Indian Energy Exchange Ltd (IEX) Q2 FY23 Earnings Concall Transcript

Indian Energy Exchange Ltd (NSE: IEX) Q2 FY23 Earnings Concall dated Oct. 21, 2022

Corporate Participants:

Satyanarayan Goel — Chairman and Managing Director

Analysts:

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Mohit Kumar — DAM Capital — Analyst

Aniket Mittal — SBI Mutual Fund — Analyst

Devansh Nigotia — SIMPL — Analyst

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Abhishek — Daydream Entertainment — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Q2 FY ’23 Earnings Conference Call of Indian Energy Exchange hosted by Axis Capital Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Sumit Kishore from Axis Capital, Ltd. Thank you, and over to you, sir.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Thank you, Michele. On behalf of Axis Capital, I’m pleased to welcome you all for the Indian Energy Exchange Q2 FY ’23 Earnings Conference Call. We have with us the management team of IEX, which is represented by Mr. S.N. Goel, Chairman and Managing Director; Mr. Vineet Harlalka, CFO; Mr. Rohit Bajaj, Head, Business Development; 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.

Satyanarayan Goel — Chairman and Managing Director

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 Operations and Product Development; Mr. Sangh Gautam, CTO; Mr. Samir Prakash, HRO; Ms. Aparna Garg, Head of Investor Relation and Communication; and Mr. [Indecipherable].

Friends, India has recently surpassed U.K. to become the world’s fifth 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 headwinds, the manufacturing PMI stood at 55.1% in September 2022, and 56.2% in August ’22. The services PMI was 54.3% in September ’22, and 57.2% in August ’22. The services PMI indicated a certain state month of extension in the month of August ’22. We witnessed a mild reduction in PMI in September as compared to August Q2 subdued increase in orders and increase in input costs. For FY ’23, 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 a year-on-year basis. And the surge in overall consumption was driven by the increase in economic activities. The total installed capacity as of September 30th stood at 408 gigawatts, registering a growth of 5% on a year-on-year basis. The renewable energy capacity is steadily growing and is today almost about 165 gigawatts, which is 40% of the total capacity. It is evident that the momentum advancing towards the carbon neutral economy, and we will achieve 50% of clean energy share by 2030. Unfortunately, led by geopolitical disruptions, that 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 price. And because of this, the cost of power was higher and the price [Indecipherable] higher. To manage the power prices, Government of India has reduced supply of coal to the e-auction and increased supply of coal [Indecipherable] power plant. The e-auction coal quantity declined by 63% on a year-on-year basis to 17 million metric tons in the first five months of FY ’23.

As a result of this, there was an increase in the e-auction price and reduction in the availability of coal, therefore, the input cost increase, availability of power [Indecipherable] was lower and it resulted into higher [Technical Issues]. The prices were high INR0.40 [Phonetic] in the second quarter against INR4.14 in the second quarter of FY ’22. A large part of the sales volume, which is almost about 65%, was contributed by the distribution company. And as you are aware, the distribution company sells power after meeting the demand and they still buy from [Indecipherable]. We are now witnessing a gradual improvement in the coal situation in India and as the government is effectively taking various initiatives to cut the increased input costs.

During the quarter, the domestic coal production increased by 10% on a 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 a better inventory at the power plant. Further to cater to the increasing demand of coal and reduced dependency on the imported coal, government has decided to further increase the domestic coal production to 1.2 billion metric tons by 2024.

The improving core situation is leading to an increasing power generation and thereby increasing self-liquidity on the exchange platform. And our price during the first 10 days of the — for the month of October is only INR3.85 against INR5.40 in the second quarter. However, despite the substantial reduction in price, these prices still do not provide optimization cost for distribution company and purchase option for the industrial consumers. Going forward, we expect further correction in prices on the scan, which will result in increased volume on the expense platform.

As part of the government’s test towards transforming the power sector in the country, further regularity and policy reforms were implemented. Some of the noteworthy initiatives for this quarter are government notified this late payment surcharge and related matter rules 2022. As per these rules, there is a provision for rationalization of late payment surcharge. Further a generating company is free to sell un-requisitioned power with the power exchange without obtaining consent of the beneficiary. I am sure it will improve sell side depleting on the exchange platform. Further, ensuring timely payment by the distribution company to the sellers will ensure financial discipline in the sector.

