Good comparison. But one major difference in your example is Zeroda is free to charge the commission fee but IEX can’t do that due to Govt. regulation.
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Interview with IEX Chairman S N Goel:
He says that Market Coupling should be interpretated as that when you have different geographies to deal with, market coupling here will mean that you match demand and supply in different geographies. In Europe, they have done this by coupling different sources of power of 26 countries to match demand and supply. Already in India, there is only one market. So this coupling would mean to integrate all exchanges together but price discovery will happen on exchanges only. (E.g. Couple BSE & NSE). This will kill competition.
CERC has to decide whether to go ahead with it or not.
Impact on IEX: If it is implemented, then what is the construct of the sector going to be.
Market share has reduced from 94-95% to 88-89%.
https://twitter.com/cnbctv18news/status/1667013900842471424?s=48&t=t9l2tt00PV7ie4i_OcyBnA
Reason why we sold IEX today at a loss:
On June 2nd, 2023 circular from Ministry of Power directed CERC to undertake the process of Consultation & Implementation of Market Coupling. This means that there will be a government entity which will do the price discovery based on which power will be dispatched on platforms like IEX, HPX and PTIX. This would dry up volumes. Currently, IEX is the most trusted platform for electricity spot price determination in India, which is its business moat. Now as price discovery will be done by the government, IEX will merely remain a platform to match bids with asks.
This will affect IEX revenues and profitability.
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I understand price discovery is a crucial thing and since it wont happen any more on IEX itself, it will lower volumes, but what I am not able to understand is, will the market leader not differentiate to bring the volumes back? If you see the volume of shares which have been traded yesterday and today, they are the highest. In fact if you really add up the daily volumes of the last 3-4 months, then these 2 days volumes will be a total of them or even more. If all retail investors are panic selling, someone big must be buying? And if they are buying, there must be something they know what the others dont so that this is an attempt to buy the stock at a lower price? Sorry, I am a newbie into this and would love to hear others’ responses.
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Lots of discussion related to notification by ministry of power to CERC related to market coupling. Both IEX & HPX management give their stance in media. As a retail investors, we need to make assumption for worst case scenario. Let’s say “market coupling” will be reality and IEX looses some market share to other exchanges. What PE multiple you will pay. IGX is optionally in the IEX. I think this overhang may remain for a while and stock may not recover any time soon. Keep eye on the development related to MBED too.
Holding & biased.
Iex management on exchange coupling
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Rightly, said. My view is that, in case, (appears likely) this becomes a reality than the price discovery mechanism will happen outside the domain of these power exchanges. That being so, basis my understanding, the role of these exchanges will get decimated to that of brokers of our BSE/NSE. Secondly, the power traded volumes may see quantum uptick in the medium to long term. Now the moot question is, will the current valuations sustain (when compared to listed brokerage peers) in the changed scenarios?
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My 2 cents on market coupling and its effects
While it’s true that market coupling can bring changes to the dynamics of power exchanges, including the potential for increased competition, it’s important to note that the impact on individual exchanges like IEX can vary based on several factors. Here are some points to consider:
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Market Position: IEX, being an established and dominant power exchange, may have advantages such as brand recognition, established relationships with market participants, and a track record of successful operations. These factors can contribute to maintaining a significant market share even aftermarket coupling.
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Competitive Pricing: Market coupling aims to promote price convergence across different market areas. As prices become more aligned, it can lead to increased competition among exchanges. However, factors like liquidity, trading volumes, and the overall competitiveness of the exchange can influence market participants’ preferences.
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Product Offering and Innovation: Power exchanges need to continuously evolve and offer attractive products and services to meet the evolving needs of market participants. This includes introducing new contracts, flexibility products, and value-added services. The ability to innovate and provide a comprehensive product offering can help exchanges maintain their competitive edge.
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Regulatory Factors: Regulatory frameworks and policies play a crucial role in shaping the power market landscape. The regulatory environment can impact the entry of new players, market rules, and the overall functioning of power exchanges. Existing relationships with regulators and a strong understanding of regulatory requirements can provide an advantage to established exchanges like IEX.
It’s important to keep in mind that market dynamics can evolve over time, and the impact of market coupling on individual exchanges is subject to various factors and market conditions. While market coupling can introduce increased competition and price convergence, exchanges with a strong market position, comprehensive product offerings, and established relationships may continue to hold a dominant position.
However, it’s worth noting that market conditions and competitive dynamics can change, and new entrants or market developments can also influence the power exchange landscape. Therefore, it’s essential for exchanges to adapt, innovate, and provide value to market participants to maintain their market position in the long term. And as long as IEX keeps doing it, even if they lose market share they will continue to be a dominant exchange in the country.
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From what I understand: the bids will be taken across exchanges and submitted to a central authority who will match the bids to determine price.
The worry is that people can choose which ever exchange they want, and there could be a race to the bottom in pricing because of competition.
This is something which could take 3yrs or so to play out.
So,
The market (or at least some) priced an extreme dominant position for a long period of time. The dominant position is a factor of volumes * price. The news basically hits at both: losing power pricing and hitting volumes. This has caused a panic leading to massive sell-offs.
Realistically no business, unless the moat is supported artificially through government interference can remain a single dominant player for a long long period of time. Competition is inevitable. And there are already other exchanges out there.
What’s the moat based on, and is it relevant?
