

Inflation adjusted, the cost of electricity in general (renewables or not) does not increase the way we expect it also. I have not done lot of research and maths here, but above is based on personal experience and awareness of electricity cost as a percentage of household earnings in various states of India and in other developed countries as well.
Wherever I have seen efficiencies, be it in production or technology, I have seen cost of electricity (as a percentage of household earnings) much low compared to other places. And my take is that with time efficiencies in both production & technology would increase…so the increase in electricity cost, if any, will not be able to keep pace with inflation.
I maybe wrong here, but guess, not by a huge margin…

1 Like
379

Here is my understanding of power sector (having analyzed it it for almost 4 years as part of my earlier job).

  1. Electricity is a state subject and taxing it will be political suicide for any party. So unlikely to happen.
  2. Cost of electricity is unlikely to go up because of (a) above and (b) primary source of electricity in India is Coal (where increase in prices is likely to be offset by better performance efficiency of power plants). Also, price of renewables has continuously been falling (Solar used to be Rs 12/unit when it was initially introduced, and now it is < 2.5 Rs/unit). And bear in mind, that renewables have very low efficiency (25% for solar and wind ~30%). This is also likely to improve with better technologies.

Why IEX may not benefit from EVs

  1. Distribution companies (Discoms) use IEX to meet their short-term power requirements. If EV is expected to result in increase in power demand, this will be a permanent increase (higher base load requirement) and will result in signing of power purchase agreements, and will not benefit IEX.

  2. How much additional electricity required if all vehicles become electric

  • Total 4 Wheelers + 2 wheelers in India = ~200Mn (~170Mn 2 wheelers and ~30 Mn cars)
  • Electricity required to charge EV = 5 Units (avg of car = 15 units and 2 wheelers = 3 unit; )
  • Annual Electricity requirement = 100 Bn Units (200Mn * 5 * 100)

Above assumes 1 charge lasts for 3-4 days i.e. travel of 40km/day and ~150 km on single charge

100 Billion units represents ~7.5% of India’s total electricity generation for FY21 (~1300 Billion units). And this assumes that all passenger vehicles are electrified (which will take at least 5 years). So it clearly doesn’t translate into significant CAGR in electricity demand

Note: Not an investor in IEX

13 Likes
380

IEX is not an EV play. The growth of IEX will come from the below main factors

  1. Changing scope of power production and distribution. As a country we are moving away from long term 25 year fixed cost PPAs to on spot and forward delivery of electricity. There are many reasons behind this trend, main being current distributors owe billions of dollars in existing payments to power producers, distributors are forced to give subsidy due to political pressure etc. We are moving away from this model. Even NTPC now plans to trade 20% of all new capacity on exchange.

  2. Renewable certificates : This has a stay order for now but this is a really lucrative area for IEX. Renewable certificates will keep on trading until we transition to a renewable first economy (likely to happen in next 10-15 years). Till then existing carbon creating players will have to offset their carbon emissions by renewable certificates. To see how lucrative this area is, you can check Tesla’s income statement. A majority % of their profit is via trading of these certificates.

  3. General demand for electricity will increase in the economy as we continue building the nation

  4. IEX and PM Modi wants to even enable export of electricity to border nations like Sri Lanka, Bhutan, Nepal and Bangladesh

Electricity is the new energy / oil and if anyone has studied last 50 years of history, you can imagine how much countries want to control energy production (US).

These are just some of the trends that are in favour of IEX.
Also, it doesn’t matter if electricity prices go to even less than 1 Rs, just the sheer increase in volume without any proportionate incremental capex to enable these volumes will still mean that IEX keeps earning that 40%+ of ROCE.

Disc: Invested and views may be biased, please do your own research before investing

11 Likes
381

I completely agree with you on points 2, 3.

On point 1
For meeting base load you gotta have PPAs (not 25 years but even 2-3 yrs will do, and these are happening). Cost plus PPAs stopped long time back. It’s now all competitive bidding. NTPC is only selling what discoms don’t buy from it, despite having PPA. That ways NTPC gets double benefit - commitment charge from discoms and revenue from sale on IEX.

On point 4
We already do intermittent power export to Nepal and Bangladesh. Margin here is much higher for IEX, but volumes have not been very encouraging. Bangladesh I think, is actually looking to develop its own gas plants.

Sorry, in case this has been discussed, but is there any risk of another exchange opening and impacting growth Potential for IEX?

1 Like
382

While I don’t go into the weeds of actual pricing of electricity, the way I broadly analyse it as follows.
Is India on track for a 5T$ economy? Even with dips and fitful recovery, we make progress towards 5T.

What does 5T mean? Lots of energy, lots. Roads,rails, vehicles, offices and mobility. And we have to generate power to make it all happen. There was an old conf call of NTPC or NLC where the CEO/MD said something like Indians use about 1300 units/year(slightly higher than 100 units/month) whereas the developed world is about 8000+ at a lower PPP rate or something to that effect.

So, what does this all mean?

We need generate lots of power; lots of regular coal/gas/nuke. The current renewables are laughable that they are not scalable for a country like ours. Still, there are contracts out there to be traded.

Will IEX have a monoply in this area? Is there a competitor? Probably NSE. As long as there is no competition and IEX is innovating in contracts/services and inviting PP/sellers to the platform, it should have a good run

3 Likes
383
2 Likes
385

Industry insiders said the move would enable power distribution companies to handover legacy PPAs from inefficient plants to reduce costs and make way for new PPAs including from renewable sources.

