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Sustaining Growth –Future of Indian

Power Sector

OCTOBER 2009

A CII — A.T. Kearney Report


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Power SectorA CII — A.T. Kearney Report


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Power Sector

October 2009

A CII — A.T. Kearney Report


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Confederation of Indian Industry

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Foreword vii

Message from Chairman of CII's National Committee on Power ix

About the Report xi

Executive Summary xiii

Part A: Indian Power Sector: The Road Ahead 1

Theme 1: Changing Outlook for the Sector 3

Theme 2: Winning in the Future Power Markets 13

Part B: Sector Outlook 21

Thermal Power: Coal Based 23

Thermal Power: Gas Based 31

Hydro Energy 37

Nuclear Energy 43

Renewable Energy 49

Contents

v Contents


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Power sector in India is at a crucial juncture today, with several large investments being undertaken by public and private sector

players, and developments promising a significant transformation of the sector. The sector is witnessing a fundamental shift

that is opening up new business opportunities for the industry. At the same time, the competition for scarce resources is

expected to intensify and support enablers in terms of logistics, T&D, equipment supply will be stretched to the fullest.

The emerging dynamics of the Indian power market would require industry players to realign their strategies and operating

models to the changing sectoral trends. The focus would need to be both on project execution as well as efficient operations,

in line with the “growth” characteristics of the sector.

With this background, CII had requested A.T. Kearney to probe two key themes that concern the Indian power sector –

a) Changing Outlook for the Indian Power Sector and b) Winning in the Future Power Markets in India

The conclusions of the study, which are quite insightful, reconfirm the continued attractiveness of the sector for fresh

investments and growth. However, the business environment will increasingly become competitive as we evolve to a new era

of “Power on Power” competition. Access to reliable & high quality fuel, especially coal, will present one of the biggest

challenge to the sector. For example, as per the current trajectory, India may face shortage of upto 250 MT of domestic coal

per annum by 2014-15. Similarly, the downstream distribution infrastructure, characterized by high AT&C losses and inefficient

grid quality is another area of concern. All these issues require immediate intervention from the government through fast

tracked reforms & execution. Similarly, industry players also need to take a fresh look at their competitive strategy as they

prepare to participate in the future of the sector.

I would also like to highlight the increasing importance of renewables in the Indian Power Sector. Buoyed by incentives &

support from the government as well as advancements in the technology, renewable energy (solar, wind, bio-mass) is all set

to play a critical role in defining the future of the industry and ensuring “sustainability” of the Indian energy sector.

Many people contributed to this effort. Several CII members (both Indian companies and MNCs), industry experts and

government officials spent time with the A.T. Kearney team, sharing experiences and debating ideas.

Senior A.T. Kearney partners and principals, including Kaustav Mukherjee, Vikas Kaushal, Abhishek Poddar, Anshuman Maheshwary

provided overall direction. Amit Bhargava, Shelly Kapur, Vipul Jain and Rohan Rijwani led the study on a day-to-day basis.

I would like to extend my appreciation to everyone who helped us in this effort.

Sudhir M Trehan

Chairman - CII India Energy Conclave andManaging Director

Crompton Greaves Ltd.

Foreword

viiForeword


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A robust and thriving Power sector is central to India’s sustained economic growth. India’s power sector has evolved

substantially over the last few decades and is now witnessing unprecedented interest and investments across the value chain.

The industry has responded strongly to the reform measures undertaken by the government with a wide spread participation

across Public and Private sector, Indian and multinational companies. Despite these improvements, the sector faces some

tough challenges across fuel, infrastructure and finances, which if not addressed immediately, can impede the potential growth

of the industry.

In this context, the CII-A.T. Kearney study on the future of power sector in India identifies the key trends impacting the industry

as it evolves to the next level of maturity. It also highlights some of the critical concerns & issues facing the power sector and

defines key imperatives and action steps for all stakeholders concerned. The study also deals with changing dynamics across

various fuel types and identifies implications of the same on the overall power sector.

The CII National Committee on Power is committed to working with all stakeholders concerned towards implementing the

recommendations from this report.

R S Sharma

Chairman - CII’s National Committee on Power and

Chairman and Managing Director

NTPC Ltd

Message from Chairman ofCII’s National Committee on Power

ixMessage from Chairman of CII’s National Committee on Power


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Indian power sector has been a mainstay of national growth. As the Indian economy prepares for sustained growth of 8-9%,

the importance of the power sector will continue to increase. The power sector itself is going through major changes with

unprecedented investments across the value chain.

It is therefore an opportune time, for industry leaders and the government to deliberate upon the path forward and identify

action steps that enable sustained growth of the sector. Many ideas and thoughts have often been propagated by industry

forums and government functionaries to the above cause. This report takes a rigorous view of the emerging trends in the sector

and prioritises the imperatives for industry leaders.

The report is structured in two parts – the first section presents insights on changing outlook for the power sector and clearly

highlights the key success factors for the future. In doing so, the report addresses some critical questions confronting the

industry:

How is the opportunity landscape changing in the Indian Power market?

With significant investments being undertaken in the generation sector, what are the future demand-supply expectations?

What role do we see for regulations in sustaining industry growth?

How are the industry enablers shaping up for the future – fuel, transmission, distribution, tariffs, equipment supply, financing

and manpower?

And in light of the above, what are the clear imperatives for different stakeholders?

– Industry players

– Government

The second section presents perspectives across all major fuel types viz. thermal (coal & gas), hydro, nuclear and renewables.

This section highlights the changes in market dynamics in terms of demand-supply, regulations and operational challenges as

well as key imperatives for the stakeholders, across each of these segments.

About the Report

xiAbout the Report


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The Indian power market is evolving rapidly from a “nascent/

opening” market phase to a “developing” phase. The power

demand in the base case is expected to grow at a steady7.5%-8% CAGR till 2017. Further, the low “power penetration”

levels indicate large latent/unmet demand. The power

markets will have to achieve consistent high growth rates to

bring our per capita consumption to comparable levels of

some of the other countries. We believe that rate of

infrastructure development and government led reforms

would have a significant bearing on how far these

developmental aspirations are achieved.

Future power markets will present new set of

opportunities and challenges

A new era of “Power on Power” competition will emerge.

Atleast 80-85 GW of new capacity (90% of them thermal units

targeting high PLF of 80-95%) will be commissioned by 2014.

This will reduce the base load deficit, in the current scenario, to

a low of 1-2%. Accordingly, we expect pricing pressures in the

generation space, with long term prices at-best maintaining

their current levels in nominal terms. The average short

term/merchant prices may decline by 40-50% by 2014-15.

The generation landscape will also change significantly.

Private sector will account for over 25% of the installed

capacity over next 5-6 years. Over forty to fifty players,

many of whom with interests in smaller capacities and/or in

1-2 projects are expected to emerge in the industry. With

increasing pricing pressures & fragmented industry structure,

we may witness some consolidation after 2015.

New business opportunities will arise across the value

chain. New fuel opportunities are expected to emerge in the

generation space, in addition to coal. Improved domestic gas

supply & strenghtening of commensurate pipeline

infrastructure will facilitate increased gas based

generation. Government’s thrust on Hydro projects (50,000

MW initiative) will provide attractive opportunities, especiallyfor peaking power. Nuclear energy will also witness strong

growth at the back of Indo-US agreement (target 20 GW by

2020).

