Indian Energy Exchange Ltd (IEX) Q3 FY23 Earnings Concall Transcript

Indian Energy Exchange Ltd (NSE: IEX) Q3 FY23 Earnings Concall dated Jan. 23, 2023

Corporate Participants:

Satyanarayan Goel — Chairman & Managing Director

Vineet Harlalka — Chief Financial Officer

Analysts:

Sumit Kishore — Axis Capital — Analyst

Mohit Kumar — DAM Capital — Analyst

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Yash Nerurkar — PPFAS Asset Management — Analyst

Nikhil Tyagi — AllianceBernstein — Analyst

Devam Modi — ARDEKO — Analyst

Anshuman Ashit — ICICI Securities — Analyst

Lavanya Tottala — UBS — Analyst

Ankush Agrawal — Surge Capital — Analyst

Arul Selvan — Independent Advisors Private Limited — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Indian Energy Exchange Q3 FY ’23 Results Conference Call 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 Limited. Thank you, and over to you, sir.

Sumit Kishore — Axis Capital — Analyst

Thank you, Darwin. Good afternoon, ladies and gentlemen.

On behalf of Axis Capital, I am pleased to welcome you all for the IEX Q3 FY ’23 Earnings Conference Call. We have with us the management team of IEX which is represented by Mr. SN Goel, Chairman and Managing Director; Mr. Vineet Harlalka, CFO; Mr. Rohit Bajaj, Head, Business Development; Ms. Aparna Garg, Head, Investors Relations and Corporate Communications.

We will begin with the opening remarks from Mr. Goel, followed by an interactive Q&A session. Over to you, sir.

Satyanarayan Goel — Chairman & Managing Director

Good afternoon, friends, and welcome to the earnings call for quarter three of financial year 2023.

Let me begin by wishing all of you a happy New Year. With me today on this call are Mr. Rohit Bajaj, Head, Business Development; 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, CHRO; Ms. Aparna Garg, Head of Investor and Communications; and Mr. Aditya Wali.

At the outset, India’s commencement of the G20 presidency on December 1 marks a significant milestone towards undertaking a leadership role on the global stage. It also brings an opportunity for India to showcase this sustainability roadmap. On the economic front, India’s post-COVID economic recovery continued with a strong H1 ’22-’23. The country registered a broad-based economic expansion of 9.7% during this period and was placed amongst the fastest-growing economies of the world.

Recently, India’s manufacturing Purchasing Managers’ Index, PMI, rose to 57.8 in December 2022 from 55.7 in the previous month, the highest it has been since October 2022. Similarly, the services sector in India did better than it has in the last 6 months with the services PMI rising to 58.5 in December from 56.4 in November. With increased economic activity within the country, electricity consumption in India for quarter three FY ’23 stood at 343 billion units, which is a year-on-year growth of 6.8%.

Key contributors to this demand were increased — increasing consumption by the states; Rajasthan 16.4% year-on-year, Karnataka 12.5%, Gujarat 8.1%, Telengana 7.6% and Andhra Pradesh 6.9%. Installed capacity in India achieved 410 gigawatts as on December 31, 2022, in line with the country’s commitment towards arresting climate change and evolving into a net-zero emitter by 2070. The installed capacity of our renewable grew to 168 gigawatts. The growth of green energy is expected to help India attain its vision of achieving 50% of its entire energy consumption from non-fossil fuel sources by 2030.

In the quarter ended December 2022, the price of e-auction coal continued to be high while the quarterly average price premium declined from 293% in quarter two to 242% in quarter three of this year. It was considerably higher as compared to 35% for the special forward e-auction coal in FY 2022. As a result of this, input costs for Gencos continued to be high. Continuing high spot e-auction coal prices led to average clearing price in the day-ahead market at INR4.56 in quarter 3, while lower from INR5.4 in the previous quarter, but still high to provide optimization potential for Discoms and Open Access consumers.

During the quarter, coal production increased by 8.7% on a year-on-year basis to 225 million tons, while coal dispatched to the power sector remained almost similar at 184 million tons compared with the same period of FY ’22. Inventories at power plants now stand at 13 days. Improving coal inventory and further reduction in e-auction coal prices is expected to result in a decline in power price on the exchange platform and provide further cost optimization opportunities for Discoms and Open Access consumers. This will result in higher volume on the exchange platforms.

On the regulatory and policy front, several developments took place. A few highlights are: In early December, the new ERC regulation — the new REC regulations for RE generators was implemented. The new REC mechanism of no floor price and fungibility between REC is likely to increase liquidity in the market. The trading of ESCerts is expected to start in this month. Based on this, CERC made amendments to define a floor price for trading energy saving certificates which is fixed at 10% of the price of one metric ton oil equivalent of energy consumed as notified by central government.

The GNA regulations were notified in October 2022 and were partially implemented at the grid as the grid quoted in the top sales. The regulations are expected to be implemented before the end of FY ’23. Implementation of GNA will remove regulatory arbitrage, which led to temporary shift of volume from DAM market to DAC market and will be more conducive to our further market development within the country. Further, CERC issued Deviation Settlement mechanism and Related Matters of Regulation 2022, linking the DSM charges to the signed worthwhile price discovered on the exchange. This will discourage Discoms to overdraw under DSM and will lead to increase in the — volume in the RTI market. All these initiatives will help further deepen power market in the country.

Coming to IEX updates, during quarter three FY ’23, electricity volume at 23 BU grew by 9% on a quarter-on-quarter basis. However, electricity volumes declined 2% on a year-on-year basis as compared to Q3 of FY ’22. Volumes were impacted largely due to supply side constraints, led by high prices of e-auction coal. REC volumes at 1.2 BU during quarter three FY ’23 witnessed a degrowth of 68% on a year-on-year basis as compared to quarter three of FY ’22, as in quarter three FY ’22 had exceptionally high REC volume of 38.3 lakhs to fulfill the pent-up demand caused by a stay on REC trading by APTEL for almost a period of 6 months — 16 months.

