Indian Energy Exchange | End of Monopoly? | Why IEX Falling? Detailed Video
Valuable Insights
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Government plans to bring in final design of Carbon Credit Trading Scheme (CCTS) in 2 weeks, says Power Secretary Alok Kumar.
What would it mean for IEX or International Carbon Exchange (ICX) specifically?
Following is the extract from the Ministry of Power’s Carbon Credit Trading Scheme (CCTS) which talks about potential exchange for Indian Carbon Market (ICM)
The Commission would approve the participation of power exchanges for Indian Carbon Market (ICM) trading, and the power exchanges must seek approval for their bylaws and rules from the Commission. The power exchanges will perform functions related to the trading of CCCs as per the Commission’s regulations
Remember IEX’s ICX will be the platform for the carbon credits in the compliance market.This mandatory market is expected to be much bigger than the Voluntary Carbon Market (VCM).
What Mr. Goel had said in past interviews
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The Indian government may still have to issue clarifications about the distinction of credits for the VCM and compliance market.
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They will probably merge Energy Saving Certificates (EScerts) or a part of it with carbon credits. Will have to see what the Government does in coming weeks.
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Renewable Energy Certificates (RECs) will be separate for now until the renewable purchase obligations timelines expire, making them eligible to be merged into carbon credits later.
There is currently no centralized voluntary carbon market. Instead, project developers, or companies can sell their credits directly to buyers or through a broker. I feel this is a great oppotunity for IEX, will have to wait and see the final design of the Carbon Credit Trading Scheme.
Disc: Invested, biased.
Source: CNBC TV 18 Twitter Handle
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Recently came across two news articles, thanks to the @SmartSyncServ Twitter handle. I feel investors of IEX must read this both articles.
Article No. 1: Why a market coupler is a bad idea
We could land in a mess, having wrecked the power exchanges by appointing a market coupler even as the MBED system turns out to be hard to implement by Somit Dasgupta on June 23, 2023
Article No. 2: Why market coupling won’t work
A non-starter. In the power sector, this will neither improve transmission infra utilisation nor improve welfare
Now why investors of IEX have to take a note of it. See who are the authors of the article.
Pramod Deo is the former Chairman of the Central Electricity Regulatory Commission (CERC) & Arjit Maitra is a consultant for the Ministry of Power & has acted in the past as the Principal Legal Advisor of the Regulators, such as the CERC.
Sources:
https://www.financialexpress.com/opinion/why-a-market-coupler-is-a-bad-idea/3138350/
Disclaimer: Invested, biased.
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Presently there is lot of uncertainty around the business of exchanges due to market coupling. As an investor I do not know what to do? MBED will come or not is still not known considering power is in concurrent list. How much time will be required if MBED needs to be implemented in India is also not known?
Sometimes its very difficult to predict the business with no clear cut clues. Valuation of IEX are also not dirt cheap to give some confidence.Will wait further and let see how situation unfolds.
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The claim that Market Coupler will enable discovery of an uniform price is dubious. If currently 90% of market participants via IEX discover a clearing price, then it is 90% assured of an unbiased price. Will adding 10% more of participants sway the price discovery so much?
It will not be like adding Bill Gates’ wealth to an average of 1000 poor-middle-upperMiddle class peoples income.
If true price discovery needs to be arrived at then MBED is a must - to agglomerate PPA too.
Speculation : As a conspiracy theory this Govt circular may have been induced by aggrieved competitors.
The study will take time to yield result - about a couple of years as mentioned in a few articles.
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My Biases in IEX -
With the recent 20% fall in IEX still fresh in mind, I thought about writing about my own experience with it.
I first came across IEX in mid-2019 when I checked the holding of Mohnish Pabrai. I am in favour of thoughtful cloning (which means it’s ONE of the criteria for stock selection) for sure. { AUTHORITY BIAS} So I started studying business. And WHAT A BUSINESS?!
Simply mind-blowing. Energy exchange has a Monopoly with a 98% market share, excellent ROCEs & NPMs. Asset light model - requires only some office space, computers and few people. And it’s the perfect way to play the INDIA GROWTH story. It’s common sense - if India has to grow, its power consumption must grow. So traded volumes have to grow. In India, only 7% of power is traded on an exchange and you can imagine the enormous GROWTH POTENTIAL & the LONG RUNWAY when more power starts trading on exchanges. And the icing on the cake is - Whether it’s traditional ( thermal / hydro / nuclear / gas ) or Renewable ( solar / wind), energy will be traded on exchanges only. And on top of all this, it’s a small-cap stock. So EASY & FAST money. { GREED} And all this is available at decent valuations.