Electricity amendment bill 2022. This bill was introduced in the parliament and as per their bill, there is a provision to introduce multiple distribution companies in the same area. And I’m sure this will promote private participation in the distribution sector, which will improve financial health of the distribution sector, and that would be good for the development of the market. And this year, power issued proposal for high-priced day-ahead market, which is [Indecipherable] market segment, which will facilitate investors with a high variable cost exceeding to INR12 per unit to participate in this exchange market. This will ensure availability of power during high demand periods even at slightly higher cost. The market is expected to be launched within the next one month’s time. Draft electricity amendment rule 2005, the proposal fixed 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 markets.

Energy Conservation 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. And 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 1st of January ’23 and implementation of GNA will be more conducive towards market development within the country. All these initiatives go a long way in creation of conducive environment for the power market in general and will contribute significantly towards lifting the exchange market in the country.

Coming to IEX update. During quarter two FY ’23, 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 a 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 on account of — the volume decline was mainly on account of the supply-side disruption. On a stand-alone basis, revenue for second quarter was INR113.8 crores, a degrowth of 6% on a year-on-year basis. The PAT declined by 10.3% on a year-on-year basis to INR70.1 crores with a margin of 1.6% [Phonetic]. However, revenue is flat and PAT increased by 2.1% on quarter-on-quarter basis. The primary intervention of the Indian government to raise their domestic production of coal has drastically improved the coal inventory with the rationalization of power prices on the exchange, their 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 will 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 requirements of our customers. In this regard, we continue to ascend our book of products, and I’m delighted to share with you that we have successfully added their contracts for 90 days. Our daily contracts supplemented, weekly contracts up to 12 weeks and monthly contracts up to a period of three months. Earlier, we were offering products only up to 11 days. Now we have products to meet requirement within three months. And based on the experience of these products, CERC is likely to approve our yearly contracts also. Our members have shown significant interest in this segment. And once prices normalize, we expect to witness similar growth in the long-term contracts also as seen in the RTM and green markets.

Now, I will discuss some of the developments at the IEX during quarter two of FY ’23. During the quarter despite the 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 [Indecipherable] lakh per MMBTU, and that is a volume growth of 500% on a year-on-year basis and 44% on a quarter-on-quarter basis.

The profit after tax was recorded at INR2.42 crores, witnessing a growth of 111% on a quarter-on-quarter basis. I’m pleased to share that important stakeholders of the gas sector are now participating on the IEX platform.

IEX is well positioned to leverage the opportunities arising from transformation in the global and Indian energy sector, and we’ll continue to pursue opportunities in the present power market and evaluate options in the other market segments. We’ll continue to fortify our position in existing products and launch new products such as ancillary markets, capacity market and gross market, gross bidding.

Indian Gas Exchange, our first diversification initiative is growing strength to strength [Phonetic], backed by Government of India’s ambition to increase the share of gas from 6% to 15% by 2030 in the overall energy bucket, thereby creating a huge potential for IEX in the years to come.

As we continue to explore other opportunities in the energy marketplace, we are inspired by the government’s idea of establishing a coal exchange within the country. Similarly, annexment of the Energy Conservation 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 harnessed vast amount of renewable power to meet its growing appetite for energy, IEX will continue to make use of technology and innovation to facilitate [Indecipherable] energy foundation.

Friends, now we will commence the question-and-answer session. Thank you.

Questions and Answers:

 

Operator

[Operator Instructions]. The first question is from the line of Mohit Kumar from DAM Capital. Please go ahead. Mr. Kumar, I have unmuted your line. Kindly proceed with your question.

Mohit Kumar — DAM Capital — Analyst

Hello, can you hear me?

Operator

Yes. Please proceed.

Mohit Kumar — DAM Capital — Analyst

I just wanted to know — you had [Technical Issues]. So our electricity volumes have fallen around 8% to 9% if we remove the REC volumes. And why do you see we might end up further in the end of the [Technical Issues].

Satyanarayan Goel — Chairman and Managing Director

Mohit, your voice is not clear.

Operator

Mr. Kumar, I would request [Speech Overlap].

