Will introduce two new market segments within six months: Rohit Bajaj of IEX

The energy market in the exchanges is looking up now with the easing of prices of imported coal and improvement in our domestic coal inventory, said Rohit Bajaj, head (business development), IEX

After years of continuous growth, trade volumes at the Indian Energy Exchange Ltd (IEX), the country’s largest power trading exchange, have slumped at least 5 percent in the past 10 months. But the company’s business development head, Rohit Bajaj, says its growth story is going to get better as prices of imported coal begin to ease and the much-awaited high-price market is launched. In an exclusive interview to Moneycontrol, Bajaj also cleared the air on IEX’s divestment plans for Indian Gas Exchange (IGX) and its strategy for the voluntary carbon credit market. Edited excerpts:

The profit margin of Indian Energy Exchange (IEX) has been declining and the income also reduced in the December quarter. Take us through the company’s performance and the reasons for the same.

We have completed 10 months in this fiscal, and if I talk about electricity, after 10 months, our volumes are down by 5 percent. This happened because our base was very high in the last two years, during which we saw more than 30 percent growth in our electricity volume. On such a high base, we were expecting to continuously gain on the volume side. But this year, we have been in the midst of a global energy crisis. There is huge pressure on input prices, which is coal and gas in the case of electricity. Gas prices are at record high levels, so is the case with imported coal prices. And at that price point, generators don't have visibility to source power in advance because they are not very sure about the prices.
So they don't buy gas or coal in advance, because by the time they get the delivery, they don't know how the prices will be. So there are a lot of uncertainties and during such a time, when prices are so high, there is always some pressure on the sell side.

Hence, if I talk about it in terms of numbers, our buy bids in this particular year increased by 24 percent, but still our sell volume saw a 13 percent reduction. As a result, our overall trade volume dipped by 5 percent.

But starting November, we have started to see positive traction. November, December, January—all these three months, our electricity trade volume was positive. In fact, in January, we recorded 9 percent growth in the electricity segment. So things are rebounding now with the easing of prices of imported coal and with improvement in our domestic coal inventory. There is increased production and more coal stocks with power plants.

What does the financial year 2024 look like for IEX? What are the new products in the pipeline?

We are in the process of launching various contracts, starting with the much-awaited high-priced day-ahead market (HP-DAM). To explain to your readers, what happened in the exchanges was that because of high prices of electricity on the exchange platform, the Central Electricity Regulatory Commission (CERC) ordered a cap of Rs 12 per unit on the maximum price for trade on the bourses. Earlier, this cost used to be Rs 20 per unit.

As a result, what is happening now is that costly power is not coming to the market (power exchanges). Those who are generating at higher prices, such as gas-based power plants and imported coal-based power plants, are not able to sell at cost-reflective prices.

Now, we are expecting an order from the CERC very soon. As soon as the CERC order comes, we would be launching HP-DAM. We are hopeful that the supply-side constraints which we are facing today will be sorted because of HP-DAM.
Next, in three-four months, we are also coming up with a market for ancillary services. It will be a reserved market. Similarly, a derivatives market is also being discussed, but this has not yet been formalised.

What is the projected volume in HP-DAM?

HP-DAM is a place where your price would be more than the day-ahead market and the buyers will come to this market only if there is not adequate supply in the normal conventional day-ahead market. So, throughout the year, probably this market will not do very well because there are times when you have very high hydro generation, high wind generation and when the overall demand in the country is low. In such times, probably we can see a little less participation.

But yes, during the summer months, particularly for which we are gearing up now, there is a good possibility that we can have decent volume in this segment because this is the time when you can have shortages and your imported coal-based generation or gas-based generation would be required and the only way to get that, the only way to buy that is going to be HP-DAM. It will be difficult to put a number to the expected volume at this point in time, but yes, we are expecting this market to be decently liquid.

I was coming to the impending summer and the rise in power demand that we are going to witness. This is an annual question now, but still, are we better placed to meet the spike in power demand this time?

What happens is that from mid-March to April, sometimes till mid-May, electricity generation from hydropower and wind is not that much. It picks up post mid-May or in June. So in the absence of that, all focus and dependency is on thermal generation. Last year, we faced a difficult situation because there was huge demand and the average price for April 2022 went as high as Rs 10 per unit. There was no ample supply available. So when participants wanted to buy, they were not getting the complete quantum that they wanted to buy. It was given on a pro-rata basis. Hence, the shortage started. But last time our preparations were not enough. Our coal stocks were not there.

