IEX — earnings call

The transcript as filed. Every paragraph is addressable: its link names the page and the position it sits at in the call.

Prepared remarks

DIRECTOR –INDIAN ENERGY EXCHANGE · MR. ROHIT BAJAJ – EXECUTIVE DIRECTOR (NON-

MR. ROHIT BAJAJ – EXECUTIVE DIRECTOR (NON- BOARD), BUSINESS DEVELOPMENT AND STRATEGY – INDIAN ENERGY EXCHANGE MR. VINEET HARLALKA- CHIEF FINANCIAL OFFICER AND COMPANY SECRETARY –INDIAN ENERGY

EXCHANGE · MR. AMIT KUMAR – HEAD OF MARKET OPERATIONS

MR. AMIT KUMAR – HEAD OF MARKET OPERATIONS AND PRODUCT DEVELOPMENT –INDIAN ENERGY

MS. APARNA GARG – HEAD OF INVESTOR RELATIONS AND COMMUNICATIONS –INDIAN ENERGY EXCHANGE

Moderator · Conference Operator

MR. SUMIT KISHORE – AXIS CAPITAL Indian Energy Exchange Limited July 28, 2023

Ladies and gentlemen, good day, and welcome to the Indian Energy Exchange Q1 FY '24 Results Call hosted by Axis Capital Limited.

As a reminder, all participant lines will be in the listen- only mode, and there will be an opportunity for you to ask questions after the presentation concludes.

Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone.

Please note that this conference is being recorded.

I now hand the conference over to Mr. Sumit Kishore from Axis Capital.

Thank you, and over to you, sir.

Sumit Kishore

Thank you, Yusuf.

So good evening, ladies and gentlemen.

On behalf of Axis Capital, I'm

Questions and answers

HARLALKA · Research Analyst

“Indian Energy Exchange Limited Q1 FY ’24 Results Call” July 28, 2023

Moderator · Conference Operator

Our first question is from the line of Mohit Kumar from ICICI Securities.

Please go ahead.

Mohit Kumar

Thanks for the opportunity.

My first question is, sir, how does the Grid Code help us in increasing our volumes?

And secondly, you said that the arbitrage between DAC and DAM will go away.

Is that regulation finalized or when do we expect this to go away?

S.N. Goel

So, Grid Code is expected to be implemented from 1st of October.

That is what we hear, but the date is yet to be notified.

See, as per the new Grid Code, there are certain changes in the scheduling mechanism.

Now, generator will have to give the schedule on day ahead basis and based on that, all beneficiaries will have to give the schedule on a day ahead basis.

And whatever URS power is left, that power now can be sold by generator in the Day Ahead Market without taking consent of the beneficiary.

This is a very, very important new change which has been introduced.

Earlier, the consent of the beneficiaries were required.

Now, it is no more required.

And if the power is sold in the Day Ahead Market, then beneficiary cannot revise the schedule to that extent.

This is one.

Second is, in case generator has given schedule and generator has given DC (declared capacity) and that has been scheduled by the beneficiary and during the day if there is some problem in the generating unit and generation is lower, then generator can make good that generation by purchasing power through the market.

This is another important provision, which has been made now.

Earlier generators were allowed to purchase power only in the event of outage.

Now they can purchase power even in the event when generation is low on account of some technical reason.

And these are 2 important provisions which will, I'm sure help exchanges to improve their volumes.

Indian Energy Exchange Limited July 28, 2023 And as far as arbitrage is concerned, the transmission charge sharing regulations were notified last year, but they also will get implemented along with the Grid Code.

And as per the new transmission charge sharing regulation, sellers are not required to pay any transmission charges.

So, it is only buyer and in case of buyer also, if the purchase is within the GNA, no additional charges are to be paid.

And if the purchase is beyond the GNA, then only the charges are applicable.

And in fact, in case of the Day Ahead Market and RTM market - the collective transactions, the charges will be calculated on post-facto basis after considering the GNA, T-GNA and all transactions scheduled during the day.