Overall, volumes at 24.2 BU recorded a 5% quarter-on-quarter growth across all market segments. However, on a year-on-year basis, overall volumes declined by 12% because of power supply constraints, high price discovered during quarter three 2023, and high REC traded volume in quarter three of FY ’22. In November 2022, IEX filed a petition for introducing the high-price day-ahead market segments to enable generators which have high variable costs, more than INR12, to participate in this market. We are expecting to start this market by February 2023.

We continued to sustainably transition India’s energy markets through efficient and asset-light business. In quarter three this year, we incorporated a wholly owned subsidiary, International Carbon Exchange, ICX. ICX is aimed to leverage opportunities that exist in the voluntary carbon market. That sales mechanism will facilitate market participants to trade in voluntary carbon credits, allowing for transparency and optimal price discovery. We are confident that ICX will go a long way in helping achieve India’s target of reducing the emission intensity of its GDP by 45% by 2030, to limit global warming to 1.5 degree Celsius. The quarter also IEX become India’s first carbon-neutral power exchange using market-based tradable instruments to offset its carbon emissions. This will help IEX members and participants to reduce their Scope 3 emissions by building a greener value chain.

I shall now talk about developments at IGX. In quarter three FY ’23, there has been several noteworthy developments at Indian Gas Exchange. IGS traded a total volume of 24.42 million MMBtu during quarter three FY ’23, which was a 568% year-on-year increase. The growth was largely on the back of participation by major domestic gas producers and an increase in the number of participants. During this quarter, several members including RIL, BP Exploration Alpha and Vedanta Limited joined IGX. Recently IGX launched, GIXI, the first ever nationwide price index to reflect benchmark natural gas prices of India — for India. The IGX price index is developed with the purpose to derive a single price for the country, in line with the international benchmarks such as JKM, Henry Hub, West India Marker, TTF, etcetera, which are currently representative of the price of the respective strategic regions.

Now I will enumerate some of the IGX financials during the quarter three FY ’23. During the quarter, profit after tax at INR12.76 crores witnessed a growth of 427% on quarter-on-quarter basis and 1,437% on a year-on-year basis. Efforts undertaken by IGX in the country’s gas sector were also recognized at the industry award 2022, where IGX won the Best & Pioneering Gas Exchange Initiative for the Gas Economy award.

It is now time for me to summarize the financial performance of the company in this quarter. On a consolidated basis, revenue for quarter three FY ’23 increased 3.1% on quarter-on-quarter basis from INR113.8 crores in quarter two to INR117.4 crore in this quarter. However, due to decline in traded volumes, revenue for quarter three witnessed degrowth of 10.3% on a year-on-year basis. Consolidated PAT at INR77.2 crores grew 8.4% on a quarter-on-quarter basis as compared to INR71.2 crores in quarter two of FY ’23.

With gradual improvement in domestic production of coal and improvement in coal inventory, we expect a rationalization of power prices on the exchange and the volume is expected to improve. Since its inception, IEX has grown with focus on customer-centricity, innovation, and technology. We continue to work towards building a sustainable and efficient energy future for India. In addition to developing new products, such as HP DAM and Ancillary markets, we are exploring business opportunities in voluntary carbon credit space with the launch of ICX, and also doing policy advocacy to create a framework for setting up coal exchange. We believe in the government vision for a sustainable future for India, India’s energy sector and are committed to help the country achieve it.

With this, we shall now commence the question-and-answer session. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from the line of Mohit Kumar from DAM Capital. Please go ahead, sir.

Mohit Kumar — DAM Capital — Analyst

Good afternoon, sir. Thanks for the opportunity. My first question is how has been the traction in long-term duration market? I think, we are afforded two kind of contracts monthly at any single-site diverse auction. Can you please comment on that?

Satyanarayan Goel — Chairman & Managing Director

Yeah, in the long — we introduced these long-duration contracts in the month of July and there is very good response from the market. I think by now, we have conducted more than 50, 60 auctions. But since the price discovery in this auction is on the higher side, because of the supply-side constraints as you are aware, many of these auctions have not resulted into a contract. And still we have done more than 1 billion unit transaction during the 6 months in this segment.

Mohit Kumar — DAM Capital — Analyst

Are we seeing any green shoots in this particular segment given that we are entering into a summer season?

Satyanarayan Goel — Chairman & Managing Director

See, invariably, in the long-duration contract, transactions happen when the prices are competitive. And then distribution companies, they get into a contract for 3 months, 6 months to have the power — seasonal power requirement — to meet the seasonal power requirement. But the price discovery at the moment because of the uncertainty in the availability of coal and very high yields and price — since the prices are higher, it is difficult to say about the volume growth in this, but I can give you broad picture about this market. Almost about 50 billion unit of projections are happening in the less than one-year contract through the trading company. And this is the potential for this market.

And with the kind of flexibility which we have provided for this long-duration contract, I’m sure we should be able to get a good — large share out of that. So going forward, we will see how the growth happens in this market. And next year, particularly, Government of India has fixed a very high target for coal production, which is 1 billion tons for the country as a whole. And if that happens, I’m sure e-auction coal prices also will cool down and our clearing price will also come down. And then you will see good traction in this market — long-duration contract market.

Mohit Kumar — DAM Capital — Analyst

Understood, sir. Secondly on this IGX, how much was the revenue, EBITDA and PAT for nine month? For Q3, you have mentioned INR12 crore. Is that the number right?

Vineet Harlalka — Chief Financial Officer

Yeah. During the quarter three, the total operating revenue was INR18.5 crores for the IGX in comparison to around INR5 crore revenues in quarter two.

Mohit Kumar — DAM Capital — Analyst

And, sir, nine-month number?

Vineet Harlalka — Chief Financial Officer

Yeah. For nine months the operating revenue was INR27 crore versus INR5 crore for the previous year.

Mohit Kumar — DAM Capital — Analyst

Profit number, sir, for the nine months?

Vineet Harlalka — Chief Financial Officer

Number for the nine months is INR16 crores.