Of course, on the negative side, the energy transaction cost will be regulated by the government and being exchange, the mandatory zero promoter holding.
But the positives definitely outweighed the negatives. To avoid biases, I did apply the “CHECKLIST”. And IEX did clear most of the points on my checklist. So it’s a DREAM girl, so why not marry? So I bought it around June 2019.
All was smooth sailing, but then COVID hit in March 2020. And this started falling. And BOY, it was a tough time. Seeing markets hitting lower circuits every day consecutively was a dreadful event. So sold most of my stock holdings. The logic was - बचेंगे तो और भी लढेंगे. But didn’t sell a single share of IEX as I had my own study & conviction in it. But didn’t add any more as I was kind of frozen by the sudden market fall. But once things started settling down, IEX started its slow upward journey. But the trigger came in Jan 21.
Few basics of the Energy markets to understand the background better.
In the Indian energy market, there are mainly 2 ways of energy transactions. The majority is with Long-term PPAs (87%) & they are for 20-25 years. The remaining Short-term (13%) can be bilateral / through exchanges.
IEX has 99% markets share in Short Term Trading & overall 88% market share.
Short-term trading has a huge runway due to the inconsistency of renewable sources like hydro, solar & wind. Volume growth in the short term through exchanges was 20% CAGR from 18-22. And this trigger caused the IEX share price to soar from 75 in Jan 21 to 295 in just Dec 21.
With this sudden up move, I got my first 5 bagger. It felt SO GREAT. And all over social media, only IEX was trending. I had a great feeling that at last I cracked the code and got better of the market.{ OVERCONFIDENCE BIAS}
But then it become 21% of my portfolio, which made me nervous. So I did partial profit booking around 270 levels and bought its allocation down to 10%.
And IEX declared a 2:1 bonus and it again started zooming up. There was so much media frenzy that I again bought it at higher valuations ( PE of 100) and increased its allocation to 15%. { RECENCY BIAS, HERD MENTALITY, ACTION BIAS }.
But then, in the next quarters, the volume growth over IEX came down, so FIIs & DIIs sold it slowly, and the retailers grabbed it all. So now it started its slow gruesome stage 3 downward journey.
I still held onto it { ENDOWMENT BIAS} The reasons that I gave to myself were - It’s a GREAT business and being asset-light, it will throw loads of dividendS in my 20 years away retirement. So I can boast by saying that this is THAT stock which gave more dividend per share than its actual buying price!!! ( one more dream of Retail Investors) IEX के dividend पे retirement निकालुंगा.
But during this time, the Government’s announced the future Market coupling regulation. And also in 2022, a third new exchange Hindustan Power Exchange was launched in addition to PXIL. But I neglected both of these { Confirmation Bias, Status-Quo Bias}
Then in June 23, the stock fell nearly 20% in just 2 days. The reason - Central Electricity Regulation Commission aka CERC came up with a draft for Market Coupling. What maker coupling will cause is - Another central authority ( not the exchanges) will decide the final uniform Market Clearing Price ( MCP). So now the role of IEX will be kind of broker rather than an Exchange. And brokers will usually get fewer valuations than the exchanges. So the downgrade happened in IEX.
So now I was left with only a 10% overall gain in the last 2 years. Didn’t have the courage to add any / lose any now. थोडीसी जो इज्जत बची हे वो लेके, मे बाहर पड गया IEX से.
So the lessons learnt
1 - GOVERNMENT REGULATIONS
ALWAYS ALWAYS keep an eye on the Govt. Interference in the business. In the case of IEX, energy being an essential commodity, Govt will never allow PROFITEERING. And how so ever it can be a great business, IEX has to comply with government regulations. It has no choice of its own. So I have added “Government Regulations Possibility” as one more point in my updated CHECK-LIST.
2 - Never marry your stock.
How much a great business can be always keep an eye on the valuations. But I made the mistake of holding onto it even when it crossed PE of 100. And on top of that fell prey to the SM frenzy & added more on the top and averaged it up. So my overall returns came down drastically. So BAAP - Buying At Any Price doesn’t work for sure. AVOID SOCIAL MEDIA FRENZY AT ANY COST.
3 - OPPORTUNITY COST
Never ignore the opportunity cost. With this overall saga, in the end, I had only a pathetic 10% gain over 3 years. So I missed a HUGE opportunity cost. If I had invested the profits from IEX in some other decent business should have definitely earned better returns over that period.
dr.vikas
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Sir, this is an excellent post. Your notes are very similar to my investment journey in this stock.