And thereafter, if there is some T-GNA required, that will have to be taken for the beneficiary.

So this is a very positive development for the exchanges, at least, for the collective transactions.

Mohit Kumar

Understood, Sir.

My second question is, what is the timeline for launching voluntary carbon credit markets and when we expect the mandatory carbon credit market to be functional?

S.N. Goel

The voluntary carbon market, we are planning to do it within this financial year.

We are working on that, in the process of developing the software and also analyzing the market opportunities.

Hopefully within this financial year, we'll launch that.

Mandatory carbon market, that is something which BEE is working on that.

They have now notified their regulations that they will be -- I mean, how this will be done.

But I think detailed procedures, everything is yet to be notified.

In fact for the mandatory market, they will have to identify the sectors where it will be first applied and also the parameters for compliance of the carbon emissions and if there is a non-compliance, and what is the treatment of that, who will get certificates and who will have to buy certificates.

So, all those things are yet to be notified.

The only thing is that these carbon credits for the mandatory market will be traded in the existing exchanges and CERC will be the regulator for that.

Mohit Kumar

Understood, Sir.

Thank You Mr.Goel.

Thank You.

Moderator · Conference Operator

The next question is from the line of Vikash Jain from Financial Quotient.

Hi!

Good evening Mr. Goel.

Thank you for letting me ask this question.

The recent development that happened about the market coupling and I got an update from IEX Management that in the current scenario the market coupling may not be something which government should be considering due to the market dynamics which operate in 1 given country, it is something which should be considered between 2 countries or between multiple countries.

So I just wanted to hear your insights furthermore that how IEX's future looks like if the market coupling and all is implemented and what are the chances that the market coupling gets implemented along with MBED, and what are the pros and cons for IEX?

I just wanted to hear some insights from you, sir.

Thank you.

Indian Energy Exchange Limited July 28, 2023

S.N. Goel

As I told earlier also, market design is something which the regulator has to decide about.

Government via their 2nd June letter has requested CERC to consider market coupling and initiate the process of discussions with the stakeholders.

Now, I'm sure CERC will do detailed analysis about the market coupling, whether market coupling in the present market framework is relevant, is it required, what kind of benefits it will bring to the market, to the consumers, and based on that they will initiate the process, if it all it is required.

So, it is too early to say for me whether market coupling will be implemented or not implemented.

But I'm sure after examining all these things, if it is something which is good for the market, good for the consumers, yes, that would be done.

But based on our understanding, in the current scenario where in India we have voluntary market and the transactions through the Exchange is just about 6%, 7%, there is no case for the market coupling.

And we have seen in the other part of the world, I mean market coupling happening in Europe.

And there, they have done coupling of different markets, different countries, geographical different markets.

They have coupled 27 different countries and made one market.

And in that market, they are transacting almost about 1,600 billion units of power.

They have taken advantage of diversity in the demand and supply of different countries.

So, there was a reason for doing the market coupling there.

In U.K., there are 2 exchanges operating.

And in both exchanges, there is no market coupling.

So, we haven't come across a situation where market coupling of exchanges was done -- just for exchanges was done, when the exchanges were operating in the same geography.

So I'm sure regulator will look into all these things.

So, it is too early to say anything beyond that.

Thank you so much.

Another thing that I just wanted to understand from you, sir, about our business in IGX and ICX.

Any tentative timelines by when our businesses would have a meaningful revenue contribution to overall top line and bottom line, sir?

S.N. Goel

IGX, last year the business was good.

IGX made almost a profit of almost about INR28 crores last year.

And this year, the first quarter was not that good, but I'm sure the things will pick up in the subsequent quarters, month of July has been definitely much better than the first quarter.

But again in the gas market, it is very high volatility at present.

World over, with the way gas supply positions and the prices are, there is a lot of volatility and because of that, we are also seeing on the Exchange platform, it is very difficult to make any assessment for the next 4, 5 years.

