Good day, ladies and gentlemen, and welcome to the Q2 FY23 earnings conference call of Indian Energy Exchange 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 Limited. Thank you, and over to you, sir.
Thank you, Michelle.
On behalf of Axis Capital, I'm pleased to welcome you all for the Indian Energy Exchange Q2 FY 2023 earnings conference call.
We have with us the management team of IEX, which is represented by Mr. Satyanarayan Goel, Chairman and Managing Director, Mr. Vineet Harlalka, CFO, Mr. Rohit Bajaj, Head Business Development, and Ms. Aparna Garg, Lead Investor Relations. We will begin with the opening remarks from Mr. Goel, followed by an interactive Q&A session.
Over to you, sir.
Good afternoon, friends, and welcome to the earnings call for quarter two of financial year 2023.
Joining me today are Mr. Vineet Harlalka, our CFO and Company Secretary, Mr. Amit Kumar, Head of Market Operation and Product Development, Mr. Sangh Gautam, CTO, Mr. Sameep Prakash, CRO, Mr. Aparna Garg, Head of Investor Relations and Communication, and Mr. Archit Gupta. Friends, India has recently surpassed U.K. to become the world's sixth largest economy and is now steadily heading towards becoming a $5 trillion economy.
Further, the Indian economy continues to gain traction and is expected to become the third largest by the end of this year. On the quarterly economic update, despite the global headwind, the manufacturing PMI stood at 55.1 in September 2022 and 56.2 in August 2022.
The services PMI was 54.3 in September 2022 and 57.2 in August 2022. The services PMI indicated a 13 straight month of expansion in the month of August 2022. We witnessed a mild reduction in PMI in September as compared to August due to subdued increase in orders and increase in input costs. For FY 2023, the Indian economy is expected to grow by 6.8% as per IMF projections.
During the quarter, the electricity consumption was 385 billion units, which was almost about 6% growth on year-on-year basis, and the surge in overall consumption was driven by the increase in economic activities. The total installed capacity as on September 30 stood at 408 GW, a yearly growth of 5% on year-on-year basis.
The renewable energy capacity is steadily growing and is today almost about 165 GW, which is 40% of the total capacity. It is evident that the nation is advancing towards a carbon-neutral economy, and we will achieve 50% of clean energy share by 2030. Unfortunately, led by geopolitical disruptions, the global energy crisis continued in this quarter and resulting in high prices of e-auction coal, imported coal and imported gas.
During the quarter, while the prices of e-auction coal witnessed a lower increase of 293% on year-on-year basis as compared to increase of 376% in the quarter one, but it was still a very significant rise. Because of this, the cost of power was higher and the prices discovered in the exchange RTM at higher.
To manage the power prices, Government of India had reduced supply of coal to the e-auction and increased supply of coal to the PPA based power plants. The e-auction coal quantity declined by 63% on year-on-year basis to 17 million tonnes in the first five months of FY 2023. As a result of this, there was increase in the e-auction price and reduction in the availability of coal.
Therefore, the input cost increased, availability of power on the exchange platform was lower, and it resulted into higher prices on exchange platform. The prices were INR 5.40 during the Q2 against INR 4.40 in the Q2 of FY 2022. A large part of the sale volume, which is almost about 65%, was contributed by the distribution company.
As you are aware, the distribution company sell power after meeting the demand and the sale by them is from the power station. We are now witnessing a gradual improvement in the coal situation in India, and as the Government is progressively taking various initiatives to curb the increased input costs.
During the quarter, the domestic coal production increased by 10% on year-on-year basis, and the dispatch to the power sector increased by 11%, whereas generation has increased only by 6%. This has led to better inventory at the power plant. Further to cater to the increasing demand of coal and reduce dependency on the imported coal, Government has decided to further increase the domestic coal production to 1.2 billion tons by 2024. The improving coal situation is leading to an increase in power generation and thereby increasing sell-side liquidity on the exchange platform.
Our price during the first 10 days for the month of October is only INR 3.85 against 4.40 in the Q2. However, despite the substantial reduction in price, these prices still do not provide optimization cost for distribution company and purchase option for the distribution consumers. Going forward, we expect further correction in prices on the exchange, which will result in increased volume on the exchange platform.
As part of the government's thrust towards transforming the power sector in the country, several regulatory and policy reforms were implemented. Some of the noteworthy initiatives for this quarter are. Government notified the Late Payment Surcharge and Related Matters Rules, 2022. As per these rules, there is a provision for rationalization of late payment surcharge.