Mohit Kumar — DAM Capital — Analyst

Am I I’m audible now, sir?

Operator

Yes.

Satyanarayan Goel — Chairman and Managing Director

Yeah, it is better.

Mohit Kumar — DAM Capital — Analyst

So, I wanted to understand, sir, our electricity volumes have fallen around 8% to 9% in the H1. So where do you see we might end up in FY ’23? And also at the start of the year, you had guided for 8 billion to 9 billion units for REC. Sir, do you think we can still achieve it?

Satyanarayan Goel — Chairman and Managing Director

See, as far as electricity is concerned, we are aware that in the first quarter, the situation was quite challenging. And 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 and e-auction prices were also higher. So, government decided to supply more coal under the PPA plants, so there is no [Indecipherable] by the states. And as a result of that, the generation improved under the PPA plant, so the demand in that market was less. So, because of that, I think quarter — first half of this year, the volumes were lower. But I’m sure in the second half of the year, coal supply has already improved. Inventory at the power plant at the mine is better than what it was last year. And as you are aware, in the second half of the year, coal production is almost 60% of the total year production. And power generation is comparatively lower in the second quarter. So, I’m sure availability of the coal in the e-auction market is — also will improve. I mean, as I told you, this year, the e-auction was only about 17 million metric tons, which was 63% lower than last year. So, now I’m sure in the second half that position will improve. There will be more e-auction coal in the market. Rates also should come down, and we should see good volume growth in the second quarter. It will be difficult to say anything about the numbers because numbers are dependent on the demand growth and participation of distribution companies. But looking at our first quarter, I’m sure we should be able to at least achieve the numbers, which we achieved in the second half of the last year or better than that even.

Mohit Kumar — DAM Capital — Analyst

Understood, sir. And also, can you give us a brief update on the new product launch on like — like the time line 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.

Satyanarayan Goel — Chairman and Managing Director

See, we have already launched these long-duration contracts for delivery of power up to three months. In these contracts, we are seeing a lot of interest from the buy side. And we have conducted almost about 25 of e-auction calls in this. But since generating companies are — they are still not very sure about availability of coal. So, the price quoted by them is slightly higher in the market. And only one transaction has been accepted by the buyer at that price. I mean, at a price of about INR5.70. So, I’m sure when the prices soften in the market, the reverse auction foundations for delivery up to three months also will improve. The volumes under that also should improve. We are — now I mean — you also asked about the REC certificate markets. In this market also, we are seeing active participation now in distribution for companies, particularly they participate most in the last quarter to comply with RPO provisions. So, in the second part, I mean, we expect a much better participation in the REC market. Other new products we are going to launch this at the DAM market, which has been directed by the Government of India. Maybe by — in the month of December, we will launch that market. And ancillary market regulator has issued the regulations, but that market will be functional only after GNA and grid codes are notified and those were implemented. So, maybe from the 1st January ’23, the ancillary markets should also be through the exchange platform.

Mohit Kumar — DAM Capital — Analyst

And sir, specifically for the derivatives contract, what is the time line for it?

Satyanarayan Goel — Chairman and Managing Director

Derivatives contracts, earlier also I have mentioned about it. Derivatives will be launched — will be regulated by SEBI. So, this will be launched only on the SEBI regulated exchanges, such as MCX or NSE or BSE. So, 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, which will bring a lot of liquidity in the market. The volatility in the price that also will be smoothened, and we have seen wherever there are derivatives, the transactions in the spot market that increases because the participants have an option to have their position in the derivative market. So we are also actively working in this market so that this market starts early. But then, there is a joint working group consisting of members from CERT and SEBI. They are working on this. We understand that this should start sometime in the month of December or January.

Mohit Kumar — DAM Capital — Analyst

Okay, sir. Thanks a lot. I’ll join back in the queue.

Satyanarayan Goel — Chairman and Managing Director

Thank you.

Operator

Thank you very much. The next question is from the line of Aniket Mittal from SBI Mutual Fund. Please go ahead.

Aniket Mittal — SBI Mutual Fund — Analyst

Yes. Thank you for the opportunity. A few questions. Firstly, in your presentation, you have highlighted that there’s been some shift in volume from the Day-Ahead Market to Day-Ahead Contingency Market. So, 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?

