In a bid to facilitate seamless supply of natural gas in a similar manner, Indian Energy Exchange (IEX) launched the country’s first national level Gas Exchange – the Indian Gas Exchange Limited. (IGX). 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 transported/delivered to the buyer. The platform provides an end-to end solution to buy and sell gas on the exchange. Since its inception, 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, boost natural gas usage in city gas distribution (CGD) sector leading to the growth and development in a cost-effective manner.

In an exclusive interview with CGDIndia, Rajesh Kumar Mediratta, Director, Business Development, IEX spoke extensively about the existing operations of IGX, challenges faced by the platform, impact on the CGD sector, contractual flexibility offered by the exchange and the future outlook of IGX…

What have been the recent trends in gas trade volumes at the IGX?

IGX has witnessed considerable growth in terms of volumes in the past few months. The platform had been facilitating trade of nearly 3-400,000 mmbtu of gas per month till July 2021. The trade volumes recorded a decrease in August 2021 due to 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 a certain quantum of their gas production on the exchange. The mandate allows domestic gas producers to sell around 10 per cent of their annual production or 500 million cubic meters (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 in 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 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 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 modify our provisions relating to registration of international sellers. Lastly, lack of a common system operator that handles capacity booking also poses a challenge to the platform’s efficient operations.

How does IGX facilitate competitiveness in price discovery? How does it impact the CGD sector?

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 disclosing the identity of the bidder. The platform has an algorithm in place that calculates the price at which maximum quantity is traded and that a single uniform clearing price is established 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 IGX?

The CGD entities are offered multiple contractual options on IGX. Contract duration offered on 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 gas price of non-contracted long or mid-term quantities. CGDs can profile its demand and choose to buy base demand under monthly contracts and week/day variations under smaller tenure contracts. Weekdays contract at IGX are of great value to the CGD entities as the downstream small-scale industries connected to CGD infrastructure generally observe weekend holidays and require higher volumes during the weekdays. Further, CGD entities have the option to buy extra volume at IGX for any single day under the daily contract in case if its downstream demand is more on any particular day. New CGD entity can start purchasing through exchange as the demand will be uncertain and fluctuating due to its new customers profiles.

How is the gas traded on IGX delivered to the CGD entities?

IGX handles the delivery of gas to the entities as well. The platform has an agreement with the pipeline operators. In case an entity wants the gas to be delivered to its location, the gas exchange handles the capacity booking and scheduling, also facilitates payment of the different charges payable to transporters on transportation of the gas. The delivery is scheduled by 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 transporter, have the option of Ex-Hub transaction wherein buyer buys gas from IGX and will take care of deliveries of gas under their own GTA.

What are some of the future plans of IGX?

Going forward, the overall natural gas market is expected to grow with existing CGs deepening the access with their geographical areas and widening the access through new CGD entities under 11th round. Expansion of gas pipeline network with Urja Ganga and Indradhanush pipeline networks in Eastern and North Eastern regions. Recently MoPNG vide its OM dated August 19, 2021 has allowed domestic gas producers to sell 500 MMSCM or 10 per cent of their annual production (whichever is higher) from their field through PNGRB authorized Gas Exchange. Domestic gas from difficult fields will also be sold through IGX. The trade of domestic gas is also expected to begin on the exchange and it will offer a huge segment of the market to IGX.  Limited availability of domestic gas, will push demand for RLNG and spot RLNG will be sold through exchange. All the above factors will help volumes to grow and we will leverage technology to provide more flexible and customer-centric products through exchange. Once the trade of domestic gas is brought on IGX, transactions of smaller quantities with flexible duration range could be made possible. Currently, IGX operates through five hubs which are expected to increase in the coming years to ensure seamless services to buyers.

Few 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 Indian gas hub and our own price discovery mechanism. This will be very handy for CGD players to choose right options to optimise their cost of gas procurement.