Here are some additional thoughts:
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This thread is an illustration of investor biases. Before 2020 there was very minimal activity. it became very chatty and there were a lot of posts that were just media reports or company updates, that served to reinforce our bias. There were several posts (I am not blaming anyone. I have posted too) that seemed to reinforce the momentum and did not highlight the risks enough.
Here is a chart showing the number of posts in this thread each year and the price. (2023 info is YTD):
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Government interference is there in almost all stocks. It is sometimes a strength too, as this company grew only based on favorable regulations.
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I have become a better investor by uninstalling my brokerage and financial apps from my phone, unsubscribing from all notifications about financial news, uninstalling Twitter on mobile phone and checking my demat account only on desktop.
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I also track the p/e of stocks based on my price than the current price. For example my IEX holdings p/e is 20, which means it is performing reasonably well for my investment price.
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Great to know your holding PE is 20. Thanks for sharing the interesting statistics. Clearly shows the investor FRENZY even on valuepickr, which we try to think of as an unbiased platform.
Nowadays, I am worried after seeing the nearly 10 new posts on VP daily. Surely we are in a bull market. So have to be cautious.
I also kind of use this kind of statistics while searching on VP. If too much chatter is seen in the stock that I am searching for, I will be careful. But when there is no chatter for a long time in any particular stock, I will dig deeper and try to find out any possible trigger/catalyst in the future.
Maybe you can do such a statistical study and share it on VP.
Regards,
dr.vikas
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Thank you for sharing Dr. Vikas.
Apart from ability to set price, could you please share your thoughts on why do brokers get lower valuation compared to exchanges?
Here, with an example, it’s easy to understand. We have mainly 2 exchanges on the stock market. BSE & NSE. It’s only on these exchanges that PRICE DISCOVERY happens. Brokers don’t do the price discovery. And the number of exchanges is limited while the brokers are plenty.
Same way, if due to MBED, Govt. comes up with some other central platform for trading, PRICE DISCOVERY will happen there and not on IEX / HPX or others. In that case, all other power exchanges will act like brokers only.
Hope this clarifies.
dr.vikas
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Can you please share how you generated this posts vs price chart? Seems interesting.
Thanks Dr. Vikas, but it is still unclear.
I understood the part where price discovery will happen on another platform.
However, how is it related to valuation of IEX? If I remember correctly, IEX gets a commission of 2 paisa per trade irrespective of the final price at which the trade takes place. So, shouldn’t it get valued based on volume traded?
Thanks,
Mahesh
Hi Mahesh, Whichever exchange will get more volumes, will help in price discovery and hence even more traders will flock to that exchange;think NSE vs BSE… giving it a positive feedback loop; but now if there is a central party which sets/discovers the price, the traders can trade on any exchange whichever offers lower transaction cost. think icici direct vs Zerodha.
So this 2 paise per trade today at IEX could go to 1 paise in future if thats the only differentiator.
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Adding another point of view for more diverse thought :
- IEX is already a monopoly which means max users use it and hence max volume will flow from it to the central party and therefore it stands to gain compared to other exchanges.
- Switching cost also needs to be taken into picture.(Not only price but ease of UI)
- In case of a pricing war, no price for guessing who can beat/eat the competitors out of business.
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Adding to this point further, not just deeper pockets of the dominant players, there are other intangible factors in favor of IEX such as
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Experienced Team with better engineers and management.
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Long-term relations with CERC and other participants including customers.
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Best product offering in the market and the best chance to develop better products.
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Dr. Vikas Sir, Is there a possibility CERC would give full powers to IEX where price discovery can happen as they are proven here already ? Makes sense right instead of forming an other exchange like NSE/BSE just for price discovery.
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Hi Anil, Power is an ESSENTIAL COMMODITY and the government will never allow anyone to do PROFITERRING in it.
The government’s aim is going to be - How the household and businesses get the best VALUE for their ELECTRICITY consumption.
And why would Govt. prefer IEX over other exchanges? It doesn’t make any sense.
Hope this answers.
dr.vikas
This sounds Logical.
Just a thought, wouldn’t the same rule apply on IGX & Carbon exchange as well. Where Govt would want to control Profiteering.
IGX : We import Gas, negligible domestic production.
Carbon exchange : With global warming starting to play a havoc already, Govt would want pvt sector to play an active role.
Though these may not be essential commodity today, but going forward the views may change.
Just a thought.
Disc : Invested.
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