Ladies and gentlemen, good day and welcome to the Indian Energy Exchange Q4 FY 23 earnings conference call, hosted by Axis Capital Limited. As a reminder, all participant lines will be in the listen-only mode. 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 touch-tone 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.
Thank you, Tanvi. good afternoon, ladies and gentlemen. On behalf of Axis Capital, I am pleased to welcome you all for the IEX Q4 FY 2023 earnings conference call. We have with us management team of IEX, which is represented by Mr. Satyanarayan Goel, Chairman and Managing Director; Mr. Vineet Harlalka, Chief Financial Officer; Mr. Rohit Bajaj, Head Business Development; and Ms. Aparna Garg, Head Investor Relations and Corporate Communications. We'll begin with the opening remarks from Mr. Goel, followed by an interactive Q&A session. Over to you, Goel, sir.
Good afternoon, friends. I welcome you all to our quarter four and earnings, annual earnings call for the year, financial year 2023. With me today on this call are Mr. Rohit Bajaj, our Head Business Development; Mr. Vineet Harlalka, our CFO and Company Secretary; Mr. Amit Kumar, Head of Market Operations and Product Development; Mr. Sang Gautam, CTO; Ms. Aparna Garg, Head of Investor Relations and Communication; and Mr. Ajit Tiwari. Friends, last year was a turbulent year, and particularly for the global economy due to geopolitical disruptions. IMF forecast baseline global growth falling from 3.4% in 2022, to 2.8% in 2023. In comparison, the Indian economy has fared much better due to several proactive policy initiatives by the Indian Government.
Economic growth sustained its momentum during the year, led by a strong rebound in the industrial activities, backed by strong private consumption, higher capital expenditure, and robust financial sector. India is expected to register a strong growth of 7% for fiscal 2023, as per the economic survey 2022-2023, and has been identified as the fastest growing major economy in the world. India's manufacturing PMI in quarter four 2023 stood at 55.7, compared with 54.4 in quarter four 2022. The services PMI was higher for quarter four 2023 at 58.1, compared with 52.3 in quarter four 2022, the country's index of industrial production for 2023 grew 5.1% year-on-year basis. India's G20 presidency this year provides a significant opportunity for the country to lead the global narrative in sustainable energy transition.
For the year 2023-2024, Government of India has presented a Saptarishi budget, with green growth being one of the seven focus areas, thus clearly laying out the policy priorities for the energy sector in the country. During the year, fuel supply constraints due to Russia-Ukraine war led to several countries facing a severe liquidity crunch. Heat waves in various parts of the world increased power demand, which coupled with rising input fuel costs, led to high electricity prices in almost all major economies. As per IEA, during second half of 2022, electricity prices increased fourfold in France to cross EUR 320 per MWh and reached almost EUR 330 per MWh in Germany. In the U.S., average wholesale electricity prices in second half of 2022 was $91 per MWh , which is 65% higher than second half of 2021.
In Australia, prices averaged AUD 170 per MWh, which is more than twice of second half of 2021. A similar situation prevailed in India. Electricity consumption in FY 2023 increased to 1,504 billion units, a 9.4% increase on year-on-year basis. This was due to increased industrial activity. The hottest summer months in over 120 years, which coupled with supply side constraints, led to high power prices being discovered on the power exchanges. By coal production increased by 14.7% on year-on-year basis in FY 2023 to 892 million tons. The coal dispatched to power sector during FY 2022 increased by 9.1%. However, this coal was mainly supplied to PPA-based power plants to meet increased demand.
This led to a reduction in availability of E-auction coal by over 50% to 53 million ton in FY 2023, in comparison to 108 million in FY 2022, leading to higher premium of nearly 260% over notified price in fiscal year 2023. The average market linking price for DAM for the fiscal increased nearly 36% to INR 5.96 per unit, while the quarter four average price on the exchange was INR 6.1 per unit, nearly 13% increase with respect to quarter four of FY 2022. Overall recently the prices of E-auction coal have reduced to a premium of nearly 137% over the notified price in April 2023. Price of 5,000 GCV imported coal has also reduced to nearly to about $95 per ton, a 33% drop over May 2022 price.
For gas also, the prices have reduced to almost about $10 per MMBtu, and in the month of May, which is a drop of more than 100% on a year-on-year basis. In this year, the country was prepared to meet the summer power surge on its back, on the back of several proactive initiatives taken by the government of India. The unexpected cooler weather conditions in April, which continued till mid of May, helped mitigate the expected demand surge. Measures during the year were taken to increase coal production and prioritize power supply to power sector. Coal blocks were auctioned to private companies, PSUs for commercial mining. Captive mines were allowed to sell up to 50% of their annual production after meeting and use plant requirement. Coal allocation for power sector was increased, and its transportation prioritized through the railway.
Further, the power ministry mandated states and GENCOs to import at least 6% of their coal needed to blend with the domestic coal. Section 11 of the Electricity Act was invoked, thereby all imported coal-based power plants were asked to operate at full capacity, with the option of selling unsold power on the power exchange. Strict monitoring was done for plant maintenance to minimize downtime. NVVN was appointed as nodal agency to facilitate supply of 4,000 MW of NTPC gas-based power and 1,050 MW of Torrent gas-based power during peak months to be sold on the exchanges. Additionally, a decisive focus on renewable energy by the government has helped the energy sector diversify its fuel sources.