Forget the moat for a second:
Are energy related products going to be traded on exchanges? Yes
Are the volumes going to go up many fold from here? Yes (and not static, as the apparent hit on volume assumes)
Do we have a visbility of the entire mature market from here? No. One thing is sure it will be many folds larger and mature than what it is now. And a centralised price setter could be positive in the long run, for an essential resource.
What’s the worst possible per unit operational margin (viz ebitda)? 40%? 60%?
Being a first mover and the dominant player for next 3 years at least, there’s a good chance that IEX can react well in maintaining their leadership. We need to watch out for the next few quarters to see how they innovate and what they innovate. The why is clear.
Can they execute enough to be at 700-800crores ebitda by 2026-27? Time will tell.
Further, let’s not forget that there’s an election in between and things can change.
Disc: invested
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IEX- A comprehensive analysis and some interesting inputs from Equitymasters.com
please scroll down to read the full report by ignoring the Adds if any. Report is dated 9th June.
Further a technical analysis by an analyst. Have put it up for pure technical study.
Discl. Holding …may be biased.
These are the views of the author and it is not a buy or sell recommendation from me.
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In the niche area of power trading that hardly anyone knows, brand recognition is nothing. Even more nothing when the bulk of the producers and distributers and users are gov. entities.
I see this as a coup by gov entities to secure their own exchange via their exchange arrangements; best case scenario for IEX is to file cases and make coupling fail(quite how is another thing)
plannng to exit IEX, if there is no clarity on what the point of these exchanges are. I mean, someone goes to a great extent to set up Ebay for power(roughly speaking), picks up experience in power trading, shares with GOI and…
GOI decides, these are all suboptimal, I got a better idea and my gencos have enough money to set up their exchange. Bye and thanks for the data.
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We should recognize that IEX is not a mass customer brand nor are they the target audience. Among the target Audiences [Discoms and power producers] they have the most robust brand recognition.
The argument is that IEX can stop it, by going to court, I have very little to no knowledge of what can be done or can it be done.
The argument that GOI is trying to kill exchanges to bring is there own system is very hard to digest, I mean they gave license to new exchange last year, and they created the environment, and policies so that in the last decade or so, these exchanges can thrive, and suddenly they want to kill them, seems very unlikely. The basic idea is to take monopoly of one exchange so that competition can thrive, and better services and products can be bought into the market seems more logical.
You rightly pointed out that there is a lack of clarity, and hopefully, we will get some in some time.
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As a small investor, I see multiple possibilities with no clarity. But I would love to hear the bull case about any possible scenario which benefits IEX. Goel interview did not inspire confidence. By evading the question he made it clear that coupling would be a catastrophe.
IGX carbon and coal are much smaller components.
I exited fully and will consider entry once the dust settles and the clouds dissipate and the birds start singing.
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The number one reason why Investment in India is not china scale, is policy uncertainty. you are seeing one in action. One guy right off the block corners the market, for a subset of power generation; not even 10% and the GOI says, he’s too good. Better stop him.
In the larger interest, market coupling was obvious, why wasn’t it done sooner?
Anyways, we are drifting from IEX to socio political things, so I’ll stop.
IEX and GOI and other exchanges have to talk
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Let’s wait for shareholder consultation outcome and then see how things pan out
you may please choose option of reading this article in English- option at bottom
Discl: Holding.
Views expressed is that of the author…Not a buy or sell recommendation
Honestly, I have no idea on what would happen to the existing Long Term Bilateral contracts after the introduction of Market Based Economic Dispatch (MBED). This is what I found in one of the discussion papers from CERC.
In case the Discoms and the Generators (tied in long term PPAs) were to participate, both would face the volatility of Day Ahead Market prices but because they are tied in bilateral contracts and have committed a price to each other, there would be a hedging arrangement (to be referred as Bilateral Contract Settlement or BCS) of refunding the difference between the market clearing price and the contracted price (the contracted price in this case would mean the variable cost as determined by the Appropriate Regulatory Commission, since the fixed cost would be paid separately based on availability as per the current practice).
If the spot rates (exchange rates for electricity) are lower than bilateral (like Power Purchase Agreements PPA) rates, volume shifts to exchanges like IEX, as we saw in Dadri-I with Delhi DISCOMS or Barh with Bihar DISCOMs.Backing down cahrges, DSM, and transmission charges too play a role to bring additional elements in realistic cost savings.
I believe the implementation of MBED would not be that easy and the expectation is that it would be done in Phases. The participation in the MBED model in Day-Ahead Market (DAM) time horizon would initially be perhaps voluntary for the parties.
Some challenges that I see are from the States. Remember that Electricity is a concurrent subject & responsibility of distribution rests with States. Govt. of India facilitates efforts of States to provide power to consumers in an improved manner. Will the States (especially Opposition rules states) agree to this new MBED policy?
In some ways, the MBED proposal is very similar to the GST mechanism implemented in India recently, where the state governments gave up their individual indirect taxation powers to pool their sovereignty to create a common market for goods and services in the country. The principal justifications for its implementation has been the efficiency gains, simplicity, and GDP growth push, not dissimilar to the MBED proposal. But GST policy implementation was the culmination of almost two decades of tax negotiations between the Centre and States. It is not clear that such a consensus has evolved for MBED, either from political authorities or from state discoms.
Sources:
https://cercind.gov.in/2018/draft_reg/DP31.pdf
https://cercind.gov.in/2019/Comments-MBED/22.%20Rohit%20Chandra_Comments_CERC%20MBED.pdf
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