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— Jayant Deo, Managing Director & Chief Executive Officer, Indian Energy Exchange

Indian Energy Exchange (IEX) is India's first electricity trading exchange, set up in June 2008. IEX has maintained its first-mover advantage and today enjoys a market share of over 85 per cent. Jayant Deo expounds in detail on the role of power exchanges and how India can achieve techno-commercial efficiency in power trading through exchanges. Deo also explains how a constantly-innovative IEX is geared up to further enrich its contribution to the Indian power sector. Interview by Venugopal Pillai.

IEX, India's first energy exchange, has seen tremendous growth since its inception in 2008. Can you take us through the growth journey in terms of trading volumes, membership, geographical reach etc.
The Indian Energy Exchange (IEX) has truly been a great success story. We are the leaders in our domain with 85 per centplus market share and are without a doubt the brightest spark in this otherwise distressed power sector.

Let me give you some facts about how we have made this journey. We went live on June 27, 2008, with the launch of the Day- Ahead-Market (DAM). The Term- Ahead-Market (TAM) was launched on September 15, 2009. By January 2010, we had 100 participants on board and currently we have 1100-plus participants. The participants themselves span across the nation; 43 discoms from 26 states and four Union territories. We cater to 880-plus open access consumers and 144-plus private generators.

The exchange has conducted auctions for 30,000-plus hourly contracts for over 29 billion units (cleared volume) without a single error! The total value of transactions till date is around 10,500 crore. On an average the number of portfolios traded on a day is 600 with approximately 40 million units of daily average volume.

In addition to electricity contracts, we launched, on February 23, 2011, trading in Renewable Energy Certificates (REC) on IEX. We are continuously developing new products to create value for our clients and help the Indian power market reach its true potential.

India's power transmission infrastructure has not kept pace with growing power generation capacity. What limitation does this pose on trading of electricity?
The lack of transmission infrastructure poses a huge problem for the overall power sector and we are equally exposed to this staggering gap.

To cite an example, Tamil Nadu has installed wind capacity of 6,000+ mw or about 40 per cent of the country's wind capacity but lack of power evacuation lines is resulting in huge losses for many projects. Lack of transmission lines amplifies the supply-deficit scenario thus resulting in huge congestion management issues. The congestion causes markets to split at the power exchanges.

As we understand, much of India's power generation is "locked up" by committed sales under long-term PPAs and could reduce the volumes available for trading. What is your view?
Today, exchanges account for around 2 per cent of our country's total generation. Over 90 per cent of our power needs are still met through long-term PPAs. That said, we cannot undermine the role of power exchanges as they cater to a different set of requirements.

Over the past three years, we have seen that while power has been available at IEX at less than 3 per unit, a significant quantum (700 mw to 2,000 mw) could not be cleared as the state utilities preferred to shed load rather than purchase cheap power. For backup power, consumers use DG sets, which run on subsidized diesel, to generate power at 13 per unit. This anomaly, where consumers are paying up to 13 per unit for back-up power while power available at 3 to 5 per unit on the exchanges is not cleared, is incomprehensible.

The point I am trying to bring home is that long-term PPAs is not the main reason for "locking up" volumes. Rather, the problem is more complex and one of the reasons is that distribution companies prefer load shedding than to buy power.

Do you feel that merchant power plants could drive up volumes on power exchanges?
At IEX, we currently have six merchant power plants participating in trading activities. This number is set to grow at an exponential pace with the new direction given by the Open Access policy.

How has IEX performed with respect to trading in renewable energy certificates?
As mentioned earlier, REC trading commenced on IEX on February 23, 2011. We have quickly climbed to the top spot and currently hold 91 per cent market share in the REC market. In the 10 trading sessions thus far, 2.96 lakh non-solar RECs have been traded with total value of transactions of around 73 crore.

Apart from electricity and RECs what other instruments are likely to be traded on IEX in future?
We are at the cutting edge of innovation and are continuously striving to bring instruments to market that would deliver high value. For instance we are closely working with the Bureau of Energy Efficiency to chalk out the roadmap for Energy Efficiency Certificates that are to be launched soon, and so forth.

We understand that a large number of IPPs are selling power over IEX. Given that private sector is set to dominate India's power generation landscape, what impact do you see this having on IEX?
Yes, a total of 117 power generators currently trade electricity on our exchange. This number is indicative of the fact that what we offer here at IEX is unique and delivers continuous value to our customers.

I would like to highlight some noteworthy factors that have contributed to our overwhelming success with private sector participants i.e. our unique selling points:

1. Adherence to the agreed power timetable for bidding, payment and power scheduling with clockwork precision by IEX and its members, many of whom are from the government sector, deserve special mention and credit.
   
2. Our settlement banks; State Bank of India, two private banks namely, HDFC & IndusInd Bank, have devised new banking products for enabling participants to take active part in the exchange. These innovative banking products are commendable.
   
3. The cost of working capital has come down substantially on account of daily cycle of payment vis-à-vis the earlier settlement of a few months, which the trade was using previously. There are 365 annual cycles of working capital available against the norm of 3 or 4 in the trade.

We feel that with increasing impetus on policies such as Open Access, coupled with the factors mentioned above IEX is the natural choice for the private sector in the future.