India has achieved a renewable capacity of 172 GW as on 31st March , 2023, which is more than 41% of the total capacity, which is 41% of the total capacity of 416 GW. The country added about 15 GW of RE capacity in the last fiscal, the fastest rate of growth among the major economies. This makes the country well poised to meet its vision of achieving 500 GWh of non-fossil fuel-based electricity in solar capacity by 2030. With improving supply side liquidity due to above policy and regulatory enablers and cooler weather conditions, more competitive prices are being discovered on the exchange now. Going forward also, we expect more competitive prices from the exchange in the coming months. I welcome the recent proposal of the group , constituted by Ministry of Power for Development of Electricity Market in India.
The country's electricity market is undergoing transformative changes led by the government's decisive focus on sustainable energy transition and energy security. Power markets will have an instrumental role to play in accelerating India's energy transition by enabling smooth integration of renewable into the grid. Some key recommendations of the group, such as mandating renewable energy sources to participate in the market and additional RE capacity to be developed through the Contract for Difference mechanism, will facilitate faster addition of RE capacities and spur investment in the sector, thus helping attain India's 2030 RE targets. To increase RE participation in the market, a pilot mechanism has been proposed for implementation within a year, and initial capacity of 1,000 MW will be tendered by the nodal agency under the single price option, with a 15-year PPAs tenure.
The significant benefit of the CFT model is that it deepens the market by providing certainty to both generator and buyers. By guaranteeing a fixed price for the defined period, the mechanism ensures a stable revenue stream for the renewable generator. Countries such as U.K., U.S.A., Germany, et cetera, were able to increase their renewable generation capacity more than 30% by implementing market-based reforms, such as CFT, to facilitate renewable energy integration into the grid. Government of India has also decided to explore this option. The proposal to introduce financial products for electricity to help against price volatility in spot market will lead to capacity addition, increased private investment, and ultimately result in lower prices for consumers. The group has also recognized the inefficiency and inflexibility of long-term PPAs, and a stronger role for power exchanges to deepen the market and enable efficiency in electricity procurement.
Improving the efficacy of Day-Ahead Market will lead to market-based merit order dispatch of electricity, which will result in effective cost optimization. Higher renewable energy integration will necessitate detailed resource adequacy planning by the utilities to ensure optimum resource mix and introduce capacity contracting through power exchange. Similarly, a market-based mechanism through exchange for secondary reserve will lead to RRAS at competitive prices. We are confident that implementation of this roadmap will fast-track India's energy transition goals through an efficient, optimal, and reliable market framework. Looking at the last fiscal, we saw several important developments on the policy and regulatory front. A few highlights are, that the Draft National Electricity Policy begins to increase the share of competitive power market to 25% of the total electricity supply by FY 2023. The policy highlights resource adequacy for better planning of resources.
It also allows flexibility among various buckets of renewable project obligations to provide flexibility to distribution licenses. The policy encourages market-based RE development and aggregation of small capacity for RE development. General Network Access was notified during the year. The notification to implement all provisions of GNA will go a long way in streamlining network access and network usage charges. GNA will strengthen exchange-based power markets in the country. It will remove regulatory arbitrage, which has led to temporary shift of volume from DAM to DAC, and will be more conducive to our further market development in the country. Electricity (Amendment) Rules, 2022 are expected to promote renewable energy through Green Energy Open A ccess. This should deepen the electricity market and efficiently integrate RE resources into the grid.
The Green Open Access Rules, 2022 have reduced the open access limit from 1 MW to 100 kW, while there is no limit for captive renewables. This will also allow smaller consumers to buy or sell RE power and increase access to renewable capacity. The Electricity (Amendment) Bill, 2022 proposes several reforms to the distribution sector to promote private participation, better services, and improve financial health. The Energy Conservation (Amendment) Act, 2022 allows for development of national carbon market in the country. Deviation Settlement Mechanism and Related Matters, Regulation 2022, is likely to increase RTM volume in the exchange. CERC Ancillary Services Regulation 2022 for development of tertiary reserve ancillary services will be effective 1st June, this will operationalize procurement of ancillary services through the exchange. Several enabling interventions were made towards increasing the generation and adoption of RE resources.
A new trajectory of RPO mandates states to procure for 27% of their electricity needs from renewable sources to be scaled up to 43% by the fiscal year 2030. Interstate transmission charges have been waived off for RE to reduce the cost of integration of renewables, while new transmission infrastructure is being set up to improve access of RE to the grid. Renewable generation obligation mandates new coal or lignite-based plants to establish RE capacity of minimum of 40% of the plant capacity. IEX will remain at the forefront of this transition by constantly innovating new products and segments to meet the evolving need of the market. Now I come to IEX updates. During the year, IEX launched the much-awaited Term-Ahead Market contracts with delivery up to 90 days.
