Indian Energy Exchange (IEX) released their power market performance for October 2023. Here are the key points:
Electricity Volume and Overall Volume Growth:
IEX achieved 9,260 million units (MU) of electricity volume in October 2023, which marks a substantial 21% increase compared to the same month in the previous year (YoY).
The overall volume traded during October, including renewable energy certificates (RECs) and energy saving certificates (ESCerts), also increased significantly, with an 18% YoY growth.
Increased Energy Consumption:
The release mentions that in October 2023, the countryâs energy consumption reached 139 billion units, indicating a substantial 22% YoY increase.
This increase in energy consumption is attributed to a surge in electricity demand, below-average rainfall for the month, and a lower base from the same period the previous year.
Day-Ahead Market Prices:
Due to the surge in power demand, Day-Ahead Market (DAM) prices on IEX increased substantially to Rs. 6.45 per unit, showing a remarkable 68% YoY increase.
Market Segments:
The media release provides details on various market segments:
The Day-Ahead Market (DAM) volume increased to 4,742 MU in October 2023, showing an 8.3% YoY growth.
The Real-Time Electricity Market (RTM) volume increased to 2,402 MU, reflecting a 6.1% YoY increase.
Day Ahead Contingency and Term-Ahead Market (TAM) traded 1,911 MU during October '23, a notable increase of 207.6% YoY.
Green Market:
The IEX Green Market, including the Green Day-Ahead and Green Term-Ahead Market segments, achieved 188 MU volume during October '23.
The Green Day-Ahead Market achieved 180.80 MU volume with a weighted average price of Rs 6.37 per unit and saw participation from 194 market participants.
The Green Term-Ahead Market achieved 7.23 MU volume in October '23 with an average monthly price of Non-Solar at Rs 8.40/unit.
Renewable Energy Certificates (RECs):
A total of 2.17 lac RECs (equivalent to 217 MU) were cleared in trading sessions held on 11th and 25th October '23, at clearing prices of Rs. 380/REC and Rs. 420/REC, respectively.
Upcoming REC trading sessions are scheduled on 8th November '23 and 29th November '23.
Energy Saving Certificates (ESCerts):
In October '23, 5,814 ESCerts (equivalent to 5.8 MU) were traded on IEX at the floor price of Rs. 1,840 per ESCert.
Hi Kapil
Marker coupling means price discovery will no longer be done on the power exchange.
The function of power discovery will be taken over by the market coupling operator (MCO)
Power exchanges will only collect bids (buy / sell) and pass it on to MCO.
Since, price discovery will no longer be done by IEX India, there is no reason for buyer / seller to stick to IEX for trading
But my doubt is, suppose,
Exchange A has a bid for price âxâ,
Exchange B has a bid for price âyâ,
Exchange C has a bid for price âzâ,
Now, suppose x<y<z. So, the discovered price is âxâ. And since it was discovered on exchange A, wouldnât the bid get executed on A, seamlessly and automatically?
Also, another question. Can the same seller and buyer quote and bid for different prices on different exchanges? For example, can it happen that a seller âSâ bids for selling power for x on A, y on B and z on C?
Your confusion arises from an understanding that there will be multiple exchanges(A,B,C), that wonât be the case.
When market coupling is implemented, the MCO(Market Coupling Operator) becomes the sole exchange, and current players like IEX, PXIL and HPX get reduced to brokers. An analogy would be, MCO will be NSE and current exchanges like IEX will be brokers like Zerodha, Angel One etc.
So in this scenario, all transactions occur on MCO while the role of IEX will be primarily not of price discovery but just collection of buy/sell bids. This is the popular understanding of MCO implementation, if there is a twist we will have to wait and watch.
This article gives a good introduction to overall business of IEX:
Block chain technology is useful for enabling transactions/record keeping in a decentralized trustless enviroment but perhaps not very useful in a centralized markets. Eaxmple if A wants to buy from B, and A & B do not known/ trust each they go to the entity C both can trust. Can be a a marketmaker like an exchange, a regulator, a business etc. for closing the transaction. Câs job is to ensure the transactions take place and also act as guarantor if the transactions fails (one side fails to deliver on the agreed terms). In other words its a centralized market
Unlike a market with high number of buyers & sellers who are all unknown to each other and thereâs no or low trust (decentralized market). Blockhain is very useful for decentralized markets unlike the centralized ones.
Usefulness of blockchain tech might have limited applicabilty is centralized markets. Mainly because of all the particiapants are known to each other, and have trust.
It is also to be noted that blockchain in terms of speed of compute is much slower than conventional exchanges, energy intensive, and with higher transaction costs. That makes it challenging to settle transactions in realtime where speed is of the essence. However it maybe noted, blockchain is radically transparent and chances of frauds/ mischief are minimised. Having said that, critics say Blockchain is a solution looking for a problem.