Mohit Kumar — DAM Capital — Analyst

Okay, understood. So most of the profit has come in this quarter?

Vineet Harlalka — Chief Financial Officer

Yeah.

Mohit Kumar — DAM Capital — Analyst

Understood, sir. Thank you, sir.

Operator

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

Sumit Kishore — Axis Capital — Analyst

Yeah, thanks for the opportunity. My first question is, there has been a slight easing of supply-side constraints but we have not seen a meaningful improvement in liquidity on the exchanges so far. October was better in that respect but then November and December sequentially saw a worsening of liquidity and high exchange prices. January also the exchange prices so far is north of INR6. So what is the sequence of events you expect over the next few months on the liquidity aspect and where do you expect — how do you expect exchange prices to pan out over the next 6 months?

Satyanarayan Goel — Chairman & Managing Director

Yes, there has been significant improvement in the coal production in the country. But when the crisis happens, always rationing is done and this time government of India, what they have done is they have increased supply of coal under the PPA. So that states, they are able to get coal for running their power plants, or running the power plants, so the IPP is with the other contracts and [Indecipherable] that, good part of the demand of the state is met by the process end of the PPA.

PLF of the coal-based power plants increased almost by 6%, 7% as a result of that. Availability of coal in the market, which is an e-auction market is still low and e-auction price is still very high. I think it is still about 240%, 250% of the listed price. And at these prices, the variable cost is INR5-plus. So generators are not willing to — they cannot sell power at a rate lower than high INR5.25, INR5.50. And that is why our clearing price is still high and — but I’m sure forward when coal production improves, the availability in the e-auction market is more, the e-auction price which was only 35% premium in FY ’22, it should come down to that level. And when that happens, then you will see our clearing price coming down to INR3.50, INR4 and the volumes should also increase with that.

Sumit Kishore — Axis Capital — Analyst

So would that be a reasonable expectation to have over the next 3, 4 months, or based on how things are going right now, you expect that liquidity will be tight for some more time?

Satyanarayan Goel — Chairman & Managing Director

Maybe after August, September, this should come down because March, April, May are high-demand periods, and during this time even hydro and wind support is also not available. So there is going to be a lot of pressure on the coal-based power plants. But after that, I think the situation should improve.

Sumit Kishore — Axis Capital — Analyst

Okay. And would it be reasonable to say that when exchange prices are high, given that state Discoms’ requirement to optimize their power procurement, C&I customers wanting to buy cheaper power, all these demand will get impacted and that could weigh on volume growth on exchanges like we have seen over the last — in the fiscal so far?

Satyanarayan Goel — Chairman & Managing Director

Yeah, whenever the clearing price is high, definitely it is impacting our business, because our cleared volume normally consists of three components. One is purchase by Discoms to meet the demand. Second is the states which are located far away from the coal mines, their variable costs used to be higher. They used to back down those costly stations and purchase power from the market. And third is, purchase of power by the operators can be numerous, the industrial consumer to optimize their cost.

Now, with high clearing price, it is only the demand of the distribution company which has come into the market and optimization opportunity is reduced to a significant extent. And that is why there’s a slight dip in the cleared volume. But I’m telling you, in spite of that, even for meeting the demand, the volume is still very high and on quarter-on-quarter basis, we have seen growth with respect to quarter two, quarter three volume growth is almost about 8.6% in electricity. So with that, I’m thinking — I’m sure quarter four should be better than quarter three.

Sumit Kishore — Axis Capital — Analyst

Got it. Also, it was expected that the volume would shift back to DAM from DAC and you will be bringing out the GNA regulations in October. So this issue around double charging of transmission charges, have they still not been addressed? Can you please explain that?

Satyanarayan Goel — Chairman & Managing Director

No, issue has been appreciated by the regulators. They have already issued the GNA regulation, where they have addressed this issue and there will be no double counting. Only thing is that GNA regulations will be implemented after finalization of the Grid Code and transmission charge sharing regulation. These two regulations are under the — hearing have been held for all these regulations. So they are under finalization of this document, and once these regulations are issued, then this will be implemented together, because all these three regulations are interlinked. So we are expecting maybe from April 1 this will get implemented.

Sumit Kishore — Axis Capital — Analyst

Okay. My last question is on ICX. In your presentation, you have mentioned that by 2014 India will sell almost 200 million carbon credits, but over the next 2, 3 years how do you see the opportunity shaping, what are the investments that you will do in ICX and could you give us some more detailed view on the next couple of years what will be the developments here?

Satyanarayan Goel — Chairman & Managing Director

See, carbon market is a different kind of a market. And we have just started this exchange. What we understand, that the opportunity size is quite big but first 1 or 2 years could be difficult period — difficult years for us. As of now, we have just incorporated the company. We are in the process of developing the technology platform for this and understanding the market, approaching the buyers and sellers, getting them registered. So maybe by middle of this year, we intend to launch this exchange.

And thereafter, I mean let’s see, because many corporates, many industrial houses, they have made their commitment under the ESG to be carbon-neutral. And these targets are quite challenging. So, all of them to achieve these targets will have to buy carbon credits. And India is a large producer of carbon credits also. And since in the international exchange we intend to interact with the international participants also, so opportunity is good but let us see how much share we are able to get out of that.

Sumit Kishore — Axis Capital — Analyst

Okay, thank you for answering my questions.

Satyanarayan Goel — Chairman & Managing Director

Thank you.

Operator

Thank you. We have the next question from the line of Sandeep Agarwal from Naredi Investment Private Limited. Please go ahead, sir. Mr. Agarwal, please go ahead.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Yes, sir. Thank you. Sir my question is, currently 85.9% is our long-term PPA.

Satyanarayan Goel — Chairman & Managing Director

Can you please speak a bit loudly?

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Hello?

Satyanarayan Goel — Chairman & Managing Director

Yeah, please.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Yeah. Sir, currently 85.9% is long-term PPA as per your comment. And then after 25 years of completion it will be no renewable. So what is the other option with the — other option for the company — to sell the power other than exchange, my question is.