These contracts enable customers to hedge risk against volatility in spot market. We also launched Green Monthly Contracts and introduced Green Hydro Contracts. Last year, due to the surge of electricity prices in the spot market, CERC imposed a price cap of INR 12 per unit across market segments. While this move rationalized prices for buyers, high cost generators were left with standard capacity. To bridge the demand-supply gap during the high demand period, the Ministry proposed a High Price Day-Ahead Market, and following a petition by IEX, CERC has granted approval to this product. This segment enables high variable cost generators, such as gas-based power plants, imported coal-based power plants, battery energy storage systems, to participate in the market in the price range of INR 0-INR 20 per unit.
IEX commenced trade of High Price Day Ahead Market after it was launched by the Honorable Minister, Shri R.K. Singhji, on 9th of March 2023. This segment will bring more capacity to the spot market during high demand periods. We have made a humble beginning in this segment with the first trade executed on 15th of April 2023. During the year, IEX maintained a near 100% market share in collective transactions, that is, DAM and RTM. Together, these two markets constitutes about 80% of the power exchange business. Moving on to IEX updates, overall volume of 26 billion units was achieved across all segments during quarter four FY 2023, a 7.9% quarter-on-quarter growth. Total certificates traded during quarter four amounted to 1.8 billion units, an impressive 50% quarter-on-quarter growth.
However, the total volume declined by 3.3% in quarter four of FY 2023 as compared to quarter four of FY 2022, due to supply side constraints. The average Day-Ahead Market price during quarter four was INR 6.07, higher by 13% on a year-on-year basis. For the fiscal year 2023, IEX traded 96.8 BUs, a decline of 4% on a year-on-year basis because of the sell side liquidity constraints. For the fiscal year, Day-Ahead Market price was INR 5.96 per unit, higher by 36% on a year-on-year basis. This was-
This is the operator here. We have lost the connection for the management. Please hold while we reconnect. Ladies and gentlemen, we have the line from management reconnected. Sir, you may proceed now.
Yeah. For the fiscal year 2023, IEX stood at 96.8 BUs, a decline of 5% on a year-on-year basis due to supply-side liquidity constraints. For the fiscal year, the Day-Ahead Market price was INR 5.96 per unit, which was higher by 36% on a year-on-year basis. Liquidity was affected due to supply constraints that led to higher prices of E-auction coal, imported coal, and LNG gas. The average Day-Ahead Market price for April 2023 came down to INR 5.41 per unit, which is a decline of 46% on a year-on-year basis as with respect to April of 2022.
Going forward, with gradual improvement in domestic production of coal and improvement in coal inventory, which is at 14 days compared to 11 days of last year, and reduction in imported coal and gas prices, we expect a rationalization of power prices on the exchange platform. This will enable cost optimization by discounts and open access consumers and will soon result in higher volume on exchange platform. In line with its commitment to facilitate India's decarbonization targets, IEX has been certified as India's first carbon neutral power exchange by using market-based tradable instruments to offset its carbon emissions. This certification will also help our members and participants to reduce their Scope 3 emissions. An employee-focused approach based on the foundation of trust and respect, has made IEX the first power exchange in India to be certified as great place to work.
IEX continued to leverage technology to launch market-friendly products and increase efficiency for our customers. We launched web-based bidding for GTAM, DAM, Monthly and Any-D ay Single-Sided reverse auction products to provide Anytime, Anywhere, easy and secure bidding access to our customers. Web-based Financial Reconciliation to enable easy reconciliation of the bidding transactions done through our platform. Web-based Data Insights to enable effective bidding decision making. Automated Financial Limit Allocation across product segments. Utility for easy integration with RTM market API. Market Data API to enable automated access to price and volume. Market data across product segments. Further, we are undertook process automation, which are leading to benefits such as better system availability and ease of operations. We continue to invest in to create a robust and secure IT infrastructure at IEX. During the year, we also integrated with the National Financial Registry of Grid India.
I shall now talk about developments at IGX. In FY 2023, there has been several notable achievements at our Indian Gas Exchange. IGX traded total volume of 50.9 million MMBtu during FY 2023, a 319% year-on-year increase. This growth was largely on the back of participation of major domestic gas producers and an increased number of participants. A total of 2,355 trades were executed during this year, an increase of 400% on a year-on-year basis. The profitability of IGX for FY 2023 has increased to INR 28 crore from INR 1.75 crore in FY 2022. I will now talk about financial performance of IEX.
On a consolidated basis, the revenue for quarter four FY 2023 increased 10.5% on a quarter-on-quarter basis from INR 107.4 crore in quarter three FY 2023 to 129.6 crore in this quarter. Total revenue of quarter four FY 2023 witnessed a growth of 1% on a year-on-year basis. Consolidated PAT at INR 88.3 crore grew 14% on a quarter-on-quarter basis as compared to INR 77.2 crore in quarter three of FY 2023. For the full fiscal year 2023, on a consolidated basis, the revenue declined by 2.1% on a year-on-year basis from INR 484.4 crore in FY 2022 to INR 474.1 crore in FY 2023.