Equipment manufacturers can leverage derived demand

from the overall growth in the power sector to drive capacity

expansions. Technology changes (increased role of super-critical plants in thermal stations; large sized reactors for

nuclear plants, etc) present opportunities to introduce and

absorb newer technologies and develop market niches.

Similarly, T&D equipment suppliers will gain from the ongoing

transmission network strengthening program (~50 GW by

2015 with increased use of 765kv and HVDC lines). Other

associated industries (mining, financing, training & education

etc) also stand to gain significantly as they facilitate and

benefit by the growth in the power sector.

Renewables will strengthen its role in the sector : Wind

energy will continue to grow at 15-20% pa with new

opportunities in offshore capacities and large capacity

turbines (> 3MW). Solar energy will drive next wave growth in

renewables space. Technology improvements are expected

to lead to grid parity costs by 2020-25. Government

incentives will open up opportunities for solar

farms/distributed generation as well as PV manufacturing.

Constrained fuel supplies present a major threat to sector

growth: As per current trajectory, India, inspite of substantial

reserves, is expected to confront a supply deficit of ~25%

(250 MTPA) of domestic coal by 2014. Similarly, India will

require 2000-2,500 tpa of Uranium to meet its nuclear energy

aspirations by 2020, against a current supply/mining capacity

of ~300 tpa.

Distribution and financing concerns will also intensify:

High AT&C losses and slow rate of discom reforms will hurt

the industry in the last mile. Financing may also present a

challenge to industry growth. About $ 200-250 Bn

investments will need to be undertaken in the power sector in

the next 8-9 years to fuel the planned growth. Sectoral and

group caps of the financial institutions may be a potential

constraints in securing such large amount of funds.

Several critical imperatives exist for the industry

The industry needs to significantly strengthen its project

Executive Summary

xiiiExecutive Summary


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management and execution capabilities. A comprehensive

and robust project plan developed at conceptualizationstage, would help in identifying potential hurdles up front.

Adequate diligence should be undertaken for selection of the

project site, EPC (Indian vs foreign), financing sources,

technology, quality control and execution timelines etc.

Creation of a strong project management center and set up

of robust business processes & control mechanisms are

critical for efficient project execution.

Securing fuel supplies will be another critical success factor.

Adequate diligence should be awarded to defining fuel sourcing

plan, especially coal (linkage, captive, imported) and its

associated costs. Fuel logistics planning and implementation iscritical and should be a focus for project leadership. Gas

availability may improve but adequate planning will be required

to identify the right locations for the plants.

The generators also need to realign their market &

customer strategy. Striking the right balance between long

term PPAs and merchant trading will become increasingly

important in the future. Reforms will also give rise to customer

mix options (SEBs, traders, bulk buyers, etc), which will open

up different possibilities. Alternate market facing models like

power tolling, distributed generation, peaking power supplies

can also be evaluated.

Capital and Operational excellence will be key to future

competitive advantage. CapEx and Operational excellence

begins from selection of right technology and suppliers/

manufacturers for the units. The asset availability and

utilisation should be maximized through O&M best practices.

Finally, robust organizational enablers need to be

established for the future. Over 150,000 additional skilled

and semi skilled personnel would be required by the sector

over the next 5-7 years. Some organisations will also have to

manage concurrent “projects” and “operations” stages.

Accordingly, a flexible organisation structure needs to be

designed and implemented. Strong HR processes for

attracting and retaining employees should be established.

Effective training programs should be designed and rolled

out by the industry. Efficient knowledge management

mechanisms would also need to be established

The government also needs to play a significant

role in driving and facilitating the sectoral growth

A prioritized “six by six” agenda has been drawn out for the

government.

1. Address fuel supplies issues (coal & gas): Coal sector

deregulation should be a high priority agenda for the

government. The government should also promote Public

Private Partnership (PPP) for new coal block developmentand set up an independent regulator for the coal sector.

Stringent monitoring should be adopted for timely

development of allotted captive coal blocks. Ensuring

priority access to gas for the power sector (especially for

peaking power) at reasonable price-points and

strengthening the gas transmission infrastructure are

other key imperatives for the government.

2. Enhance downstream efficiencies (transmission &

distribution): A few immediate interventions are

required on transmission side including streamlining

private participation, aggressively extending nationalgrid reach & improving quality of the same and building

flexibilities in BPTA tenures. The government should

also define a time-bound implementation plan for the

pending discom reforms and accelerate implementation

of open access to distribution networks. Finally, the

power subsidy mechanisms for the agriculture sector

also needs to be reformed.

3. Aggressively promote clean source of energy

(renewables and nuclear): Special focus should be

provided to renewables by identifying high intensity

renewable “zones” and establishing all enablers (land,

transmission, site approvals etc) therein. The government

should ensure effective implementation of the National

Solar Mission, including clear policy on Feed-In Tariffs.

Distributed generation for rural areas (to benefit from solar

& bio-mass applications) should be encouraged through

special incentives and fast track clearances.

For nuclear energy promotion, the government should

develop a comprehensive nuclear fuel plan for enhancing

Uranium and Thorium mining & availability for the country.

Special incentives should also be provided to encourage

participation across the nuclear value chain.

4. Facilitate efficient market side development: The

government should accelerate the pace of reforms in

power exchanges and deregulate the trading segment.

Initiatives also need to be rolled out to smoothen peak

demand curve and promote peaking power supply.

Introduction of flexibilities in PPA tenure and promotion of

real time market mechanisms, through time of day

metering & pricing could be undertaken to enable

efficient market development

5. Strengthen execution and monitoring mechanisms: A

comprehensive “next generation” reform agenda with

well defined implementation timelines should be

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developed by the government. There is also a need to

establish an “execution group” for following up on policyimplementations. Creation of an empowered “single

window” co-ordination and clearance body and defining

clear time-lines for approvals across ministries &

agencies will streamline the regulatory process.

6. Streamline industry enablers (equipment, financing &

manpower): New equipment capacities should be

encouraged for emerging technologies in the generation

space. Investments should be promoted in renewablecomponents & supplies through special incentives. The

government should also address the financing issues in

terms of sectoral caps of financial institutions and explore

opportunities for loan re-financing by multi-lateral

agencies / foreign institutions. Finally, strengthening of

Industrial technical institutes is required to enable

adequate skilled manpower availability for the sector.

xv Executive Summary

Sustained growth of the power sector is critical for enabling the high economic growth targets of India. All stakeholders needto put in a concerted effort to attain the above objective and address potential challenges and constraints confronting the

industry. If successful, the Power Sector will directly improve the socio-economic wellbeing of more than a billion people and

also create some world class “energy eco-system” in the country.


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INDIAN POWER SECTOR:THE ROAD AHEAD

PART A


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Indian power sector is undergoing a significant change that is

redefining the industry outlook. Sustained economic growth

continues to drive power demand in India. Government’s focus

on attaining “Power For All” has accelerated capacity addition

in the country. At the same time, the competitive intensity is

increasing on both market side as well as supply side (fuel,

logistics, finances and manpower).

The Indian power sector is evolving from a “nascent/

opening” market phase to a “developing” phase (Fig 1.1).

There are four attributes that characterize the above

evolution, over last few years:

1. Steady demand growth and supply deficits: The power

demand in India has grown at a CAGR of 8% over the last

five years (Fig 1.2). At the same time, the supply (CAGR

of 6.8%) has not been able to keep pace with the

demand. Accordingly, the deficits have increased steadily

from ~5% in 2003 to ~11% in 20091.