Have been reading about Blockchain disrupting industries for better part of a decade, however yet to see âkiller appâ or usecase for it.
Note: My understanding is derived from readings of The Bitcoin Standard by Saifedean Ammous and other similar texts.
Your observations look useful, as use of Blockchain seems limited as of now in practical life. When ever new technology comes in, there are initial days of enthusiasm but it usually dies after few years.
The Killer App or the successful use case should be there to see it getting widely adopted.
One simple and easy to understand use case may be used car sales. In many cases the authenticity of records are questionable but blockchain can solve this problem. But as already pointed above, it requires huge computing power and is super expensive (at least for now). Another challenge is that all the value chain partners should be connected and canât work in silos.
Thanks for your response Amey.
So I understand that price discovery may not happen on IEX. But, even if it collects bids and pass it on to MCO, it has to do almost everything what it is doing now. Some infrastructure that is deployed in execution of bids would be replaced by infrastructure that connects with MCO to pass on the bids.
So, letâs assume that it continues to do what it has been doing and hence incurring the same cost and therefore holding on to the price.
Now, assuming that itâs platform continues to be the best, as what is claimed now and has no reason to deteriarate, and since the pricing shouldnât decrease further, owing to above broad assumptions, I am still not sure why itâs business prospects would go down.
Suggesting a counter argument for the sake of discussion?
So, your comment, âSo in this scenario, all transactions occur on MCO while the role of IEX will be primarily of price discovery.â suggests that price discovery would happen on IEX. This is in contrast to the above reply from Amey or what is in general being proposed. Hence wanted to confirm. Was there a typo in your comment or did you really mean to say that price discovery would happen on IEX. Because if it is the latter, then isnât it better for IEX? Since if price discovery happens on IEX, then it will attract more bidders and hence greater volume?
And now about IEX being reduced to just a broker, would it be still fair to compare it with other stock market brokers? I am asking this because, (a) there are many many stock market brokers but just 3 power exchanges and opening of new power exchanges doesnât look so viable near term at least.
And (b) With greater uncertainties on fuel supply side and pricing on one hand and push towards renewables and operations optimization on the other hand, isnât there a natural unidirectional unobstructed push towards power exchange business which, for stock market brokers, is not so unidirectional considering alternate options of investments?
And therefore, shouldnât exchanges command higher multiples?
Again, sorry for the counter argumentation. But I feel that there isnât as much threat to the long term business model of IEX as was projected in the media.
Saw this interesting bull vs bear case scenario for IEX. Please watch, itâs < 2 min.
A puzzling information from this video was, all BJP run states are in favor of market coupling whereas non-BJP run states do not like market coupling.
Wondering why is that so? Any insights into why this divergence of opinion on market coupling between BJP and non-BJP run states?
Sorry, thatâs a typo from my side. To correct myself - In case of a MCO in place, all transactions occur on MCO while the role of IEX will be primarily not of price discovery but just collection of buy/sell bids.
I can comment on your a) and b) questions, may not be the answer. If MBED(Market Based Economic Dispatch) is implemented, in which case all power trading must happen via the power exchange. you can ignore all the reasons for moving towards exchanges like - âuncertainties on fuel supply side and pricing on one hand and push towards renewables and operations optimizationâ. In one fell swoop, this will move all power trading to happen via exchanges. And when this happens, there is one MCO who is the âsole exchangeâ and several brokers like IEX, PXIL and HPX. With this surge in volumes, and way lesser uncertainty in terms of business regulations, there could be many more players who could be interested in entering the business.
About commanding higher multiples, exchanges always will command a higher multiple because there is a great room for innovation, they can come up with newer products, like derivatives for example which can add significantly to existing revenues. But here that would be the MCO and not IEX. IEX, as they say, is as of today NSE + Zerodha rolled into one but after MCO implementation it will become just like Zerodha and their success will be linked to things like how well they manage the commissions and UX(user Interface) rather than adding newer innovative products, and hence a lower multiple.
The reason I couldnât form conviction to buy IEX is the number of uncertainties around it. Just take the MCO and MBED, you really cannot reliably build a bull or bear scenario without knowing if and when they will be implemented. Two many key variables in the equation.
This is 1 month old news. But yeah generally positive development. The general perception about CERC bringing in market coupling was that the govt agencies involved in other power exchanges were lobbying hard for it and trying to exert their clout. The fact that CERC has taken the stakeholders consent in a honest way deducts credibility to the lobbying aspect and surely something to cheer about.
Disc: Have built a small position, tracking closely.
Not completely, until the MCO and MBED is settled once and for all the overhang is still there. Also, donât forget that the commission ceiling also lies with the CERC. In general, I personally think that in companies like IEX, IRCTC etc overhangs are always there.
The commission ceiling is certainly with CERC but the prospect of increase in volume in future can discount that. The major issue has been MCO & MBED. If they settle then the business is certainly a monopoly business with huge future growth prospects