Consolidated PAT at INR 305.9 crore was lower by 0.9% on a year-on-year basis as compared to INR 308.6 crore in FY 2022. Please note that Indian Gas Exchange was a subsidiary of IEX till 16th of January 2022, and IEX became associate company with effect from 17th January 2022, and was consolidated basis on equity measured in above numbers. For fiscal year 2023, the board of directors of the company announced a final dividend of INR 1, equivalent to 100% of the face value of the equity shares. During the year, the board of directors of the company also approved the buyback of the equity shares on the open market amounting to INR 98 crore, and this was completed successfully from January to March.
For the past 15 years, IEX has continuously pioneered the market with a keen focus on Customer Centricity, Innovation, and Technology. IEX will remain at the front of accelerating India's energy transition towards net zero. We will continue to explore business opportunities in new products and markets, such as Ancillary Market, Capacity Market, and Block Trading. Through our diversification initiatives, IEX will continue to deepen the energy markets of the country. In addition, IEX will help build a vibrant gas market in India, enabling the government's aim of doubling the share of natural gas in the energy mix of country. IEX will continue to work with the ministry regulator, our partners and clients, and all other stakeholders to build a sustainable, energy efficient future for India. Thank you. Now we can have question and answer.
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 telephone. 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. The first question is from the line of Nikhil Abhyankar from ICICI Securities. Please go ahead.
Thanks for the opportunity, sir. My first question is: when do we expect the GNA regulations to be effective, which will remove basically the arbitrage between DAM and DAC?
We understand that this will be effective from 1st of August. Grid code, they will be issuing the grid code maybe in this month itself. After that, NLDC will need maybe two months to develop the procedure and do necessary changes in the system to implement grid code and the transmission charge saving regulation.
Understood. By 1st of August, by Q2, it will already be included. How do you expect, like, all the volumes which were shifted to DAC will be transferred back to DAM?
That should happen because if you look at the volume in the RTM market two years back, there was practically nothing happening in this. In fact, at that time, even RTM market was not there. Now, with the RTM market, there is no case for the RTM market.
Mm-hmm.
Without this arbitrage.
Sir, how do you expect the long-term duration volumes to pick up, sir? Because now it hasn't picked up substantially, so what are the measures that you are taking, towards it?
Yeah, I think in the long version contracts also, there's a lot of interest which has been shown by the distribution companies, many auctions were conducted. Since the price discovered in these auctions was quite high this year, they have not resulted into contracts. Now with the improvement in the coal supply and reduction in the E-auction rates, I'm sure the price discovered in the long-duration contracts will also be very competitive, and the conversion should happen.
Okay.
We expect good volume growth in this market also. Last year, we did-
1.6 BU.
1.6 BU
Mm-hmm.
In, you can say, eight months. This year, we are planning at least 5 BU in this segment.
We've already done 1 BU in the first two months.
Yes. We have already done 1 BU in six months of this year. In two months, it should be at more than 6 BU.
You just said 1 BU in April and May?
Yeah. Yeah.
Okay. Understood. sir, final question: what is the product launch pipeline for FY 2024?
Ancillary market is going to start from 1st of June.
Okay.
You know, in last two years, we have launched so many products. It is time that we get, we bring liquidity in these products and, bring awareness about these products so that participants do participate in these things.
Okay, sir. That's all from my end. Thank you.
Thank you. Next question is from the line of Sumit Kishore from Axis Capital. Please go ahead.
Thanks. I have a few questions. The first one is that you seem to have exercised some cost control. Your employee cost is down year-on-year, even other expenses are down year-on-year. Q4 EBITDA margin has improved. Could you speak about, you know, the cost control? Is the margin improvement sustainable?
In case of employee, I think, the cost is almost same what it was last year.
Sir, it is down from-
Yeah, I will request my CFO, Mr. Vineet Ralasa, to respond to this question.
On year-over-year basis, when if you look at the employee cost, it came down from almost around INR 41 crore to INR 34.5 crore. It was mainly because some portion of the IEX cost was in the IEX cost till for the nine months for the last year.
Yes.
That was one significant portion. Secondly, because of the higher profit last year, there was a provision for that for the variable scheme. Those two impact were there, which is not there. That's why you see the gap in the cost.
Got it. Got it. As far as other income is concerned, I mean, I see on your balance sheet. The cash and bank balance and investments have reduced. There was a buyback also of INR 98 crores, but the reduction is higher. Your other income has gone up on a year-on-year basis in Q4, quite substantially. It has gone up even quarter-on-quarter. What is resulting in lower? Yeah. Yes, sir.
Yeah, please, can you repeat what you were saying? The last line I didn't get it.
No, sir, I think basically the movement of cash and bank balance and investments, there is a reduction year-on-year, even after adjusting for the buyback and the, but the other income in quarter four has gone up quite sharply on a year-on-year basis.
Okay. If you look at the total investments had not gone down significantly. Actually, there was a shifting of the investment into the long-term products. If you look the investment reduced in the short term, the current investments to the long term, from the current to non-current. That is the case. Secondly, because of the few initiatives and the parking of the fund into the good yielding products, that was the impact. Last year, if you see, there is a significant increase in the interest rate. During the last quarter, because, quite liquidity crunch and also we got a good opportunity in the MLDs and other products, we take the advantage of that. That's why we got the better return in our overall investment portfolio.
