Plenty of scope to generate and sell carbon credits in India: IEX CMD

In a Q&A, Satyanarayan Goel, CMD of the exchange, dwells on the current and future power distribution scenario in India and his plans to set up an International Carbon Exchange

By 2030, India will be selling almost 200 million carbon credits, with the demand from Indian corporations alone expected to be about 120-130 million, says Satyanarayan Goel, chairman and managing director of Indian Energy Exchange, the country's biggest energy trading platform. In an interview with Business Standard, Goel dwells on his plans to set up an International Carbon Exchange to capture a share of the ever-growing global clean energy pie. An electrical engineer, he spent 29 years at NTPC and retired as executive director. Edited excerpts:

How do you see power trading volumes on IEX this fiscal, and where do you see IEX in the next few years? What new products are in the offing?

India is one country where the GDP is going to grow for the next 10 years at a rate of 6-7 per cent at least. And if the GDP has to grow, then the demand for electricity also has to increase. The projected electricity demand growth is estimated to be 6-7 per cent on average for the next 8-10 years. And today, our demand is about 1,400 billion units (kilowatt hours), so if it is growing at a rate of six per cent, that means 80-90 billion units is the incremental demand every year. Exchanges will definitely have good business opportunities.

What new products are in the offing? The Indian Gas Exchange (IGX-an IEX unit) launched a gas index. Is there an Indian Electricity Index on the horizon?

We have launched the Indian Gas Index. An index has value when there is significant liquidity behind it. On the power side also, we are thinking of launching a similar kind of index. Since we have multiple products on the power side, we are working on identifying the best way to launch this from an index point of view. Maybe in the next 5-6 months, you will see a power index as well.

IGX is doing good business. Last year, we broke even in the first full year of operation. The government has also allowed domestic gas transactions through the exchange and has even allowed fertiliser plants to buy gas on IGX. The government is also considering bringing gas under GST. If that happens, then the opportunity for the gas exchange will multiply because today, each state has its own taxes on gas, varying from four per cent to 26 per cent. So, you cannot have standard contracts in the gas market.

The third initiative is the Carbon Exchange. Fourth, the coal ministry had appointed Crisil to bring a market framework to the coal sector. We had a couple of meetings with the ministry. (We will have to wait) until that happens because the coal sector, unfortunately, does not have a regulator, and there are some enablers to be created. That can be another area of diversification for us.

Like a Coal Exchange, you mean?

Yes, like a Coal Exchange.

Can you dwell a bit more on the international carbon exchange? Would it also mean that the RECs and the EECs, which are being traded on IEX, will shift to the carbon exchange?

Recently, the government passed amendments to the Energy Conservation Act (2022), paving the way for the development of a national carbon market in India. The government is working on creating a compliant carbon market that is expected to be regulated by the CERC. In this market, it is expected that REC and E-CERTS will be merged to create a single carbon attribute. There will be fungibility, and these will be then converted into carbon credits, and many more industries will be then brought into this sector. The Bureau of Energy Efficiency is working on this, and a mandatory carbon market will be introduced soon. The plan is to introduce this in the next year.

In addition to the targets taken by the different countries, what we also see is that multinationals, large companies in India and also in the developed countries, have taken targets for themselves under the ESG to become net zero. To meet these requirements, they are purchasing carbon credits in the voluntary market, which is an international market. In India, Africa, and Southeast Asia, we have a large opportunity to generate carbon credits. European and American companies are the largest buyers in the voluntary market. Large companies like Amazon, Reliance, Adani, and Tatas, also have declared their net-zero goals, so they also will be buying carbon credits. So, to cater to this voluntary market, we have set up this International Carbon Exchange.

What kind of value and size of the carbon credit market do you see? Will the entire market be on the exchange, or will there be private arrangements? Also, what percentage of the total Indian market or interest will be on an Exchange?

This is an international exchange. As of now, almost 500 million units of carbon credits are getting traded. By 2030, it is expected that this will become almost 1.5-2 billion carbon credit units, which means a 3-4 times increase in the trading volume. Secondly, today a large part of these credits are traded on a bilateral basis, and exchange transactions are only 20-25 per cent. But as the volume is increasing, both buyers and sellers want to do it through the exchange. Bilateral transactions are opaque and inefficient. It is expected that as the need for transparent and competitive sourcing of credits emerges, the share of exchange-traded credits will go up to 50-60 per cent by 2030. In today’s market, 3-4 carbon exchanges are operating in the voluntary carbon markets. We are going to be among them.

