How much money exchanges make on trading carbon credit?
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An excerpt from the KEYNOTE research report:
In Q3 FY23, IEX incorporated a wholly-owned subsidiary, ICX, to leverage
opportunities in the carbon market, for which it is closely working with agencies
like the Bureau of Energy Efficiency (BEE), major carbon exchanges, and
potential players in this space. ICX will enable participants to buy and sell
voluntary carbon credits at competitive prices through its transparent & reliable
Exchange platform, helping large corporates meet their ESG requirements. By
facilitating the companies to meet their climate commitments goals, ICX will
help India achieve its target of reducing the carbon emission of its GDP by 45%
by 2030 to limit global warming to 1.5 degrees Celsius.
Presently, ~500 Mn units of carbon credits are traded globally. Based on a study
by McKinsey, by 2030, this is expected to reach 1,500- 2,000 Mn units in trading
volume. India is expected to sell ~200 Mn carbon credits, with demand from
Indian corporations are expected to be ~120-130 Mn units by 2030.
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Could someone pls explain, why is the cleared volume not equal to the lower of Buy & Sell Bids.
eg. for 21st May; there were 240MUs of purchase bids and 260MUs of Sale bids, but only 130MUs of cleared volume… Maybe its a normal practice for all exchanges as rest might be invalid bids; wonder if they can do some education sessions to reduce the gap. I notice the gap has remained like this for a long time…
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It is because of difference in price bided by buyers and price asked by sellers. It is an auction process wherein a fixed clearing price is determined, volumes of buyers above this price and volumes of sellers below this price gets cleared at this fixed clearing price.
Thanks! So being auction based, the sell and buy bids can be at any price, maybe within a defined range for the day! So this gap may remain. Should be there in our stock exchanges too.
Also wonder what causes sudden spikes in sell bids, eg in the last week, there were spikes seen on 21st May which led the price discovered to fall from 6.5 to 5.1. If there are long term PPAs signed, only the excess discretionary power generated would find its way here i suppose; what causes sudden spikes in these? Maybe being a Sunday, less demand in factories (usual buyers of PPAs), excess found its way here!
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An interesting video on how Governments and corporates create an illusion of an Energy Market and con their very own citizens.
Will we reach a stage in the future that allows an electricity consumer to choose from the available electricity producer based on cost, reliability and efficiency or is that too complicated ?
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Implementation of provisions of General Network Access (GNA) and what it will mean for IEX
First lets understand What is General Network Access (GNA)?
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GNA refers to non-discriminatory access (open access) to the inter-State transmission system (ISTS) for an estimated maximum injection and for a consumer to draw for a specified period.
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As part of its continued efforts to improve energy access, GNA is being implemented, which allows eligible discoms and gencos to draw or inject power from specific points along the ISTS
How is GNA different from point-to-point access concept?
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Today a power generator has to work out how the supply will be done due to the point-to-point access concept which, according to the producers, is restrictive.
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GNA will allow them to supply from any point, as long as the quantum contracted for is met.
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This allows access or withdrawal on the entire belt of transmission
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Thus it provides generators and procurers (states) the choice of injection and withdrawal.
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A generator focuses only on producing power and the consumer focuses only on buying it.
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How the power is transmitted will no longer be a challenge for the producers.
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This will benefit both the power generator and the consumer.
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This is expected to create a level playing field.
What does it mean for IEX?
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The GNA Regulations will go a long way in streamlining network access and network usage charges.
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GNA will strengthen the exchange-based power market in the country.
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It will remove regulatory arbitrage which has led to a temporary shift of volume from Day-Ahead-Market (DAM) to Day-ahead Contingency (DAC) and will be more conducive towards further market development in the country.
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According to Mr. Satyanarayan Goel - Chairman and MD IEX, in the latest concall, the provisions of GNA regulations will be effective from August 1st, 2023 (Not in the hand of IEX, it depends on Regulatory bodies like Central Electricity Regulatory Commission (CERC) ). It will be first followed by issuing the Grid Code and after that the National Load Despatch Center (NLDC) will need another 2 months to develop the procedure and do necessary changes in the system to implement the Grid Code and the Transmission Charge Sharing Regulation.
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IEX Management expects that all the volumes which shifted to DAC will be transferred back to DAM after these regulations come into force.
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The market share of IEX in the Day-Ahead_Market (DAM) and Real-Time-Market (RTM) is 100%.
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The transactions happening in the DAC market are mainly because of the arbitrage available in the DAC market. Once that arbitrage is removed (when provisions of GNA are implemented), there is no reason for the transaction to happen in the DAC market.
Sources:
IEX Latest Concall Trasncript
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Order by Ministry of Power directing CERC to start work on market coupling. No mention of MBED can be pretty bad for IEX
Implementation of Market Coupling by CERC.pdf (575.0 KB)
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Can you please elaborate what is market coupling and how it will negatively impact IEX?
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I found this article, hope this helps…
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Lets understand what is Market-Based Economic Dispatch (MBED) and Market Coupling
In December 2018, the Central Electricity Regulatory Commission(CERC) released a draft proposal for the Market-Based Economic Dispatch (MBED) system.