What is the nature of non-current investments which you are saying you have increased?
Non-current are basically, we put the money on the target maturity funds or the long-term MLDs, SDs, so that's the those are the non-current investments.
Okay. Okay. On the business front, a few questions. You know, one is, we find that in May, as you pointed out, the inverted coal prices have come off, E-auction coal prices have come off. Availability has also seemed to be improving. You know, we had weak demand growth in March and April, but, I mean, May also seems to be soft on volume growth on a year-on-year basis so far. What is the inflection or when is the acceleration going to happen?
See, the volume growth for the first two months, so far has been almost about 6% in electricity. It has already started, I mean, growth has already started, but I think in the coming months, when we see better supply of coal in the market at lower E-auction prices, because the E-auction conducted in the month of April, it has quantum was also significantly higher and the price was also reasonable. The supply of this coal will start maybe in the month of June, July, and we should see competitive price, further reduced price, and higher volume on the exchange platform. Wind is also coming, wind generation also will improve, hydro generation also will improve. All that should provide good improvement on the sales side.
Sure. Finally, on Contract for Difference, seems to be a very promising move. What is possible in the next one year in terms of volumes coming to exchanges? What is possible over a three-year timeframe, you know, in terms of CFD, leading to higher penetration of renewables in the merchant market?
I would like to say one thing, that we have been working on this product, Contract for Difference, from the last three years. I'm very happy to say that Government has finally accepted this concept. That's, that is one thing which is a achievement, big achievement in itself. One thing they have accepted is that they will tender out 1,000 MW of renewable capacity under the CFD, which will be sold through the market. Second thing they did this year is, that 4,000 MW of NTPC gas stations and 1,050 MW of Torrent gas stations will operate and sell power in the Day-Ahead Market. The difference between the market clearing price and the cost of gas-based generation will be paid by Government of India. Again, this is a Contract for Difference.
They had also approved procurement of 1,500 MW of imported coal-based power under Contract for Difference for selling in the exchange platform to meet the demand during the current period. Of course, in that particular contract, there was no response from the generators, so that did not materialize. What I'm saying is that there is now acceptance of this concept, and in the coming years, I'm sure the standard capacity, gas-based capacity in particular, will be utilized during the high-demand period to meet the peak hour demand, and that should provide good liquidity on the sales platform.
Okay. What was the volume in HP-DAM since launch?
HP-DAM, the volume has not been significant because April and May months were comparatively much cooler months. The demand has not increased. In fact, the demand in these months was lower by 1% with respect to last year, and our clearing price was 40% lower than last year. That is why volume has not happened in the HP-DAM market.
Those are my questions. Thank you.
Thank you. The next question is from the line of Apoorva Bahadur from Goldman Sachs. Please go ahead.
Hi, sir. Thank you for the opportunity. Sir, continuing on this Contract for Difference product. I understand it's a derivative product, will IEX be allowed to transact once the volume picks up? Also for approvals, will you need to approach CERC or SEBI?
I think, this product has been already approved by Government of India now. For delivery transactions. See, if you look at the delivery transactions beyond 11 days, that is also considered as a forward contract. Now, these contracts are allowed on the exchange platform. Similarly, this contract also, since it is going to result in delivery of power, actual delivery of power, this will be allowed. This, in fact, Government of India has already contracted, 1,050 MW gas-based capacity from Torrent and 4,000 from NTPC for selling to the market under this concept.
Okay, since it is delivery-based, there won't be any issue for-
Yes.
The regulatory side?
Yes. Yes.
Okay, I understand, sir. Second is on one of the suggestions, recommendations which the ministry panel had suggested for deepening the market, and that's for 15-year renewable contracts, right? Just wanted to know, what sort of appetite will the lenders have in funding this type of product?
If you look at the contracts, in most of the contracts, the debt obligation is serviced within 10 to 12 years. As far as lenders are concerned, this will be comfortable with 15 years.
To the short lending period, I mean, will they really be viable on the, on a cost competitiveness basis?
See, today, one of the big problem is integration of renewable with the conventional power, and most of the renewable is happening through PPA. If it is PPA, then it is a must-run, and it will operate as and when the power generation happens. I think to integrate with the market, they need this kind of market instruments, and that is why government is now saying that we should have 15-year PPA, so that after 15 years, this power is sold through the market mechanism. I'm sure 15 years is a long period, even from the funding point of view, they should be able to get funding at a reasonable cost, even for this period.
Understood. Essentially, the new capacity might sort of start coming in our platform, say, after 15 years?
Yes. Yes, you are right.
Okay, okay. Got it. I think last question is, probably on the demand side. We are seeing that the prices have corrected sharply, and that has something to do with the softness in demand, maybe due to weather factor. Do you think that, structurally, has the supply side situation improved? Or going ahead, if the demand picks up again, we'll again be in a supply crunch?
I think there is significant improvement in the supply side, but, it is not as it was, two years back, definitely. I think in the next two, three months, with increased coal supply to the IPPs, there should be further improvement in the supply side.
Sure, sir. Thank you so much.