The past few years have seen an increase in the per

Theme 1

Changing Outlook forthe Indian Power Sector

3Changing Outlook for the Indian Power Sector

1 Source – Ministry of Power

Figure 1.1

Industry Maturity1 Curve


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capita consumption from ~ 410 kwh in 2002 to ~600 Kwh

in 2008. Despite the growth, the power consumption ismuch lower than other BRIC countries like China (2150

Kwh), Brazil (2100 Kwh) and Russia (6000 Kwh)2,

suggesting a large unmet/latent demand in the country.

2. Improved sector attractiveness supported by

regulatory reforms: The reforms which were initiated in

the 90’s, got strengthened with the enactment of

Electricity Act 2003, followed by open access regulations,

national electricity policy and national tariff & integrated

energy policy. Accordingly, the sector which historically

had only a few central & state utilities, is now witnessing

interests from over 75-100 new players looking atinvestments across the value chain.

3. Increased rate of capacity additions: The generation

capacity3 has grown from around 63 GW in 1990 to 149

GW in 2009, more than double over last two decades.

Infact, over the last few years, India has added an average

of 6-7 GW of generation capacity per annum, highest in

the history of the Indian power sector. This growth rate is

expected to further increase in coming years.

4. Inadequacies in support enablers (equipments,

transmission and distribution): Limited domestic

capacity of generation equipment supplies including

boiler, turbine, generator and balance of plant have been

one of the key reasons for delays in power projects.

Similarly, transmission and distribution segment still has

high AT&C4

losses of ~ 30%, despite the reduction over

last 8-9 years. Inadequacy in transmission capacity to

meet peak demand, low grid discipline, difficulties inimplementing unscheduled interchanges and

predominance of low voltage profile of 220 kv are some of

the challenges confronted by the National grid. On the

distribution side, cross subsidization of consumer

categories along with the high grid losses are areas of

serious concern.

Future Outlook: New opportunities within an

increasingly challenging environment

We believe five key trends will characterize the future of

the Indian Power sector, supported by select industry

enablers (Fig 1.3).

At the foremost, significant capacity is expected to come online

resulting in Power on Power competition in the generation

space. Secondly, the industry landscape will change

significantly with emergence of the private sector alongwith

continued importance of central utilities. Third would be the

onset of “next generation reforms” throwing open newer

opportunities across the value chain. Constrained fuel

supplies is the fourth dimension that would impact the

evolution of the sector. Finally, “renewables” will set the stage

for long term “sustainable” growth of the industry.

The above changes will be also be impacted by four critical

industry enablers viz. transmission, distribution, equipment

supply, financing. The ability of the sector to gear up on these

enablers will determine future growth of the sector.


Figure 1.2

Historical Supply and Demand Trend (BU)

2 Source: EIA and United Nations

3 Only grid based capacity in terms of GW (1GW=1000MW) ; Source: Ministry of Power

4 Aggregated technical and commercial losses; Source: Crisil


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First: A new era of “Power on Power” competition

Steady demand growth with potential upsides

As per the CEA estimates, power demand in India will grow at

~ 7.5% CAGR during 2009-17, to increase from ~775 BU

currently to ~1400 BU by 2017 (Fig 1.4). Sustained

economic growth coupled with initiatives of providing

electricity for all including rural electrification, will be the key

demand enablers. In addition to the above project growth,

there is a potential upside from the “latent demand” which

has not been addressed currently due to supply constraintsand infrastructure inadequacies (including distribution

access, grid reliability, etc.). The potential is immense as

reflected in the significantly lower per capita power

penetration in India, when compared to other developing

countries like China and Brazil. The demand in 2017 would

need to grow at a significant higher CAGR of ~ 17%, if India

were to even achieve the per capita consumption, similar to

the current levels in these countries.

Large scale capacity additions and efficiency improvements

India is also poised for significant supply addition over the

next few years (Fig 1.5). The incumbents and new entrants

have announced large capacity augmentation plans in the

sector. The announced grid based projects already sum up to

a staggering figure of ~ 300 GW (most of them are of much

larger unit sizes than historical additions). However, as per the

current trajectory5, 80-85 GW of capacity is most likely to be

commissioned in the period of 2009-2014 (with another 5-10

GW “probable” capacity on the top, depending on the rate of

progress attained). This in turn will be the highest capacity

augmentation in any block of five/ ten years in India. The rate

of capacity addition will increase further in the subsequent

years as India matures in its capabilities for executing such

large scale projects.


Figure 1.3

Emerging Sector Trends

Figure 1.4

Expected Demand Scenario, 2009 – 2017(BU)

Figure 1.5

Capacity Addition scenario(GW)

At base case demand scenario, India’s per capita

consumption would be ~ 1100 kwh in 2017, much lower

than even the current consumption level of developingeconomies like China (2150 kwh), clearly indicating a

latent/unmet demand, which can be tapped by the industry.

5 A.T. Kearney analysis based on CEA status, project progress and project execution stage including ordering of BTG (for coal based

projects), under-construction for other fuel types


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Additionally, the generation and transmission efficiencies is

also expected to improve in the future. Most of the newthermal plants (accounting for ~90% of incremental capacity

addition) are basing their production at high PLF (80-90%).

Accordingly, the average PLF of the generation capacity will

increase from ~56% currently to ~61-63% by 2014-15.

Similarly, the adoption of higher voltage lines & strengthening

of the grids will help reduce the T&D losses in the system. All

these will improve the power supplies to customers.

Narrowing supply-demand gap, resulting in Power on

Power competition

The planned capacity expansion along with efficiency

improvements will substantially reduce the supply-demandgap in the future. The supply deficit, for the base load could

potentially reduce to 1-2% over the next 5-6 years in the base

case (Fig 1.6). Even in an optimistic scenario (increased

realization of latent demand), the deficit could be around 4%-

5%.

The above scenario will usher in a new era of “power on

power” competition, early signs of which are already visible in

the market. The advent of bid based power purchase by states

will further increase the competitive intensity in the market, For

example, the number of participants (qualified RFP stage) in

the recent Case I bid by Madhya Pradesh, was around 25,

unheard of in the past. There have been similar experiences at

other bids like Gujarat and Haryana as well. This trend is likely

to continue, and potentially intensify, in future.

A clear implication of the above will be on price realizations.

It is expected that the long term PPA prices will continue to

be at current levels (or even decline) in nominal terms over

the next few years. The average trading prices are expectedto peak over next two years and thereafter decline by 40-50%

by 2015.

The peak deficit will however continue to exist in the future.

Peaking stations (hydro, gas, solar, etc) would therefore have

a large role in addressing this deficit. Demand management

would also be an essential imperative for the generators as

well as SEBs.

The implications for the sector from the above trend are

significant. On one hand, it would be essential for the sector

to realize the latent demand, on the other hand, the players

would need to clearly chart out their business strategies to

align with the emerging market scenario. Some of the critical

imperatives for the industry have been covered in detail in thenext chapter.

Second: Changing generation sector landscape

Increased role of the private sector

Private sector is expected to play a much larger role in future

supply additions, as compared to the past. Over 40% of the

capacity addition, over the next five years will be undertaken by

the private sector. Consequently, the private sector capacity

share will increase from ~16% today to ~26% by 2014,

primarily at the cost of state utilities (Fig 1.7). Central utilities

will continue to maintain their relative position as they too are

participating aggressively in the capacity expansion programs6.