Further, a generating company is free to sell unrequisitioned power to the power exchange without obtaining consent of the beneficiary. I'm sure this will improve sell-side liquidity on the exchange platform. Further, ensuring timely payment by the distribution company to the seller will ensure financial discipline in the sector. Electricity (Amendment) Bill, 2022.
This bill was introduced in Parliament. As per the bill, there is a provision to introduce multiple distribution companies in the same area. I'm sure this will promote private participation in the distribution sector, which will improve financial health of the distribution sector, and that will be good for the development of the market. The Ministry of Power issued proposal for high price day-ahead market, which is HP-DAM market segment, which will facilitate investors with a high variable cost exceeding INR 12 per unit to participate in this exchange market.
This will ensure availability of power during high demand period, even at slightly higher cost. The market is expected to be launched within next one month time. Draft Electricity (Amendment) Rules, 2022. The proposal seeks procurement of renewable energy through a central pool mechanism. The proposal also includes the framing of resource adequacy guidelines for central government to create opportunities for introduction of capacity market. Energy Conservation (Amendment) Act, 2022.
This amendment aims to establish a carbon market in the country and has already been passed by the Lok Sabha. CERC also notified GNA regulations during the quarter, issued draft sharing regulations and draft grid code.
These are expected to be finalized in the month of October, November. In this regard, hearing have already been held. I'm sure the final documents will be issued shortly.
GNA is expected to be implemented from first of January 2023. Implementation of GNA will be more conducive towards market development within the country. All these initiatives will go a long way in creation of conducive environment for the power market in general and will contribute significantly towards deepening the exchange market in the country.
Coming to IEX update. During quarter two of FY 2023, IEX achieved 23.121 billion units of volume, of which 19.73 billion units is from the conventional market, 1.47 billion units from the green market, and we have 19.1 lakh certificates, which is equivalent to almost about 1.9 billion units. During the quarter, total volume declined by 11% on year-on-year basis.
However, during first half of this year, the volume decline was marginal, which was by 2% with respect to first half of the last year. The volume decline was mainly on account of the supply side disruptions.
On a standalone basis, revenue for Q2 was INR 113.8 crores, a decline of 6% on year-on-year basis. The PAT declined by 10.3% on year-on-year basis to INR 70.1 crores with a margin of 61.6%. However, revenue is flat and PAT increased by 2.1% on quarter-on-quarter basis. The timely intervention of the Indian government to raise the domestic production of coal has drastically improved the coal inventory.
With the rationalization of power prices on the exchange, the volumes are expected to improve further, and we expect to end the fiscal year on a stronger note. With the customer centricity at the core of our operations, we continue to improve the customer experience on our platform. In addition to enabling flexibility, transparency and a competitive price discovery, we are constantly working towards designing innovative products and services to meet the different requirement of our customers.
In this regard, we continue to expand our bouquet of products, and I'm delighted to share with you that we have successfully added day contracts for 90 days. Our daily contracts up to 90 days, weekly contracts up to 12 weeks, and monthly contracts up to a period of 3 months. Earlier we were offering products only up to 11 days.
Now, we have products to meet requirements up to three months. Based on the experience of these products, CERC is likely to approve our yearly contract also. Our members have shown significant interest in this segment, and once prices normalize, we expect to witness similar growth in the long duration contracts also, as seen in the RTM and Green markets.
Now I will discuss some of the development at the IEX during quarter two of FY 2023. During this quarter, despite a massive increase in LNG price, which was from $13.6 per MMBtu in last year to almost about $36.5 per MMBtu this year. In spite of this, the volume achieved in the Indian Gas Exchange was 59.38 lakh MMBtu.
That is a volume growth of 500% on year-on-year basis, and 44% on quarter-on-quarter basis. The profit after tax was recorded at INR 2.46 crores, witnessing a growth of 111% on quarter-on-quarter basis. I am pleased to share that important stakeholders of the gas sector are now participating on the IEX platforms. IEX is well-positioned to leverage the opportunities arising from massive platform expansion in the global and Indian energy sector, and will continue to pursue opportunities in the present power market and evaluate options in the other market segments.
We will continue to fortify our position in existing products and launch new products such as ancillary market, capacity market and drop market, drop bidding.