Thank you. The next question is from the line of Damodaran from Equitas Capital. Please go ahead.
Yeah, thank you, sir, for the opportunity. Just two questions from my side on the Day-Ahead Contingency Market. The first one was, while we have a Day-Ahead Market, what purpose does the Day-Ahead Contingency Market serve? That's one. The second is, why is our market share in that low, at 35% off? Those are my two questions.
In fact, you know, Day-Ahead Contingency Market was introduced in the beginning, because if somebody has not been able to purchase power, his volume bids are not cleared in the Day-Ahead Market, then there was another opportunity in the Day-Ahead Contingency Market for him to do the transaction. In 2022, the RPO market was introduced. This market, there is a lot of liquidity available. I think now the purpose of the Day-Ahead Contingency Market is over. That is why no significant volume was happening in this market. Volume started happening only when, in 2021, when the transmission pricing regulation was issued, and there was arbiters available in the DAC market, the volume started shifting in this market. In this market, since it is a price matching, it is not a price discovery.
I think all three exchanges have, are on the same footing, and it all depends on the interactions with the customers, connectivity with the customers. That is why we have a better share in this market in comparison to other two exchanges. I think all of them has the opportunity to get market shares, and I understand some of the other exchanges are also giving some incentives on the transaction fees.
Okay. Sure, sure, sir. Thank you.
Thank you. The next question is from the line of Ankit Kanodia from Smart Sync Services. Please go ahead.
Thank you for taking my question. I just wanted to understand in relation to this GNA regulation, if I remember correctly, it was first supposed to be implemented from October 2022. From there, the date changed to January. Then in the last phone call, we discussed about 1st April , and now we are guiding for 1st of August . Why this delay is happening for so long? Do we have any sort of certainty that 1st August is a clarity, or we can further have delay from 1st August as well? That's my first question.
The point is, implementation of this will depend on the regulatory orders. This is linked with the issuance of grid code of regulation. That has not been issued so far. After grid code is issued, thereafter, NLDC will align its processes and systems in line with the new grid code and transmission charge setting regulation. They will also need some time to implement that. Based on the discussions and based on the developments which have taken place, we expect that they should get implemented on 1st of August 2023. I cannot guarantee that. It all depends on the order issuance of order by CERC and thereafter, revision of processes and systems by NLDC.
Thank you so much, sir. That really helped. My next question would be, if I understand correctly, when the price of electricity in exchange is higher, then probably the demand suffers. That is what we witnessed in the last year. What gives us an idea that this year, sustainably, the price will be lower? Or can we have any guidance in terms of how we look at the prices? Do we have any forecast for the prices, or it is completely demand, supply driven, and we have no control in foreseeing that?
The power price discovered is purely based on the demand and supply. We have seen years in which the supply is more, the prices are competitive. Last year, we had more demand than the supply, the prices were higher. This year, we are definitely expecting a much better situation because coal supply, coal production targets are very, very high, and the target is for 1 billion ton of coal production, which is 12% more than last year. Whereas the demand, electricity demand increase is expected to be only 5%-6%. Increased coal availability in the market, that should lead to better liquidity on the sell side and lower price on the exchange platform. Also, you know, what happens if the imported coal prices are higher?
Last year, the 5,000 GCV coal price was about $130. It has come down to almost about $90 now, and it is expected to go down further. E-auction prices are invariably linked to the imported coal price. If E-auction prices also have started coming down now, quantum of coal offered in the E-auction, that has also started increasing. All these things should result in availability of coal at a lower price and lower clearing price on the exchange platform.
Right. Thank you so much, sir. If I can squeeze in one last question. As you rightly mentioned, that the DSM regulation is not in your control, but it is all in the regulatory hand. Do we see any threat or risk in terms of our market share getting further eroded, if we are unable to get the market share from DAC to back to DAM? Do you see that as a long-term problem if this issue persists for a longer period of time?
One thing I want to make clear that in that Day-Ahead Market and RTM market, our share is practically 100%. That is one. I mean, we are quite confident we will be able to retain this market share. The transactions happening in DAC market are mainly because of the arbitrage available in the DAC market. Once that arbitrage is over, there is no reason for the transactions to happen in the DAC market.
Yes, sir, my question is related to that only. If the arbitrage persists for a longer period of time, do you think that could be a threat to us or not? That is what my question is.
I mean, this is a market distortion, shifting the volume from the DAM market. In DAC market, as I told you, all three exchanges are equally active, that will definitely then lead to loss of share. Looking at the developments which have taken place and which are happening, I'm sure within a day or two, you will see CERC issuing the grid code and implementation of DSM should happen from 1st of August, as discussed with the other stakeholders.
Thank you so much. Thank you so much, sir, and all the best.
Thank you.
Thank you. The next question is from the line of Drishti from Thinqwise Wealth Managers. Please go ahead.
Thanks for the opportunity, sir. I just have one question. In a recent interview of one of the exchanges MD, he mentioned that the initial steps towards market coupling will be implemented by CERC, which is introducing ancillary services market from 1st May 2023. At that time, he mentioned that date. If you could help us understand what exactly are these steps and how can it impact our existing products? Thank you.
