Thread by @Finology_Quest

Indian Energy Exchange: Analysis

The meteoric rise of IEX!

One stock that has been making a lot of noise currently is the IEX. For most investors, exchanges have been a safe bet because of high entry barriers. Is IEX one of them? - A thread 🧵 /1
#sharemarket #StockMarketindia

But before getting into that, let’s first understand what exactly is the business model of IEX?

So, govt’s generally enter into long term agreements (PPA) with power companies for electricity, these agreements are based on their forecasted demand.

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Suppose now in September the demand for electricity is high in Mumbai due to the Ganpati puja and other festivities, while in Kerala due to bad weather there are frequent power cuts and consumption is less, so what local govt can do is trade electricity through an exchange.

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Where the seller that has excess energy can sell it, while someone who has deficit energy can purchase it.

Indian Energy Exchange is basically an energy marketplace, which provides a trading platform for the physical delivery of electricity, renewables, and certificates.

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The company has around 6,800+ participants which include buyers and sellers of power. Buyers of power include distribution companies (DISCOMs), large retail consumers and industrial consumers.

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On the other hand, sellers of power include power generation companies, independent power plants, captive power plants & discoms.
It allows trading in short term requirements of power. There is a spot/real-time market, a day ahead mrkt and a term-ahead market (up to 11 days)
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Product offering of IEX:

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#investing #sharemarket

Renewable power is traded in a similar fashion. The exchange also facilitates trades in renewable energy certificates, which allow a buyer to fulfil any mandatory obligation to use renewable energy.

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The company has also expanded overseas. Since its inception, the company has grown at a CAGR of 32%. But what has led to the rise of IEX?

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IEX was founded in 2008 by the Central Electricity Regulatory Commission to meet contingencies & sudden spikes in the demand for electricity. During that time, most of the power agreements were long term contracts & just 2.5% of the power consumed was traded at OTC market. /10

But now IEX handles 6.3% of an average 180 gigawatts of daily demand and has around 95% market share in the power exchange market.

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In the early 2000’s most of the power in the country was contracted through long term power purchase agreements, even today 88% of the power is sold through PPA’s. This happened because during that time India was a power deficit country.

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But over the years, India has gone from being a power deficit to a power surplus country.

As in the last decade, the industry expanded capacity rapidly. From 2012 to 2017 the thermal power capacity expanded in India, we witnessed a lot of players entering this space.

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In the last few years, renewable energy capacity has increased drastically.

Also, In the last decade installed generation capacity has grown at a compounded rate of 8%, compared to 5% growth in consumption.

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Since the production was higher than the consumption, the prices in the open market were less compared to the long term contracts. Consumers of electricity started shifting to the spot market due to lower prices.

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The transactions on IEX started to grow and so did the revenue from these transactions.

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Drivers of Growth:

To keep up with the changing consumer demands the company is coming up with new trade products, for ex a few years back the company launched real-time market trading, where an auction is conducted every 30 minutes for 15-minute contracts.

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In these contracts, power has to be delivered an hour after the auction. Due to these varied offerings, the trade volume on the exchange is increasing.

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It now plans to launch a day-ahead market feature as well as a long-term contract for up to a year, for which it has already applied for permission to the Central Electricity Regulatory Commission.

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In April, the exchange added cross-border trading to its portfolio, starting with Nepal.

Also, the company is in the process of launching power derivatives, which is a hedging instrument used against price fluctuations.

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The govt policies also favour the exchanges as in the draft of National Electricity Policy 2021 proposes an increase in the share of spot markets to 25% by 2023-24, the govt has proposed this because the states owe around 90,000 crore to the power companies.

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And if they buy through exchange they would have to settle accounts with them.

IEX’s has a first-mover advantage in the industry since it has more participants registered with it.

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And due to that price discovery mechanism on the platform is efficient and consumers get the best price on the exchange.

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The shift towards rnwable enrgy could b a major driver in d grwth of IEX, with major player like Reliance entering into d space, we cn expct good grwth in the sctr.

As the generation of rnwable enrgy is dependent on nature & is uncertain, it would incrse the usage of IEX

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Healthy financials

1) ~ 65% PAT margins
2) ~ 80% Operating profits
3) ~ 45%% ROE
4) ~ 59% ROCE

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Challenges:
- Highly regulated by the govt.
- A new power exchange backed by PTC India and BSE has been set up
- Competition from power exchange of India.

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