Indian Energy Exchange’s (IEX) shares have crashed more than 17% in the last 2 days!

But why?

Well, IEX has recently faced a significant challenge in the form of market coupling.

But what does IEX do and what exactly is market coupling?

IEX is an Indian electronic system-based power trading exchange and is a market leader with the highest volumes in terms of power trading. IEX enjoys a virtual monopoly in trading of electricity with around 90-95% market share.

Due to this, it has an inherent advantage over other players with respect to better price discovery. IEX's advantageous position as a platform for price discovery could lose its sheen as the market coupler takes over.

Market coupling enables buyers and sellers to access a larger pool of electricity supply and demand, resulting in increased liquidity and better price discovery. Introduction of a market coupler implies an independent third party will collate all buy or sell bids and derive a uniform market price across all exchanges, and this will potentially negate the moat of IEX, as other exchanges can eat into its market share over time.

How does IEX suffer?

The introduction of market coupling in the Indian power space has raised concerns for IEX, which has been a dominant player in the country's electricity trading market. With market coupling, IEX may face increased competition and could potentially lose its market share.

Shares of IEX plunged after the government came out with a directive to speed up the consultation process and finalise the implementation of market coupling.

What should the investors do?

While market coupling presents challenges for the IEX, it is important for investors to take a measured approach and evaluate the potential long-term impact. One should also consider the other factors such as time that will be taken for stakeholder consultations and implementation of this decision, impact on valuations, effect of govt.’s target to increase the share of power purchased through exchanges in the coming times etc.

Conclusion:

While such developments introduce uncertainties, investors should adopt a cautious approach. By diversifying their portfolios, assessing long-term prospects, monitoring regulatory developments and staying informed about industry trends, investors can navigate the changing landscape and make informed decisions regarding their investments.