I think there was a lot of input, but let me repeat your question, what I have understood. What you said that ancillary market is a step towards market coupling. Is that correct?
That's right, sir. Yeah, he mentioned that these are the first steps towards market coupling, which are being implemented.
Can you be slightly away from the microphone? Because there's a lot of-
Sir, is it better now?
Yeah, better now.
Yeah, in one of the interviews of the competitive exchange, the MD had mentioned that the first steps towards market coupling are being implemented by CERC while introducing ancillary service markets. If you could help us understand this, and how can it impact our existing products?
See, ancillary market, if you look at the market design, ancillary market is exchanges are only taking bids from the participants. These bids are forwarded to NLDC, because NLDC is deciding how much of power they have to procure on real-time basis. Based on that requirement, then they will track these bids and procure, I mean, purchase the power or take that power based on the least cost option basis. In this case, because the requirement is by NLDC, it has to happen only in this manner. I mean, each of the exchange cannot do price discovery and discover these prices and volumes to the NLDC. NLDC have to decide how much of power they want to buy, and based on that, they will exercise the least cost option. There is no price discovery in this case.
The demand is fixed, and based on the demand, based on the bids for the supply, they will find out what is the least cost option.
Correct, sir. That's what I wanted to understand, that since these are the initial steps for market coupling, how can it impact us in the future, and which our products would be impacted?
No, no. See, this is a different kind of a product. This is a product which is for meeting the requirement of NLDC. This is again, not price coupling. This is just exchanges are inviting bids and forwarding the bids. It is NLDC who have to basically then select how much of power they want out of that bids received by them. I don't think this will have any impact on the other products in the market.
Understood. Okay.
Line of other products is, exchanges will invite the bids, they will do the price discovery and settle financial and physical settlement. In this case, we are not even doing the physical and financial settlement. It is just we are collecting the bids and sending it to NLDC.
Okay. Okay. Yeah, thank you, sir.
Thank you. I simply request you to use handsets while asking a question. The next question is from the line of Lavanya from UBS. Please go ahead.
Hello. Am I audible, sir?
Yeah, I can hear you.
Yeah. Yeah, thank you. Thank you for the opportunity. Just going on, with the earlier question, ancillary market, if I understand it is for you'll be taking only supply side bids and, forward to the NLDC, who will, pick based on the merit order. Is my understanding right, sir?
Yeah, yeah, you are right.
How will you put the transaction fees on this particular product?
Based on the bids received by us, selected by NLDC and scheduled for supply. On that, the quantum which is scheduled for supply, on that we can charge transaction fees. Since the opportunity in this market, let's see how much of volume happen in this market, and then we will decide about it.
Okay.
As per the CFD order, we can charge the INR 0.02.
Will be 2 paisa only to the supply side, then?
We can charge up to 2 paisa, but then we don't intend to charge that, because in this case, the scope of work is much less for the exchangers.
Okay.
It is only collection of bids and sending the bid to NLDC.
Okay, got it. Other thing on the overall market side, just wanted to understand, in terms of power market. Last year, whatever we have seen, it was just only because of coal availability or, we are seeing any difficulty in terms of capacity as well? Like, the supply side, it was largely due to only coal availability or in terms of capacity also we are closing
It was more because of the coal availability.
Okay. The quantum, I mean, capacity is-
I think we have capacity. Even now also, when the demand of 221 GWs was met, I think in the month of May.
Mm.
We still had, surplus capacity available in the system.
Okay.
In any case for meeting this kind of demand, 25 GW of gas-based capacity is also available. Based on the current gas prices, which are likely to go down further, I'm sure even cost of generation with the gas also will come down to less than INR 10.
Before 2019, I mean, the supply from gas stations was happening or was then, was that not happening before?
No, see, before 2019, the demand in the country itself, in comparison to what it is today, was much lower. There was no need for the gas-based generation to be there in the market, because that's a costly generation. Now, since the demand has increased-
Mm.
If there is a shortage of capacity, maybe for 15 days, one month in a year, the gas-based generation also can be utilized.
Got it. Thank you so much, sir.
Thank you. The next question is from the line of Nikhil Nigania from AllianceBernstein. Please go ahead.
Yeah, thanks for the opportunity. My first question is regarding a portal which the government had launched, PUShP portal. Any traction which has happened on that or not really till now?
Not to my knowledge. I think, [audio distortion] happened there, but nothing out of that.
Okay. Okay, understood. The second question I had was regarding the CFD, which is proposed. I think, great move from a renewable generator or even an exchange perspective. If I think of it from a DISCOM perspective, what is the incentive for them to sign a CFD contract versus signing a PPA, for example? Especially if renewable prices are falling every year.
No, sir. DISCOMs will not sign the CFD contract. These DISCOMs will not sign the CFD contract. Normally, these kind of contracts are signed, I mean, signed by the nodal agency of the government. In this case, it may be SEBI or any other public sector company, government can ask them to get into this kind of contracts. Even in case of distribution companies also, see what happens, you know, a distribution company who have to meet the RPO obligation, if they get into a RE capacity on through the PPA, then they will have to purchase that power, and they will have to manage the variability of that power with respect to their demand and supply.
