FREE

Event update: Power Utilities - Exchanges; Unexpected rise in prices and volumes

Event update

India Energy Exchange (IEX) recorded the highest volume in day ahead market (DAM) at 5.8BU in September 2018 with average monthly spot price at a 7-year high of Rs4.7/unit (daily average peak price of Rs6.5/unit). In September, one day market volume rose to 306MU, ~10% of total demand, highest in history.

Details

• Average price of Rs4.7/unit at IEX was up +15% yoy and +43% mom (second half of September 2018 price at Rs5.6/unit), while average peak price at Rs6.5/unit was up +15% yoy and +41% mom. These are the highest average prices recorded in last seven years.
• IEX’s monthly DAM volumes stood at 5.8BU in September, up 40% yoy. It recorded the highest one day market volume in history in Sep 2018 at 306MU (10% of total demand). While on average, IEX share of total electricity volumes is 3-4%, September was the first time when volumes spiked to 10%.
• IEX’s term ahead market (TAM) increased 91% yoy to 0.19BU in September 2018 whereas volumes grew by 34% yoy in Q2FY19. In H1FY19, while total volumes grew 33% yoy, DAM saw 18% yoy growth with 470% yoy growth in REC volumes and 64% yoy rise in the TAM market.

Analysis

Daily power demand and utilisation at power plants – Energy demand rose 8% yoy in September 2018, while peak demand was the highest at 176GW, up 11% yoy. Despite high merchant prices, plant load factor (PLF) of coal-based power plants stood at a decadal low of 60% due to huge capacity addition of 134GW in last 10 years.

Domestic coal supply – Coal India Ltd (CIL) production and dispatches have not kept pace with the demand requirement in the power industry. We understand coal inventories at power plants have fallen to 7 days (vs 20 days), which is expected to improve over next two months with supply to coal power plants being ramped up by Coal India.  

Shortfall in coal led to the spike – A coal supply deficit explains the shortage in power availability under long-term PPAs, which in turn has led to the spurt in power prices. As power prices follows international coal prices and currency rates in a coal-deficit scenario, the recent rise in international coal prices and sharp rupee depreciation has aggravated the situation. We expect domestic coal supply to improve, which would lead to a correction in the short term and DAM power prices.

View and Valuation

We believe the rise in spot prices is temporary and a short-term relief for power producers, especially given the huge stranded power capacity. Exchanges are key beneficiaries of increase in volumes, and provide the most effective way of meeting the short-term demand–supply mismatch. IEX, being a dominant exchange, has clearly benefitted from the rise in volumes. We estimate 17% earnings CAGR for IEX over FY17-FY20E. Stock is trading at 25xFY20E. Maintain Outperformer rating on the stock with a  target of Rs1,862/share.