Indian Gas Exchange, our first diversification initiative is growing from strength to strength, backed by Government of India's ambitions to increase the share of gas from 6% to 15% by 2030 in the overall energy basket, thereby creating a huge potential for IEX in the years to come. As we continue to explore our other opportunities in the energy marketplace, we are inspired by the government's idea of establishing a coal exchange within the country. Similarly, enactment of the Energy Conservation (Amendment) Act, 2022, which talks about creating a carbon market, provides us the opportunity to set up India's first carbon exchange. We have already appointed consultant to study the feasibility of carbon market in the country.
As India moves towards carbon neutrality and harness vast amounts of renewable power to meet its growing appetite for energy, IEX will continue to make use of technology and innovation to facilitate commercial energy transition. Friends, now we will commence the question and answer session. Thank you.
Thank you very much.
We will now begin the question and answer session.
Anyone who wishes to ask a question may press star and one on their touchtone phone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question.
Ladies and gentlemen, we will wait for a moment while the question queue assembles.
The first question is from the line of Mohit Kumar from DAM Capital Advisors . Please go ahead.
Mr. Kumar, I have unmuted your line. Kindly proceed with your question.
Hello, can you hear me?
Yes, please proceed.
I just wanted to know, sir. Our electricity volumes have fallen around 8%-9% if we remove the REC volume. Where do you think we might end up for the-
Sorry.
In the end of the
Your voice is not clear.
Mr. Kumar, I would request you.
Am I audible now, sir?
Yes.
Yeah. It is better.
I wanted to understand, sir, our electricity volumes have fallen around 8% to 9% in the H1. Where do you think we might end up in FY 2023? And also at the start of the year, you had guided for 8 to 9 billion units for RECs. Do you think we can still achieve it?
See, as far as electricity is concerned, you are aware that in the Q1 situation was quite challenging. It's not only in India. World over energy market situations was difficult. In fact, in India, comparatively, government has managed it still in a much better manner. There was shortage of coal. Imported coal prices were higher. ERS prices were also higher, so government decided to supply more coal under the PPA plants, so there is no hue and cry by the states.
As a result of that, the generation improved under the PPA plants, so demand in the market was less. Because of that, I think first half of this year, the volumes were lower. I'm sure in the second half of the year, coal supply has already improved.
Inventory at the power plant, at the mine end is better than what it was last year. As you are aware, in the second half of the year, coal production is almost 60% of the total year production. Power generation is comparatively lower in the Q2. I am sure availability of the coal in the USRS market will also improve. As I told you, this year the USRS was only about 17 billion tons, which was 63% lower than last year.
Now I'm sure in the second half that position will improve. There will be more EFCM coal in the market. Rates also should come down, and we should see good volume growth in the Q2.
It will be difficult to say anything about the numbers, because numbers are dependent on the demand growth and, participation of distribution companies. Looking at our Q1, I'm sure we should be able to at least achieve the numbers which we achieved in the second half of the last year. Better than that even.
Understood, sir. Also, can you give us a brief update on the new product line launches, like, actually, like, the timeline for these launches and also the new business initiatives?
Can you also tell me some detail about the derivatives market as to when are we looking to launch it, and also are we looking to launch it on our own or are we tying up with some other exchange for it?
See, we have already launched these long duration contracts for delivery of power in up to three months. In these contracts, we are seeing lot of interest from the buy side, and we have conducted almost about 25 of these auctions also in this. Since generating companies are still not very sure about availability of coal, so the price quoted by them is slightly higher in the market.
Only one transaction has been accepted by the buyer at that price, I mean, at a price of about 5.70%. I'm sure when the prices open in the market, the reverse auction transactions for delivery up to three months also will improve. The volume and tenor of that also should improve. I mean, you also asked about the REC certificate markets.
In this RTM market also, we are seeing active participation now in distribution companies particularly they participate most in the last quarter to comply with RPO provisions. In the second, we expect a much better participation in the REC market. Other new products we are going to launch this HP-DAM market, which has been directed by the Government of India.
Maybe in the month of December we will launch that market. Ancillary market, regulator has issued the regulations, but that market will be functional only after GNA and grid codes are notified and those are implemented. Maybe from January 1, 2023, the ancillary market should also be through the exchange platform.
Sir, specifically for the derivatives contract, what is the timeline for it?
Derivative contracts, earlier also I have mentioned about it. Derivatives will be launched, will be regulated by SEBI. This will be launched only on the SEBI regulated exchanges, such as NCDEX or MCX or such BSE. These are going to be launched on these exchanges, but we are actively working with them because, we strongly believe that when derivatives are launched in the market, this will bring lot of liquidity in the market.