Satyanarayan Goel — Chairman and Managing Director

See, the reason for some shares shifting from DAM market to the Day-Ahead Contingency market is — but in that they had contingent — they had market. Buyers and sellers both have to pay their transmission charges. Whereas in the Day-Ahead Contingency market, it is only either buyer or seller for the transmission charges. So, there is double charging of transmission charges in the Day-Ahead Market. So, there is arbitrage of almost about 30%, 40% available in the Day- Ahead Contingency Market. So, some of the participants do transactions in the Day-Ahead Contingency Market to take advantage of that. And our share in the Day-Ahead Contingency Market in the quarter two, I think was almost about 50% — more than 50% in quarter two. And — but as I told you in the past also that GNA is going to get implemented from 1st of January. And under the GNA, all these anomalies will be corrected. So, there will be a single charging of transmission charges. Only buyers will have to pay the transmission charges. There is no transmission charges applicability for sellers. And in fact, for the Day-Ahead Market and the RTM market, the provisions are more favorable for these markets. So, I’m sure whatever transactions are presently happening in the Day-Ahead Contingency Market, they all will shift to the DAM market. So, this anomaly will get corrected.

Aniket Mittal — SBI Mutual Fund — Analyst

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? So, is there some market condition that is also facilitating, let’s say, to DAC from DAM?

Satyanarayan Goel — Chairman and Managing Director

No. I mean except for this arbitrage, I don’t think there is any other reason.

Aniket Mittal — SBI Mutual Fund — Analyst

Okay. The other question that I had was on the RTM market. And I’m fairly surprised by the growth that you’re seeing in the RTM market despite the higher prices. I think we’re 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? And despite the higher prices, why is the growth fundamentally coming over here? Is there — is just some sort of cannibalization that you think is happening from them or are there any other factors at play?

Satyanarayan Goel — Chairman and Managing Director

So, definitely, some cannibalization is also happening because earlier participants were placing bid in the DAM market at a slightly higher price. And now they have the option to buy power in the RTM market also. So, many of the participants are placing price sensitive bid also. So, as a result of that, it is not clear when they participate in the RTM market. So, some cannibalization has happened. But RTM market is mainly improving because of the higher share of the renewable generation taking place in the country. And because of the high renewable now, because of the variability in the renewable generation, participation has increased. Whey they suddenly define that the renewable is highest, many of the states can start [Phonetic] selling power and when wind generation starts going down, they start buying power. So, this kind of problem is happening. So RTM market, I’m sure when the unit reach [Technical Issues]. But now they have option to buy power in the RTM market. So, 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.

Aniket Mittal — SBI Mutual Fund — Analyst

Okay. That’s very helpful. Just one last question, and this is — I understand more fundamentally. So, 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?

Satyanarayan Goel — Chairman and Managing Director

Yeah. See, seller is taking a bit slightly higher price in the DAM market. But if it is not clear than in RTM market, he has no other choice. So, in the RTM market, he is placing at the marginal cost. So, it is like a real-time market. So, seller has no other option, but he will try to sell power at the lowest possible — I mean — minimum viable rate for him.

Aniket Mittal — SBI Mutual Fund — Analyst

Okay. So the seller is actually being more dominant than the buyer in the RTM in determining the pricing, [Speech Overlap].

Satyanarayan Goel — Chairman and Managing Director

Earlier also if you see the trend, Exchange Day-Ahead Market rates always need to be lower than the bilateral market because Day-Ahead Market was more near to the delivery. The transactions were happening in the Day-Ahead Market at the marginal cost. Now RTM market is further near to the delivery — actual delivery. So, I think this is a natural phenomenon.

Aniket Mittal — SBI Mutual Fund — Analyst

Got it. If I can add one more question. Sir, in the RTM market, as per you on the sell side, how much of the sell side is coming from URS power?

Satyanarayan Goel — Chairman and Managing Director

So, in this first half of this year, because of the high demand and less supply, there are hardly any URS power and most of the seller by the distribution companies, whatever surplus power they had under the PPA and beyond after meeting the demand, they were selling power in the exchange platform, and we also had import from Nepal about 400 megawatts of import. So, all that facilitated their RTM market.