But I am sure about one thing that gas exchanges, as I have always mentioned, that will definitely do as good as IEX.

And if you look at the profit of IEX for the second year and what IGX has done, they are almost similar.

So, in future also I am expecting IGX to do much better.

And we expect a similar kind of EBITDA and margins coming from these businesses?

S.N. Goel

Yes, yes.

IGX, yes.

ICX, International Carbon Exchange, we are yet to launch that and when we launch that and get into the market, then we will see what kind of opportunities are there in that.

Thank you so much for answering my questions, sir.

I've been a shareholder with IEX since IPO, and I'm a happy shareholder and having vision for next 10 years.

Indian Energy Exchange Limited July 28, 2023

Moderator · Conference Operator

Next question is from the line of Devesh Agarwal from IIFL Securities.

Please go ahead.

Devesh Agarwal

Just two questions.

First, you did mention multiple drivers which could improve the overall volume growth on the power side.

Any target that you have in terms of what could be the full- year volume growth in FY '24 for us?

That is one.

And secondly, you talked about Ancillary Services starting from June both DAM and RTM.

Some more information about them and the likely revenue potential from those new products?

S.N. Goel

Yes.

See, our first quarter volume growth has been almost about 8%.

Month of July so far has been very good.

I think it's almost about 20% volume growth so far.

So I'm expecting that by the end of the year we should have a volume growth of at least about 15%, but then in exchange market, it is very difficult to estimate these things.

It all depends on the demand and supply and availability of the coal.

So if everything goes well, because you know first quarter you have seen the demand increase only by 1.8% whereas we were expecting demand increase of almost about 8%, 9%.

So, it all depends on these external factors, but we are quite optimistic about the volume growth.

And second is, volume opportunity because of ancillary market.

Ancillary market is basically - - in an energy deficient country, volume in ancillary market is not expected to be very high.

So, the market has been introduced as per the direction of the Regulatory Commission, but so far there is absolutely no volume in this.

No transactions in this market because whatever power is available, generators are scheduling it in the energy market only.

Devesh Agarwal

Understood Sir.

Thank You.

Moderator · Conference Operator

Next question is from the line of Nikhil from Bernstein.

Please go ahead.

Nikhil

Thank you for the opportunity.

The first question I had, Mr. Goel, was on the Grid Code.

I think the URS power sale, if allowed, will be a good move for the market.

Just wanted to understand; A, timelines of this.

I think I've missed it, if it was discussed on the call earlier; and B, whether it'll require any changes to existing PPAs or even without that it can be done?

S.N. Goel

Timeline for implementation of Grid Code as I've told you, we are hearing that it may get implemented from 1st of October, but no timeline has been notified so far because NLDC has to finalize some procedures and they have to do some software tweaking.

They are working on that.

So based on that, our expectation is 1st of October.

And for selling URS power through the Exchange, no change in the PPA is require.

Grid Code supersedes all PPAs.

The scheduling mechanism indicated in the Grid Code supersedes the PPA.

And as per that, the generators will be now free to sell URS power on the Exchange platform.

Nikhil

Got it.

That's helpful Mr. Goel.

The second question I had was then on the other point you made after GNA, the contingency market volume will move to collective bids.

Just wanted to understand from a competitor standpoint, the competitor Exchanges largely operate in the Indian Energy Exchange Limited July 28, 2023 contingency market.

So, for them, will they will not be able to sustain, do you think, without something like coupling coming in, if even DAC volume moves to DAM/RTM?

S.N. Goel

See, the point is, today, if you look at 5 years back, Day Ahead Market was constituting just 95% of the volume transactions through the Exchange.

Today, Day Ahead Market is constituting only 50%.

So, there are lot many new products which have been introduced in the market in the last 2, 3 years.

We have Day Ahead Market, we have RTM market, we have Day Ahead Contingency, we have Term Ahead Market, we have Long Duration Contracts, Contracts for Delivery up to 90 days now.

That also can get extended to delivery up to 1 year.

