March 06, 2018

Indian Energy Exchange to launch spot gas exchange for marginal fields

Business Standard

If the IEX's plan succeeds, this will be the first spot gas market in the country.

The Indian Energy Exchange (IEX), the country’s largest power trading platform, is looking at launching a spot gas exchange for trading of natural gas produced by marginal fields.

Speaking to Business Standard, S N Goel, managing director and chief executive officer, IEX, said the company was in discussion with stakeholders on the proposal. “There is a disparity in gas prices. In India, the domestic gas price is $3.5 per mmbtu, while the LNG rate is $9 per mmbtu. If there is a market, the rate would be $7-8 per mmbtu,” he said.

Mmbtu stands for one million British thermal units (BTU), a measure of energy content in a fuel. Goel said a higher price would help operators produce gas from the marginal fields. Since output from these fields was less, gas production did not make commercial sense at a lower rate, he added.
“There is a lot of synergy between a power and gas exchange. Since we are already operating a power exchange for the last 10 years, we think we are good for setting up a gas exchange,” he said. Currently, natural gas derivatives are being traded on commodity platforms such as the NCDEX. If the IEX’s plan succeeds, this will be the first spot gas market in the country.

The move comes at a time when gas-based power generation is facing fuel crisis. Of the 24,150 megawatts (Mw) of gas grid-connected power generation capacity in the country, 14,305 Mw has no supply of domestic gas. The remaining (9,845 Mw) is working at a sub-optimal level.
The Centre recently conveyed to private power producers that natural gas would no longer be allocated, and that they would have to bid to buy the fuel. “We are working with different stakeholders to understand what we need to do.

It will be a privately owned exchange, so you might see participants like GAIL. But it is all in the discussion stage,” said Goel.

The IEX, which recently concluded its IPO listing, is looking to offer several new products to the electricity sector. “One opportunity is in the forwards and future markets in electricity, which is not there in India as yet. The government and the regulator did look into it, but there was not enough liquidity in the power trading market. Now, with an increase in liquidity, the discussion has started again, and I think in the next 1 to 2 years, there will be opportunity in this as well,” he said. Liquidity or volume of power trading at the spot market has seen a spurt over the past year. With states reluctant to sign long-term agreements for power purchases, and thermal power generators reeling from demand crunch, the spot market has emerged as a necessary tool.

Volumes during the nine months of the current fiscal year grew 32 per cent over the corresponding period of 2016-17. Goel said the company was confident of 25 per cent year-on-year growth by the end of the financial year.

“We estimate that the variable demand over and above the base load of all the states would come to the spot market. In the next 4-5 years, the spot market will have close to 10 per cent of the power generation market with trading of 125 billion units,” Goel said, citing a CRISIL study that was commissioned by IEX.

He said the spot market would soon be source agnostic, like the mature electricity market globally. “With large renewable capacity being built, a liquid market is being discussed actively with the government and the regulator. We need a good short-term market to meet the variability of the renewable. Lack of balancing power begets the need of a dynamic spot market,” said Goel.