IGI Logo

CERC enables creation of a market coupling operator

* CERC has enabled the creation of a market coupling operator (to view notification, click here). The same, if implemented, can have massive ramifications on IEX and threaten the company’s liquidity advantage.

* We await details on its implementation (if it indeed does go ahead). The above regulations, in its current form, are only an enabling provision. The implementation of: a) market coupling, and b) assignment of a market coupling operator will have to come into effect through separate regulations. The same can usher in another round of discussions among stakeholders.

* Our medium-term story on IEX has played out well, with the company registering strong market share gains and volume growth. Implementation of market coupling is a key risk and one we would keep an eye on.

Market coupling can have strong implications

* The foundations for implementation of market coupling were laid in CERC’s draft power market regulations (issued in Jul’20). We note the new order has gone ahead and enabled its creation in the final regulation.

* The implementation of market coupling would result in the designation of a separate market coupling operator for discovery of uniform clearing price. Power exchanges would end up being just an aggregator of bids. This would severely impact the liquidity advantage at IEX (97% market share). In such a scenario, competition intensity (especially with the launch of a third power exchange) can increase and dent volumes/fees for IEX.

But a lot of unknowns remain

* While the impact is well understood, its implementation though is still an unknown. Spot volumes on India’s power exchange are nascent (5-6% of generation), with advancements and adoption of products such as Real Time Market yet to fully play out. Electricity derivatives as a concept is yet to come to India. From a power exchange perspective, a) investing in technology, b) product innovation, and c) aiding DISCOMs though power procurement tools are still an important facet. Making exchanges just an aggregator of bids would take away their incentive to invest in technology.

* In our view, the enabling provision, prima facie, may still be a more of a discussion point from a longer-term perspective. It leaves a lot of unknowns in terms of: a) assignment of a market operator, and b) implementation timeline, if it does come in. Its implementation can very well be looked at in tandem with a move towards a Market-Based Economic Dispatch (MBED) model, which can lead to a sharp jump in overall exchange volumes.

* Implementation of such a coupling mechanism is a risk and one we would keep a keen eye on.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer