In a bid to facilitate seamless supply of natural gas in a similar manner, the Indian Energy Exchange (IEX) launched the country’s first national-level gas exchange – Indian Gas Exchange Limited (IGX). The IGX was inaugurated on June 15, 2020 and is the country’s first automated national-level online trading platform where natural gas is traded through a flexible market-based pricing mechanism and delivered to the buyer. The platform provides an end-to end solution to buy and sell gas on the exchange. Since its inception, the IGX has taken the lead in forming a benchmark natural gas price index in India based on transparency, flexibility and market participation. The platform is expected to increase competitive trading and boost natural gas usage in the city gas distribution (CGD) sector, leading to the growth and development of in a cost-effective manner. In an interview with Smart Utilities, Rajesh Kumar Mediratta, Director, Business Development, IEX, spoke extensively about the existing operations of the IGX, the challenges faced by the platform, the impact on the CGD sector, the contractual flexibility offered by the exchange, and the future outlook for IGX. Excerpts…
What have been the recent trends in gas trade volumes at the IGX?
The IGX has witnessed considerable growth in terms of volumes in the past few months. The platform had been facilitating trade of 300,000-400,000 mmbtu of gas per month till July 2021. The trade volumes recorded a decrease in August 2021 due to the increasing prices of natural gas, which eventually led to subdued demand. However, trade volumes are expected to pick up pace in the coming months as the trading platform has been well received by all the stakeholders owing to the various benefits offered by it. On the policy front, the government has recently revised a guideline issued in October 2020 that allows domestic gas producers to sell around 10 per cent of their annual production or 500 million cubic metres (mcm) of gas, whichever is higher, through the exchange. Further, various amendments in the regulatory framework such as introduction of a uniform transmission tariff and bringing natural gas under the ambit of the goods and services tax have been proposed. These amendments are also expected to drive the volumes of gas being traded on the platform.
What has been the response of industry stakeholders towards the IGX? What are some of the key challenges faced by the gas exchange platform?
The response of industry stakeholders towards the IGX has been highly positive due to the opportunities and flexibility offered by the platform. As far as challenges are concerned, the major challenge being faced by the platform currently is the incessant increase in gas prices due to which demand shrinks and the volumes being traded on the IGX are adversely affected. Due to the increase in gas prices some industries have now moved to alternative fuels such as furnace oil. Another challenge being faced by the platform is the lack of sellers in the market, as currently there are only 10-15 suppliers. The issue of limited number of sellers often results in supply constraints, due to which the trade volumes decrease. Further, the international sellers are currently not registered to trade on the platform, due to which trade volumes are not able to reach their full potential. In this regard, the exchange has sought approval from the regulators to allow us to modify our provisions relating to the registration of international sellers. Lastly, the lack of a common system operator that handles capacity booking also poses a challenge to the platform’s efficient operations.
How does the IGX facilitate competitiveness in price discovery? How does it impact the CGD sector?
The IGX has a robust model to facilitate price discovery as a double-sided auction approach is followed. In a double-sided open auction, sellers and buyers submit their bids wherein the bid price and quantity are visible to the market participants without the identity of the bidder being disclosed. The platform has an algorithm in place that calculates the price at which maximum quantity is traded and establishes a single uniform clearing price for each contract type. The price discovered on the exchange on a particular hub for a particular contract is applicable to all the participants uniformly. The advantage of this mechanism is that such auctions ensure transparent, neutral and competitive price discovery leading to increased competitiveness in the CGD sector.
How much flexibility is offered to CGD entities through the contractual agreements on the Indian Gas Exchange?
CGD entities are offered multiple contractual options on the IGX. The contract duration offered on the exchange ranges from delivery of gas for one day, five days, seven days, 15 days and up to 30/31 days. The different contractual durations offer greater flexibility in managing the gas price of non-contracted long- or mid-term quantities. CGD companies can profile their demand and choose to buy base demand under monthly contracts and week/day variations under smaller tenure contracts. Weekday contracts at the IGX are of great value to CGD entities as the downstream small-scale industries connected to CGD infrastructure generally observe weekend holidays and require higher volumes on weekdays. Further, A CGD entity has the option to buy extra volume at the IGX for any single day under the daily contract in case its downstream demand is more on any particular day. A new CGD entity can start purchasing through the exchange as the demand will be uncertain and fluctuating due to its new customers’ profiles.
How is the gas traded on the IGX delivered to the CGD entities?
The IGX handles the delivery of gas to the entities as well. The platform has an agreement with pipeline operators. In case an entity wants the gas to be delivered to its location, the gas exchange handles the capacity booking and scheduling, and also facilitates payment of the different charges payable to transporters on transportation of the gas. The delivery is scheduled by the IGX and once the transporter confirms it, the delivery is handled by them. Further, those buyers who have a gas transportation agreement (GTA) in place with the transporter have the option of ex-hub transaction wherein buyers buy gas from the IGX and take care of deliveries under their own GTA.
What are the future plans of the IGX?
Going forward, the overall natural gas market is expected to grow with existing CGD entities, deepening the access in their geographical areas and widening access through new CGD entities under the 11th round. There will be an expansion of the gas pipeline network with the Urja Ganga and Indradhanush pipeline networks in the eastern and north-eastern regions. Recently, the MoPNG vide its OM dated August 19, 2021 allowed domestic gas producers to sell 500 mmscm or 10 per cent of their annual production (whichever is higher) from their field through the PNGRB authorised gas exchange. Domestic gas from difficult fields will also be sold through the IGX. The trade of domestic gas is also expected to begin on the exchange and will offer a huge segment of the market to the IGX. Limited availability of domestic gas, will push demand for RLNG and spot RLNG will be sold through the exchange. All the above factors will help volumes to grow and we will leverage technology to provide more flexible and customer-centric products through the exchange. Once the trade of domestic gas is brought to the IGX, transactions of smaller quantities with flexible duration ranges could be made possible. Currently, the IGX operates through five hubs which are expected to increase in the coming years to ensure seamless services for buyers.
Enabling policy and regulatory reforms like GST, uniform transport tariff, independent system operator and expansion of network and terminal capacities will help us create a neutral and transparent liquid market. This will help us establish the Indian gas hub and our own price discovery mechanism. This will be very handy for CGD players in choosing the right options to optimise their cost of gas procurement.