Emergence of two distinct player groups

Two different player groups are expected to emerge in the

industry: The first category will comprise large companies/groups taking significant positions in the sector – likes of NTPC


Figure 1.6

Projected electricity supply deficit(% of demand)

Figure 1.7

Category-wise capacity addition,2009 – 2014 (GW)

6 Source: A.T. Kearney analysis


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(the incumbent), Reliance Power, Sterlite Energy, Jindals, Tata

Power, Adani, Lanco and others will fall in this category.

Over next few years, as the industry evolves, these top few

players are expected to account for 40-50% of new capacities

coming on-stream. These players are building their presence

through a portfolio of generating assets with varied fuel mix,

spanning across different geographic locations in India and

some of them are taking positions in other parts of the value

chain. They are also at the forefront of newer technologies (eg

super-critical plants) and larger unit sized projects – which in

turn will improve generation efficiencies.

The other category of players would be made up of small tomid sized generators with interest in only a few projects.

There are more than 40-50 players that fall in this category

(excluding the state utilities). In line with a typical industry

evolution, presence of such large number of small to mid

sized operators will accentuate the competitive intensity in the

sector. Many of these players are banking on high price short

term market. As the deficit reduces in the sector on account

of increased supply, we would expect pricing pressures to

emerge in the sector both in long term PPAs (a trend already

visible in latest Case I bids) as well as short term merchant

power. As the margins come under pressure, we may

witness some consolidation in this space, after 2015.

Adoption of innovative business models

Emerging opportunities in the sector along with increasing

presence of the private sector would also drive adoption of

newer business/operating models. On one hand, large

players may move towards integrated presence in the value

chain; at the same time many new entrants are expected to

establish niche presence in the market. Power tolling, direct

supply to bulk customers, peak demand based capacities etc

could emerge in a big way in the future.

Third: Next generation reforms creating newer

opportunities

Several next generation reforms are on the anvil, which if

realized will change the dynamics of the power sector.

Reforms in the coal sectorCoal sector reforms will probably have the biggest impact

on the power industry. The government is contemplating

opening up of the sector to private participation, beyond

captive blocks. By bringing in market forces, we would

expect significant improvements in coal blockproductivities. Setting up of an independent coal regulator

will also drive efficiencies & transparency in this sector.

Reforms impacting sales to bulk customers

A key reform, on the horizon is effective implementation of

open access to distribution networks across states. The

generators would accordingly have the opportunity to

target bulk consumers as part of the consumer mix, at

market determined prices. This will significantly improve

the customer options for generators.

Reforms on merchant power tradingSeveral new products are being introduced in the power

exchanges, which will strengthen its role as the overall

market clearing mechanism. Recently, in addition to day

ahead – spot, week ahead, day ahead contingency

products have been approved. Other longer tenure

products would also be introduced in exchanges in near

future. The other initiative that can enhance the

effectiveness of the trading market could be to remove the

cap of 4 paise per unit remuneration to the traders. This

would incentivize the ~40 number of registered traders to

actively participate (currently less than 15 traders are

active) and provide greater options to the generators.

Setting up of ‘settlement pools’ for accurate and

transparent reconciliations (energy and monetary)

between participants of trading transactions will also

enhance market efficiencies.

Incentives and reforms for “clean energy” (nuclear

and renewables)

The recent Indo-US nuclear deal and ratification by the

Nuclear Suppliers Group (NSG) is opening up new

opportunities for investments in this sector. Government

has set a target of achieving 20 GW generation capacity

by 2020. This in turn, presents new opportunities across

the value chain (equipment supply, generation, EPC etc).

Similarly, government is aggressively incentivizing

investments in the renewables space through feed in

tarrifs, issue of renewable energy certificates etc. These

along with continuous technology advancements will

provide opportunities across solar, wind and bio-mass

segments.

Reforms of the state discoms

Distribution continues to be one of the weakest links in

the power sector value chain in India. Unbundling of thestate utilities have improved efficiencies across many

states. However concerns continue on the high AT&C

losses and poor financial health of several state discoms.


Given the increasing competitive intensity, it will be

imperative for the incumbents and the new entrants to

identify “levers of strengths” for themselves and base their

business model on the same.


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The success of discom privatization in Delhi and other

states have not been rolled out aggressively to otherregions, though there is an increasing realization for the

same. Discom privatization will usher in new opportunities

in the sector and significantly improve last mile

efficiencies.

Overall, the next generation of reforms would open up new

opportunities for the sector in terms of better availability of

fuel, ability to reach directly to the bulk consumers and

greater role of merchant trading. The government needs to

ensure timely roll out of these reforms to provide impetus to

the sector.

Fourth: Constrained fuel supplies

Widening coal demand - supply gap: about one-fourth of

the thermal plant capacities may face constraints

Coal based power plants will account for over 80% of new

capacities to be commissioned over the next five years.

Accordingly, the share of thermal power plants (including

gas) is expected to increase from 63% currently to more than

70% by 2014. This along with sustained growth in the cement

and metal industry is expected to increase coal demand by

over 75% by 2014 (Fig 1.8). The domestic coal production7

however is expected to grow slower, resulting in a widening

deficit (as high as 250 MTPA) by 2014-15.

Increasing demand with relatively constrained production

growth has resulted in significant over-commitments by

Coal India (CIL) subsidiaries (Fig 1.9). ECL, MCL and

SECL are over committed to the extent of 20%- 40% of their

2010 production plans. To align the demand supplymismatch, CIL has been entering into substantially low

‘supply commitment’ agreements. For all new FSA/LOAs

with the private sector, CIL has been signing undertakings

to provide only upto 50% of annual contracted quantity

(ACQ). Accordingly, securing fuel supplies will be a critical

success factor for generators (especially coal based plants).

Secured access to fuel, a critical success factor

As the new capacities will compete for the limited available

resources, establishing secured access for fuel will be critical

for the players. At government’s end, significant reforms are

required in the coal sector to improve productivity andenhance coal access to players. The industry players need to

identify mechanisms to secure fuel, including captive coal

block and imported coal. Adoption of efficient technologies

and practicies that reduce specific consumption of the

resources should also be encouraged.

Fifth: Strengthened role of Renewables in the sector

Renewables currently comprise only ~8% of total generation

capacity8 in India. Several significant efforts are however

being undertaken by the government for promoting

renewable based energy, including:

Fiscal incentives, tax holidays, depreciation allowance &

remunerative returns for grid capacity

Budgetary support for research, development and

demonstration of technologies


Figure 1.8

Domestic Coal Consumption in India –Projections (mt)

Demand – Supply Scenario for Coal(mt)

7 CIL, A.T. Kearney analysis

8 Includes captive capacity


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Facilitating institutional financing

Creation of a comprehensive National Solar Mission

(NSM), which outlines demand as well as supply-side

incentives for the solar energy

In addition to government incentives, there have been

significant improvement in the supply side technologies, that

favourably impact the sector. The solar PV costs have been

coming down steadily and is expected to reduce by 20-25%

over the next 3-4 years. Infact, solar power is expected to

reach grid parity, in India, in terms of costs by 2020-25. 9 The

wind power technology has stabilised and found wide-spread

applications around the world. Additionally, India has an

estimated potential of 16-20 GW of bio-mass power, which is

an ideal fuel for distributed generation.

These changes are throwing up several opportunities across

the value chain:

Demand/generation side opportunities: Development of

solar farms as well as distributed solar power are

becoming attractive propositions. The Gujarat government

recently approved 34 solar power projects at an investment

of Rs.12,000 Cr to add 716 MW to the state electricity grid.

Similarly, Wind energy players are exploring new wind

potential sites including off-shore wind power projects to

expand the available technical potential.

