(Bloomberg )
(Bloomberg )

Dull summer demand casts shadow on Indian Energy Exchange’s earnings

  • The 28% drop in average market clearing price underscores the weak demand conditions in spot electricity market
  • The fall in volumes coincides with the improvement in fuel availability at thermal power plants

Investors never took fancy to the Indian Energy Exchange Ltd (IEX) stock in the secondary markets since it was already priced at a premium in the initial public offering. Besides, its high dependence on one product segment—the spot electricity market, was also a worry. Compared to the 8% rise in the Nifty 500 index, the stock lost 9% since its listing in October 2017. The stock underperformed, even though the firm delivered decent earnings.

There now seems to be another reason for the stock to underperform. Volumes in the so-called day-ahead market on the exchange are down 13% in the first two months of FY20 (April-May). In the previous two fiscal years, volumes in this segment grew 14-22%. The day-ahead market is a key business segment for IEX, generating a majority of the volumes.

The fall in volumes coincides with the improvement in fuel availability at thermal power plants. This allows state electricity boards (SEBs), large buyers of electricity, to source more power from their existing power purchase agreements (PPAs), rather than depending on spot purchases.

Further as IIFL Institutional Equities points out, lower purchases from Gujarat state utilities and SEBs’ preference for short-term bilateral contracts spanning one-three months have hurt IEX volumes. Gujarat reduced purchases after the resumption of supplies from long-term PPAs.

The 28% drop in average market clearing price on IEX last month, from a year ago, underscores the weak demand conditions in the spot electricity market.

With volumes remaining weak in the two busy months of the summer season, analysts worry the impact will be felt not only in the current quarter, but in the whole year. “Weak volume growth in 1QFY20 coupled with an unfavourable base in September-October is likely to depress the overall day-ahead market volume growth in FY20. Although we build-in 12% YoY growth for the remainder of FY20, blended growth will be only 7.5%.

Pick up in volumes under medium-term PPAs and commencement of a third power exchange (low probability) are other risks to volume growth," IIFL said in a note. Volumes during September-October last year saw an unusual rise on IEX as fuel shortages at thermal plants forced SEBs to step up purchases from spot electricity markets.

Conversely, the current low prices in the spot electricity market should attract buyers’ interest. But how well the recovery in volumes is going to be has to be seen.

Hydro and renewable energy segments are increasingly capturing the incremental demand; and both are largely sourced through bilateral contracts. Further, to alleviate stress in the power sector, the government is increasingly pressing SEBs to ink purchase contracts with producers, which hurts IEX’s prospects as well.

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