So, I think there are many opportunities for the other exchanges to also pick up their volume.

So, it is up to them.

And if you look at the long duration contracts for delivery up to 1 year, the volume transactions happening in the market is something about 40 billion, 50 billion units.

And that's the market size, which is available.

Nikhil

Understood, Sir.

Thank you for answering my questions and good to see the good volumes in July.

Moderator · Conference Operator

The next question is from the line of Mr. Sumit Kishore from Axis Capital Limited.

Sumit Kishore

The first one is assuming that market coupling happens and the exchanges don't discover prices directly, what will the exchanges do?

So, what is the incentive for individual exchanges to invest in coming out with new products if everyone is discovering the same price for a given time slot?

S.N. Goel

You asked a very relevant question, but I have no answer to that.

The point is, the role of the Exchange has been defined in the PMR.

And as per the PMR, Exchanges are associated with a price discovery.

And if they're not doing price discovery, will they be called as Exchange or something else?

I don't know that.

So I'm sure all these aspects will be examined by the regulators before taking the next step.

Sumit Kishore

The Contract for Difference are a very promising step forward for deepening the exchange markets, what is the expectation, how many gigawatts can happen over the next 1 year and next 2 years?

S.N. Goel

See, Contract for Difference is now being considered by the government.

One is for the renewable generation capacity addition.

If you recall, in the earlier earnings call also we have been always saying that other countries, they have very efficiently used CfD model for renewable capacity addition.

U.K. has added almost about 30 gigawatt of capacity through this.

Similar cases in case of Germany and other European countries.

So, in India also, because otherwise there is lot of delay in signing the PPAs, thereafter scheduling the power and then getting the payments.

So, if you do through the market, then all these problems are over.

So, government is first now considering 1,000 megawatt capacity addition through the CfD model where one of the nodal agency will issue the tender and contract that capacity at a fixed price.

Indian Energy Exchange Limited July 28, 2023 Generator will get the fixed price and that capacity will be sold in the market.

And whatever is the difference in the price between the market price and the strike price under the PPAs, that will have to be taken care by the nodal agency.

Expectation is that nodal agency will be able to in fact make money out of the process.

Based on the results of the first 1,000 megawatt, maybe they will contract additional 4,-5,000 megawatts in the next subsequent years.

And this is basically pilot projects, showcasing a project for the market, so that other developers can also setup capacity for this model.

And in fact the CFD model is also now being considered for ensuring additional generation capacity during the peak hours.

If you recall, this year, Government of India, they had invited bids for purchasing imported coal-based power during the summer peak -- for meeting demand in the summer peak time.

And they said that whatever rates are achieved by them, the generators will be selling the power in the Day Ahead Market and difference in the price between the Day Ahead Market and the price quoted by them will be borne by the government.

Similarly, they also contracted gas-based capacities for meeting the peak hour demand.

They also in fact identified 5,000 megawatt of NTPC and Ratnagiri capacity to be utilized under the peak hours under the CfD model.

So, CfD model is now being used extensively for bringing more liquidity in the market.

And this is a welcome step.

We have been working on this from the last couple of years and finally, we see that, yes it is happening.

This year we could not see any benefit of that because, by grace of God, month of April and May were very, very cool months and there was no crisis of power.

So, this gas-based capacities and imported coal-based capacities under the CfD model were not put to use.

Sumit Kishore

Sure.

Just one last question.

IGX, would it be right to think that LNG prices have come off, should there be any correlation in ramp-up of local gas consumption and a pickup in IGX volumes in FY '24 versus FY '23?

S.N. Goel

See, the immediate effect of cooling of gas prices has been, number 1, this year domestic gas production has increased.

Second is, because of the lower gas prices, GAIL had some long-term contracts and under those contracts because of the high gas price, they were not getting the full gas supplies.

And in fact, maybe some of those suppliers were selling that gas in the European markets at high price.

But now they have started supplying the gas.

In fact, the backlog quantity is also getting supplied.

