IEX Ltd: Regulatory risk dilutes; volumes recovering

14 Feb 2024 , 12:40 PM

Analysts of IIFL Capital Services hosted Indian Energy Exchange (IEX) at IIFL’s Investor Conference in Mumbai. Management believes that the recent CERC order takes off the risk of implementation of just market coupling as it does not find any merit in it. Further, coupling of RTM market with SCED is likely to see lot of operational challenges and would be difficult to implement. However clarity on this would emerge only after pilot studies by Grid India. Ex of regulatory concern, mgmt. shared that underlying business is seeing a recovery in volumes driven by strong power demand and improving supplies. 

Risk of market coupling diluted: 

Mr. S N Goel, CMD, shared that CERC in its latest order mentioned that market coupling on its own does not have merit given little economic advantage. Management sees this as a big positive as it put to rest the uncertainty around implementation of pure market coupling. However CERC asked Grid-India to undertake a study to see if coupling of RTM market with SCED would unlock value. While benefits of coupling RTM and SCED is yet to be proven (Grid India is given 6 months to complete this study); management believes its implementation would pose challenges such as financial settlement of transaction between different exchanges. Further, operating RTM markets separately will entail additional margin requirements for participants. Thus, even if approved, actual implementation may take much longer. Also, with no risk to DAM – the coupling of RTM and SCED segment will impact 25-30% of IEX’s volumes. 

Volume growth to improve as supply increases: 

Implementation of GNA regulations has aided volumes growth in DAM segment; where IEX has >99% market share. IEX’ expects power demand to grow at 8-9% over medium term. Lower international coal and natural gas prices are likely to ease supply situation in near term. Additionally, new 20,000 MW of coal based capacity is likely to be commissioned in FY25 driving further volume growth on exchanges. IEX’ expects exchange volumes to grow at 15% pa over next 2-3 years. 

Other Highlights:

1) CERC has no intention to regulate exchange trading charges. 2) IEX enjoys >99% market share in collective markets (75% volumes) and 90% in total volumes. 3) Charges on Gas Exchange – Rs8/ mmbtu (both sides) excl. delivery and Rs10/mmbtu with delivery.