Satyanarayan Goel — Chairman & Managing Director

Yeah. I mean, the present companies who have long-term PPAs after 25 years, they are free to sell their power in the market and then they can — they have the option to sell this power under the bilateral contracts, maybe for — on medium-term basis or short-term basis, but exchange is the most flexible option where they can depend — because after 25 years the plants also get aged and their performance also deteriorates slightly. So depending on the availability of the plant, they can best utilize that capacity to the exchange platform, because we have both day-ahead market and RTM market and we also have long-duration contracts. So I’m sure these — participation of these platforms will be more through the exchange.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

And sir, any data that after three to five years what will be the percentage reduce — 85.9% to what percentage?

Satyanarayan Goel — Chairman & Managing Director

See, as of now, from the last 5, 6 years, long-term contracts are not happening and demand is increasing every year at a rate of 5% to 6%. So definitely, the share of the long-term contracts in due course of time will decrease and purchase through the markets will increase.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Okay. Then sir, my next question is regarding the gas exchange. Approx 50% of gas imported via short-term. So what is our exact market size in this and what is the main trigger you think, other than price to increase the volume in our platform?

Satyanarayan Goel — Chairman & Managing Director

See, in any market platform — on any market platform, the volume increases when the prices are competitive. And same thing holds good for the gas exchange also. This year, the volumes in the gas exchange increased because for the first time Government of India allowed domestic gas with a ceiling price also, allowed trading of that through the exchange. And that brought us good volume, but — and it was — LNG trading was hardly any quantity, because LNG rate is very, very high in the international market. So import was less and our trading transactions was very less. It was mostly domestic gas with a ceiling price and domestic gas from other sources. Going forward, as and when LNG prices moderate, they come down to the level of $5, $6, which used to be the price earlier also, and I’m sure when that price comes, the LNG import will increase and we will see larger volumes through the IEX platform.

Sandeep Agarwal — Naredi Investment Private Limited — Analyst

Okay, thank you, sir.

Operator

Thank you. The next question is from the line of Yash Nerurkar from PPFAS Asset Management. Please go ahead, sir.

Yash Nerurkar — PPFAS Asset Management — Analyst

Yeah, hi, thanks for the opportunity. So I had two questions, one is basically from a business perspective. So you have introduced many new products in the past, say, few quarters. So going forward, what would be the revenue composition looking like? Say, if I have to portray from a year or two from now, like what would you want from the revenue side, like how the product should be looking like?

Satyanarayan Goel — Chairman & Managing Director

I couldn’t get your question, can you repeat, please?

Yash Nerurkar — PPFAS Asset Management — Analyst

Yeah. So my question is, since you have introduced many new products, so the revenue contribution of DAM and RTM is supposed to be the highest right now. So, say, two years down the line, how would you want the revenue composition to be like?

Satyanarayan Goel — Chairman & Managing Director

See, today — I mean there was a time when DAM was constituting around 90% of our volumes — 90% of our revenue. Today DAM is only about 50% of our volume and RTM has become 26%. So taken together it is about 78%, DAM plus RTM. And, in fact, DAM plus RTM is the most competitive market as far as the exchange is concerned. So volume in these two segments will continue to lead other market segments, but we also expect long-duration contracts volume to pick up in future.

As I told you, whenever the prices — the coal price come down in the international market and in our domestic e-auction market, in the IGS market also we expect significant volume growth. So it will be very difficult to say how will be the distribution of volume under the different segments. That depends on the clearing price. When the clearing prices come down, then you will see large volume in the LNG market also.

Yash Nerurkar — PPFAS Asset Management — Analyst

Okay.

Satyanarayan Goel — Chairman & Managing Director

This green market is another area with large renewable capacity addition. So should see good volume growth in this market also.

Yash Nerurkar — PPFAS Asset Management — Analyst

So would renewals also be like a major component going forward in the DAM segment — the green DAM segment?

Satyanarayan Goel — Chairman & Managing Director

Yes, green market it was only 2%, 3% two years back, now it is — last year it was 5%, and this year it is already 6%. So I’m sure next year you will see green market going to be almost about 10% of the total volume.

Yash Nerurkar — PPFAS Asset Management — Analyst

Okay. And secondly, just wanted to know about the transaction charges which are under review. You had submitted your proposal about the transaction charges and it was under regulatory approval. So does that risk still remain that the transaction charges would drop or would be half?

Satyanarayan Goel — Chairman & Managing Director

See, hearings were held in the month of December and order is reserved by the commission, order has not been issued. So till order is issued, it is very difficult to say what is going to be the final order. But looking at what happened during the hearing, I think we might have a case. And we tactically convinced the commission that INR0.02 transaction fees is the right — which they have — the right number which they have also fixed in the regulations. And probably that should happen.

Yash Nerurkar — PPFAS Asset Management — Analyst

Okay. So basically from your point of view, you think that — I mean it would work in your favor?

Satyanarayan Goel — Chairman & Managing Director

Yes.

Yash Nerurkar — PPFAS Asset Management — Analyst

Okay. And just one last question. I just wanted to understand about the gross bidding mechanism, like at what implementation stage it is, or is that too is under regulatory approvals and it’s under review?

Satyanarayan Goel — Chairman & Managing Director

See, gross bidding is basically voluntary participation of the state through the market. States can sell the capacity, which is at the margin. I mean, if the exchange clearing price is INR3, then they can sell power from the power plants, which are less than INR3, maybe from INR2.75 and above they sell in the market and buy power whatever is required from the market. So you are selling in the market and buying from the market. In turn, you are optimizing because your demand during the day is not uniform. So you optimize your power procurement cost to the market. But these kind of things happen normally when the clearing price is competitive. Since this year, the clearing price has been very high, there was no opportunity for distribution companies to utilize this gross bidding concept.

Yash Nerurkar — PPFAS Asset Management — Analyst

Okay, that’s very helpful. Thank you so much. I mean these are all the questions which I had. If I have any further questions, I’ll get back in the queue.

Operator

Thank you. The next question is from the line of Nikhil from AllianceBernstein. Please go ahead.

