is there a cartel which is controlling prices?? people are free to trade where they want, let demand supply and quality of service decide what one pays and how much profits are made out of it.
allowing profits or controlling profits is not governments job, making sure there is fair chance to everyone to compete is what govt can do
is this move going to give fair chance to other exchanges to compete or it is going to take away the business itself from all of them? and who will run the new exchange? will it make profits or it will be govt non profit thing?
can govt say they will move price discovery away from BSE NSE and do it somewhere else?
Absolutely true. What stops the government from controlling gas/carbon credits transactions?
If it’s essential for a nation, it will never allow profiteering from it.
This is one definite contra point which making me not invest in IEX.
Power is an ESSENTIAL COMMODITY and the government will never allow anyone to do PROFITERRING in it.
Have you come across any GoI-backed list of commodities that are classified as essential?
The best I can find are the ones mentioned in EC Act 1955 but it isn’t helping me make my mind.
My current PoV (quite confused and likely flawed):
In the longer horizon, is zeroing profits sustainable in a capitalistic economy? Maybe the profits can be capped but is that sustainable either?
Would the government not be more interested in attacking at B2C side of the value chain than the B2B side?
I am assuming water is essential (really need the official list of essential commodities). GoI does allow profiteering here (even GoI likely makes it). IRCTC procures water from Ion Ex etc, and then resells it.
This could be an exaggeration: If electricity is essential, why would housing not be essential? Can’t run electricity without a house. The government does admit that there is a cartel of steel/cement. If housing is essential and GoI admits cartelization, isn’t the entire value chain’s profit under threat? Will the government actually limit the entire value chain? This makes me again refer #1 again - “is limiting/zeroing” profits sustainable?
Haven’t been able to make up my mind on this.
Disc: Exited. But I might re-enter when valuation makes me comfortable
Is market coupling a threat for IEX?
More than 90% of the buyers and sellers solely depend on the IEX platform for exchange of electricity, but the introduction of market coupling could change this. Market coupling would mean somebody from a different exchange will also be able to buy electricity from a seller on IEX because the orders will be matched by a government-appointed authority. In other words, it doesn’t matter which platform the buyers and the sellers are on. They would get the same price irrespective of which exchange they use.
IEX will lose its authority to determine prices, leading to a potential loss of market share. This will create an opportunity for the other two exchanges to gain a larger market share.
Industry insiders are talking about another theory which is apparently doing the rounds in the government circles – that since NTPC has acquired a 5% equity stake in PXIL, which hardly has any volumes and market share, the introduction of market coupling will benefit the two.
Excerpts From TATA Power annual report: Power Trading
Around 190 billion units (BUs) of electricity were traded in the short term power market during FY23, as compared to a total of 184 BUs traded during FY22. Out of this, around 42% of trading had taken place through power exchange(s). Due to high competition amongst power traders, trading margins are under immense pressure. The market is concentrated with 8 larger players with the remaining traders operating in regional pockets, largely for trading their own power. At ~ ₹ 5.94 per unit, the average clearing price for Day Ahead Market (DAM) in FY23 increased by nearly 35% as compared to the previous fiscal. The increase in DAM prices is largely attributable to the combined effect of a surge in overall demand, an increase in international coal and gas, and a shortage in the supply of domestic coal, especially during monsoons. The prices being discovered in the tenders floated by Discoms for the upcoming months of 2023 remain high, being in the range of ₹ 8-11/kWh.
One additional point is valuation matter especially when there is stratospheric rise in Stock prices. You have to do some kind of common sense assessment of if the numbers make sense. When Reverse DCF implies a 10 year growth which is much higher than historical growth or PE ratios are touching triple digits it is time to do a sense check if it makes sense to hold on. Business can continue to be good but high valuations will look for excuses like change in government regulations etc. To sharply correct.
Disc: Personally bought in 2020 and then sold (maybe too early) at 2-3X when valuation made me uncomfortable.
We know sentiment wise it’s bad. But what about from a “value” perspective?
Also, does this change the companies plans related to other exchanges.
Exchanges are potentially lucrative businesses if run well. They will always be susceptible to regulatory action. After all they operate in regulated markets.
The point is at what point does the price justify even the worst case scenario.
I have not done the numbers. But perhaps someone else has?
There are many discussions around market decoupling and its potential impact on the growth and share price appreciation of IEX.
As many boarders have already mentioned in this thread, several times in the past, Exchange is a highly regulated business, and one can’t do much about it.
But the answer to the question, “Is it a profitable business with consistent cash flow generation?” is a resounding “YES!”
My rationale for continuing to hold IEX is as follows.
-As per the Annual Market Monitoring Report 2021–22 (p. 17), only 7.38% of the total energy supplied by the country is traded through exchanges. However, if you look at European markets, it an astounding 29–32%. As we mature, exchange traded power contracts will definitely grow, and IEX will be a major beneficiary along with other power exchanges
-In any business, the market leader and the first mover have a definite advantage compared to new entrants.
-New business verticals like carbon credit trading
-As the gas exchange matures, this can positively impact the earnings of IEX
It appears SBI Small cap and SBI Balanced Adv have added IEX to their portfolio.
I guess time will tell whether the regulatory risk is priced in or not
A good case study to track and follow for evaluating similar high returns, high margin businesses but which have a regulatory sword hanging over them. Perhaps it will also throw up some lessons on how to allocate to such stocks.