Aniket Mittal — SBI Mutual Fund — Analyst

Okay. That’s very helpful. Thank you for taking my questions.

Satyanarayan Goel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Sumit Kishore from Axis Capital. Please go ahead.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Hi, sir. My first question is that in the first 20-odd days of October, the liquidity situation seems to have improved because sell bids were almost 70% higher than the purchase bids. And 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%. So, still, we see the October volumes so far down close to 20%, at least correct me so far on a year-on-year basis. So, 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?

Satyanarayan Goel — Chairman and Managing Director

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. Distribution companies were very, very active on the exchange platform. Every day, we were getting buy bid far in excess of the sell bid. 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. So, distribution companies buy on the exchange platform, it’s not a desperate buy. Some of the distribution companies are buying power to optimize their costs. Some of them are buying power maybe during the evening hours when the demand is higher. So, October, as of now is in comparison to last year, the volumes are lower, mainly because the participation of distribution companies is slightly lower. But I am sure [Technical Issues] when the availability of coal improves and prices are expected to go down further to maybe about INR3.25 to INR3.40, and 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 plants; and third is, it is viable even for the industry consumers to buy power from the exchanges.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Okay. Sir, because coal inventory at power plants is actually better than what it was same time last year, it’s almost [Technical Issues] from IEX perspective, we should be tracking e-auction coal availability and e-auction [Indecipherable].

Satyanarayan Goel — Chairman and Managing Director

Actually, this 9-day inventory is the PPA of this power plant. If you look at the inventory of the IPPs, which are merchant plants, that situation we’re still not compatible. So, I’m sure in the next 15, 20 days, Coal India has already started increasing the quantum in the e-auction that definitely should also improve.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Okay. Another question, which is actually a follow-up from the last one. The shift to DAC from DAM and the arbitrage that you mentioned around transmission of 40-odd paisa, will that arbitrage completely go after GNA is implemented from 1st of Jan? Will it reduce significantly for that shift back to happen?

Satyanarayan Goel — Chairman and Managing Director

No. this should complete — actually, in 2020 December, the transmission charge sharing regulations, which were implemented, there was some anomaly in that. Because of that, it has happened. Now, this issue was discussed with the regulator, and they have corrected this thing. So, going forward, this anomaly is not going to be there. And in fact, the regulations are more in favor of that Day-Ahead and RTM collective transactions. So, in most of the occasions, distribution companies will not have to pay any transmission charges for purchase of power for 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. So, these regulations are in fact more favorable to the collective transactions.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

But this arbitrage will go once the GNA is implemented?

Satyanarayan Goel — Chairman and Managing Director

100%, this will go.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

So, of course 1st of Jan.

Satyanarayan Goel — Chairman and Managing Director

What we’re expecting is that if we get implemented from 1st of Jan, based on our present discussions with NLDC and CERC. But then for implementing it some — we are now doing all transactions through the National Open Access Registry, which is a software-based solution. So, there are some changes to be done in that. NLDC is already working on that. Hopefully, from 1st of January, it will get implemented.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Okay. Otherwise, because of these operational issues, there will be some more delays before that can be implemented. Is my understanding right?

Satyanarayan Goel — Chairman and Managing Director

No. We are reasonably sure that it will get implemented from 1st of January because there is a lot of monitoring from the CERC and also — and NLDC, I think, they have done a very significant progress as of now.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Yeah. And on a previous question, so INR3.85 is the current exchange price for the Day-Ahead Market. Reaching about INR3.30 will be a reasonable level or stage to the demand to come back on exchanges? Or so what price would really be attractive?

Satyanarayan Goel — Chairman and Managing Director

I mean what we have seen in the past around INR3.25 — I mean, something around INR3.25 to INR3.50. In this price range, there are many high-cost power plants and distribution companies then will shut down those high-cost power plants and start buying from the market. Even in many of the states, they’re open to consumers also, there is a breakeven at a price, which is around this. So, their purchase also increased on the market. So — and distribution companies, in any case, for them, this is a lucrative price.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

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 declined slightly higher, closer to 13%. So, is that explained by any rebates, which have been given by IEX or what explains that? And the other income is slightly on the higher side? Is that mainly because of treasury income? Or is there any clarification on this?