Nikhil Tyagi — AllianceBernstein — Analyst

Hi, thank you for the opportunity. I have two questions. First question was regarding power derivatives. While we understand is going to come on another exchange, but it has implications for IEX as well. So wanted to understand if there are any updates on that front.

Satyanarayan Goel — Chairman & Managing Director

Our derivatives have not been introduced yet because this will be introduced in the semi-regulated exchanges. I think NSE and the MCX are working on this. So — but then there is a joint working group, that joint working group has to approve the contracts for the derivatives, because in electricity, we have spot market also and regulator wants to be sure that there is no adverse impact of those derivatives on the spot market. So, I think it is in advanced phase and maybe in the next 1 or 2 months, we will have derivative contracts in the market.

Nikhil Tyagi — AllianceBernstein — Analyst

Understood, sir, good to hear that. The second question I had was regarding RECs. You mentioned the new regulations coming into play in December. Wanted to understand that the regulation allows power traders also to participate in RECs, did that have an impact on December volumes and could it have an impact on future volumes for REC?

Satyanarayan Goel — Chairman & Managing Director

I don’t think, because all distribution companies, particularly, they would like to do trading of RECs only through competitive platforms, so there are no questions asked. And exchanges have been well accepted over the last 12 years that this is the competitive platform for price discovery and REC trading has been happening through this platform. So I’m sure distribution companies will continue to buy RECs through this exchange platform only, and other open access consumers, the industrial consumers, their requirement is in very, very small quantities and they buy it as and when required basis.

So they will also like to prefer exchange platform because there is no — on exchange platform the fixed day on when the transformation is going to happen. So I don’t see allowing trading companies will have any adverse impact as far as REC volume is concerned, but let’s see. So far I don’t think any transaction has happened through the trading companies because it is almost about one and a half month over and nothing has happened.

Nikhil Tyagi — AllianceBernstein — Analyst

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

Operator

Thank you. The next question is from the line of Devam Modi from ARDEKO. Please go ahead, sir.

Devam Modi — ARDEKO — Analyst

Yeah, good afternoon, sir. Sir, what would be the IGX share in the total gas volumes of the country?

Satyanarayan Goel — Chairman & Managing Director

So as of now IGX share is only about 1%, 1.5% only. Just we started two years back.

Devam Modi — ARDEKO — Analyst

This would be based on the third quarter, 24 million MMBtu would be 1%, 1.5%?

Satyanarayan Goel — Chairman & Managing Director

Yes.

Devam Modi — ARDEKO — Analyst

And would there be any — so what will be the Q3 profit from IGX, would be around INR12 crores? Would that be correct?

Satyanarayan Goel — Chairman & Managing Director

Yes, you’re right.

Devam Modi — ARDEKO — Analyst

So would there be any one-offs in this current numbers, because with this kind of volumes also would we be posting these kind of numbers? So if the volumes expand further, what kind of profitability can be expected over here? Are there any one-offs in this current number on the profitability side?

Satyanarayan Goel — Chairman & Managing Director

No. This quarter volume is mostly driven by the domestic gas — domestic ceiling price gas sold by Reliance and ONGC, and they have regular supply of gas. So I’m sure their requirement will be to do sell off this gas on a monthly basis. And they have seen that exchange platform again is more flexible and efficient platform. Again here, the transactions have been very smooth. So the transactions from these companies would continue. And in addition, as and when the LNG prices come down, the volume should further increase.

Devam Modi — ARDEKO — Analyst

Okay. So what kind of — would you — so you are saying current base would remain around this levels and then volume increase will depend on further narrowing down of LNG prices. Would that be the right impression?

Satyanarayan Goel — Chairman & Managing Director

See, in fact, in the gas market, there are many fields which have been given to the private sector. And there are many fields, in fact, presently which were auctioned in the recent past. In those fields, there is no ceiling in their price. So as and when gas production from those fields start, their participation also will increase on the exchange platform. There are many marginal fields which are coming up now. So we expect good participation. And this year already gas exchange has done more than 3 times of what they did last year, which is In 9 months. So by the end of the year, it should be almost about 4 times of what we did last year. So for next year it will be difficult to give a number but certainly should be in the range of 50 million MMBtu.

Devam Modi — ARDEKO — Analyst

So what would be the quarterly overheads at IGX level?

Vineet Harlalka — Chief Financial Officer

Quarterly overheads is around INR5.5 crores.

Devam Modi — ARDEKO — Analyst

This would mean all admin expenses and salaries?

Vineet Harlalka — Chief Financial Officer

Yeah.

Devam Modi — ARDEKO — Analyst

Okay. And sir, what would be the volume share in the core business of IEX that is the energy exchange, what would be the volume share of SEBs on the buy side and the sell side in this quarter?

Vineet Harlalka — Chief Financial Officer

Buy side, it was about 88% to 90% between — about 88%. On the sell side 65%. So distribution companies today are the major buyers and sellers by — mostly it is distribution company because due to the reasons explained by Mr. Goel. Sell side also we are seeing very good participation from Discoms because they are the ones who are getting more coal under long-term supply that they have — they are operating their plants at higher PLF. Wherever they have surplus, they come to the exchange market and sell that power.

Devam Modi — ARDEKO — Analyst

Correct. Sir, I was just trying to understand what you were saying with regards to the fact that when the prices are higher, typically you would expect the volumes to be slightly hit because of the lower SEB participation. So what would be — would you feel that the non-SEB component of the demand and supply will be much more inelastic to price movements, would that be the right understanding?

Vineet Harlalka — Chief Financial Officer

No, what we were trying to explain was from the Discom or SEB side, we get two types of buying. One buyer is there to meet the deficit, which is price insensitive. Whatever is the price, they want to buy this power and supply to the end consumer. Now second part of buy is actually optimization buying. In first 9 months the growth in the — overall electricity demand grew by 10%.