As of today, most of the renewable energy capacity in India is tied up under long-term PPA contracts. This model is not flexible and there is a need to reduce the tenure of long-term PPAs and gradually move towards more market-based models. It is the time to adopt and implement market products like pool-based CFD mechanism for revenue sustainability to the RE Generators and allow virtual PPAs where corporates can procure green attributes while providing certainty in the cash flows of RE Developers. All such enablers must be backed by financial markets instruments for enabling adequate capacity financing.
In Europe, countries like Denmark, Finland and Sweden with a rich share of renewables in their energy mix, channel ALL their green electricity through exchanges. Going forward, green markets in India should also introduce suitable products which have been proven to be beneficial for renewable markets across the globe.
Lets look at the best practices across globe.
Contract for Differences (CfDs)
Imagine you have a solar power plant, and you want to sell the electricity it generates on a power exchange like the Indian Energy Exchange (IEX). However, the price of electricity on the exchange can fluctuate throughout the day based on supply and demand.
Here’s where a CFD comes into play:
What is a Contract for Difference (CFD)?: A CFD is like a special agreement between you (the seller) and a buyer, let’s say a company or another individual. In this agreement, you both agree to exchange the difference in the price of electricity at two specific points in time.
Example: Let’s say you enter into a CFD with a company that wants to buy electricity from your solar power plant. The CFD agreement specifies that you will sell them electricity at a fixed price, let’s say ₹5,000 per megawatt-hour (MWh), for the next month.
Actual Market Price: However, the actual price of electricity on the power exchange can vary from day to day. Sometimes it may go up, and sometimes it may go down.
How it Works: At the end of the month, you and the company will compare the fixed price of ₹5,000 per MWh agreed upon in the CFD with the average market price of electricity on the exchange during that month. Let’s say the average market price turned out to be ₹4,500 per MWh.
Settlement: In this case, the company will pay you the difference between the fixed price in the CFD (₹5,000) and the actual market price (₹4,500) for each MWh of electricity they bought from you. So, they will pay you an additional ₹500 per MWh for each unit of electricity they purchased from your solar power plant.
Benefit for Both Parties: The CFD allows you to have more predictable revenue because you know you will receive a certain price for your electricity, regardless of how the market price fluctuates. On the other hand, the company buying from you benefits because they are protected from sudden price spikes in the market, ensuring they pay a stable, pre-agreed price.
In summary, a CFD market in the context of renewable energy power trading provides a way for both sellers (power generators) and buyers (companies or consumers) to hedge against price fluctuations, making the process more stable and predictable for both parties involved.
Contracts for Differences (CFDs) can be beneficial for power exchanges like the Indian Energy Exchange (IEX) in several ways:
Increased Trading Volume: CFDs provide additional opportunities for trading on the power exchange. They attract more participants, including renewable energy generators and buyers, who may not want to be exposed to the volatility of real-time market prices. This increased trading volume leads to higher liquidity on the exchange, making it more attractive to other market participants as well.
Risk Management: CFDs help manage risk for both buyers and sellers. For renewable energy generators, CFDs offer a way to secure a fixed price for their power output, protecting them from potential price fluctuations in the spot market. For buyers, CFDs provide a hedge against unexpected price spikes, ensuring they pay a predictable price for electricity.
Market Stability: By offering CFDs, power exchanges like IEX can create a more stable market environment. CFDs help reduce price volatility and provide greater certainty to market participants, making it easier for them to plan and manage their energy purchases or sales.
Product Diversification: Introducing CFDs as a market product diversifies the offerings on the exchange. A broader range of products attracts a more diverse set of participants, enhancing the overall competitiveness and attractiveness of the exchange.
Market Attraction: Power exchanges that offer CFDs can attract international investors and market participants who are familiar with such financial instruments. This can increase the exchange’s profile and help in establishing it as a reliable platform for power trading in the global energy market.
CFDs have been coming for a long time now since they are awaiting regulatory framework from SEBI and CERC after SC ruled both have jurisdiction over energy derivatives, SEBI over the cash difference and CERC over the energy price.
The Contracts are for a long period and cannot be terminated: These long term contracts are mostly for a period of over 25 years and cannot be terminated before the end of the period. Therefore, a discom has to ascertain its demand projections and other factors for 25 years in advance before signing the PPA. The prices of power through other sources, demand in the area of supply of the Discom or other factors may change the requirement of the contracted power considerably.
Huge cost implications: The Discoms have to pay the capacity charge irrespective of the power consumed by the Discom. If the Discom over contracts than its actual power requirement, the Discom will have to pay the capacity charge for the entire 25 year period for the power it does not even require. In such a scenario, the only option left for the Discom is to pay fixed cost to the generating stations on the declared available capacity, save variable cost to the extent generator is not asked to generate.
Globally, all countries have moved away from long term contracts, since predicting
the status of the sector 25 years in advance with certain level of accuracy is difficult. A discom may either over contract or under contract. The prices can change considerably making the Discom worse off because of signing a PPA at high cost.
This explanation is true for conventional power generation (e.g coal based) bcos there you have fixed and variable costs. RE like wind and solar have no variable cost, once installed, there is only O&M cost mostly which is not a big amount. Moreover in current scenario, RE contribution in total supply of power by a discom is small, most discoms are trying to just fulfill their Renewable Purchase Obligations (RPO) and nothing more. So RE forms a small portion of their pool of power.
RE projects are accorded a “must run” status, meaning the discoms cannot ask generators to reduce power generation and supply, since power generated from wind and solar is not stored. When they integrate storage, then the power can be dispatched whenever needed, but that is possible only with storage which adds a significant cost and hence the tariff would also be higher.