Satyanarayan Goel — Chairman and Managing Director

Yeah. Number one is, last year, there were no REC certificates. This year, there is some quantum of REC certificates in the volume. And in the REC certificate, we give rebates to the customers. I mean, we give some incentive to them based on the volume. So, that is one reason. Second is, in the membership and client fees also, we’ve made some concessions this time. We did give some incentives because of the high price, many of the trading companies were in open access for open access consumer. This was not viable and they were not doing a good volume, some of — many of the traders. So, we allowed them open for a couple of months. And I think primarily because of these two reasons, right, revenue is — percentage wise, this is a difference.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Got it. And on other income, sir, is this mainly treasury income? Or is there any…

Satyanarayan Goel — Chairman and Managing Director

Yeah, mainly treasury income because the interest rates have gone up, so it’s…

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Got it. Thank you so much. Thank you for answering my questions.

Satyanarayan Goel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Devansh Nigotia from SIMPL. Please go ahead.

Devansh Nigotia — SIMPL — Analyst

Hi, sir. Thanks for the opportunity. Sir, just a follow-up to the temporary shift in what we call DAM to DAC. I mean — I just want to understand the change in transmission charges and then the arbitrage of INR0.3 to INR0.4, you mentioned that, if we recall, from December 2020, but the shift we are largely seeing in last three to four months or probably six months, so then — I mean, I’m not able to understand why this change happened in only the last six months? And secondly, also, the uncertainty of availability that I mentioned in Bihar [Phonetic], but both DAM and DAC, both 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? So, if you can just share some perspective on this.

Satyanarayan Goel — Chairman and Managing Director

Yeah. So, 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 price. From December 2020, it started increasing. It increased to almost about 4%.

Devansh Nigotia — SIMPL — Analyst

Okay.

Satyanarayan Goel — Chairman and Managing Director

In March this year, when we had shortage of power, so the distribution companies, they wanted to ensure availability of power. And then, that is the point when they shifted to the DAC market. In many of the cases, they did off-market agreements and verbal understandings and then participated on the exchange platform in the DAC market and did those transactions. So, from March, right, DAC volumes have started increasing. But then again, from the month of September, if you see, when our prices have started coming down, DAC volumes have again started coming down more. They are significantly lower now in September. And in October also, these are hardly about 7%, 8%.

Devansh Nigotia — SIMPL — Analyst

Okay. But, in Day-Ahead Contingency also, the trade happens a day — just a day before the power is purchased. Is that understanding correct?

Satyanarayan Goel — Chairman and Managing Director

[Speech Overlap] Day-Ahead Contingency, if they are doing understanding before the market hours, so generator is keeping power for him and then doing transactions in the Day-Ahead Contingency Market.

Devansh Nigotia — SIMPL — Analyst

Okay. And sir, as you mentioned that REC, there is a — if it might go around then, there will be the carbon market where carbon credits will be traded, so what will be the market platform for that to happen? Is that decided yet? And 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?

Satyanarayan Goel — Chairman and Managing Director

See, Bureau of Energy Efficiency is a nodal agency for this, and they have issued a discussion paper also on this for creating a carbon market in the country. And 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 not — which is unsold, maybe those will be converted into carbon credits and then participants can buy that. And going forward in the next two, three years, they will create a mandatory carbon market, and they will create obligation for the business and different users who are generating CO2 for the compliance that they have to reduce or obtain these carbon credits from the market. And when that market is introduced, that is going to be a market something like what is there in REC market or the ESCerts 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.

Devansh Nigotia — SIMPL — Analyst

Okay.

Satyanarayan Goel — Chairman and Managing Director

And we are also talking about the voluntary carbon market. The voluntary carbon market is — India is — India has large options to create carbon credits [Phonetic] and a lot of buyers from the European countries, multinationals, they want to buy carbon credits on a voluntary basis to comply with the ESG requirements to their brand building. And so, we see a lot of demand in that market also. And we want to start — they are also considering that option, exploring that option. 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.

Devansh Nigotia — SIMPL — Analyst

Okay. Okay. And sir, based on your discussion with SEBI and MCX regarding the relaunch of derivatives, what is the constraint, which is postponing the launch of these contracts? Because LDC — CERC has launched LDC. So, what do you think what are the constraints for the derivatives to be launched?

