Q&A with S N Goel, Chairman & MD, Indian Energy ExchangeIndia’s largestpowerexchangeIndian Energy Exchange(IEX) is preparing to boost the share of renewable energy in its trading volumes and also diversifying into newer areas like the Carbon Markets and Coal trading, Chairman and MD S N Goel tells ETEnergyworld in an exclusive interview. Edited excerpts..
IEX has been the largest power exchange in the country for 14 years now. How do you view this journey and where do you think the platform stands today?
IEX has come a long way since it started operations in 2008. It provides a platform for trading of electricity, green energy, renewable energy certificates and also energy saving certificates. Currently our market share is around 90 per cent. We have over 7,000 participants that include all the discoms, 600 generators, 4,500 commercial and industrial consumers and more than 1,500 renewable energy participants. We achieved more than 100 BUs of electricity trade last year and have achieved a growth of 33 per cent CAGR since inception. When we started in 2008 there was only one product – the day ahead market where power is purchased today for delivery tomorrow and each day is divided in 96 time blocks. Today, we have around 13 contracts in various market segments, including Day Ahead Market, that also covers cross-border trade; Real-time Market which was started two years back and helps in renewable energy integration; Green Energy market where generators get a green premium. We also have Day Ahead Contingency market and also long duration contracts which were introduced as recently as July. So, our offerings to the customers are expanding as the market expands.
How have these products performed over time?We have been constantly innovating and introducing new contracts based on the feedback from the customers. We have witnessed very good participation in the green market which was started last year. TheReal Time Marketis also doing well and is contributing 20-25 per cent of our volumes. The cross border trade on the exchange was started last year in April. Bhutan and Nepal are already doing transactions and Bangladesh is likely to join soon. With this we have now created a South Asia regional electricity market. It had been under discussion for 5-6 years but has now become a reality. The competitive power price that is getting discovered at our platform is setting a benchmark for the entire power sector. This is also serving the purpose of boosting capacity addition. If the price discovered in the exchange is high, it indicates there is supply shortage and acts as a signal for adding generation capacity. Exchange transactions in the past have also provided a signal for transmission capacity addition. Earlier there used to be a lot of grid congestion that used to lead to market splitting. That has changed now.
There is a view that the Indian economy has done very well in the past some time. That should ideally reflect in the data for power demand and also the volume of power trade happening at the exchanges. Have you seen that happening?The data for the last 14 years since the inception of IEX shows that we have grown at a CAGR of 33 per cent. In the last five years, our growth has been around 20 per cent CAGR, and the last two years data shows we have grown at a 35 per cent CAGR. Two factors have helped us achieve this – Discoms preferring to buy power from the exchange due to the Covid-led uncertainty in demand and the introduction of new products. Currently, demand growth is happening but not many long-term PPAs are being signed. So, a good share of the incremental demand is coming to the market. When the GDP grows at a rate of 7-8 per cent, electricity consumption grows at a rate of 6-7 per cent. The electrification of the economy — with the focus on electric cooking, electric vehicles and electric traction — is helping grow renewable power and at the same time leading to increased power demand. The CEA has projected a demand growth of 7.2 per cent over the next five years. Such a scenario presents a very good opportunity for the growth of the power market.
What has been the trend of trading volume growth in the current financial year?This year, because of the revival in the economy, power demand has grown by 10-11 per cent but there have been a few challenges. We have around 20,000 MW of imported coal-based capacity and coal prices have risen 4-5 times. The variable cost of power generated using imported coal is around Rs 8-9 per unit. So, many of these plants are not operating. Same is the case with gas-based generation capacity. Hence, the dependence on domestic coal-based plants has gone up and more domestic coal has been supplied to plants with long term PPAs. Also, the coal available via the e-auction route was less and coal prices rose by 350-400 per cent. So, the price at which generators are selling power on the exchange has increased. Because of the limited power purchase ability of discoms, their purchase from the exchange has also reduced. We have around 4,500 open access consumers too who buy from us to optimize their procurement cost but when the IEX rate is high, their purchase also reduces. Because of these factors, in the first six months of this year, the volume of power traded at IEX has been flat. The price is around 180 per cent more than the last year’s level. I think post October, with the onset of the winter season, the power demand will go down. Coal production generally rises in this period. That will lead to moderation in coal demand and low e-auction rates.
Has the flat nature of volume this year impacted profitability?Last year (2021-22), our PAT grew by almost 50 per cent over 2020-21. The profit in 2020-21 was also around 20-25 per cent more than 2019-20. This is because there is a direct correlation between our volume growth and profitability. The transaction fee charged by us, 2 paisa on either side of the trade, has remained the same. This year so far, because the volumes have been flat, the profit also has been flat.
Do you think there is a case for the revision of the two paisa transaction fee now?The transaction fee has not changed in the last 12 years, whereas a lot of investment is happening for the introduction of new products and technology in the market. I think the 2 paisa transaction fee is nothing in comparison to the value the exchange is providing. New regulations require us to take regulatory approval for the fees being charged, and we have filed a petition for, charging 2 paisa on either side.
One of the main objectives the government has tried to achieve in the power sector is to increase the share of short-term power trade, and the trade happening through exchanges, in the overall power sale in the country. Has that happened?Transactions through the exchange used to account for 2.5-3 per cent of the total electricity sales ten years back. Currently, that number is around 7.5 per cent. So, it has grown significantly. The actual number, in terms of volume, is very high because the overall power consumption in the country has also grown at a rate of 5 per cent during this time. The share of exchange transactions in India is still very low as compared to the scenario in the European power markets because of structural issues. However, we expect exchange volumes to continue to grow significantly in the future because of the huge value it brings for the buyers. In the past ten years, thanks to competitive price and availability of liquidity in the market, the average price discovered at the exchange has been 74 paise lower than the price in the alternative mode of transaction, for example, the bilateral market.
How do you visualize the ongoing energy transition impacting business for IEX?This is a big opportunity for the exchange. Because of renewables, there is a large variation in supply. It is not possible to forecast these variations accurately. This issue brings the need for a technology platform where these variations can be managed on a real time basis. A power exchange can very efficiently integrate renewable energy with conventional power. The distributed power that gets available from solar — for example in the case of rooftop solar plants — can be sold in the daytime when its demand is low. That is where a technology platform like an exchange comes in.
When it comes to planning for future growth what are some of the top ideas being evaluated?IEX is well positioned to leverage the huge opportunities created by the massive transformation in the global and Indian energy sector. We will continue to pursue these opportunities in the present Power Markets and fortify its position in the current products, such as GDAM and GTAM in Green Markets, and increase volumes in the existing products. We will evaluate foray into adjacencies and launch new products, such as Ancillary Market and Capacity Markets. Indian Gas Exchange, our first diversification initiative, is growing strength to strength. The Government of India’s ambition to increase the share of Gas from 6% to 15% by 2030 in the overall energy basket presents a huge potential for IGX. We will continue to explore other opportunities in the energy marketplace. We are encouraged with the Government’s idea of establishing a Coal Exchange. Similarly, the provision of setting up a carbon market in the country as per the Energy Conservation Act 2022, provides us the opportunity to set up a Carbon Exchange in the country. IEX will continue to harness technology and innovation to facilitate the nation’s energy transition towards carbon neutrality.