The Ministry of Law has recently permitted Open Access ending years of uncertainty on this issue. How do you see this move affecting IEX?
For over three years, we have been working on propagating this interpretation, and on November 30, 2011, the Ministry of Power ministry has removed all ambiguity from Open Access and has asked all concerned to implement it. The circular says that all 1 mw and above consumers are deemed to be Open Access consumers and that the regulator has no jurisdiction over fixing the energy charges for them. It further states that the necessary steps for immediately implementing the provisions relating to open access in the EA 2003 may be taken.

The EA 2003 had given a fiveyear notice in 2004 for preparing everybody for implementing the scheme of the open access given in the Act. The EA 2003 removes the responsibility of power supply from government and casts it on society (users, generators and traders). It de-licensed the generation, made wire business public and gave encouragement to captive power along with choice of supplier to bulk consumers. The bulk consumers are required to make arrangement for own power through captive or group captive or pay negotiated or market determined rates to discom or IPP or any generator either directly or through trader or on exchange.

The delayed but correct interpretation has brought suddenness and the sector has to find a road map for implementing without causing distress.

Do you also think power tariffs can become more competitive following Open Access?
IEX will be one of the options available for bulk consumers (1 mw and above). Experience from developed countries where Open Access has been implemented suggests that tariffs are lowered as a consequence of Open Access. The Act prescribes that bulk consumers will be out of a regulated tariff regime in phases, thereby effectively insulating retail consumers from marginal cost of incremental energy. This would insure inherited power to retail consumers particularly for lifeline and living purposes at affordable tariff.

However, due to lack of clarity on the interpretation of relevant sections, bulk consumers (needing supply of more than 1 mw and above power at any given time) continued to be included in tariff determination process even after January 2009—the timeline prescribed by the EA 2003. On account of inclusion of power required by bulk users coupled with economic growth, average cost of power procurement went up. This has pushed up tariff to be charged to retail consumers and made it unaffordable for some of them. Hence, power tariffs will certainly become more competitive following Open Access implementation.

How inclined are captive power producers in selling surplus generation through IEX?
Recently, IEX has lowered the minimum requirement of no objection certificate from SLDCs (state load dispatch centres) from the earlier 1 mw to 0.5 mw. This means that a customer with a connected load of 0.5 mw can also participate at IEX.

The main objective of lowering the minimum requirement is that it broadens and deepens the energy market and attracts smaller players. Captive power producers who have surplus power can trade through trader and/or on exchange. As a result, the capacity utilisation can be raised to optimum level thereby reducing fixed cost component. This will in turn attract those captive plants which cannot be economically justified on self-use.

Also, by buying power whenever captive plant is down for maintenance, the need for standby capacity and capital for it is eliminated.

We understand that prices of spot trades can be very volatile. Please discuss your plans for introducing higher duration contracts.
Our spot market is completely demand and supply dependent. The prices determined in this market are a clear signal to the power market. Currently, the longest duration contract offered on the exchange is the weekly contract. We are ready at our end to introduce longer duration contracts, which is monthly, and will be launching it as soon as we get the approval from the statutory agencies. These higher duration contracts will bring more liquidity to the market.

Today, less than 3 per cent of the total electricity generation in India is traded on power exchanges. If you were to cite three most important steps that could take this metric to a significantly higher level, what would they be?
Given the contribution of power exchanges to the sector, it is very important to pave way for enhancing role of exchanges in the future. If I were to cite the three most important steps that could make our contribution significantly higher they would be: (1) Implementing Open Access for bulk consumers (2) Introducing futures contracts on power exchanges, and (3) Congestion management.

With three power exchanges in operation already, how do you view competition with respect to power exchanges? What would be your strategy to maintain leadership position?
I believe competition is good for growth and development of any market. In fact, apart from IEX, there is one more power exchange that is currently operational and two more exchanges are slated set to come up in the near future. IEX is the market leader with an overwhelming 85 per cent share of the market and this also speaks a lot about our performance. Having said this, we are not satisfied and are continuously striving to achieve greater heights. We are trying to raise the bar for ourselves.

Tell us about various initiatives that IEX is taking to educate members and the public at large, on the concept and practices in energy trading.
We are in constant touch with our existing members and clients to keep them updated with new developments as well as provide support. IEX regularly conducts capacity building activities such as training, workshops, conferences etc. on our existing and upcoming products to educate stakeholders of power sector and the public at large across the length and breadth of the nation.

Do you think that IEX is perhaps the biggest expression of information technology enabling India's power sector?
Of course! Since our inception, IEX has operated flawlessly transacting over 29 billion units in terms of cleared volume.

Undoubtedly, IT has been the backbone of the system and IEX has procured its IT support from NASDAQ OMX. The trading platform most noticeably helps to evenly distribute transmission losses, enables participants to hedge against UI risks and guarantees timely payment to sellers.

Please summarise your growth strategy for IEX and discuss some important milestones that you would like IEX to cross in the coming years.
With lot of merchant capacity coming up, open access mechanism being implemented in most of the states, the volumes on the exchange platform is expected to rise. With the recent opinion by the Union power ministry that considers all 1 mw and above consumers as open access consumers, the participation is expected to further increase on IEX. Talks are also going over developing a SAARClevel exchange that would enhance inter-regional transmission of power across the whole of South- East Asia.

Indian Energy Exchange has a wide base of members which includes, generators, state utilities, distribution parties, CPP etc. They prefer trading on the IEX platform as it guarantees payment upon execution of trade.

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