Now growth was so robust that there was so much deficit buy which led to prices being on the higher side, coupled with the higher input costs and hence optimization buy was not happening. So the number that we have registered till now, it is purely on deficit buy the point we were trying to explain was as the supply will improve, as the input cost will go down, we expect more buy to come from same SEBs. Now this additional buy would be on account of optimization or replacement.

Devam Modi — ARDEKO — Analyst

Sure sir. What I was trying to ask was the non-SEB volume, that is the volume from industries and other private entities, would that be remaining generally — would that be growing in a normal trend, I mean irrespective of the fluctuations in power cost?

Satyanarayan Goel — Chairman & Managing Director

No. That has gone down drastically. In fact, non-SEB volume today is only 10%, because our prices are very high. As the prices will start to come down, you will see this number going up to as high as 30%, 35%. There is so much demand which is there, which is waiting on the sidelines, waiting for price to come down, every day basis these players or these industries are placing their buy bids, but their bids remain uncleared, because the prices are high. So this is additional over and above SEB buys, this quantum will also come as the prices will come down. It is highly price sensitive buying which we get from industries.

Devam Modi — ARDEKO — Analyst

Okay, sure sir. That is it from my side. Thanks.

Satyanarayan Goel — Chairman & Managing Director

Yeah.

Operator

Thank you. We have the next question from Anshuman Ashit from ICICI Securities. Please go ahead.

Anshuman Ashit — ICICI Securities — Analyst

Thank you, sir, for the opportunity. Sir, over the past few days, we have seen the INR12 price cap being hit during the morning and evening during many time blocks. So, sir — so what is generally the view on this price cap, will it continue, will it be changed because it is hurting the Discoms and over time hurting our volumes as well? And do you see with the coal — international coal price moderating a bit, do you see supplies from imported coal-based plants increasing and there being some near-term relief on prices?

Satyanarayan Goel — Chairman & Managing Director

Yeah, price cap of INR12 is expected to continue for some more time. The CERC has already issued that this will continue till further orders, which means that they don’t see — they don’t expect revision of this upward in the near future. But let me tell you one thing, with INR12 price cap, we don’t see any impact on the volume because whatever sale is available in the country, the marginal cost of that is much lower than INR12. Even domestic coal-based power plants, there also the cost is — in spite of high e-auction rate is INR5, INR5.5. Imported coal-based plants, the cost is about INR6.5, INR7. So INR12 is much higher than that. So, all of them have incentive to participate in this market. So I don’t see any impact on the volume because of this price cap.

Anshuman Ashit — ICICI Securities — Analyst

Okay, understood. And sir, for the 9 months, so what has been the total exchange volumes and how has been our market share? So could you give some details on that?

Satyanarayan Goel — Chairman & Managing Director

Exchange volumes have been — has been almost about 70 billion units — 70.7 billion units in the first 9 months and our market share is — in this quarter, it is almost 92%, and if you take the full year it is 89% in electricity.

Anshuman Ashit — ICICI Securities — Analyst

Sir, is it fair to assume, because the other two exchanges mostly have term-ahead contracts and because volumes there have increased and for DAM it has reduced. So once DAM volumes pick up, our market share may revert to the earlier levels.

Satyanarayan Goel — Chairman & Managing Director

Let us first understand one thing why that DAM volume pick up. If you analyze the volume trend on the exchange platform for the last 13, 14 years, the DAM volume used to be hardly 1% or 2% of the total volume cleared on the exchange platform, because distribution — when there is enough liquidity in the day-ahead market and RTM market, they prefer to buy in the DAM and RTM because that provides them lot of flexibility. In this year, when there were supply-side constraints, demand was more, many distribution companies preferred to get into the DAC market to ensure availability of power. So that is why the DAM volume increased.

In future, with the increase in coal supply, price moderating on the exchange platform, I am 100% sure that DAM volume doesn’t go down. We have seen in these 9 months also, the month in which the clearing price was lower the DAM volume was lower in that month. So I don’t see any reason for DAM volumes to go up.

Anshuman Ashit — ICICI Securities — Analyst

Okay. Understood. And sir, for FY ’24, so what is the growth that you are looking forward to in terms of exchange volumes overall?

Satyanarayan Goel — Chairman & Managing Director

Yeah. Our growth is dependent on the market conditions. If GDP grows, electricity demand is going to grow. If electricity demand increases by 5%, 6%, which means that almost about 50 billion to 90 billion units of extra demand in the country. And I’m sure a good part of that will come to the market. But for meeting the demand, there should be enough supply also, and supply can happen only if there is adequate coal supply. So it is all dependent on these things. So it will be difficult to make any guess on that, but I can tell you one thing. If you take our average for the last five years, six years, our growth rate has been almost about 20% on a CAGR basis. So it should be possible to achieve that kind of a number if market conditions are conducive.

Anshuman Ashit — ICICI Securities — Analyst

Okay, understood. And sir, one final question, sir you had mentioned in your initial remarks that ESCerts trading will start in this month, is it? So sir, what kind of volumes are you expecting in that?

Satyanarayan Goel — Chairman & Managing Director

ESCerts, I think the total volume of the ESCerts for sale is hardly about I40 lakhs, 50 lakhs — 70 lakhs. But the purchase obligation is for only 35 lakhs. So the size is very less in this.

Anshuman Ashit — ICICI Securities — Analyst

Okay. And similar for the REC for FY ’23?

Satyanarayan Goel — Chairman & Managing Director

Sorry?

Anshuman Ashit — ICICI Securities — Analyst

REC, so what’s the kind of volumes —

Satyanarayan Goel — Chairman & Managing Director

FY ’23?

Anshuman Ashit — ICICI Securities — Analyst

Yes, what’s your expectation for Q4?

Satyanarayan Goel — Chairman & Managing Director

We have already done 43 lakh REC trading, and we should close this year with — I think almost about 60 lakhs REC volume.

Vineet Harlalka — Chief Financial Officer

So we are expecting another 20 lakhs in the next three months, because these are the closing months and majority of the buy in these ending months only.

Anshuman Ashit — ICICI Securities — Analyst

Okay. Understood sir. Thank you so much for answering my questions. Best of luck.

