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Assessing energy exchanges

Energy exchanges, like IEX, connect power-generating companies with power distributors. Here's how you assess them

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Energy exchanges enable trading in electricity. They connect power producers and power-distribution companies (discoms). Discoms that have a dearth buy power from the producers with surplus through energy exchanges.

Assessing energy exchanges

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Energy exchanges are also involved in full settlement process like other exchanges (BSE, NSE and MCX). Additionally, they also deal in power contracts and enable physical delivery of power.

IEX, the most important energy exchange, got listed on the Indian exchanges in 2017. It is the only energy exchange with a direct presence in the Indian markets.

The trading on IEX differs from that on stock exchanges. On stock exchanges, orders are matched through the bid-ask mechanism. But on IEX, the trading price is the point of intersection of maximum buyers and sellers.

Currently, IEX has over 6,000 members registered on it.

The business model
Energy exchanges derive their revenues from the following types of fees:

Admission fees: This is a one-time fees charged from members at the time of admission. It also includes processing fees.

Security deposit: A member also has to keep an interest-free security deposit and margin money with the exchange. The interest earned on these deposits also adds to the exchange's income.

Transaction fees: Energy exchanges charge its customer for every transaction they do on the exchange. The fees charged are based on the number of units transacted. For instance, for every unit of electricity traded on its platform, IEX charges about Rs0.02 each from the buyer and seller.

Annual subscription fees: Energy exchanges also charge its members annual fees, in advance, for using their platforms.

Here are the segments in which energy exchanges operate:
Day ahead market (DAM): Here power can be purchased one day in advance in blocks of 15 minutes. This is IEX's most-popular segment and contributes a major chunk of its revenue.

Term ahead contracts (TAM): In this segment, electricity contracts can be bought for fixed terms in the future. It includes intra-day contracts, day-ahead-contigency contracts and contracts that are up to 11 days in advance.

Renewable energy certificates (REC): Indian power producers have targets of producing renewable energy. Companies that are unable to meet those targets buy RECs with the help of the exchange from the companies which exceed the targets.

Energy-saving certificates (ESC): These are similar to RECs. Companies which are not able to meet their energy-saving targets buy these certificates from the companies which have exceeded theirs.

This article is part of a series on how to assess new business models.

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