Supply side opportunities: On the supply side, there is

a clear trend of shifting of global centers of manufacturing

locations, especially for solar PV, from Germany, Japan &

USA to South Asia including India. India’s costs are

already comparable to other low cost destinations in Asia

and is further expected to be boosted by continuedstrong government support. Industry players can

leverage these opportunities to establish world class

manufacturing centers in India

As a whole, renewables will become an important part of the

total energy space in India. If all plans for renewables are

realised, this segment will account for 10-15% of the total

installed capacity over next decade. To realise the sector

potential, it is imperative for the government to ensure

speedy and effective implementation of policies and

incentives. Similarly, the industry players can also look at

renewables as either a potential fuel diversification or a“focused play” strategy.

Key enablers impacting the sector outlook

While the power sector is poised for a rapid growth, there are

four critical enablers that need to fall in place to support the

future of the industry.

1. Transmission network, improving steadily

Establishment of a strong transmission capability is critical to

achieving the ambitious growth in the power sector. Over the

past few years, this has gained momentum and the National

grid is expected to significantly augment capacity. The

capacity10 is expected to increase to ~50 GW, by 2015, from

the current level of ~20 GW (Fig 1.10). New links are being

established to evacuate power from Eastern regions to deficit

regions of West and North.

Multiple measures are also being undertaken to improve

transmission quality, including

Increasing voltage profile of the network (765kv and

HVDC lines)

Installation of high quality energy meters and capacitors

Improve frequency management and outage prevention

These steps would strengthen the transmission network in

India and enable the national grid to evacuate the additional

power effectively. Timely achievement of these goals is critical

to support the growth in the power sector.

2. Distribution presents potential challenges

While the transmission is witnessing steady improvements,

concerns continue on the distribution front:

Limited reach of distribution: Only 44%11

of rural


Figure 1.9

CIL subsidiary coal commitment vs.production (mt, 2010)

9 Source: A.T. Kearney analysis

10 Source: PGCIL, A.T. Kearney analysis

11 Source: Ministry of Power


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households in India are connected to the grid, pan India.

Similarly, various industrial and new urban pockets

continue to rely on expensive local generation due to

inadequacies in distribution network. The growth in key

elements of distribution network has barely kept pace with

the increase in generation, which needs to change in the

future.

Losses in distribution: India has high AT&C losses at

~30% of supply. About 10%-12% of this loss is

attributable to technical reasons while remaining18%-20% is due to commercial reasons. Such losses will

continue to financially bleed the SEB segment and also

result in high the cost of power at the customer’s end12

Achieving improvements in the distribution end of the power

value chain would be critical to the growth of the sector.

3. Generation Power equipment availability

expected to increase

The pace of generation capacity addition in India has picked

up, thus increasing the requirement of the power equipment.

Responding to these needs, domestic capacity of generationequipment is expected to increase in the next few years.


Figure 1.10

Inter-regional Capacity Additions (2009-2015, GW)

Source: CEA, CRISIL, A.T. Kearney

12 Source: Ministry of Power (Segregation between technical and commercial losses inferred from 2006 statistics)


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Currently, domestic capacity for BTG is 8-10 GW per annum

which is primarily owned by BHEL. This capacity is expectedto increase to 30 GW by 2015 with expansion of BHEL’s

capacity and entry of private players like L&T/MHI,

Toshiba/JSW, Alstom and Bharat Forge.

Realization of these expansion plans and enhanced domestic

capability of catering to the super critical technology would

be important for the future of Indian power sector.

4. Financing constraints may arise

The planned expansion projects in India, on a broad estimate

entail a cumulative investment of ~ Rs 1100,000 cr13. in the

next 8-9 years. The debt component in turn will be around Rs770,000 - 850,000 cr. However, sectoral and group caps by

financial institutes may be a potential constraint in securing

the required funds, at the overall sector level. Timely solutions

would need to be worked out for ensuring the availability of

financing for various projects. This would be critical forachieving the planned growth ambitions.

Conclusion

In summary, the Indian power sector is at a stage that

provides significant opportunities for growth and investment.

However the environment is increasingly becoming

challenging. While the government will need to ensure

timely and effective implementation of next generation

reforms, the industry will need to re-orient their business

strategies to align with changing market dynamics. The nextchapter highlights a few success factors for “winning in the

future power markets” and lays out imperatives for all key

stakeholders.


13 Based on A.T. Kearney analysis and Industry standards for capital expenditure; Source: Planning Commission, A.T. Kearney analysis


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Based on the emerging trends, a comprehensive set of action

imperatives have been identified for the industry and the

government. It is important that individual players customise

the approach based on their respective business strategies.

Similarly, the government needs to institutionalize a

mechanism for effective roll out & implementation of the

defined action steps.

A “five pronged” approach for the industry

There are five critical imperatives for the industry players to

“win in the future” in the Indian power industry (Fig 2.1).

1. Strengthen project management & execution

capabilities

At a sector level, India has fared poorly in terms of project

deliveries. Over the last two 5 year plans, India has added

less than 60%14 of the total planned capacities in the sector.

As of April 2009, about 64% of the ongoing projects were

delayed (Fig 2.2).

Power projects have been delayed due to number of issues.

The four key factors that are causing delays for over 40% of

the ongoing projects include EPC and BOP issues,

regulatory (environmental and state government) issues,

fuel issues (discussed in detail later in the report) and

financial closure issues.

Inability to secure EPC and BOP, in a timely manner is

amongst the most significant challenge resulting in delay of

nearly 25% of the projects. Historically, domestic EPC

13Winning in the Future Power Markets

Theme 2

Winning in the Future Power Markets

Figure 2.1

Imperatives for the Industry

14 Source: CEA, Analyst reports


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companies were confronted with capacity constraints and

could not meet the sudden surge in demand from the

generation sector. Recent capacity expansions by domestic

suppliers and increasing presence of international EPC

companies is improving the situation.

Delays in environmental clearances and other approvals is

also a key area of concern. Power being on the concurrent list

results in coordination inefficiencies between the State and

Central authorities. Similarly, with the involvement of multiple

ministries at Central level (power, coal, environment), many

projects confront delays in obtaining requisite approvals. It is

critical for the government to address this issue urgently

(discussed later) and for the industry players to plan for

contingencies incorporating the above.

Financial constraints are expected to emerge as a

significant challenge in future. India would need ~ Rs

1100,000 cr.15 of investment in the next 8-9 years in the Power

Sector. The high magnitude of investments may confront

issues in terms of sectoral and group caps of large funding

houses. SBI for instance has a sectoral cap for funding in

Infrastructure (including sectors like Power, Telecom) of Rs

55,000 cr16.

Finally, the unprecedented scale & number of projects in the

sector may cause execution issues due to limited experience

in India.

In the above context, there are clear action items for the

industry:

i. Develop a comprehensive project plan addressing

major potential hurdles: Adequate diligence should be

undertaken for selection of the project site, EPC (Indian vs

foreign), financing sources, technology, quality control

and execution timelines. Planning for project and

operational logistics should be done right upfront to avoid

implemantation delays. Initiate regulatory approval steps

early in the process and assign responsibilities internally.

ii. Establish a strong project management center for

coordination and monitoring: Establish an empowered

team of technical and business executives for project

management. Develop a detailed activity schedule and

monitor the same centrally. Identify potential risk factors

early in the cycle and adopt suitable risk mitigation

strategies.

iii. Develop robust business processes & control

mechanism: Detail out the processes & systems for

project management & execution. Define clear approval

& authorization mechanisms for capital investments &

plan change. Clearly define delegation of authority &

internal decision making to expedite decision making.

iv. Define a right operating model for projects: Assess


Figure 2.2

Power Plant Capacity Development Status(April – 2009, MW)

15 Based on A.T. Kearney analysis and Industry standards for capital expenditure; Source: Planning Commission, A.T. Kearney analysis

16 Source: Company website


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and define the right mix between in-house vs

outsourced activities (for project execution early.Structure the roles & responsibilities between the

company and service providers clearly with defined co-

ordination mechansims.

