Indian Power Generation Sector - At Cross-roads

Over the years, the Indian power sector has had its own share of ups and downs. The Electricity Act 2003 was a watershed event, giving a much needed boost to the sector's economic viability.

However, there have been a host of other concerning factors, leading to poor performance of the sector:

• Lack of adequate power generation capacity addition. Power generation capacity addition has been stagnant for the past 2 decades, and planned targets have been consistently missed
• Delayed clearances – environmental, forest etc. 
• Land acquisition issues 
• Fuel linkages 
• Dismal conditions and inappropriate maintenance of existing power plants and transmission and distribution (T&D) equipment/infrastructure
• Rampant power theft, leading to high Transmission and Distribution (T&D) losses impacting finances of Power T&D utilities.
• Poor financial condition of the State Electricity Boards (as per report from the Power Finance Corporation the aggregate losses of SEB’s reached a peak of INR 526 Billion in FY2008-09)

India’s current Installed Power Generation capacity stands at 186.6 Giga Watts (GW) (as at end December,
2011), with an energy deficit and peak deficit of 7.9 percent and 10.6 percent, respectively.

In an ideal scenario, Power Demand growth in India is expected to be atleast equivalent to the economic growth (experts indicate for developing nations, Power Demand growth should be in the range of 1-1.5x  the Growth Domestic Product (GDP) growth). Comparison of India’s GDP growth vs. Power Demand over  the period ofFY2000- 1 to FY2010-11) indicates Power Demand growth has been muted in comparison to the GDP growth.  

Challenges and Issues
• Availability of coal
Coal-based power plants contribute to approximately 55 percent of the total power generation installed capacity in India, thereby being the mainstay of country’s power generation fuel mix.  However, recent delays in the development of captive coal blocks has led to shortages in the supply of Indian coking coal, and this has led to the gloomy prediction that India is likely to face a coal shortage  of approximately 15 percent before March 2012. Demand for coal in the power sector increased at a  CAGR of 7.9 percent whereas total coal production increased at a CAGR of only 5.4 percent. As per  estimates of the Ministry of Coal, the coal demand-supply deficit could increase to almost 200 MT  during the 12th five year plan (FY12-13 to FY16-17) in the event of coal production from domestic  sources not being enhanced.

• Availability of Natural Gas
Gas based power plants currently contribute less than 10 percent of the total power generation installed capacity in India. The preference of Natural gas as fuel source for power generation is  increasing due to its lower environmental impact in comparison to coal. Current natural gas production in India stands at 132.5 mmscmd which dropped from 143 mmscmd in 2009-10. The allocation of  natural gas to Power and Fertilizer sector contributes a lion’s share of approximately 70 percent, and with the current domestic production there exists a deficit in the supply of natural gas.  

• Increasing Fuel prices
In the current market scenario, domestic sources are not able meet demand of natural gas and coal requirement for power generation. The fall out has led to imports to fill this supply void. Price of both coal and natural gas in the international market has been steadily increasing over the last one year. Domestic coal prices range between INR 770 and INR 1,700 a ton, a difference of almost 20-50 percent from international coal prices. In FY2010-11, India imported almost 8.7 percent of its coal requirement, with Australia and Indonesia contributing approximately 50 percent of India’s total coal import. At these price bands power generation economics become unviable and non-competitive as compared to power generation from coal as a fuel source. 

• Physical constraints (land acquisition, regulatory clearances, etc.)
Projects were delayed due to issues such as local protests, the lack of environment and forest clearances as large capacity additions strained the system/resources. This is a function of excessive strain on limited resources and the delays impacted project cash flows.

• Funding for the power sector
Raising funds has become critical due to tight bank finances and lack of investor appetite. Lending to the infrastructure segment increased to approximately 13 percent of overall bank credit in FY11, from 1 percent in FY98. The power sector has been the biggest contributor to growth in infrastructure lending, accounting for 40 percent of the outstanding credit to the infrastructure space, up from 20 percent in FY98. The current scenario of constrained fuel availability commensurate with the increasing demand in domestic market and escalating import prices has led to lack of investor appetite, resulting in constrained availability of debt funding for the sector.

Power Generation - A Huge Opportunity to be Tapped
The rapidly growing demand for electricity has led the Government to plan for huge capacity expansions over the next two decades. As per Government estimates, cumulative power generation capacity is planned to be increased to 835 GW by the end of FY2032, in line with the increasing power requirement to complement economic growth of 8 percent per annum.

If these plans materialize, India’s power generation capacity in FY2032 would be more than 6 times the installed capacity at the end of 10th five year plan (FY2007). By this time India is expected to become the 3rd largest country in terms of power generation installed capacity, trailing behind China and US. These plans offer tremendous opportunity to all stakeholders – equipment suppliers, construction agencies, consultants, investors, etc.

A Host of Positive Developments
• Increasing Role of Private Sector
Private sector participation in the power generation space has been rapidly increasing over the past decade (FY2002-FY2011). Private sector companies contributed 13 percent to the new power generation capacity during the 10th five year plan (FY2002-07), which is expected to increase to approximately 18-19 percent during the 11th five year plan. Several new Independent Power producers (IPPs) have entered the power generation sector with generation capacity portfolio under construction of 30-40GW 

Table 1: New Private Developers Having Power Projects under Various Stages Of Development

• Ramping of captive mines producing coal
Captive mines allocated to the power sector have potential production of 480mt. Of this, 292mt projects were awarded in 2006 and 2007. Given a time lag of 7-8 years, these mines are expected to become productive over the period FY13-15. Coal from captive mines contributed 4.6 percent to the fuel basket for power generation sector in FY2010. The contribution of captive mines to power generation is expected to increase from 4 percent in FY12 to 12 percent in FY15.

• Increasing power tariffs
Lower end-user tariffs / electricity charges are one of the factors impacting SEB finances and leading to huge losses. The Agriculture and Residential sectors contribute 47 percent of the total electricity consumption, and in fact these 2 consumer categories are highest subsidized segments. There have  been some positive developments off-late, and several states have undertaken/proposed tariff hikes.

The Way Forward
India’s power sector is at cross-roads, the next five years beginning 2012 will be a redefining period for the sector. Although constraints and challenges exist, many have been magnified; and gradual but fundamental changes are expected to occur. A recovery looks likely to occur in the mid to long term, by when the sector is expected to and will regain its lost reputation of steady long-term growth with reasonable returns.  

Amol Kotwal, Deputy Director, Frost & Sullivan, Indian Power Generation Sector