So there is enough of gas available under the long-term and medium-term contracts.

And that is why the demand in the market is comparatively lower.

But, going forward, when the gas prices are lower, I'm sure the import will increase and transactions to the market will also happen.

So, that should be a good thing for the market.

Sumit Kishore

Thank you and wish you all the best.

Moderator · Conference Operator

Next question is from the line of Apoorva Bahadur from Goldman Sachs.

Please go ahead.

Indian Energy Exchange Limited July 28, 2023

Apoorva Bahadur

Hi Sir!

Thank you for the opportunity.

Wanted to understand what's our right to win in the carbon credit exchange.

I believe NSE is also looking to enter this?

S.N. Goel

See, IEX, we have the experience of running a spot exchange for last 15 years.

We incorporated gas exchange that is also working satisfactorily efficiently from the last 3 years.

So, we understand this market, we have good connect with the market participants.

We have today more than 7,000 market participants who are registered with us in the power exchange, and large number in the gas exchange also.

So, we have reach with this market participants and that is our strength.

I'm sure with this and our expertise of the operating exchange, we should be able to get good market share in the carbon market.

Apoorva Bahadur

And sir, you expect the margins to be as lucrative as the current business?

S.N. Goel

Carbon market, I think let us first launch it, let us see what the market is and maybe after 1 or 2 years of that, we will able to say something about the margin and profits.

At the moment, we are in the process of creating a platform and launching the exchange and then maybe initially for a couple of months we will have to do all promotional activities and see the response of the market thereafter.

Apoorva Bahadur

Sure Sir.

Secondly, I believe you are expecting like 15% type of volume growth year-on-year.

It would be very helpful if you can sort of provide a breakup, product wise, for this 15% growth.

So which segments do you expect to grow?

S.N. Goel

No, see, I just told you 15% growth is our expectation based on the projected demand and supply position.

And again, product wise, giving breakup is going to be difficult, because it depends on the market conditions.

But our Day Ahead Market and RTM market, definitely these are flagship products and the large volume growth is going to come from these 2 segments.

And thereafter, even long duration contract volumes are also picking up.

So that will be the next.

Green market, volume is increasing but not in a significant -- definitely, the increase is going to be more than 15%, but not significant volume growth.

Apoorva Bahadur

Sir, why hasn't really the long duration product really picked up?

We are still seeing lot of bilateral transactions which ideally, I think, should have shifted to this product?

What's holding it back?

S.N. Goel

Whatever volume we did in last year, we have done the same amount of volume in the first quarter.

So the volumes are increasing in the long-duration contract in that segment.

And we are expecting this year, more than 5 billion units in the long-duration contract segment.

And the shift from the bilateral to the exchange transactions will need some time.

For every new product, market participants they normally try that, see what kind of benefit they're getting from that, is the price more competitive here or that payment terms are more competitive in other markets.

So, they will have to assess all these things and then decide.

I think in every market, the shifting happens gradually.

Apoorva Bahadur

Fair enough Sir.

Thank You so much.

All the best Indian Energy Exchange Limited July 28, 2023

Moderator · Conference Operator

Thank you.

Next question is from the line of Bharani Vijay Kumar from Spark Capital.

Bharani Vijay Kumar

I just want to know what would be the approximate number of participants on a daily basis transacting in the important Day Ahead and the Real Time market.

Though we would have many registered participants, what is the, like the average number of participants transacting through Day Ahead and Real Time markets?

S.N. Goel

Earlier, number of participants used to be very high.

As far as distribution companies and generators are concerned, their participation is limited.

Distribution companies, we have almost about 50 distribution companies and generators maybe 400, 500.

But earlier open access consumers, industrial consumers and commercial consumers, they were participating in a big way when the clearing price used to be low.

But from the last 2 years, the clearing prices have increased and the viability for the open access has slightly reduced.

That is why the participations have reduced now.

And average number these days is something around 600 and 700.

Rohit Bajaj

So, total registered participants are close to 1,500.