2. Secure fuel supplies

Different fuels are experiencing varying levels of growth and

related issues. While coal presents a cost-competitive fuel

option, concerns exist about reliable supplies. Gas and

nuclear fuel availability on the other hand is expected to

improve in the future. The industry therefore needs to define

a well thought out strategy for its fuel portfolio.

Coal – significant challenges exist: As per the current

trajectory, there may be a shortfall of ~25% in terms of

domestic coal availability over the next 5-6 years. Captive coal

mines have also not ramped up production as desired, on

account of various issues including delays in approvals &

limited initiatives from many mine owners to expedite the

production.

Coal logistics is also a critical challenge confronting the

industry. Issues exist across two dimensions:

a. First Mile issues: Unavailability of rapid loading systems,

few railway sidings and transport contractor/ union issues

are amongst the factors that limit the quantum of coal that

can be produced and evacuated.

b. Transportation issues: Low availability of rakes, high

turnaround time (5-7 days), limited share of mechanized

discharge wagons, low wagon payload etc present long

distance transportation issues

Gas – improving availability: Significant increase in

domestic production is expected through new gas finds,

development of CBM fields & expansion of LNG capacities.

As per A.T. Kearney estimates, the gas availability in India -

both from domestic sources and LNG, will increase to 70-80

bcm by 2015, up from 37 bcm in 2008 (CAGR of 10-11%).

Over 11,000 km of new transmission infrastructure is also

expected to be commissioned by 2015 to enable pan India

supply. This would facilitate increased gas availability for

power generation.

Nuclear – fuel constraint presents a big challenge :

Government has set a target of achieving 20 GW generation

capacity by 2020 (up from ~4 GW currently), buoyed by the

recent Indo-US deal. The targeted generation will require ~

2000-2500 tpa17

of uranium (to sustain the first phase ofnuclear growth from PHWRs). India has estimated reserves of

~64,00018 tons, the commercial & technical mining, however

viability of the same needs to be assessedcomprehensively.

The current mining capacity in India is only ~300 tpa19 of

uranium. Increase in uranium requirement by nearly seven

folds would urgently need enhancement in mining capabilities

in India coupled with seamless sourcing from international

markets.

The industry can take a few steps in response to the

emerging fuel scenario:

i. Develop a comprehensive fuel portfolio strategy:

Clearly evaluate and select fuel type for generation based

on availability, costs & reliability. Gas may present a viable

opportunity near transmission pipelines. Nuclear is

emerging as an interesting opportunity as well (clear

policy needs to be defined by the government) A multi-

plant generator can look at fuel diversification as a means

to controlling risks. Renewables may also present a good

opportunity for diversification beyond conventional fuel.

ii. Invest in infrastructure development for logistics/

transportation: As part of project design, fuel logistics

should be given special consideration. For coal, end to end

handling including first mile evacuation, rail/road based

movement to plant site and in-plant movement should be

designed efficiently. The port infrastructure also needs to

be expanded. Similarly for gas, adequate transmission and

last mile connectivity needs to be put in place and secured.

iii. Specifically for coal, clearly define the sourcing plan:

Source domestic coal wherever possible, which will

be the main and cheapest source of fuel for coal

power plants

Enhance access to imported coal, especially for port

based/near port plants – define procurement plan

through long term contracts or own mines globally

Aggressively source & develop captive coal blocks as

available

Invest in technologies that reduces fuel requirement

3. Realign market/customer strategy

Future power markets would be much more dynamic than the

existing ones in terms of customer options. The trading

market will evolve with strengthened role of power exchanges


17 Based on current industry benchmarks

18 Source: Department of Atomic Energy, GoI

19 Source: Uranium.info


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for short term transactions (Fig 2.3). Open access would be

operating at different contract tenures (3 years, 15 years, 25

years, etc.). Sales to bulk customers will be made easier

through reforms in local grid policies. As a result, the options

for buying & selling power would increase both from the type

of customers and nature of sales contract.

There are a few other emerging trends that will influence the

sales strategies of generators:

Case I/ II bidding emerging as dominant form of long

term transaction

Case I and II bidding is becoming the dominant route for

securing long term PPAs with SEBs for the private

players. A bid based strategy will result in high

competitive scenario and potential pricing pressures.

Trading market expected to increase multifold

Trading market or transactions through traders andexchanges is expected to increase by 3-4 times in the next

5-6 years. New products (including structured derivatives)

are expected to be introduced in the exchange, which will

increase the potential options for generators.

Average merchant power prices expected to decline

The short term prices are expected to peak over the next 1-

2 years (Fig 2.4) and then decline steadily (in response to

the market supply situation). The generators accordingly

need to evaluate the profitability of their plans focused on

merchant power, and also define sales portfolio that

balances long term sales and short term trading.

In light of these market trends, generators would need to

develop suitable sales strategies

i. Balance the portfolio between long term and short

term allocations (depending on the size and

commissioning timelines): Long term PPAs will continue

to be the dominant sales option for generators, with

secured market but controlled returns. Merchant power

provide upsides but present high variabilities

ii. Define a customer mix plan: Evaluate various customer

options viz. SEBs, traders and bulk buyers (based on

quantum of purchase, financial stability, cost of delivery

etc) and define a plan accordingly.

iii. Explore alternative market facing models: Evaluate

opportunities for alternative models like peaking power

capacity, power tolling, distributed generation & supplies

as part of the overall strategy


Figure 2.3

Trading Market Projections(BU)

Figure 2.4

Merchant Power Prices have increasedin recent past due to increasing deficit(Rs/Unit)

Merchant Power Prices May Moderateas Supply Increases(Rs/unit)


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4. Develop Operational Excellence

Managing operations efficiently will be critical for all players to

develop a sustained competitive advantage in the future

markets.

There are several aspects that need to be considered &

incorporated by the generators as part of operations

efficiency:

1. Select the right technology: Choice of technology and

fuel mix is critical for achieving higher efficiencies. New

players are increasingly designing their plants based on

super-critical technology (Fig 2.5). This also helps in

constructing large scale plants more efficiently (requires

comparatively lesser units, than sub-critical technology).

At the same time, super-critical technology is still evolving

in the country and the EPC & skilled manpower

availability is limited. It is therefore imperative to weigh the

pros & cons of the same, before selecting the technology

for generation. The plant design should also incorporate

cost efficiencies in terms of auxiliary energy, logistics flow

and other associated costs.

2. Maximise asset availability through maintenance best

practices: Efficient O&M practices need to be

institutionalized including condition-based monitoring of

equipments and robust maintenance practices. Traditional

maintenance practices need to be bolstered by reliability

improvement initiatives.

