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China has been grabbing the media attention of late. Before the global economy could get over the Evergrande episode, the issue of power outages cropped up. China’s electricity sector has been facing a variety of challenges which include, rising coal prices, demand-supply mismatches and tightening of environmental norms  to name a few. Experts estimate that power outages have affected 44% of China’s industrial activity.

Can India learn anything from this?

China’s existing power sector conundrum primarily stems from it failing to keep up with its promises on lowering emissions and increasing the share of renewables in its energy mix. China still derives ~60% of its electricity from coal-fired plants. And the transition from polluting energy sources to renewables is creating problems for the world’s second largest economy.

The biggest lesson for India is to make its entire energy ecosystem future-ready.

In India’s context, development and deepening of power markets is crucial for supporting various initiatives such as Atmanirbhar Bharat, Electricity for all and One-nation-one-electricity-rate, amongst others.

Thankfully, India has already taken giant steps to reduce its dependence on fossil fuels and focus on renewables. As a result, India’s energy ecosystem is expected to become more decentralized in future.

India’s energy sector is at an inflection point

At present India’s installed renewable power generation capacity is ~100 GW. Interestingly, Reliance Industries alone aspires to set up 100GW of renewable energy capacity by 2030. This might give you an idea about what lies ahead. Moreover, India endevours to increase the contribution of gas in its energy mix from 6% at present to 15% by 2030.

Short-term power procurement contracts to gain prominence

India is an electricity surplus nation now with its peak demand hovering at ~200 GW against the nation’s total installed capacity of ~390 GW. Despite this, India’s power distribution system still remains the elephant in the room.  Unless the power purchasing process becomes more flexible, turning around the loss-making-debt-laden power distribution sector is going to remain an uphill task.

As India’s energy system undergoes transformation, the relevance and importance of energy exchanges is likely to increase. Developing an efficient spot market is a prerequisite for seamless functioning of decentralized energy ecosystem.

Can you spot any potential beneficiary?

Indian Energy Exchange (IEX) is an automated physical delivery-based electricity trading platform. IEX is focused on developing the short-term power market in India—from 1-day to 11-days. It strives to increase the market share of exchanges in power consumption.

Indian Energy Exchange has product offerings such as Day-Ahead Market (DAM), Term-Ahead Market (TAM), Real-Time Market (RTM), Renewable Energy Certification (REC), Energy Savings Certificates (ESCerts) and Green-Term Ahead Market (GTAM). Various market segments such as RTM, G-TAM witnessed the highest-ever volumes in June 2021 and the market is expected to grow rapidly.

Andhra Pradesh has already saved Rs 2,350 crore by buying power in the spot market over the last two financial years. If other state utilities follow suit, the Indian energy landscape can completely transform over the next 8-10 years.

Future growth opportunities

IEX endevours to grow new verticals such as Longer Duration Contracts, Green Day Ahead Markets, Integrated Green Day Ahead Market, and Ancillary markets in future. It’s also looking at diversification opportunities across the energy basket.

In fact, India Gas Exchange (IGX), a subsidiary of IEX, commenced operations in December 2020. IGX has received a go-ahead from the Petroleum and Natural Gas Regulatory Board (PNGRB) in the last fiscal to set up and operate India’s first automated physical delivery-based regulated gas exchange for 25 years.

Factors such as the expansion of the existing gas pipeline infrastructure and a potential rise in the penetration of City-Gas-Distribution (CGD) network bode well for the prospects of IGX.

The stock has run up a lot in the recent past and isn’t cheap at 77 times Q1FY22 annualized earnings.  Nonetheless, it’s time to be careful not fearful.

To conclude…

India’s short-term power procurement market has a huge growth potential. Various policy initiatives, new product development and the country’s changing energy mix present an immense growth opportunity to IEX. The addressable business opportunity is very large.

As long as IEX along with its subsidiary businesses continue to clock higher growth, the stock may enjoy the spotlight.

PS: Please let us know what is the most crucial stock selection parameter for you - growth visibility or valuation, especially at a time when markets are hovering at their all-time highs? Feel free to share your responses.


You may also like to read: Will the combination of PLI and FTAs make Indian ports attractive bets?

Disclaimer: The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities.

Please note, Ventura Securities Research division recently initiated the coverage on Gujarat Pipavav Port Limited (GPPL). If you are planning to take any investment decision based on the said coverage of Ventura Securities, we strongly recommend you to read risk factors/disclosures/disclaimers mentioned therein.

We strongly suggest you to consult your financial advisor before taking any decision pertaining to your finances. Asset allocation becomes extremely relevant.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.


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