The 'Power'ful challenge

The growth prospect related to the power industry has been very well realised by both government as well as the private sector. As the government is pushing for greater private participation to expedite project execution, it needs to clear certain bottlenecks that the industry has been facing for a long time. Although India can take some solace from the fact that its pace for capacity addition has improved over the period of time, it still lags behind by huge margin.

India is expected to add 62,374 MW against the target of 78,700 MW during 11th Plan. While this is less than the target it has set, it is way above what the government had achieves during last five-year plan. India’s demand for power has been growing by leaps and bounds, thanks to robust industrial growth and booming economy. It now has to intensify its project execution process.

Opportunities up for grabs

The huge demand-supply gap which is pegged at 14% peaking deficit and 11% energy shortage calls for quicker capacity addition. With private sector contribution of 19,797 MW (31.7%) against total addition of 62,374 MW during 11th plan, the government estimates the contribution from private sector would be much more as many power plants in private sector have been planned during 12th plan.
The private participation in the power sector was long overdue which has started to change in last four-five years, thanks to industry friendly policies that the government brought in after it started to liberalise the sector.
According to a White Paper brought out by KPMG on power sector in India, the Electricity Act, 2003 was a turning point in the reforms process which removed the need for license for generation projects, encouraged competition through international competitive bidding, identified transmission as a separate activity and invited a wider public and private sector participation among other things.
The report further observes: “Some of the other major reforms that have been implemented over the years include: unbundling of SEBs, tax benefits, Accelerated Power Development and Reform Program (APDRP) for distribution, permission for trading of power, etc.”
Manoj Agarwal, MD, Adhunik Metaliks Limited says: “Since the promulgation of Electricity Act-2003, there has been a lot of development in the merchant power space and we have seen a large number of industrial houses coming in the sector and taking steps for substantial capacity addition in 11th & 12th Plans. Private investment in power sector has increased from around Rs12000 crore in 2002-03 to around Rs35000 crore in 2009-10, signifying the growth prospect.”
These reforms actually opened up great scope for private players who earlier chose to shy away from taking up power projects. “The government is looking to set an ambitious target of adding 100 GW of power generation capacity. This opens up huge opportunities for all the companies operating in a wide spectrum of power space. The private power developers have a tremendous opportunity as most of the power projects are likely to be awarded through competitive bidding,” says J Suresh Kumar, CFO, Lanco Infratech Limited. Lanco is one of the top three private sector power developers in India with 2087 MW under operation, 8468 MW under construction, and 1239 MW of projects under development.Kumar says there are ample opportunities in transmission network ventures with an additional 60,000 km of transmission network expected by 2012, translating into an investment opportunity of US$200 billion. “The Power trading market in the country is also growing fast. The demand for equipment supplies is also high and to bridge the gap, Indian companies are also in the process of establishing in-house equipment manufacturing facilities. So the overall growth prospects of power sector in India appear to be quite healthy,” Kumar adds.

With the growing number of power projects being implemented in India, it has created huge opportunities for power equipments manufacturers, EPC contractors and developers.
A recent research by Frost & Sullivan says that the total market of power and distribution transformers in India is US$2,668.1 million which is dominated by companies like BHEL, CGL, Areva T&D, EMCO, Vijai Electricals, ABB and TRIL. Some of the other key players are TELK, Voltamp Ltd., Bharat Bijlee Ltd., Siemens, Kirloskar Electric Co Ltd, Kotsons Pvt. Ltd., ECE Ltd, Indo Tech Transformers and Kanohar. Today, India has emerged as a major base for transformers exports to over 100 countries. It also imports transformers from countries like China, Germany, USA, Korea and Japan.
“For power equipments, Siemens, ABB, Areva and BHEL have augmented their capacities in India to meet the growing demand of power equipments. Additionally, several new players such as L&T, Bharat Forge, JSW Group, BGR Energy, and Thermax have been reportedly planning to form a JV with a foreign partner and have plans to enter manufacturing of supercritical power equipments,” says Hiten Khatau, CMD, Cable Corporation of India who is into power cable manufacturing.

The company believes that the growth in the power sector to the tune of 170000 MW in power generation will also translate into the growth in power transmission. The Central Electricity Authority panel has projected an investment of nearly Rs6.1 trillion in 11th plan and Rs11.5 trillion in 12th Plan. “This will definitely get translated into increase in demand for EHV cables, giving us the platform to grow and retain our number one position. We will be looking at investment in capacity additions in line with market demand to have the good market share in EHV segment. We will be definitely planning to add 400 KV EHV cable soon to the Indian market,” he adds.
Another player, Thermax, which began its presence in the power sector by providing boilers for steam generation, has so far generated 8000 MW of power. Anticipating huge growth prospect in the sector, the company moved up the value chain as an EPC player and got into setting up captive power plants including cogeneration systems for various industries.
“Today, through its Power Division, Thermax has ventured into the utilities space setting up Independent Power Plants with unit size up to 300MW, besides strengthening its leadership position in the captive power segment,” says Vivek Taneja, Head of Business Development, Power Division, Thermax.
“The next two five-year plans will see the power sector continuing to grow at a rapid pace. The government has set a target of 2,00,000 MW by 2020, and 20,000 MW of power to come from solar thermal initiatives. Captive power sector also is expected to contribute significantly,” Taneja adds.
ABB which is into providing power plant electrical equipment and automation systems says, in the present scenario, the Indian manufacturers have expanded their capacities and thus non availability of equipments for transmission is not anticipated in future.“We are currently introducing new products onto the market and will be doing even more in India as we move forward. For example, we are now manufacturing 765kV transformers, Current transformers, Capacitor Voltage transformers and Switchgear in India for the Indian market and there are more products in the pipeline,” says Pitamber Shivnani, Power Products Division Manager in India, ABB.