3. Minimize “total cost of delivery” to customers: In

addition to low cost production, the transmission costs

should also be minimized. In the current scenario, agenerator selling power to a SEB located in a different

region (through a national grid) will need to incorporate

35-40 paisa per unit for transmission costs20. PGCIL is

significantly strengthening the national grid which will

provide better access to generators and also potentially

reduce the inherent losses in the system. The generators,

at the same time, should also evaluate the option of using

public grid vs. creating a dedicated grid network from the

perspective of total transmission costs.

5. Establish robust organizational enablers

Access to and retention of right skill set will be one of themost critical success factor for the future. A broad brush

estimate suggests that over 150,00021 additional skilled and

semi-skilled personnel would be required by the sector over

the next 5-7 years. The new entrants in the sector would also

need to plan for effective transition from projects organisation

to operations organization as the plants come on-stream. Key

enablers are therefore essential to support the future growth.

i. Develop a flexible organization structure which

maintains the balance between technical specialists,

management expertise and execution. Clearly define level

of centralized vs decentralized decision making.

ii. Establish strong HR processes to attract and retain

employees, manage their career development and

ensure job satisfaction.

iii. Design and roll out effective training program, which

provides the new recruits with the skills required at each

level. Multi-skill training may also be necessary to

manage requirements across functional areas.

iv. Develop a strong performance management systems,

with well defined KPIs, clear linkages between rewards

and performance.

v. Define an efficient Knowledge Management

mechanism, which captures learnings’ and disseminates

them across the organization & project sites.

A “Six by Six” agenda for the government

To facilitate sustained growth of the industry and enhance its

competitiveness, we have drawn out a prioritized agenda for

the government across six dimensions, each with 6 action

steps (Fig 2.6).


Figure 2.5

Coal based power plants by technologyand player (2009-14, MW)

20 Source: Ministry of Power, PGCIL

21 Estimates based on expected capacity addition and industry norms


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1. Address fuel supplies issues (coal & gas)

Most of the action items for the government are in the area of

coal availability. A few interventions are required for improved

gas availability as well

i. Deregulate the coal sector, allow private investments

and move to market determined pricing: Coal sector

should be opened up to investments from other public

and private sector entities (including MNCs) to improve

supply. The de-regulation can be undertaken in a phased

manner with learning drawn from the Oil & Gas E&P

industry.

ii. Promote Public Private Partnership (PPP) with Coal

India: For coal blocks outside CIL’s immediate

development program, encourage PPP model with

customers.

iii. Set up an independent industry regulator for coal:

An independent regulator, in lines of Telecom and

Power sectors, is necessary to oversee coal block

allocations and monitor its development. The regulator can

oversee reform implementation as they are undertaken in

the sector.

iv. Adopt a stringent stance on development of allotted

captive coal blocks: Punitive measures, including

withdrawal of blocks, should be adopted if a time based

production schedule is not followed (for reasons directly

attributable to the developer).

v. Ensure priority access to gas for power sector

(especially for peaking power): Provide higher priority

to the power sector for gas allocation. Encourage use of

gas for power generation in geographical areas with

access to gas transmission pipelines.

vi. Strengthen logistics for coal movement &

transmission infrastructure for gas:a. For coal movement, first mile connectivity should be

strengthened through involvement of state

authorities. Indian Railways should be mandated to


Figure 2.6

‘Six by Six’ Action Program


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improve rail sidings, take on-board high payload

coal wagons and de-congest major coal corridors (inOrissa, Chhattisgarh, Jharkhand, West Bengal and

Madhya Pradesh). Ports authorities should be

required to drive strengthening of imported coal

handling facilities at ports.

b. Similarly for gas, the transmission pipeline

requirements should be adequately met to ensure

gas availability across the country

2. Enhance downstream efficiencies (transmission &

distribution)

Interventions are required on both transmission anddistribution end by the government.

Transmission

i. Streamline private participation in transmission grid:

Enhance transparency in project award through

competitive tariff based bidding process.

Streamline approval process for exclusive

transmission lines of generators and support in obtaining

“right of way”

ii. Aggressively extend national grid reach and improve

quality: Establish/strengthen grid connectivity to remote

locations eg. North East (Hydro); interiors of western

region (Solar and wind). Continue strengthening grid

quality through higher voltage network

iii. Extend flexibilities in BPTA tenures, supported by

similar reforms in PPA: Provide easy access to flexible

“single/multi-year” BPTA contracts to fuel market

innovation at generator’s end. Support the same with

similar reforms in PPA tenure

Distribution

iv. Define a time-bound discom reform plan: Set out the

plan for privatization or franchising of all poorly

performing discoms, in a time-bound manner.

v. Accelerate implementation of open access to

distribution networks across states: Provide seamless

access to bulk & gradually non bulk customers directly

from generators

vi. Reform power subsidy mechanism for the agriculture

sector: Provide for subsidies to the sector under

state budgets rather than loading costs to thediscoms. Aggressively support agricultural

feeder separation across states through central

interventions.

3. Aggressively promote clean source of energy

(nuclear and renewables)

Renewables

i. Define high intensity renewable “zones” and establish

all enablers therein. Work along with state governments

to define priority zones for renewables. Ensure land

availability and establish grid connectivity from the same

ii. Ensure effective implementation of the National Solar

Mission, including clear policy on Feed-In Tarriffs.

Incentivise renewables to match expensive peak load

requirements/unmet demand, so that it complements

the significant investments in base load that are alreadybeing undertaken through conventional energy

iii. Encourage distributed generation for rural areas (to

benefit solar & bio-mass applications) through special

incentives and fast track clearance. Promote adoption of

renewable energy by mandating use of rooftop PV on

government buildings, and applications to replace Diesel/

Kerosene where solar power is cost competitive.

Nuclear energy

iv. Develop a comprehensive nuclear fuel plan: Detail a

plan for enhancing Uranium and Thorium mining

(exploration, development & production) capacities by 4-

5 times. Gradually open the sector up for other players

(including PSUs like NMDC and private players). Secure

uranium mines in the international markets.

v. Establish a detailed fuel policy to clarify modes and

procedures for fuel fabrication, spent fuel treatment

and waste management by private players.

vi. Provide special incentives (including tax & other fiscal

benefits) to encourage participation across the Nuclear

value chain i.e.. components, construction and

generation. Introduce a special status for nuclear energy

for ensuring easy availability of funds.

4. Facilitate efficient market side development

i. Accelerate the evolution of power exchanges: Provide

independence to exchanges to introduce innovative

“power products” (time based, tenure based, futures &

options) for generators, customers & traders.

ii. Deregulate the trading segment to enhance market

efficiencies: Gradually increase/remove the tradingmargins for power traders. Introduce reforms in PPA to

provide flexibility to traders for “aggregation &

distribution” (flexibilities to supply power from multiple



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sources based on market efficiencies)

iii. Smoothen peak demand curve through introduction of

multi-year “time of day” tariff, where possible and DSM

initiatives

iv. Aggressively promote peaking power supply: Provide

special support & incentives to hydro projects (launch

UMPP like models), renewables and ensure priority gas

supply to peaking thermal capacity

v. Introduce flexibilities in PPA tenure: Coordinate with

ERCs and state governments to introduce shorter / multi-

period tenures for PPAs

vi. Promote real time market mechanisms, through time of

day metering and pricing.

