Finally long awaited MBED policy notified.
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The ministry plans to implement phase 1 of MBED with effect from 1st April 2022 with mandatory participation of the interstate generating companies. Other generating companies can also participate on a voluntary basis. The idea is to transition away from long term contracts and move towards more sustainable market-based operations.
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Sachin
Power Market Regulations 2021
Section 15(1)(b)
Unless CERC has permitted PTC to keep holding a >5% stake in PranUrja even after the operations of the new exchange start, diverting volumes is probably going to be a problem.
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Check this CERC order granting registration to PranUrja
Pg 23 - PTC is re-iterating that it will bring down its shareholding below 5% in case it decides to take membership of the new power exchange.
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One thing which we are missing is currently IEX is acting as an Exchange. But with MBED, Govt will also bring market decoupling which in turn will make IEX as a broker. In that case, any broker which charges less transaction fees will have the volumes.
Its similar for equities as well. Exchanges like NSE & BSE have sustainable earnings. NSE with advanced technology has most of the derivative markets. But there is a dogfight amongst brokers. This is the reason Zerodha with disrupting pricing gained market share from older brokers.
I am not so certain how its going to play for IEX but this needs to be considered now as market is giving IEX valuation for an Exchange and not a broker.
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True. With market coupling, IEX will be reduced to broker and not an exchange. However the news for market coupling is not yet out and I couldn’t find any article from Gov which is giving clear timelines in this regards. So till that time IEX can enjoy the increased volumes resulting from MBED.
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Very interesting & balanced thread on twitter explaining recent developments in power sector:
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We can apply mental model of inversion in this scenario. What would be more interesting and beneficial to energy markets in India from Government perspective? A good competition market with few large players or standardized model with less incentive ( read reduced fees 1 paisa/unit)? Will government will be able to improve market with less incentives?
IEX has put in lot of efforts in developing maket, bringing in right products and they are tremendously successful in satisfying their customers including government owned utility companies. Expecting this from any competitor in short time will be nothing short of miracle. ( Read IGX journey so far)
Investor can draw their own conclusions.
Reform story has started after so many years of waiting, as a investor if that was your thesis you may wish to see it playing out
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MBED if intentions are implemented can make PPA’s redundant just imagine how the financials of power companies change because of this. More volumes to IEX and quick realization for power generators especially private.
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When someone controls >50% of product supply … Fair Price discovery is not possible
Hence CERC tries to control and that is why you have PPAs so that customers gets Cost Plus pricing ( Fair pricing) and not what Power suppliers can charge … That is relevant for base load > 90% of energy supplied
Only peak load sales where there is some margin to make incentive can be really traded , unless power consumers who tied up is inefficient or under Debt …
A market without PPA is very risky for Discoms as there will be consumer unrest if they prices flucutate on daily basis esp on higher side …
The next level problem is Virtually integrated players … Tatapower / Adani Power into generation , Transmission and Distribution … Now NTPC too is trying this
As they expand there wings into multiple geographies and be both producers and consumers … Where is price discovery ?? It will be cost plus pricing … Unless regulation is implemented in such a way each entity acts as independent and fair entity …
Lot of water has to follow before we reach for perfect solution … What has happened in recent times in EU indicates exchanges may not be right approach for 100% energy trading …
Long term approach ( 1 to 1 ) in power generation , transmission and distribution is necessary for base loads
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Exchanges will soon have medium term contracts of upto 1 year. So discoms can lock-in prices for upto 1 year in advance and thus daily fluctuations can be taken care of. Further, derivatives are also going to be available soon, so that buyers/sellers can hedge daily volatility.
Even if discoms revise prices every quarter or 6 months, then it is still feasible from the consumer end point.
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If India wants to buy Gas from Qatar will it go to exchanges or have 1-1 deal
But say XYZ wants to buy soybean he may go to exchanges … Why does that happen …
- Size of Deal
- Period of contract
- unique SLAs ( SLA customisation ) etc …
Standardised Short duration & Small size contracts are most conducive for Exchange trading .
Unless it is made mandatory to trade through exchanges
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Thanks Amey for the clarification. This is what I had as my understanding on why PTC cannot move volumes from IEX to PranUrja entity as it’s holding would come down over time.
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PTC moving volumes to new exchange will give good boost to business for new exchange, PTC will have 2 options, hold 22% in a exchange which does not has huge volumes vs hold 5% in exchange that has good volumes from start. What will it choose? Will be interesting to find out, my biased view is it will choose to reduce holding to 5% if mandated by regulator (no exceptions alllowed).
Disc: invested in IEX and BSE
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Interesting Data points … How short term market has expanded for last few years … rest 88%+ is Long term PPA market .
The percentage moves between 10% to 12% … and IEX is already 54% of this market …
Where is chance for future market gain … 3% of short term market which is < 1 years which PTC dominates …
What new regulation MBED does is opens up part of 88% market … by saying low cost producers should produce more and all this volume could move to exchange / short term trade …
Plus as country becomes more RE centric … Balancing power will also increase … How much that numbers will be - will be interesting to watch
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When PTC sells / buys on IEX, PTC earns a commission of 2 p from its customer.
This is in addition to the 2 p that the customer pays to IEX.
If it directs this customer to PranUrja (new exchange) then it earns 22%* 5p.
So to make the same money, the volumes on the new exchange will have to be 4X the current PTC volumes. And we are not accounting for income tax, dividend tax, holding company (PTC) discount for its stake in PranUrja.
To my mind it does not make sense for PTC promote a new exchange.
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- Why can PTC not become a member of new exchange and can charge 2 paisa to clients just like it charges today ? this is over and above what pran urja will charge separately to customers.
- In concall, PTC is already talking about introducing new products which they say IEX is not introducing bcos it will harm their legacy products. Why will they say this ?
They are trading on IEX currently and still discussing on these lines.
holding a 5% or whatever is allowed by regulator while still trading on this exchange can be mutually exclusive ?
Would love to hear ur thoughts
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All these “new products” are value-added.
First the DAM market has to be liquid enough for the other so-called products to even make any sense.
All the so-called new products actually build on the plain vanilla offering.
If I can’t walk, how will I do Iron Man?
They can only trade on PranUrja if they hold less than 5%.
So, they will have to first divert volumes to new exchange for free, then dilute holding to 5% and then start becoming an intermediary and start charging 2p to customers who are now used to free services. Why won’t they just go back to IEX? and go to a different power trader like NVVN, Meenakshi, Mittal, Gloabl Energy (all large experienced licensed power traders).
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Reading all these comments remind me of one thing Nick sleep said. Every information shared has a shelf life, focus on the information that is going to stay relevant for the longest time and only focus on the information that actually matters.
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