Other option for them is that you get into a contract, pay the money contracted by you to the generator, take the green attribute for your RPO obligation, and let the generator sell the power in the conventional market. Difference between the conventional market rate and the strike price can be borne by the distribution company, which is basically towards the Green Agreement. What we find is that for such kind of contracts also, there is a very, very strong case because rate in the conventional market is definitely higher than the strike price. In fact, we got a study done from Deloitte doing the price forecast for the next 15 years based on the marginal cost basis.
What we have come to see, note that, the price for the next 15 years, if somebody gets into this CFD model, no funding will be required. In fact, there will be a surplus in that pool.
Okay. Got it, Mr. Goel. One more question then, not a related point, but regarding another notification from our ministry on fair allocation of coal, where they said that if states are found using domestic coal to sell excess power on the exchanges, their RECs will be curtailed and given to other states. Has that been implemented in practice or any impact of that that you have seen till now?
I think that notification was applicable up to 31st of May, and nothing has happened in the last two months.
Got it, Mr. Goel. Perfect. Thank you. Those are the questions I had.
Thank you. The next question is from the line of Bharanidhar Vijayakumar from Spark Capital. Please go ahead.
Good afternoon, sir. In this development of power market report by the government, there is also a lot of mention on MBED. Looks like MBED is seriously being thought about by the government, at least in the long term. How is this positive or negative for IEX?
First of all, in the report, they have very clearly mentioned that implementation of MBED is a complicated issue and will require a lot of consultation with the stakeholders. Having realized that, government has already said that this is a part of the long-term plan, and in future, for renewable integration, they may consider it at appropriate time. I don't think they have mentioned any timeframe about that. It is in long-term timeframe.
Is it possible to expect this say in the next five years or 10 years? Any such anticipation from your side?
Very difficult to say what is going to happen in the next five, 10 years here. I think things are changing very fast these days, but I'm very sure that not in the next five years.
Okay.
Yeah.
Got it. Also we had this clarity on our margins, recently with CERC order. However, even in that order, there has been indications that in the future, there could be margins, you know, that could come under the scanner of the regulator. Essentially, say, being lower, even IEX has submitted lower margins for longer duration products. What is your view on long-term nature of our margins? Is it likely to come down anytime in the next say, five years?
The CERC had mentioned a cap of 2 paisa on the transaction fees in the regulation. Based on the requirement of regulation, we filed our application, CERC. That also they have given approval for charging transaction fees up to 2 paisa. We don't see any, I mean, further challenge in this, though it is mentioned in the order that staff will work out details, I mean, after studying the other exchanges. Looking at the market size, which is just about 6%, 7% of the total generation in the country, I think, looking at what has happened in the last two, three years, regulatory is more concerned about development of the market. Looking at the roadmap of the expert group also, government is concerned about deepening this market.
More efforts are required for deepening the market than for regulating the transaction fees, because if you do that, then you are going to create entry barriers for the market. I mean, I'm sure other exchanges will not be commercially financially viable if the transaction fees is in.
Understood. Two bookkeeping questions. What is the potential in this DAC volume shifting to GNA in this year, say, in beginning year?
Can you repeat the question, please?
What is the potential in million units where the DSM regulations are implemented, there will be a shift from DAC to DAM market for us?
Last year, DAC volume was 14 BU. Now this year we are expecting from 1st of August, four months, you can say two-third of the 14 BU, which is about nine, 10 BU. That should shift back to DAM market.
Nine -10 billion units should be incremental for us on an annual basis?
No, no, for this year. Next year, we are expecting that out of this 14 BU, at least 12 BU will get shifted to the DAM market.
Okay. The second on the ancillary services, you mentioned the demand is kind of fixed. In megawatts terms or in million unit terms per year, what is the overall demand in the country for this kind of power?
Demand is very high, but again, we are expecting sell side is going to be constant.
No, no, I'm talking about ancillary market-
Yeah.
Which is arranged by NLDC. Any number on per year, so capacity that, it is, met through ancillary market?
Yeah, requirement of ancillary market ranges in the range of 2,000 MW-3,000 MW. Again, that depends on the time of the day.
Okay.
It is not for the day and throughout the year.
Okay, it will be 2,000 MW-3,000 MW. If it is on an average for every day for the full year, it will be 2,000 MW-3,000 MW.
No, no, no. It is 2,000 MW-3,000 MW whenever they want it. If you look at it, an average for the full year, the quantum is going to be much, much lower.
Okay. Okay, understood. Those were my questions. All the best.
Thank you. Due to time constraint, we'll take one last question from the line of Ankit Kanodia from Smart Sync Services. Please go ahead. Ankit, your line has been unmuted. Please proceed with your question. As there is no response, I'll hand it over to management for closing comments.
I would like to thank all of you for being part of this call. While the higher input cost impacted our volume last year, going forward with increased coal production and pulling down of input prices, we expect lower clearing price on IEX platform and increasing opportunities for optimization by distribution companies and our financial consumers. I am sure thereby our volumes also will be much better. As always, we remain committed to positively contributing towards a sustainable Indian energy sector. Thanks for the interest. 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.