The volatility in the price, that also will be smoothened. We have seen wherever there are derivatives, the transactions in the spot market, that increases because participants have the option to hedge their position in the derivative market. We are also actively working in this market so that this market starts early.
There's a joint working group consisting of a member from CERC and SEBI. We are working on this. We understand that this should start sometime in the month of December or January.
Okay, sir. Thanks a lot. I'll join back in the queue.
Thank you.
Thank you very much. The next question is from the line of Aniket Mittal from SBI Mutual Fund. Please go ahead.
Yes, thank you for the opportunity. A few questions. Firstly, in your presentation, you've highlighted that there's been some shift in volume from the Day-Ahead Market to Day-Ahead Contingency Market. Just wanted to understand the reason for that and what is the type of shift that has happened and what would be our share in the Day-Ahead Contingency Market right now?
The reason for some share shifting from DAM market to the day-ahead contingency market is that in the day-ahead market, buyers and sellers both have to pay the transmission charges. Whereas in the day-ahead contingency market, it is only either buyer or seller pay the transmission charge. There is double charging of transmission charges in the day-ahead market.
There is arbitrage of almost about 30%-40% available in the day-ahead contingency market. Some of the participants do transactions in the day-ahead contingency market to take advantage of that. Our share in the day-ahead contingency market in the quarter two, I think, was almost about 60%, more than 50% in quarter two.
As I told you in the past also that, GNA is going to get implemented from first of January. Under the GNA, all these anomalies will be corrected. There will be single charge of transmission charges. Only buyer will have to pay the transmission charges.
There is no transmission charges applicability for seller. In fact, for the day ahead market and the RTM market, the provisions are more favorable for these markets. I'm sure whatever transactions are presently happening in the day-ahead contingency market, they all will shift to the DAM market. This anomaly will get corrected.
Sir, just a clarification. Apart from the transaction charges, has something in the market also changed? Because this quarter our DAC volumes have also gone up very significantly. Is there some market condition that is also facilitating that shift to DAC from DAM?
No. I mean, except for this arbitrage, I don't think there is any other reason.
The other question that I had was on the RTM market. I'm fairly surprised by the growth that you're seeing in the RTM market despite the higher prices. I think we are now doing close to almost 70 to 75 million units per day. Just wanted to understand how do you see the potential for the RTM market? Despite the higher prices why is the growth fundamentally coming over here? Is there some sort of cannibalization that you think is happening from DAM, or are there any other factors at play?
Definitely some cannibalization is also happening because earlier participants were placing bid in the DAM market slightly. They set a slightly higher price. Now they have the option to buy power in the RTM market also, so many of the participants are placing price into the bid also. As a result of that, if their bid is not clear, then they participate in the RTM market.
Some cannibalization has happened. RTM market is mainly improving because of the higher share of the renewable generation taking place in the country. Because of the high renewable now, because of the variability in the renewable generation, participation has increased. When they suddenly find that the renewable is highest, many of the states start selling power. When wind suddenly starts going down, they start buying power.
This kind of phenomenon is happening. RTM market, I'm sure you know when it reaches, they have no other option. Earlier they had no option. They had to do the load shedding. Now they have option to buy power in the RTM market. Volume in the RTM market, I expect will continue to increase. May not be at this rate what has happened in the last two years, but definitely at a rate of 10%-15% that this market also will increase.
Okay. That's very helpful. Just one last question, and this is to understand more fundamentally. When i compare the average prices on the RTM versus DAM, the average prices on RTM are still lower than DAM market. Just wanted to understand the reasons behind that.
Yeah. See, a seller is placing a bid at a slightly higher price in the DAM market. If it is not clear to him, in RTM market, he has no other choice. In the RTM market, he's placing at the marginal cost. It is the real-time market, so seller has no other option. He will try to sell power at the lowest possible, I mean, what I will call minimum viable rate for him.
You're saying the seller is actually being more dominant than the buyer in the RTM in determining the price and that's why.
Earlier, also if you see the trend, exchange day-ahead market rates always used to be lower than the bilateral market. Because day-ahead market was more nearer to the delivery. The transactions were happening in the day-ahead market at the marginal cost. Now, RTM market is further nearer to this delivery, actual delivery. I think this is a natural phenomenon.
Got it. If I can just add one more question. In the RTM market, as per you on the sell side, how much of the sell side is coming from URS Power?