Satyanarayan Goel — Chairman and Managing Director

See, if you look at the different derivatives, which are there for the — different commodities, derivatives for the different commodities on the MCX platform or the NCDEX platform, you don’t have a spot market for any of those commodities. In case of electricity, we have a very vibrant electricity market. Regulatory is definitely concerned about the effect of the derivatives in the spot market. They want to analyze from all angles that there is no adverse impact of this on the spot market. And that is why there is some delay, which is happening.

Devansh Nigotia — SIMPL — Analyst

Okay. Okay. Noted, sir. Thanks a lot for the detailed explanation.

Satyanarayan Goel — Chairman and Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Milind Karmarkar from Dalal & Broacha Stock Broking Private Limited. Please go ahead.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Hi, good afternoon, gentlemen. I have a couple of basic questions. So, we have been talking about 4 to 5 times volume growth because of PPAs moving away and trading volumes increasing in the last — in the next — in the coming years, let me put it that way. But this year, if I see, this year’s volumes actually don’t support them. So, I just wanted to understand, has our thought process changed or we are reasonably confident that this type of volume growth will come in going forward?

Satyanarayan Goel — Chairman and Managing Director

See, you can’t have that kind of volume growth, which we had seen in the last two years, every year. And we definitely get a year in between where the consolidation will happen.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

No. Fair enough. Fair enough.

Satyanarayan Goel — Chairman and Managing Director

This year, in particular, was a very, very challenging year for all countries. And this was mainly because of the high increase in the input cost. See, if you look at the generation last year from the imported coal to power plants, and even many of the ITPs were importing coal and blending with the domestic coal and selling power in the exchange platform, but it is no more viable for them. So, I think situation has changed this year. And in spite of that, if we are able to maintain our volume at par with the last year first half basis, I think I must say that it is a good job done. And in the coming second half, we definitely expect a better [Technical Issues].

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

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?

Satyanarayan Goel — Chairman and Managing Director

See, that is a stated rule of the government, that distribution companies have the option to exit PPA after 25 years. They can do that, but there are not many projects where the PPAs are 25 years old. Mostly, the ITP station started from 2007/’08. So in many of the cases, the PPAs are still only about 13, 14, 15 years. So, another 10 more years to go. Some of the NTPC stations, with their PPAs, I mean, 25 years is over in one or two cases. So, in one of the cases, I think distribution companies have exercised their option to exist from that plant also. But in any case, there is demand growth happening in the country and demand growth happening at a rate of 6% to 7%. I think draft national electricity plant projection is 7.2% growth in the demand for the next five years. And it’s a very high number. So, if the demand increase continues to happen, I’m sure good part of the demand increase will come in the market. And that gives us the opportunity to increase power volumes.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

And what about the new generating capacities, which are coming in, let’s say, renewables. They would — what — in your opinion, they would directly come to the market or they would prefer to go the PPA route?

Satyanarayan Goel — Chairman and Managing Director

See, as of now, most of the renewable capacity is under the PPA. But the distribution companies who have the PPA, we have seen their participation on the exchange platform has started increasing now. Whenever they have more renewable power, we want the requirement to generate that power in the market.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay.

Satyanarayan Goel — Chairman and Managing Director

So, that is one. Second is that at the price, which they are able to get in the Day Ahead Market within the solar hours, many of that — that price is definitely more than INR3.50 for the last year and this year. So, many of the ITPs are also now considering to set up merchant capacity. Maybe that merchant — maybe 20%, 25% merchant and that balance [Technical Issues] to the lenders. So, many of them are considering this option also.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. 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. So, 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?

Satyanarayan Goel — Chairman and Managing Director

See, last two years in the electricity segment, we saw a growth of almost about 35%. So, yes, this year, definitely the year of consideration and next year, difficult to say about the growth number. But if the generation demand growth happens at a rate of 7% to 8%, then I am sure exchange volumes should also grow at least at the rate of 20%.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. But what about the competition from the new exchanges?

Satyanarayan Goel — Chairman and Managing Director

I’m sure you all must be having the numbers. I need not talk about that.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Sir, one has not yet started. The second is just started. So, what’s your take on that? That’s what I’m asking.