It will always be base load that will go to PPAs, base load will never come to exchange market ( they can’t afford that gamble). the Peak load - base load goes to exchange.

IEX at current price is trading cheaper than Asian paints for instance but that doesn’t mean its trading cheap. There is a lot of euphoria lately about the stock, EV play is the biggest joke of all.

12 Likes
386

Power generation from renewable sources is inconsistent, depending upon time of the day/ season. As more discoms move towards a greater % of solar/ wind energy in their portfolio, shortfall from peak demand will rise. This will force discoms to buy power on short term basis. Currently Kerala has high % of renewable power in its portfolio and is also the first SEB to trade on the exchange.

3 Likes
387

Potential competition, regulator interference:

1 Like
388

I too feel the same - predictable load will be handled via bilateral contract as it’d would give financial visibility and guaranteed power.

Growth should have to come from:

  1. higher electricity consumption in India (assuming a constant percentage of it would be traded in exchanges)
  2. increasing share of smaller renewable power generators that can’t make long term contracts due to vagaries in power output and that don’t have negotiating power
  3. increasing share of renewables, where power output can’t be predicted. They can’t make long term contracts.
  4. increasing share of exchange traded power in line with some of the developed countries

Risks:

  1. Regulator interference (MCX was handicapped by regulation)
  2. Greedy state governments charging extra surcharge for power purchased from exchanges. This seems to be a significant portion currently.
  3. New exchanges undercutting price (Although it may be difficult to unseat the number 1 player because of ‘winner takes most’ dynamics in exchange businesses)
389

One reason these exchanges can’t be a top 10 market cap is they can’t reinvest capital and compound it at their existing RoE. They payout a lot of dividends or buyback.

Assuming constant P/E, market cap growth is proportional to RoE x Retained Earnings.

If you can invest most of your earnings back into your business and grow the business at a great RoE (say, 20%) for a long number of years, the market cap will be huge.

10 Likes
392

IEX Monthly Update – April 2021

IEX Highlights

  • Estimated revenue from transactions is up 31.7% for the FY till March end as compared to the same period last FY. Revenue has been supported by DAM, RTM and TAM volumes.
  • DAM - On a cumulative basis, FY21 volume and estimated revenue till March end are 23.0% greater than revenue in FY20 for the same period.
  • TAM – On a cumulative basis, FY21 volume and estimated revenue till March end are down 31.4% compared to revenue and volume in FY20 for the same period. The uptick in volumes has helped reduce the figure from 33.2% reported in last month’s update and a peak of 57.4% in September.
  • There have been no REC transactions since June 2020.
  • RTM – RTM continues to be a strong revenue generator. RTM volumes grew by 26.4% MoM after having dropped 9.3% MoM in last month’s update.
  • G-TAM – GTAM dropped 43% MoM, recording the second lowest volume since it started in August 2020.
  • FY21 estimated revenue contribution break up:
    • DAM – 81.3% (-)
    • TAM – 4.5% (-)
    • REC – 0.4% (-)
    • RTM – 12.7% (+)
    • GTAM-1.1% (+)

CERC Short term market update (December 2020 report – No new report):

  • The short-term market witnessed a 33.1% rise in December compared to the same period last year while the long-term market witnessed a marginal uptick in volumes of 1.6% in the period. The overall market growth rate was 5.0%.
  • IEX’s DAM market share has recovered to above 99.8% in December.
  • While IEX’s TAM market share has been under pressure from 90% in March 2020 to less than 20% in September, the steady recovery since then has continued and reached above 30% in December.
  • No REC transactions have taken place.
  • IEX has a 100% market share in RTM for the fifth consecutive month.
6 Likes
393

Whats the probability this growth going to continue ? looks like mostly driven by RTM as it gained marketshare from DSM but it was almost like 16 -20 % of total short term market , i have feeling this tail wind is gone for next year.
If next year we are back to 10-15% growth at best , i have feeling its already priced in perhaps expectation is of higher growth by the market overall.

394

I share the same feeling myself. Growth for IEX comes from eating away other participant’s share (DSM and it’s own TAM in the case of RTM now and it’s other products vs bilateral and others in the past) plus it’s own organic growth from power market growth. So a growth rate of about 1.5x power market growth rate (assuming power growth = GDP growth (6-7%) and 1.5x of that should bring us to 10%) is what I feel is realistic until it matures.

The staple products will continue to be DAM (est. 241cr, FY21) and RTM (est. 37cr, FY21) and these would determine growth. The other products like RECs and all would barely add up to a few crores. The impact would be single digit %. So whatever drives these 2 will drive incremental volumes.

I tried looking into PPAs (that would be real and permanent source of volumes), but it seemed like a dead end. Too opaque. So maybe other people know something about this. I think you, @ankit_tripathi and @prashantrane2000 did some research into PPAs right? @hack2abi, did you do some research on PPAs as well?

Edit: incorrectly typed 249 instead of 241.

3 Likes
395

If I am not wrong IEX handle today 5%-6% of total power demand in country. So if 2% portion of that 10% electricity growth comes via IEX. IEX growth should be 30-%40%.
2021 : 100 Total Power = 95 PPA + IEX 5
2022 : 110 Total Power = 103 PPA + IEX 7
IEX Growth = 40%

5 Likes