See, in this first half of this year, because of the high demand and less supply, there was hardly any URS Power. Most of the sale was by the distribution companies, whatever surplus power they had under the PPA. After meeting their demand, they were selling power on the exchange platform. We also had import from Nepal, about 400 megawatts of import. All that facilitated the RTM market.
Okay. That's very helpful. Thank you for taking the questions, sir.
Thank you.
Thank you. The next question is from the line of Sumit Kishore from Axis Capital. Please go ahead.
Thanks. My first question is that, in the first 20-odd days of October, the liquidity situation seems to have improved because sell bids are almost reaching close to 70% higher than the purchase bids.
The prices on DAM and RTM have also come up quite sharply. Even on a year-on-year basis, they're down almost by 60%. Still we see that October volumes so far are down close to 20%, please correct me so far on a year-on-year basis. I mean, at what price level do we really see industrial demand on exchanges coming back or volumes coming back? Because I thought prices have come off quite significantly even on a year-on-year basis.
See, if you look at last year month of October, if you are comparing with that, last year month of October was a very high demand period and less availability of power.
Mm-hmm.
Distribution companies were very, very active on the exchange platform. Every day we were getting buy bids far in excess of the sell bids, so the volumes were higher.
This year, as I told you, the coal inventory at the power station under the PPA is very good and the power availability under PPA is good. Distribution companies buy on the exchange platform, it's not a desperate buy. Some of the distribution companies are buying power to optimize their cost. Some of them are buying power maybe during the evening hours when the demand is higher. October as of now, in comparison to last year, the volumes are lower, mainly because participation of distribution companies is slightly lower.
I'm sure going forward, when the availability of coal improves and prices are expected to go down further to maybe about INR 3.25-INR 3.40. At that price there are three things which happen. One is that distribution companies, they meet their demand. Second is they optimize their cost, they shut down their costly plant. Third is it is viable even for the industrial consumers to buy power from the exchange.
Yes. Because coal inventory at power plants is actually better than what it was same time last year. It's almost 9 days.
Yes.
From IEX perspective, we should be tracking e-auction coal availability and e-auction premia to multiply it there.
Actually, this 9-day inventory is with PPAs power plants. If you look at the inventory at the IPPs which are merchant plants, that situation is still not comfortable. I'm sure in the next 15, 20 days, Coal India has already started increasing the quantum in the e-auction. That situation should also improve.
Okay. Another question which is actually a follow-up from the last one. The shift to you know RTM from DAM and the arbitrage that you mentioned around transmission of 40-odd paisa. Will that arbitrage completely go after GNA is implemented first of January, or you know will it reduce the propensity for that shift back to happen?
No, no. This is complete. Actually, in December 2020, the transmission charge ceiling regulations which were implemented, there was some anomaly in that. Because of that, it happened. Now, this issue was discussed with the regulator, and they have corrected this thing. Going forward, this anomaly is not going to be there. In fact, the regulations are more in favor of the day-ahead and the collective run auctions.
In most of the occasions, distribution companies will not have to pay any transmission charges for purchase of power through the exchange. Because if the GNA plus TGNA is more than the total power purchased by them, including the exchange, then there is no further charges to be paid.
Yes.
These regulations are in fact more favorable to the collective run auctions.
This arbitrage will go once the GNA is implemented.
100%. This will go.
Of course, first of January.
What we're expecting is that it will get implemented from first of Jan, based on our present discussions with the NLDC and CERC. for implementing it, we are now doing all transactions through the National Open Access Registry, which is a software-based solution. There are some changes to be done in that. NLDC is already working on that. Hopefully from first of January, it will get implemented.
Okay. Otherwise, because of these operational issues, there will be some more delay before that can be implemented. Is my understanding right?
No, we are reasonably sure that it will get implemented from first of January because there is a lot of monitoring from the CERC end also. NLDC, I think they have made significant progress as of now.
Yeah. On a previous question so INR 3.85 is the current exchange price for day-ahead markets. Do you think about 3 or 3 rupee 30 paisa will be a reasonable level for states to the demand to come back on exchanges? Or it is what price would really be attractive?
I mean, what we have seen in the past, around INR 325, something around INR 325-INR 315. In this price range, there are many high-cost power plants and distribution companies then shut down those high-cost power plants and start buying from the market. Even in many of the states, there were open access consumers also reach a breakeven at a price which is around this. Their purchase also increased from the market. Sure. Distribution companies in many cases, for them this is a lucrative price.