The proposal outlined that, under the MBED, all power transactions would be conducted through power exchanges, including those tied up in Power Purchase Agreement (PPAs). Instead of each Discom having its merit order individually, there would be a shared pool of all power generators to fully utilize sources traded on the exchange.
The MBED would allow for pooled electricity produced by all the Gencos to be purchased by Discoms from the cheapest electricity source through the exchange, thereby reducing their costs. Furthermore, the implementation of MBED would increase the opportunity size, and volumes traded on the exchanges.
Additionally, the CERC has proposed the implementation of a Market Coupling Operation (MCO) in its Draft of Power Market Regulations 2020, which will determine the price at which electricity will be traded on all power exchanges. This will help to arrive at a ‘uniform market clearing price.
The MCO will club buying and selling bids on all power exchanges to facilitate better price discovery and an increased opportunity to serve more customers. Although the market coupling has been introduced, the timeline for its implementation has yet to be determined.
This introduces a potential drawback for market leader - IEX, as it may nullify the advantage of liquidity on the platform. Analysts believe this may dry up volumes in a significant manner for IEX among other power trading platforms. This led to IEX stock correcting by around 8% today on 08.06.2023
What does this mean for IEX?
IEX’s monopoly has been due to the depth and liquidity it provides the participants. The proposed market coupling will take away this advantage. In one stroke, the ‘competitive advantage’ and the exact reason why IEX is a monopoly gets destroyed.
I still feel even after the implementation of Market Coupling, the market share between power exchanges will be determined by product offerings and technological services. Remember Integrating the API-based bidding system was one of the first innovations that IEX implemented on its platform. This system was also integrated with all its customers as well in order to pass on bidding information to Exchange. Time sensitivity is of utmost importance to the Real-Time Electricity Market (RTM) in the power trading industry since every task of the power trading has a clear completion time with a minute granularity. Any delay or failure caused therefore can have far reaching consequences. And that calls for cutting down on manual processes and turning power trading system highly automated which IEX is trying to achieve. So clearly IEX has the advantage when it comes to Tech innovations in its product offerings as against its competitors.
But after the introduction of MBED (Market based Electricity dispatch), which basically forces power gencos & buyers to get on to spot power markets even when they have bilateral contracts, would increase the volumes & in a way compensate for potential loss of IEX in market share by market coupling. When does the MBED happens is not yet known. The expectation is that such a measure as MBED would be brought in phases. For instance, in the first phase, CERC may require all inter-state generating stations of NTPC to go through the exchanges.
I also believe that CERC will have to hold talks with all the stakeholders (IEX included) and then come out with a paper before the implementation of Market Coupling. So they will have to lend an ear to IEX and their arguments on this issue.
Remember last time in Jan 2022, IEX’s Rajesh Mediratta, Director – Strategy and Regulatory Affairs, had argued that IEX feels that now is not the time to bring in such a reform of market coupling. At present, only 7% of the total electricity consumption is traded on the power exchanges. Mediratta said that measures such as ‘market coupling’ could be brought in at a time when the traded volumes increase to about 15-20%.
Let’s wait for the management’s commentary on this issue this time.
Disclaimer: Invested, biased.
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So what would happen to the original long term bilateral contracts?
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Why they are talking about super exchange is not understood? I do not understand also why price discovery will not happen on exchange and only bidding will happen?
Dis: Invested and biased.
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Can someone share the original power ministry order link as I am not able to locate this order on their website?
Looks like this could be a short-term negative news for exchanges but in the long run isn’t the pie itself will be growing much bigger then what the existing exchanges can handle ?
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Narrative: Share of renewable power is growing to increase exponentially in the next decade leading to significant power being traded on the power exchanges.
Reality:
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Now the million dollar question!!! Will you buy or average out at lower levels or not? New indipendent entity will not be created overnight. It may loose some share but may remain dominant player.
Other views are welcomed.
Holding & biased
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Ok. Please help me understand two things.
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Why will the recent changes force Gencos and buyers to use power exchanges?
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I am seeing this from this angle. If the #1 is right and more volumes come into power exchanges, then it could be also possible that IEX gets more volume in, right?
Giving a personal example: When I started investing I was confused which broker to choose. I saw many were using Zerodha and it seemed like a good platform with lots of features. So I took Zerodha. And Zerodha doesn’t control the stock prices.
Can’t this be happening to IEX too? Even though prices would be uniform accross exchanges, won’t new volumes that would be coming, choose IEX, because duh, most volumes are with IEX and they have a wide variety of products and decent platform.
Where am I going wrong with the above thesis? Did I assume something wrong?
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Fair point. But unlike a retail investor, the institutions buying and selling power will be price sensitive. If the product they want to trade is available on other exchanges, they will route the order through an exchange which is cheaper. This means a price war is likely. Second, while IEX has product superiority now, how long might it take for other exchanges to replicate the products which IEX has today?
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One Nation, One Grid, One Price | India plans market coupling in power trade
Market coupling is not new concept. It has been known from the very beginning. It is infact a step towards MBED or more clearly precursor for mbed. It is near term ‘tough time’ to achieve much ‘stronger future’.
Disclosure: holding and can be biased. Brought today also. My views or my understanding of the subject can be wrong.
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