Indian Energy Exchange Ltd (IEX), on which electricity is traded in the short-term market, has seen the average price of power ease in May after a demand-supply mismatch sent it soaring in March-April, Chairman and Managing Director Satyanarayan Goel said. India’s power situation may be “comfortable” in May-August, but could turn challenging in September-November if coal supply is impacted in the monsoon months, Goel said in an interview with Moneycontrol’s Rachita Prasad. Edited excerpts:
IEX reported a year-on-year decline of 1.7% in electricity volume traded on the exchange at 7.57 billion units (BU) in April due to supply constraints. How are the volumes looking now?
In the month of April, we had supply constraints. The buy volume was almost three times the supply side. But in the month of May, the supply has improved and the result is that our volume growth in comparison to last year of May, is almost about 8 to 9% more . There is good volume growth and clearing price is lower, which indicates that the supply position is good.
We have seen very high demand growth for power. In the last two months, power demand increased at the rate of about 18-19%. This is unprecedented. It has happened mainly because, one, the revival of economic activities. And second, this year just after winter, we had summer, with no spring in between. Right from the month of March itself, the demand started increasing. We were not prepared for this kind of a demand increase. Coal production and coal movement can't take place at the pace at which the demand increase has happened. So, there was a crisis for a short duration.
Power demand was at record highs and supply was constrained which led to power cuts in some states and triggered concerns of the power crisis getting worse. How are things looking going ahead?
The good thing is that the government took immediate steps to resolve this crisis. And in the month of April, their coal production has increased by almost 28%. Railways also has started moving additional rakes. The coal supply at the power plants has also increased significantly. So, I think today, most of the plants have a reasonable amount of coal stock, and one of the indicators of the demand and supply position is the exchange clearing price. In the month of April, the exchange clearing price was almost as high as the cap price. When the cap was Rs 20 a unit, it was around Rs 17-18, when the cap was reduced to Rs 12, the clearing price was around that of the Day-Ahead Market (DAM) and the Real-Time Market (RTM). But now in May, the price in the DAM and RTM, the key electricity market segments, have seen a significant correction. The average price in the DAM in the week has been Rs 5.41/unit while the average RTM price was Rs 4.63 per unit. The exchange average prices were around Rs 10.38 per unit just 10 days ago. This indicates that there is a lot of sale available; this is a good indicator that the situation is under control now.
In May, wind will pick up and we will get almost about 150 million units of extra generation through wind energy. Then the hydropower generation also starts improving, so we will be very comfortable in the months of May-August. September is going to be another difficult month because coal production goes down because of rains. This is the time when the weather is still hot and humid and agricultural demand is also at its peak. But the initiatives which have been taken by the government of India to import coal will augment the coal position at the power plants. The government is taking actions to take care of the power supply requirement in the months of September-November. The months of November-February are the low demand periods so I don't see any challenges. So this is a short-term power deficit issue and to a large extent, this has been already addressed.
The government has put a Rs 12/unit cap on the power that is traded on power exchanges. With the coal prices going up globally, some power generators believe there is not much motivation for producing more with this restriction. Is that going to be a challenge?
We have to see what kind of generation is coming on the platform for sale. We are mostly getting domestic coal-based generation where the variable cost is Rs 3- 4 depending on the location of the power plant. We are also getting hydro, wind, solar generation, where the marginal cost is zero. We are also getting imported coal-based power, but the sell bids from these plants constitute hardly about 20 -25% of the total sell base. In case of imported coal-based (plants) also, the marginal cost is around Rs 10-11 Looking at all these things, the government of India felt that Rs 12 /unit is a reasonable cap to harness whatever resources are available. It's a question of debate whether it should have been Rs 12 or 15; I would not like to get into that debate. But the cap is only for a brief period until June 30; after that it will be back to Rs 20/ unit as per the normal system.
The Central Electricity Regulatory Commission (CERC) is believed to have asked for an explanation on T+1 contracts, after states raised concerns over the product which enables settlement in 24 hours, without approvals. There were concerns that this was allowing sellers to move to the uncapped Term-Ahead Market. Has the government asked you for an explanation, what is your take on it and why is this segment important?
We have Day-Ahead Market contracts and Real-Time Market contracts. There is a cap on both these of Rs 12/unit. But there were no caps on the Term-Ahead Market (TAM). Term-Ahead Market constitutes Day Ahead contingency, which means you can buy power for tomorrow and it also has an any day contract for the next 11 days and a weekly contract. On all these contracts, there is no cap. In a deficient situation, when the demand is more and supply is less, there are states who want to buy power; they were earlier willing to pay Rs 20/unit in the Day-Ahead Market. Now, they had the option to purchase power in the Term-Ahead Market at a higher price. So, they all started shifting to the Term-Ahead market and entered into the weekly contracts or any day contract. Day-ahead contingency contract is a subset of the T+1 contract. Day ahead contingency was already there, T+ contract was introduced in the green market. It was introduced by mistake. We wanted to introduce the day-ahead contingency contract; that starts at 3 o'clock in the afternoon but the T+ starts right at midnight. There was some confusion, and we felt that the T+ contract was not per the provisions so we had withdrawn this even before we got the intimation or notice from the CERC. There was no such intention of diverting volume to the T+1 contract in this market to get a high price.
Looking at the year ahead, what kind of overall volumes do you expect in 2022-23, and what is your price outlook?