Got it. Just one last question to clarify on quarterly results. If you look at the volume decline on a year-on-year basis in Q2 was about 11%, but revenue decline slightly higher, closer to 13%. Is that explained by any rebates which have been given by IEX or what explains that? The other income is slightly on the higher side. Is that mainly because of treasury income or is there any clarification on that?
Yeah. Number one is last year there were no REC certificates. This year there is some quantum of REC certificates in the volume. In the REC certificate, we give rebates to the customers, and we give some incentive to them based on the volume. That is one reason. Second is in the membership and client fees also we made some changes this time.
We gave some incentives because because of the high price, many of the trading companies were open access for open access and membership was not viable, and they were not doing good volume, some of many of the traders. We allowed them exception for a couple of months. I think primarily because of these two reasons, the revenue is percentage-wise there is a difference.
Okay. On other income side, is it mainly treasury income or is there any,
Yeah. Mainly treasury income because the interest rates have gone up, so it's mainly.
Got it. Thank you so much. Thank you for answering my questions.
Thank you.
Thank you. The next question is from the line of Devansh Nagotia from SIMPL. Please go ahead.
Yes, sir. Thanks for the opportunity. Just a follow-up to the temporary shift in volume from DAM to DAC. I mean, I just want to understand the change in transmission charges, and then the higher charge of 0.2-0.4. You mentioned that it was from December 2020, but the shift we are largely seeing in the last three to four months, or probably six months.
I mean, I'm not able to understand why this change happened in only the last six months. Secondly, the uncertainty of availability that you mentioned in peak hours, but both DAM and DAC, the trades happen a day before, so the uncertainty should be there in both of them, then why that is causing the shift to happen?
If you can just share some perspective on this.
Yeah. Let me tell you one thing. If you look at our market share, if you look at the volume in the different DAM market, RTM market and the DAC market, prior to December 2020, the DAC market was hardly 1% or 2% of the total market size.
Mm.
From December 2020, it started increasing.
Mm-hmm.
It increased to almost about 4%.
Okay.
In March this year when we had shortage of power, distribution companies, they wanted to ensure availability of power. That is the time when they shifted to the DAM, DAC market. In many of the cases, they did off-market agreements and verbal understandings and then participated on the exchange trading platform in the DAC market and get those transactions.
From March, DAC volumes have started increasing. From the month of September, if you see, when our prices have started coming down, DAC volumes have again started coming down now.
Mm.
They are significantly lower now in September and in October also. These are hardly about 7%-8%.
Okay.
Yeah.
Okay. Okay. In Day-Ahead Contingency also that trade happened the day just a day before the power is purchased. Is that understanding correct?
Day-Ahead Contingency time, they are doing understanding before the market hours. Generator is getting power for him and then doing transactions in the Day-Ahead Contingency market.
Okay. Then you mentioned that REC, if it might go well, then there will be the carbon market, where carbon credits will be traded. What will be the market platform for that to happen? Is that decided yet? Will IEX be the only one who will be able to trade it or there will be other players as well? Can you share some perspective here?
See, Bureau of Energy Efficiency is the nodal agency for this, and they have issued a discussion paper also on this for creating a carbon market in the country. The first step of that market is that they will create fungibility between REC and ESCerts, and whatever spare volume of this REC and ESCerts is available which is unsold, maybe those will be converted into carbon credits and then participants can buy that.
Going forward in the next two-three years, they will create a mandatory carbon market, and they will create obligation for the different users who are generating CO2 for the compliance that they have to reduce or purchase these carbon credits from the market.
When that market is introduced, that is going to be a market something like what is there in REC market or the ESCert market. Maybe the market model may be different, but then all exchanges will have the option to introduce those contracts. Since CERC is going to be the regulator, so CERC regulated exchanges, which are three at present, all three of them will have the option to introduce those contracts.
Okay.
We are also talking about a voluntary carbon market. The voluntary carbon market is India is, India has large options to create carbon credits, earn carbon credits. Lot of buyers from the European countries, multinationals, they want to buy carbon credits on voluntary basis to comply with the ESG requirements to do their brand building. We see lot of demand in that market also. We are also considering that option, exploring that option.
Okay.
That is going to be a different market. That is going to be a voluntary market, whereas the mandatory market is basically what is going to be done by the government.
Aniket, based on your discussion with SEBI and MCX regarding the launch of derivatives, what is the constraint which is postponing the launch of these contracts? Because CERC has launched LDC. What do you think, what are the constraints for the derivatives to be launched?