This time, the government has taken so many different measures. In fact, they have directed NTPC to source gas, as and when needed. Today, coal stocks are also at a decent level. About 14 days of coal stock is there in the country as of now, which is much better than how it was last year. Besides, all the plants have been told not to conduct maintenance during this time.

Then HP-DAM will also be available. So together, I think we shall sail through this summer in a much more efficient way compared to last year.

IEX had to reduce its stake in Indian Gas Exchange (IGX). What is the status of that? Also, is there any plan to list IGX?

IEX’s stake in IGX is 47 percent as of now. There is no plan to divest further at this point in time. All the divestment that we have done so far, it was all strategic. We have partners like GAIL, ONGC, Indian Oil—all bigwigs of the gas sector. Also, as per the regulatory provisions, we have three years in which we have to reduce it to 25 percent. So at this point in time, we are not considering it. We will do it at an appropriate time.
A public offering for IGX is, again, a little far since we have a two-three years’ window available with us now.

Nearly two months ago (December 2022) IEX announced it was forming a subsidiary to get into the voluntary carbon market. How have things moved from then?

We see a lot of opportunity in this (carbon credit trading) space because all the big corporates, they have taken targets of net-zero. Some of them, they want to achieve X% of carbon neutrality by 2030 and all those targets have been taken by many of them. So, we see huge potential in the voluntary carbon credit space. Hence, last quarter we formed a wholly owned subsidiary company——International Carbon Exchange (ICX) —to explore business opportunities in this space. A few weeks back, we declared that IEX has become a carbon-neutral company. We want to facilitate those who want to achieve the same. They can buy carbon credits and then claim to be net-zero or at least start working in that direction.

Power exchanges currently constitute 7 percent of the total electricity consumption in India in terms of billing. For companies like IEX, which among the three power exchanges in the country as of now has 90 percent market share, how do you see the growth path?

Look, the biggest thing here is that the power demand increase is going to continue in the years to come. In January, our demand (India’s electricity demand) registered a 13 percent growth on a YoY (year-on-year) basis. And if I talk about the first 10 months, April to January, it is 10.5 percent more compared to last year. There are forecasts available that going forward, we can expect 6-6.5 percent demand increase annually. So when the demand increase is there and not many long-term power purchase agreements (PPAs) are being signed, we expect the exchange volume to grow because of the incremental demand which will come into the system. I think these are some of the things which are very positive.

How has the response been in the green day-ahead market (G-DAM), long-duration contracts (LDC) and the real-time market?
In the last two-three years, we have introduced many new contracts. It started with the launch of the real-time market which has become so popular that it is contributing more than 25 percent of our total electricity volume.

Next we introduced G-DAM, which is a step toward India’s goal of having 50 percent of electricity generation capacity from renewable sources by 2030. The share of G-DAM plus the conventional day-ahead market in IEX is over 7 percent. The YoY growth of our G-DAM segment has been 517 percent. But it won’t be just to compare this with the other segments because its volume is pretty small.

After that, we started cross-border trade and that is doing very well with Nepal and Bhutan. They are well-connected with us, taking advantage of this market, and selling when we need because they have huge hydropower generation. During our summer and monsoon seasons, they are the major sellers. When we have surplus during the winter season, they buy. So because of the diversity, each of the entities, whether we or them, they are taking full advantage of this market.
We launched LDCs in July, 2022 and we have received very good participation in this segment. In the last six-seven months, we have done more than reverse auctions. It has two types of products. One is a customisable product where there is one buyer and there we invite participation from multiple sellers. This is under the reverse auction. And then there are standardised contracts where you have multiple buyers and multiple sellers and it is done on the basis of open auction. In both segments, more so in the case of reverse auction, we have received phenomenal response.

But in real terms, conversion is not very high. We have done more than one billion units till now. The conversion is low despite huge participation because of high prices. These are all forward contracts and the price discovered on those platforms is generally more than Rs 7. There are very few cases where the price is between Rs 6 and Rs 7, but mostly it is above Rs 7. So conversion is a bit low. As the supply situation is improving, the conversion numbers are also gaining momentum and we expect this to improve, going forward.