The volume demand is growing. If GDP has to grow at a rate of 8-9%, electricity consumption also has to increase at a faster rate. The government has the intention to supply 24x7 electricity to all consumers. Electricity is a cheaper option in comparison to the other energy options, so the government's thrust is to switch over to the electricity side so electricity demand is definitely going to increase. My estimate is that the increase may be almost about 7-8% in this year and a good part of that incremental demand will come to the market. If the increase is 7% on last year’s total generation of 1,300 billion units, the extra requirement this year would be 91 billion units; a good part of this will come to the market. The supply-side initiatives by the government are being monitored right at the highest level by the PMO (Prime Minister’s Office) and the home minister himself; so I am sure it will be resolved.
How do you see the Green Market doing?
We started the Green Market in 2020; today, we have a full bouquet of the products in the segment. We are already seeing almost 200 participants in this market and there are large corporates who are interested in buying green power. There are many companies who want to go green to meet the ESG (Environmental, Social, and Governance) requirements. There are also states who are not able to fulfil the RPO (Renewable Purchase Obligation) obligations and want to buy green power. The good thing is we also have states who have surplus green power beyond the RPO obligation and now they have the option to sell on the exchange. PSUs are also considering this option. In the next two years, we expect to see good liquidity on the sell side in the Green Market also. In 2020, we did almost 1 billion units of volume, while we did 5 billion units last year. This year my estimate is that it should be about 10 billion units. And maybe in the next two, three years, the green segment on the exchange platforms will contribute almost about 30%-40% of the total clearing volume.
The government has asked imported coal-based power units to run at full capacity by invoking Section 11 of the Electricity Act. They have given a very detailed explanation on how this will be done but there is a lot more that needs to be done to ensure these plants run, that dicoms pay them and that they are able to sell surplus on exchanges. What is your assessment of the situation? Can this boost volumes on the exchanges?
I am really amazed to see the speed at which the government is working today. In the past, I had never seen that act at this high speed; not just decisions but actual action is being taken at this high speed. This is really a situation where the Section 11 needs to be invoked because there are some of the power plants like that of Adani Power and Tata’s Mundra Power plant where a couple of units are already working and it will be much easier to augment the coal supply and increase the generation from rest of the units. For the rest of the plants, where the coal supply is not there, it may take about one month’s time to get the coal and start generation. This is a very good initiative, not just for now but for the coming months also. About 7,000-8,000 MW of imported coal based capacity is not operational. Even if 3,000- 4,000 MW starts operation, it will be a big support. There are reports that NTPC may run some of the stressed assets which are in NCLT. If all these things happen, we will have about 8,000 to 9,000 MW of additional generation and that is what we need, since our shortage is around 7,000-8,000 MW.
IEX set up the Indian Gas Exchange (IGX), which has a huge potential. How do you see that space evolving; what are your plans for this business?
In the first full year of operation in 2021-22, they have achieved a break-even and made a profit of Rs 1.7 crore. We have large energy players as shareholders, we have a large number of traders and members. Our client base is more than 500 as of now. The only problem we have faced is that gas prices were very high last year. In 2020, the gas prices were hovering around $3 to $4, but in 2021, it was around $ 25 to $30. At these high prices, the gas becomes unaffordable for the Indian consumers; naturally the trading also gets impacted. This situation will ease out because prices have started coming down now. The opportunity for the gas exchange is in fact larger than what we have in the power sector. In the case of the power sector, around 85-90 percent demand is already contracted to the long term. Whereas in the gas sector, most of the consumers are commercial entities, who are very sensitive to the gas price and exchanges which provide a transparent platform to them with competitive price discovery. In the next four or five years, you will see, the future of the gas exchange is going to be much better than what we are doing in the power exchange.
Would you consider an initial public offer for IGX?
I don't think we can talk about IPO at this stage; the exchange is at a very nascent stage. The only thing is IEX currently holds 47% equity in IGX, and as per the regulatory provisions, we will have to bring it down to 25% in the next three-and-a-half years.We find IPO is the most efficient option for divestment. So maybe at that time, if the market conditions are good, and if the IGX is doing good business, maybe we will think about an IPO. The exchange should be making profit continuously for four-five years and have a track record of good volume growth. If we are able to achieve a volume growth of 30- 40% on a compounded annual growth rate basis for the next four or five years, I think that can be the right time.
What next for IEX?
We are working on a couple of new products in the power market; new products with long-duration contracts. We are very excited about it because today, we have contracts where the delivery period is 11 days. Now with the resolution of issues of jurisdiction between SEBI (Securities and Exchange Board of India) and CERC, the latter can regulate delivery contracts on exchange platforms for any duration of time. We have applied to CERC for approval of our contracts and the process is over. The order is reserved, we are expecting the order maybe in the next 15, 20 days. That will be one important new product launch where the opportunity is also quite large.In the Green Market, we are very actively working with the participants to develop this market. After gas exchange, we see good opportunities in the carbon market also. It is at a very nascent stage, but we have created a team in the company to work on the carbon market initiative. The Ministry of Coal is also talking about the coal exchange; they have appointed a consultant to do some study to create a coal market in the country. In this initiative also we are actively working. In the case of coal, there are a couple of issues– quality and quantity. If we find ways and means to address them, then this is an interesting area. We started working at the gas exchange in 2015 and launched it in 2020. These two new initiatives will not have such a long gestation period; we may be able to do something in the next one or two years