Challenges to overcome

But, the industry is faced with lots of challenges such as land acquisition & environment clearances, fuel availability, equipment shortage, project financing and shortage of skilled manpower. These are the key issues which need to be addressed before India could meet the target of adding nearly 100,000 MW in 12th Plan.
“Fuel, land and water requirement are likely to increase significantly in the 12th five-year plan period. Sourcing them at a reasonable price would undoubtedly be a major challenge,” Kumar of Lanco says.
The biggest hurdles for new projects as well as the ones which are going for expansion are land acquisition and availability of fuel. As there is growing insurgency in the mineral-reach regions of the country by Maoists, it poses serious threat to mining sector, a key component for coal supply. As supply constraints for domestic coal remain, India majorly relies on imported coal for its thermal power plants.
“While this is expected to secure coal supplies it has again thrown upon further challenges. For example, the main international market for coal supply to India – Indonesia, poses significant political and legal risks in the form of changing regulatory framework towards foreign companies,” the KPMG White Paper findings say.
The same report says the failure to achieve the planned target from the captive coal blocks presents itself as a major challenge to the power sector, as only 24 blocks have become operational out of the total 210.
Land acquisition has been the most controversial and difficult issue for project developers. Many projects are still stuck due to strong resistance from the land owners. The new Bill relating to land acquisition is continue to face political opposition. “India has an adverse land-population ratio (per capita land availability is a mere 0.25 ha) and acquiring land for industrial and mining projects is a major cause of conflict.
Land is a major resource constraint and this would worsen unless inclusive growth in which local communities proportionally benefit is ensured,” says Agarwal of Adhunik Metaliks Limited.
Environmental clearance is another issue which is very critical for power projects. As power is a pollution-sensitive industry, it goes through lots of scrutiny to get environment clearance. “For a predominantly coal based power industry, finding the right technology to mitigate the environmental impacts of power plants is another area of concern,” says Taneja of Thermax.
Agarwal feels that the growing concern for environment is causing undue delay in granting MOEF related permissions. “While there is no debate or argument on protecting environment, we need to strike a balance with developmental needs of the economy and industry,” he adds.

The power sector also faces shortage of equipments, primarily in the core components of Boilers, Turbines and Generators. Though, many Indian players have started producing them here after having tie-up with foreign companies, there is still lack of adequate supply of Balance of Plant (BOP) equipment which includes coal-handling, ash-handling plants, etc. Apart from these, there is shortage of construction equipment as well.
Kumar says: “Currently indigenous equipment supplies alone cannot meet the demands of the ever growing power sector, so the developers are resorting to imports. The equipments across the BTG and BOP segments are currently being sourced through indigenous and imported supplies. Delays in ramping up the indigenous capacity or unfavourable regulations towards imports may hamper the growth or cause delays in the project execution of the power sector.”
According to Shivnani of ABB, the biggest challenge faced by the Indian Power Sector today is electricity losses during transmission and distribution, which are extremely high and vary between 30% to 45%. “Uncertainty of power transfer requirements, implementation time for the transmission system and harnessing the seasonal and daily load diversity are India’s shortcomings,” he says, adding that a strong all-India grid would enable harnessing of unevenly distributed generation resources in our country to their optimal potential.
In terms of the finance, though, the credit scenario has improved the huge requirement of fund for ultra mega project poses challenge for developers. “Massive financial investments will be required to meet the plan targets. With interest rates moving up, for promoters, external borrowings can be tough,” says Taneja.
Developers say the availability of long-term finance is also an issue. “While business plan for power is made for 25 years, the bank loans are generally available for 8-10 years and that too, at a high rate of 11-12% which increases the cost of power generation,” says Agarwal.
Availability of skilled manpower has become very critical issue not only for power but all the other sectors in India. “Govt and industry, together, need to tackle the issue of developing skilled manpower. This, probably, is the biggest challenge that needs to be resolved,” Taneja says.

Measures to be taken

Industry players acknowledge government efforts to recognise power as the key driver of the economic growth. But, it feels the government needs to work on a comprehensive fuel plan to ensure that the utilities are able to meet their capacity addition targets. “A positive step taken in this direction is the opening up of the allotment of coal mines to the private sector. However, auction of coal blocks should be a priority in order to reduce the dependence on coal imports,” Kumar says.
Besides this, he says, the govt has to create an enabling environment for investments to address the ever growing liquidity needs in the power sector, as funding from domestic banks and financial institutions are reaching the sectorial limits.
Taneja feels government policy initiatives that can include direct foreign investments, can facilitate financial closures of power projects. “It can draw up feasible land acquisition and rehabilitation norms. On the environment front, government needs to introduce stringent pollution norms and enforce them diligently to avoid possible public alienation,” he adds.
Agrwal is of the opinion that Infrastructure Finance Company Ltd which is doing refinancing to banks rather than direct financing to power generators should lend more to private sector.