Operator

Thank you. The next question is from the line of Lavanya T from UBS. Please go ahead.

Lavanya Tottala — UBS — Analyst

Hello. Hi, sir. Thanks for the opportunity. So I just wanted to understand if once we get approval or order from CERC on the transaction charge, do we have any idea on the frequency of the approval which is needed, or is it only whenever a new product is launched?

Satyanarayan Goel — Chairman & Managing Director

No. Invariably these kind of approvals are once approval and thereafter, if there is — if conditions change, if regulator feels that there should be re-examination of that, then they can do that. In fact, in case of trading margin, the next best example is the trading margin, CERC had notified trading margin in 2010. And in 2020, they reviewed that and issued an order wherein they, in fact why is the trading margin upward, after 10 years. So it is not done on yearly basis. Once this approval is there, I’m sure this approval is going to be for pretty long time, maybe for a decade.

Lavanya Tottala — UBS — Analyst

Okay. So I was just checking because for trading margin, it was a cap and explicit approval for each of the trading licensee was not required. But here with exchanges, along with the cap, approval was required for each of the exchanges separately.

Satyanarayan Goel — Chairman & Managing Director

Here also, they are going to approve the transaction fees as a cap that exchanges cannot charge more than so much of paisa as transaction in the DAM market, so much paisa in the RTM market because if you fix the number, then between the different exchanges they will not be able to promote competition. So here also they are going put a cap and they have already put that cap in the regulation, a cap on INR0.02. So I’m sure that number is going to come.

Lavanya Tottala — UBS — Analyst

Got it, got it. And I mean, I just wanted to understand your view on the overall market. So usually during winter overall electricity demand comes down and supply is relatively better during this period. But despite that exchange prices are quite high. So coal prices is the only reason or any other change in the market that you’re seeing — why so high market prices even in January?

Satyanarayan Goel — Chairman & Managing Director

One is the demand of power in the country has increased, it has increased by almost 10% this year, which is again unprecedented. In the last 20 years, this is the first year where the electricity demand in the country has increased by 10%. Otherwise, it used to be at a rate of 4%, 5%, 6%. So that is one factor. And second factor is, I mean, coupled with this, there is unfortunately the coal prices have increased in the international market because we have almost 20 gigawatts of imported coal-based capacity, that capacities were operating hardly at 30%, 40% PLF. So the pressure is on the domestic coal-based power plants and that is why all these problems are happening.

Lavanya Tottala — UBS — Analyst

Okay, got it. So with some more moderation in international coal prices, do you see this improving in the coming months or how do you see this moving?

Satyanarayan Goel — Chairman & Managing Director

I’m sure, the prices have already started coming down. Every month we are seeing 4%, 5% reduction in the imported coal prices. And domestic coal price, e-auction price also is reducing every month. So in the near future that should come down to the normal range.

Lavanya Tottala — UBS — Analyst

Got it. So last question from my side. So we have seen sell side from states boards — state electricity, these things, is about 65% now. So what this used to be earlier, like what is their sell-side in the normal year, like 2020?

Satyanarayan Goel — Chairman & Managing Director

Yeah. No, distribution companies sell used to be 30%, 40% and generating companies used to be 60%, 70%. But this year since distribution companies states put more coal under the PPA, so they had more power at their disposal. And there are many states where the demand is in the morning and evening hours, but then they don’t have — they have very less demand during the night hours than daytime. So to keep the plant running, they sell power during the night time and run daytime.

Then there are states, we have contracted capacities keeping the demand growth for the next 10 years and they have today surplus capacity at their disposal. So they sell power from those plants. And since the price — clearing price on the exchange platform is lucrative, these states in turn are also able to make some reasonable profit out of that.

Lavanya Tottala — UBS — Analyst

Got it. Thank you so much, sir. Thanks for the opportunity.

Operator

Thank you. We have the next question from Ankush Agrawal from Surge Capital. Please go ahead.

Ankush Agrawal — Surge Capital — Analyst

Yeah, hi, sir. Thank you for taking my question. So firstly, on the IGX. So what will be the total traded natural gas in India, including the domestic gas?

Satyanarayan Goel — Chairman & Managing Director

So far the natural gas traded is almost about 36 million MMBtu, and a very large part of it is domestic gas only. Domestic gas plus — domestic gas has got two times —

Ankush Agrawal — Surge Capital — Analyst

No, sir, I’m asking the Indian total consumption, not what IGX is doing.

Satyanarayan Goel — Chairman & Managing Director

India gas — total gas consumption in India is almost about 160 CMD, which is million cubic meter per day, 160 million cubic meter per day. And out of that 50% is produced domestically and 50% is —

Ankush Agrawal — Surge Capital — Analyst

What would this be in MMBtu terms, and size — rough number, would be helpful.

Satyanarayan Goel — Chairman & Managing Director

I don’t have the number right now. Right now, I will not like to make a wild guess on this.

Ankush Agrawal — Surge Capital — Analyst

Okay. So, sir, out of this, what would be the addressable opportunity for IGX, like the short-term traded gas, like which is traded from traders or by directly something like that?

Satyanarayan Goel — Chairman & Managing Director

IGX this year is doing almost about 1.5% of the total gas consumed in the country.

Ankush Agrawal — Surge Capital — Analyst

Okay. But what would be the short-term market size?

Satyanarayan Goel — Chairman & Managing Director

And then looking at the plan of the government of India, government plan is to increase consumption of gas from 6.3% to 15% of the energy basket in another 7, 8 years. And they have created large infrastructure in the gas sector, like LNG terminals, gas pipelines are being constructed. So if gas growth happens like that, I’m sure opportunity for the gas exchange is very, very high and I always say that opportunity for the gas exchange is as big as what we’re doing in the power sector.

Ankush Agrawal — Surge Capital — Analyst

Yeah. That’s taken, but any idea on what is the short-term market size? Like for — in the electricity, we have about 12%, 13% you just stated on the short-term side. So on the gas side?