See, if you look at the different derivatives which are there for the different commodities on the MCX platform or NCDEX platform.
Mm-hmm.
You don't have a stock market for any of those commodities.
Mm-hmm.
In case of electricity, we have a very vibrant electricity market.
Mm.
Regulator is definitely concerned about the effect of the derivatives on the spot market. They want to analyze from all angles that there is no adverse impact of this on the spot market. That is why there is some delay which is happening.
Okay. All right, sir. Thanks a lot for the detailed explanation. I'll get back in touch.
Thank you.
Thank you. The next question is from the line of Milind Karmarkar from Dalal & Broacha Stock Broking Pvt. Ltd. Please go ahead.
Yeah.
Hi. Good afternoon, gentlemen. I have a couple of basic questions. We have been talking about 4-5x volume growth because of PPAs moving away and trading volumes increasing in the coming years, let me put it that way.
This year, if I see, this year's volumes actually don't support the above. I just wanted to understand, has our thought process changed, or you are reasonably confident that this type of volume growth will come in going forward? See, you can't have the kind of volume growth which we have seen in last two years every year.
Mm.
You definitely get a year in between where the consolidation will happen.
No, fair enough. Fair enough.
This year in particular was a very, very challenging year for all countries. This was mainly because of the high increase in the input costs.
Mm.
See, if you look at the generation last year from the imported coal-based power plants, and even many of the IPPs were importing coal and blending with the domestic coal and selling power on the exchange platform. It is no more viable for them.
Mm-hmm.
I think situation has changed this year. In spite of that, if we are able to maintain our volume at par with the last year.
Mm.
On per unit basis, I think, I must say that it is a good job done. In the coming second half, we definitely expect a better result.
Okay. That's fine, but the basic thought process that over a longer period of time, PPAs will be abolished and most of the volumes will happen on the exchanges. How, what's your thought process on that? Has it changed or it still remains?
See, that is a stated rule of the government.
Mm.
That distribution companies have the option to exit PPA after 25 years.
Okay.
They can do that.
Mm.
You know, there are not many projects where the PPAs, they are 25 years old.
Mm-hmm.
Mostly the IPP stations started from 2007-8, so in many of the cases, the PPAs are still only about 13, 14, 15 years. Another 10 more years to go. Some of the NTPC stations, yes, with the PPAs, I mean, 25 years is over in one or two cases. In one of the case, I think distribution companies have exercised their option to exit from that plant also. In any case, there is demand growth happening in the country.
Mm.
Demand growth happening at a rate of 6%-7%, I think, Draft National Electricity Plan projection is 7.2% growth in the demand for the next five years.
Mm.
It's a very high number. If the demand increase continues to happen.
Mm.
I'm sure good part of the demand increase will come in the market.
Right.
That will give us the opportunity to increase our.
What about the new generating capacities which are coming in, let's say, renewables? What, in your opinion, they would directly come to the market or they would prefer to go the PPA route?
See, as of now, most of the renewable capacity is under the PPA.
Mm.
The distribution companies who have the PPA.
Mm
We have seen that their participation on the exchange platform has started increasing now. Yeah. Whenever they have more renewable power-
Mm-hmm.
Than the requirement, they put that power in the market.
Okay.
That is one. Second is that looking at the price which they are able to get in the day-ahead market-
Mm-hmm.
During the solar hours.
Mm-hmm.
That price is definitely more than rupee 50% for the last year and this year.
Mm-hmm.
Many of the IPPs are also now considering to set up merchant capacity. Maybe part merchant, maybe 20-25% merchant, and the balance PPAs.
Mm-hmm.
comfortable lenders. Many of them are considering this option also.
Okay. My second question was that we have already seen two exchanges being set up, and I think one of them has already started business. With this, are you expecting some reduction in the share which we hold currently, or a lower growth than what we have seen in the past few years?
The last 2 years, in the electricity segment, we saw a growth of almost about 35%.
Mm-hmm.
Yes, this year definitely is a year of consolidation.
Mm-hmm.
Next year, difficult to say about the growth number, but if the generation demand growth happens at a rate of 7%-8%.
Mm-hmm.
I'm sure exchange volume should also grow at least at a rate of 20%.
Okay. What about the competition from these new exchanges?
I'm sure you all must be having the numbers. I need not talk about them.
No, one has not yet started. The second has just started. What's your take on that? That's what I'm asking.