What competitive advantage will this international carbon exchange bring so that people come to start to trade?

One is that India is a big supplier of carbon credits, so we will have that inherent advantage of getting Indian suppliers on our platform. Our estimate is that by 2030, India will be selling almost 200 million carbon credits, and the demand from Indian corporations is expected to be in the range of 120-130 million carbon credits. So, 60-70 per cent of carbon credits will be sold within India itself. Then, we will also have networks with other countries and buyers in the European and American markets. Further, with the integration of neighbouring countries like Nepal, Bhutan, and Bangladesh, I think the credibility of IEX as an exchange has definitely increased.

How will India's thrust on renewables benefit IEX?

We have green contracts. In fact, the clearing price of the exchange is much higher than the rate at which the renewable generators are selling power under PPAs. So there is a good business case for them. Renewables have variation in demand and supply, so you need a marketplace where you can balance on a real-time basis. In fact,  in countries like Germany and the UK, where they have added renewable capacity in the past 5-6 years, the exchange volumes, which used to be 20-30n per cent, have increased to almost 50 per cent of the total generation because exchanges can integrate renewables with conventional power more efficiently.

What does it take for India to become more of a market-led power platform like the UK and Germany?

In these countries, the whole power sector is market-driven. The market starts right from the retail level.  You have multiple distribution companies operating in the same area. You can change your suppliers. So when you have that kind of a model in those countries, then you don't have these long-term contracts. The maximum contract is for five years. So that is why in those countries, the market model is very dominant, and the exchanges have a large share.

Unfortunately, in our country, there is resistance to the privatisation of the distribution business. The outcome of their privatisation is very, very positive, whether it is Delhi or Mumbai, Kolkata, Ahmedabad or Surat. In all these places, wherever this function has been privatised, distribution companies are doing much better, and the service level is much better there. But, due to the resistance to privatisation, these distribution companies, which are government-owned, are commercially not very sensitive and want to get into long-term contracts to ensure their power is lifted.

How important for the exchange is the new Electricity Act, which is still pending? I mean, it is important for India, of course, but how will it help the exchange?

One of the provisions in the new Electricity Act is the privatisation of the supply business. There are enabling provisions for the privatisation of the supply business in the country. And that is a very, very positive thing, I mean, the existing distribution company will continue to operate, but if somebody wants to supply power in a particular area, distribution companies will have to allow the use of wires for him, maybe at a rate which will be determined by the regulatory commission. But they cannot stop this new supplier in the market, and the Regulatory Commission also will have to allow new suppliers to come to the market. So, I think this particular provision will create that market mechanism in the power sector. Once the Act is passed in the next four, five or six years, you will see improvement in the distribution sector. And if that happens, then you will see good participation in the market on the Exchange platform also.

Talking about integration, will IEX be expanded into the South Asian Energy Exchange? What kind of infrastructure is now available in terms of transmission grids because this is a delivery-based exchange?

First of all, for doing business with neighbouring countries, we need transmission infrastructure because the power has to be transmitted to those places. Now, Nepal is rich in hydropower. In India, we have a shortage of hydropower--the combination mix for hydro and thermal should be 70-30; our hydro has come down to almost 15-20%. Bhutan is rich in hydro, but then in the winter, hydropower is not available. So, they want to buy power from the market. Bangladesh has a generation capacity, but then most of it is on liquid fuel, HFO, which is a very high cost of generation. So, they can replace the high cost of generation with cheaper power from India. So, I think by integrating these countries, we can utilise cheaper hydropower in India and with the neighbouring countries also.

Transmission lines are existing between Bhutan and India. With Nepal, a 400 kV line has been constructed now, and what I understand is looking at the advantage Nepal has been able to take by that line, they are intending to expand the transmission interconnection with India further. With Bangladesh also, we already have interconnection for almost about 1100 megawatts of power transfer between the two countries, but that is not enough. So, there are discussions going on to increase connectivity with Bangladesh also. So, a real integrated South Asian energy market will take place only when we have a robust transmission system with these countries and the transmission system interconnection will only happen when these countries also participate in the investment.