Satyanarayan Goel — Chairman & Managing Director

In case of power sector, long-term contracts are almost for 87%, 88% of the demand, In the gas sector, long-term contracts are hardly for about 70%, 75% of the demand. The rest of the gas is under the short term, getting imported or stocked in the short-term market. So for that matter, it is much higher.

Ankush Agrawal — Surge Capital — Analyst

Right. Okay, got it. Secondly, sir, on this carbon exchange that we are looking to start, so I believe this would be a global opportunity for IEX because carbon credits basically the issuing agencies are global in nature. So this would be fungible globally. Are we targeting the global opportunity or we would be restricting to carbon credits that would be issued in domicile, largely in Indian markets?

Satyanarayan Goel — Chairman & Managing Director

No, this is going to be a global opportunity. That is why the name of this company is International Carbon Exchange, because as of now many European and American companies to comply with their ESG commitment, they are buying these carbon credits. So buyers are more active in the international market. And we have — on sell-side, it is also producing many carbon credits. In fact, there is good opportunity for sell from the India, Southeast Asian countries and American countries. So, we intend to tap all these sources for the carbon credits and buyers in the European and American markets.

Ankush Agrawal — Surge Capital — Analyst

Right. The idea would be firstly act as a supplier of Indian carbon credits to the global market.

Satyanarayan Goel — Chairman & Managing Director

You are right.

Ankush Agrawal — Surge Capital — Analyst

Right. Got it. Okay, sir, that was all. Thank you.

Operator

Thank you. The next question is from the line of Arul Selvan from Independent Advisors Private Limited. Please go ahead.

Arul Selvan — Independent Advisors Private Limited — Analyst

Hi, can you hear me?

Satyanarayan Goel — Chairman & Managing Director

I can hear you.

Arul Selvan — Independent Advisors Private Limited — Analyst

Yes. I remember — I heard that from a long-duration perspective, you said that the current market size is about 50 billion units. Am I right in what I heard?

Satyanarayan Goel — Chairman & Managing Director

You are right.

Arul Selvan — Independent Advisors Private Limited — Analyst

Yes. So my basic question here is that how exactly are the current market players trading in this segment. If it’s not really through the exchange platform, is there some other platform or is it just the traditional P2P or bilateral contracts over here?

Vineet Harlalka — Chief Financial Officer

Most of the trading in this market is happening through the heat platform. There is a platform which is for —

Arul Selvan — Independent Advisors Private Limited — Analyst

Right. Owned by the government, right, if I’m not mistaken?

Vineet Harlalka — Chief Financial Officer

Where the reverse auction happens for price discovery, and most of the trading through their trading companies are directly — generated through distributed companies.

Arul Selvan — Independent Advisors Private Limited — Analyst

Okay. Okay. So now when long-duration contracts are I guess introduced for, let’s say, progressively longer durations. And right now we have — if I’m not mistaken — 6 months, right? That’s the longest duration that we have right now. Right. So let’s say.

Satyanarayan Goel — Chairman & Managing Director

So right now, confined for delivery up to three months. We are talking to regulator for approving contracts up to soon delivery.

Arul Selvan — Independent Advisors Private Limited — Analyst

Yes. So now my question here is that suppose, let’s say, in the future we get the regulatory approval for launching contracts for, let’s say, up to 6 months or one year, or two years, do you expect these players to automatically shift to our platform or do you think that the existing DEEP platform provides certain other advantages that are not available on our platform?

Satyanarayan Goel — Chairman & Managing Director

See, shifting of the participants on our platform will depend based on the value which we provide. If they are finding more value through the exchange, they will definitely switch to the exchange. So we are trying to create value for them to the exchange platform. Number one value is that these exchange platforms are flexible. You can give your requirement for doing your auction any day and the auction can be done within 3 days’ time — 2, 3 days’ time. And we have very efficient system of power scheduling, so we in fact ensure that it’s fast in distributing of the power also and also do the complete financial transaction.

We pay to the generators on daily basis. So that is a big USB of the exchange. Generators are willing to sell power at a price lower on the exchange platform because they are assured of the payment. In case of DEEP contracts, they are not assured of the payment on daily basis. They, in fact, get payment after the supply of power, a month, they raise their bill and after that it may — in many cases, it takes 2, 3 months also. So looking at these kind of values, I’m sure participants will be more active on the exchange platform.

Arul Selvan — Independent Advisors Private Limited — Analyst

Right. And just a couple of more questions. The first one — the next question here is that, are there any competitors who are offering these long-duration contracts for up to three months as of now?

Satyanarayan Goel — Chairman & Managing Director

All the three exchanges are offerings this.

Arul Selvan — Independent Advisors Private Limited — Analyst

Okay. And you said that the traction that you’re seeing, that the lower amount of traction, is that also across other exchanges or is it across any — is it only on our platform?

Satyanarayan Goel — Chairman & Managing Director

No. I mean, volumes happening in other exchanges also but I can definitely say that our share is more than their shares.

Arul Selvan — Independent Advisors Private Limited — Analyst

Would you have a number for that, in terms of what our market share would be on just the long-duration contracts that have been recently introduced?

Satyanarayan Goel — Chairman & Managing Director

No, because as I told you that the volume in this segment at the moment is not significant because of the high clearing price. So this percentage and market share will be meaningful when the volumes increase.

Arul Selvan — Independent Advisors Private Limited — Analyst

Okay, that’s it. I don’t have any more questions. Thank you.

Operator

Thank you. Ladies and gentlemen, that was our last question for today. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Satyanarayan Goel — Chairman & Managing Director

I would like to thank all of you for being part of this call today. Friends, higher input costs continue to impact our volumes. Going forward, with the increased coal production, target for which has been fixed as 1 billion tons for the financial year 2023-2024, we expect a reduction in input price, lower clearing price on exchange and increasing optimization potential for Discoms and Open Access consumers. And I’m sure this will support better volumes from IEX platform. IEX has always remained committed to positively contribute towards a sustainable Indian energy sector. Thank you.

Operator

[Operator Closing Remarks]