Number 1, one exchange is already in operation for the last 14 years.
Yeah.
Started operation in November. We started operation in June.
Mm-hmm.
18. We are in operation for the last 14 years.
Mm-hmm.
Other exchange started on seventh of July.
Yeah.
They are in operation.
Mm-hmm.
I think you have the numbers, you can compare with that. I don't think it has made any impact on our volume, on our business.
Okay. My last question was that this government has also talked about privatization of distribution capacities across India. Just wanted to understand in which way would this impact the volumes of the traded volumes on the exchanges?
If the distribution sector is financially viable.
Mm-hmm.
It will bring viability in the power sectors. Today, a distribution company is losing money for every unit they supply.
Correct.
Because there is a gap between the ARR and ACS.
Mm-hmm.
They have no incentive to supply more power.
Right.
If privatization happens.
Mm-hmm.
There is an improvement in the distribution sector, the loss reduction happens.
Mm-hmm.
Distribution companies start making some money out of the sale of power.
Mm-hmm.
They will have incentive to supply more power.
Okay.
I mean, in a country like India.
Mm-hmm.
We have been seeing about 7%-8% kind of GDP growth.
Yeah.
Our per capita consumption is only about 1,300-1,400 units per year.
Mm-hmm.
World average is more than 3,500.
Mm-hmm.
There is a very high potential for demand growth.
Yeah.
It is not happening because there is no incentive for distribution companies to supply more power.
Mm-hmm. Got it. Okay, thank you very much, and all the best for the future.
Thank you. Thank you.
Thank you.
Thank you. Ladies and gentlemen, this would be the last question for today, which is from the line of Abhishek from DayDream Entertainment. Please go ahead.
Hi, sir. I just wanted to know one question. Like, we always talk about India's growth, we always talk about future growth. We are expanding in other countries and also a lot of other things, prospects.
I want to know if you can give us some guidelines and some brighter detailed picture about what's going to happen and what's your plan and what is going right and what's not going right from your perspective. Thank you.
What is not going right is I told you, presently the fuel availability is not going right. Less coal available in the market under the e-auction route. E-auction rates are higher. Exchange clearing price is higher, which is not good for any market.
When the price is higher, market is not doing well. Same is the condition with us. In our case, distribution companies not only purchase power to meet their requirement, they also purchase power to optimize their cost. In fact, in last two years, Andhra Pradesh as a state has reduced their power procurement cost by more than INR 1,000 crore just by purchasing more power through the exchange because our rates were very, very competitive.
This year, that kind of opportunity was not there for the distribution company to optimize their cost.
Third is open access consumers, industrial consumers, large industries. Earlier they were also active on the exchange platform, but when the rate is high, it is more than the best given rate. They have no incentive to buy from the market. I think because of all these things, this was a challenging year for us and volumes were less because of that. Going out-
Yeah. Lovely explanation, sir. One more very short and quick question. Like, there's a lot of negativity right now in terms of competition. I know you just explained that there's no competition in a literal way, but a lot of negativity, and especially FIIs, we see they're selling in, and share price also, we see a lot of negativity. Do you have any plan to counter that or working on that?
See, I can't say anything about what FIIs are doing and what is happening in the share market. I can only talk about my business and how we are doing and what we hope to do in future. I can only talk about that.
Did you want to say anything about the competition? There's a lot of negativity about the competition, but you said that volume is dry, but it's not well, I mean, not well communicated.
I told you about the competition. four months have passed. The third exchange also is in operation and you can see the volume of the other two exchanges.
Lovely, sir. Lovely. Thank you very much.
I'm sure these numbers will speak in the market.
Thank you, sir. Thank you very much.
Thank you. Thank you.
Thank you. That was the last question for today. I would now like to hand the conference back to Mr. Sumit Kishore for closing comments.
Thanks a lot for giving us this opportunity to host the call. I wish team IEX and the audience in this call a very happy Diwali. Over to you for any closing comments. Thank you.
I would like to thank all of you for being part of this call today. Q2 has been a challenging quarter for all of us. Going forward, we expect reduction in input costs, lower prices on exchange and which will provide optimization opportunity for discounts and efficiencies for users.
I'm sure that we bring better volume growth on the exchange platform. IEX has always remained committed to positively contributing towards the growth and sustainability of the Indian power sector. Thank you all for being a part of this call. I look forward to our interactions in the next quarter. Thank you.
Thank you. On behalf of Axis Capital Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.