IEX Power Exchange – Inflection Point?

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In 2019, the total consumed electricity in India was 1267 billion units which can be categorized in two ways:

1. Long term PPA (Power purchase agreement)

  • For 25 years, between fixed buyers & sellers
  • Pays fixed fee and variable pay on consumed energy unit
  • 89% market share

2. Short term market

  • Less than 1 year
  • Further categorized in
  • Bi-lateral (5%)
  • Buyers & Sellers are identified beforehand & the prices are decided by negotiation
  • Power exchange (4%)
  • A platform on which buyers and sellers come together to transact just like the stock market
  • The aims are to retrieve the excess generation from the surplus region and transmit to a deficit region at a market-clearing price (MCP)
  • IEX (power exchange with 97% market share) charges 2 paise/ unit from the buyer and 2 paise/ unit from the seller
  • Another competitor is PXIL
  • DSM & others (2%)
  • Deviation settlement mechanism, injecting power (the equivalent of selling, causes the frequency to rise) or drawing power (the equivalent of buying, causes the frequency to decrease) directly from the grid
  • High penalty charges, losing market share as IEX has launched RTM (real-time market)

Why Inflection point?

In December 2018 CERC came with an article for implementing MBED

Link: http://www.cercind.gov.in/2018/draft_reg/DP31.pdf

The MBED (market-based economic dispatch) proposes to shift the entire volume of the power sold in the country onto the exchange platform. In this case, volume growth in power exchange will be unimaginable.

However, in July 2020 CERC introduced a new concept ‘Market Coupling’.

It is a process of collecting bids from all the power exchanges and matching them to discover a uniform market clearing price.

The job will be carried on by a ‘Market Coupling Operator’, an entity to be notified by the regulator.

Read more at: https://economictimes.indiatimes.com/industry/energy/power/indian-power-regulator-proposes-uniform-price-discovery-through-pooling-of-bids/articleshow/77056461.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst

The moat of IEX is it is almost monopoly in power exchange (competitor PXIL has tiny market share less than 3%) as buyers can’t go to any competitor as sellers aren’t available there and the same logic is true why sellers can’t go to competitors just like MCX/NSE.

But with market coupling, this monopoly gets killed.

Now, the market coupling operator will work like NSE platform and IEX will work as a stockbroker like ICICI securities.

Now a new competitor may come and introduce lower commission (like Zerodha) and gain market share.

There is a probable scenario that may start playing out after 18 months and slowly all long term PPA volume starts coming to exchange.

Risks:

  1. If the only market coupling is implemented whereas MBED gets stuck, it will be terrible for IEX as competitors may gain share.
  2. Currently, IEX earns 4 paise per unit of the transaction (2 paise from buyer & 2 paise from the seller). Currently, this is regulated by CERC and never changed since its inception (12 years). However, there is a high probability this margin may get reduced which will proportionally hurt the revenue of IEX.
  3. The regulations, implementation philosophy, timeline, etc are not clear yet and there is a lot of unknown. It is too early to take investment bet assuming implementation of MBED & volume gain by the exchange

Brief Highlights of IEX:

IEX is a debt-free cash printing machine with negative working capital.

It does not need much capital (ROCE 65%) to grow and it does not have much expense apart from employee & software expenses (EBITDA margin 80%).

It is consistently gaining market share, for example, in June quarter, FY2021 Electricity demand in India degrew 16% but volume in IEX grew 14.5%.

Profit & Revenue CAGR:

Other potential opportunities of IEX like REC/green energy/Gas exchange (subsidiary) or the introduction of the forward & derivative market have not been discussed here.

This article is only for education purpose, it is not any kind of stock recommendation.

Cover Image: Business Standard

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Swarnashish Chatterjee
Equity Investor | Loves Playing Chess & Bridge | Solves Rubik's Cube Under 15 Seconds | BARC & IISC Drop Out
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