Satyanarayan Goel — Chairman and Managing Director

Number one, one exchange is already in operation for the last 14 years. Started operation in November. We started operation in June. We’re in operation for the last 14 years. Our exchange started on 7th of July and we are in operation. I think you have the numbers, you can compare with that. I don’t think it has made any impact on our volumes — on our business.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Okay. Okay. My last question was that this government has also talked about privatization of distribution capacities across India. So, just wanted to understand in which way would this impact the volumes — of the traded volumes on the exchanges?

Satyanarayan Goel — Chairman and Managing Director

The distribution sector is financially viable. It will bring viability in the power sectors. Today, the distribution company is losing money for every unit they supply.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Correct.

Satyanarayan Goel — Chairman and Managing Director

So, there is a gap between there ARR and [Indecipherable]. And so, there is no incentive to supply more power, but if privatization happens and there is an improvement in the distribution sector, the loss reduction happens and if the companies start making some money out of the sale of power, then we will have incentive to supply more power. I mean, in a country like India, maybe we’re talking about 7%, 8% kind of GDP growth and our per capita consumption is only about 1,300 units to 1,400 units per year. World average is more than 3,500, which is large. There is a very high potential for demand growth. And it is not happening because there’s no incentive for distribution companies to supply more power.

Milind Karmarkar — Dalal & Broacha Stock Broking Private Limited — Analyst

Got it. Okay. Thank you very much. And all the best for the future.

Satyanarayan Goel — Chairman and Managing Director

Thank you. Thank you.

Operator

Thank you. Ladies and gentlemen, this would be the last question for today, which is from the line of Abhishek from Daydream Entertainment [Phonetic]. Please go ahead.

Abhishek — Daydream Entertainment — Analyst

Hi, sir. I just wanted to know one question. Like we already talked about India’s growth. We always talk about future is good. We are expanding in other countries and also a lot of other things, prospects. But 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.

Satyanarayan Goel — Chairman and Managing Director

See, 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. So, the e-auction rates are higher. Exchange clearing price is higher, which is not good. For any market when the prices are higher, that is not doing well. And the 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 state has reduced their power procurement cost by more than INR1,000 crores, just by purchasing more power for the exchange because our rates are very, very competitive. So, this year, that kind of opportunity was not there for the distribution company to optimize their costs. [Technical Issues] 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 their breakeven rate. So, they have more incentive to buy from the market. So, I think because of all these things, we — this was a challenging year for us and volumes were less because of that. But going forward [Speech Overlap].

Abhishek — Daydream Entertainment — Analyst

Yeah. I love the explanation. So, one more space warranted [Phonetic] 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 literal way, but a lot of negativity and especially FIIs, we see they’re selling and share price also, we see a lot of negativity. So, do you have any plan to counter that or working on that?

Satyanarayan Goel — Chairman and Managing Director

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 are — what we hope to do in future, I can probably talk about that.

Abhishek — Daydream Entertainment — Analyst

Did you want to say anything about the competition because a lot of negativity about the competition but you said that the volume is dry, but it’s not well — I mean, not well communicated?

Satyanarayan Goel — Chairman and Managing Director

I told you about the competition four months apart, the trade exchange also is in operation. And you can see the volume of the other two exchanges.

Abhishek — Daydream Entertainment — Analyst

Lovely, sir. Lovely. Lovely. Thank you very much.

Satyanarayan Goel — Chairman and Managing Director

And I’m sure these numbers will speak in the market.

Abhishek — Daydream Entertainment — Analyst

Thank you, sir. Thank you very much.

Satyanarayan Goel — Chairman and Managing Director

Thank you. Thank you.

Operator

Thank you. As that was the last question for today, I would now like to hand the conference back to Mr. Sumit Kishore for closing comments.

Sumit Kishore — , Axis Capital, Ltd. — Analyst

Thanks a lot for giving us this opportunity to host the call. I wish team IEX and the audience on this call a very happy Diwali. So, over to you for any closing comments. Thank you.

Satyanarayan Goel — Chairman and Managing Director

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 Discoms and open access consumers. And 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. And thank you all for being a part of this call. I look forward to our interactions in the next quarter. Thank you.

Operator

[Operator Closing Remarks].