So it is dependent on price.

As the price will come down, we will see this number going further up.

So these 1,500 are active participants.

S.N. Goel

So, overall registered is more than 7,000, out of that active are 1,500.

Moderator · Conference Operator

Seems that we have lost the connection from the current participant.

We'll move to our next question from the line of Saaksha Mantoo from Old Bridge Capital.

Saaksha Mantoo

So, most of my questions have been answered, just one on account.

There is a spike in the other expenses that we see this time around of around INR12.6 crores in total.

Could you just explain like, is there any one-off that we are seeing here or this is a regular run rate?

HARLALKA · Research Analyst

If you look at the quarter 1 numbers, normally what happens, we book the CSR expenses during the quarter 1, which is tune of around INR7 crores.

So this is the one-time expenses of CSR mainly which impacted the number.

Going forward, we look at in the range of INR5 crores, INR7.5 crores during the quarter.

Saaksha Mantoo

Okay.

So, you mentioned INR7 crores is CSR out of this INR12.6 crores?

HARLALKA · Research Analyst

About it.

It's rounded off.

That is the number, and few other one-time expenses.

So going forward...

S.N. Goel

We did 15 years' celebration this year, as we completed 15 years on 28th of June, we had celebration for that.

We had organized an event for the special participants.

And then the CSR, entire obligation for the full year has been already booked in the first quarter itself.

So the total amount is about INR7.5 crores.

This amount will not appear in the subsequent quarters.

Saaksha Mantoo

Got it.

Thank you so much.

That’s all from my side.

Moderator · Conference Operator

Next question is from the line of Nikhil Abhyankar from ICICI Securities.

Indian Energy Exchange Limited July 28, 2023

Nikhil Abhyankar

Just a follow-up on the earlier question, Sir.

Should we expect similar levels of other income as well going forward.

Quarter-on-quarter it is flat, but y-o-y, it is 40% jump?

HARLALKA · Research Analyst

Yes, it is in -- hopefully, it will remain same, but it's mainly dependent upon how the RBI look at it.

If there is a significant cut from the interest rate by the RBI, it will definitely going to come down.

But looking at the current scenario, we hope for this year that this will maintain the same.

Nikhil Abhyankar

Sure.

Sir, and earlier you mentioned about 1,000 megawatt of RE CfD contracts.

So, what should be the expected timeline for it?

S.N. Goel

I think there are activities happening on that.

So, nodal agency will have to come out with the tender for purchase of the power.

Maybe this year, at least all these activities should be over.

That is what we understand.

Nikhil Abhyankar

So, the additional 4 to 5 gigawatt will be from next year?

S.N. Goel

Yes, this year 1,000 megawatt and next year maybe another 4,-5,000 megawatts.

Nikhil Abhyankar

Okay.

And sir, any progress on other product additions like capacity market and derivatives?

S.N. Goel

Capacity market, I mean CEA has come out with the paper for capacity building in this sector and adequate resource planning.

I think it is too early to talk about the capacity market because capacity market is going to be mandatory market, the framework will have to be developed for that.

So, we are also working on that.

And derivative market is, again, that market will be introduced on the SEBI regulated exchanges.

So -- but once that is introduced that will also help the spot market.

So, we are also actively working with the regulator to ensure early start of this derivative market.

But difficult to say any date on that.

Nikhil Abhyankar

Okay Sir.

That’s all from my side.

Thank you.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, this was the last question for the day.

I would now like to hand over the conference over to the management for the closing comments.

S.N. Goel

Thank you, friends.

I would like to thank each one of you for being part of today's call.

During the quarter, we have witnessed a lot of initiatives announced by government and the regulators towards creating a favorable policy and regulatory environment to transform the energy sector.

We remain committed in doing our bit towards building a sustainable and efficient energy future.

Thank you all.

Moderator · Conference Operator

Thank you.

On behalf of Axis Capital Limited, that concludes this conference.

Thank you for joining us, and you may now disconnect your lines.