5. Streamline execution and monitoring mechanisms

i. Define a comprehensive “next generation” reform

agenda, with well defined implementation timelines

ii. Establish an “execution group” for aggressively

following up on policy implementations: Create an

empowered group to oversee policy implementation,

co-ordinate with different stakeholders, facilitate

interventions in case of delays and monitor/report progress

iii. Create a “single window” co-ordination & clearance

body: Such a body is necessary to co-ordinate activities

among various government entities including Ministry of

Coal, Railways, Ministry of Environment & Forest, State

government agencies etc.

iv. Define clear time-lines for various approvals across

ministries & agencies and monitor adherence to the same

v. Streamline new power project execution through

accelerated adoption of Case I bids/UMPPs/central

projects, incorporating all site related approvals and

facilities (land, water, logistics, fuel, regulatory

clearances)

vi. Develop broad based performance metrics and

parameters for various agencies, monitor performance

against the same and address issues therein if any.

6. Streamline industry enablers (equipment, financing &

manpower)

Equipment supply

i. Encourage new capacities for emerging technologies

in the generation space: Provide support to equipment

manufacturers for setting capacities in areas of super-

critical technology, larger sized nuclear reactors etc

ii. Promote investments in renewable components &

supplies through special incentives: Develop a plan

(entailing fiscal & non fiscal benefits like land allocation,

tax breaks, R&D breaks etc) for making India as the hub

of component/ equipment supply for renewables (solar& wind)

Financing

iii. Address the issues confronting sectoral caps of

financial institutions: Work along with RBI to revisit

sectoral cap limits/redefine clubbing with other

infrastructure projects.

iv. Explore opportunities for loan re-financing by multi-

lateral agencies/foreign institutions

v. Provide special focus for financing hydro and nuclear

projects through priority lending: These segments have

long gestation periods and require special long term loan

facility

Manpower

vi. Strengthen Industrial technical institutes: Promote new

institutes especially in high intensity investment regions,

enhance the quality of training through certification

standards and increase exposure to the industry

Conclusion

It is critical that all stakeholders put in a concerted effort to

enable sustained growth of the power sector. If successful,

the power sector can enable rapid economic growth of the

country and improve the well being of more than a billion

people.



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SECTOR OUTLOOK

PART B

THERMAL POWER: COAL BASED

THERMAL POWER: GAS BASED

HYDRO ENERGY

NUCLEAR ENERGY

RENEWABLE ENERGY


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THERMAL POWER:COAL BASED


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Coal is the most widely used fuel in the Indian power sector.

Nearly 52% of the installed generation capacity currently coalbased. The share of coal as part of the overall sector fuel mix

is only expected to increase over the next two plan periods.

The high relevance of coal for the power sector is also

reflected by the fact, that nearly 3/4th of the coal consumption

in India is accounted by the power sector. Coal supply has

not been able to keep pace with the demand resulting in high

deficits, a situation expected to worsen in the future. This is

despite significant domestic coal reserves to meet over 200

years of consumption at the current rate.

Such a situation calls for urgent interventions by the

Government and the Industry to address the constraints.

Accordingly, a six point agenda has been defined for the

government for immediate action.

Coal Demand-Supply Scenario

Supply gap reaching alarming levels

Coal demand in India has grown at a CAGR of ~ 6.1%,

during the last 7-8 years (Fig 3.1). Power sector is the

dominant consuming sector, accounting for over 75% of the

coal consumption. Steel and cement are the other major

consuming industries.

Cement sector’s coal demand has grown the fastest, owing to

the strong emphasis being laid on infrastructure

development. Demand from steel sector is relatively lower

due to increasing share of high grade imported coal.

India is the third largest producer of coal in the world, with

about 90% of the domestic production being controlled

by public sector units (CIL, SCCL and NLC)22. However, at

5.7% CAGR production growth, domestic supply has

not been able to keep pace with the growing

demand, leading to a demand-supply gap of about 50million tons in 2008 (~9%) (Fig 3.2). The allocated captive

Coal – Dominant Fuel for Power Plants

25Coal – Dominant Fuel for Power Plants

Figure 3.1

Coal demand in India – Historical(mt)

Figure 3.2

Domestic coal production in India –Historical (mt)

22 Balance coming through captive coal blocks and other sources


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coal blocks have also not ramped up as fast and efficiently as

required.

Going forward, coal demand is expected to increase to 993

mt by 2014 (at a CAGR of 11.9%) driven by large scale coal

based power capacities, and strong impetus from the cement

and metal expansion plans (Fig 3.3). As per CIL’s plans,

domestic coal production is expected to grow only at 7.3%

CAGR. This in turn will significantly widen the demand supply

gap – It is expected that by 2014, India will face a deficit of

over 250 million tonnes of coal (25%), as per the current

trajectory.

Major on – the – grounds challenges exist that need to be

addressed

There is a short supply of coal in India, despite large proven

coal reserves, enough for ~200 years at current production

levels (Fig 3.4).

There are three main issues constraining the production

growth:

1. Rehabilitation and resettlement (R&R) issues: India

does not have unified R&R policy with each state

government, CIL, Railways and central ministry having

separate R&R23 guidelines. Multiplicity of policies and


Figure 3.3

Domestic Coal Consumption in India –Projections (mt) Demand – Supply Scenario for Coal(mt)

Figure 3.4

Domestic Coal Proven Reserves (BT, 2005)

23 Source: State Government Policy Documents, Coal Ministry


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disputes relating to them lead to long delays in land

acquisition and initiation of mining activity. Employment

has to be guaranteed to all displaced people which

delays resolution of R&R issues.

2. Productivity issues: Limited adoption of new mining

techniques has resulted in manpower intense operations

in India. This in turn restricts the coal mine productivity.

Compared to an average productivity of 57 (Australia) and

45 (USA) MT of output per man shift, the output per man

shift in India is only 4 MT (Fig 3.5). Similarly the

production per employee in India is almost one-tenth

compared to leading coal producers in the world. Some

of the coal mines in Indonesia and South Africa produce

over 20-30 mtpa, while the maximum production in

India is still in 10-15 mtpa range.

3. Logistics issues: Coal evacuation and transportation

is also a major factor constraining production.

First Mile issues: Unavailability of rapid loading systems, few

railway sidings and transport contractor/ union issues often

limits the quantum of coal that can be produced and

evacuated. Recently MCL, one of the fastest growing

subsidiaries, has an inventory of over 10 million tons of coal,

even while there was a significant unmet demand in the

market, due to evacuation issues.

a. Transportation: Coal being a bulk commodity is largely

transported by railways which suffers from various

bottlenecks like – low availability of rakes, high

turnaround time (5-7 days), low share of mechanizeddischarge wagons, low wagon payload etc. All these

result in significant evacuation issues from the mines.

Getting coal linkages not adequate; captive mines not

yielding results

Increasing demand with relatively constrained production

growth has resulted in significant over-commitments by CIL

subsidiaries (Fig 3.6). ECL, MCL and SECL are over

committed to the extent of 20%- 50% of their 2010 production

plans.

To align the demand supply mismatch, CIL has been

entering into substantially low ‘supply commitment’

agreements. For all new FSA’s / LOA’s with private sector

operators, CIL has been signing undertakings to provide

only upto 50% of annual contracted quantity (ACQ). With

widening of the demand- supply gap, there is a risk of further

reduction in committed supply as more FSAs are issued for

the planned projects. Accordingly, power projects with

27Coal – Dominant Fuel for Power Plants

Figure 3.5

Output per man shift (MT) Production per employee per year (MT)

Figure 3.6

CIL subsidiary coal commitment vs.

production(mt, 2010)


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linkage supply need to plan for alternatives (like captives

and imports) to secure fuel.

Similarly, the captive coal mines have not ramped up

production as desired, on account of various issues:

Delays in mining plan approvals, land acquisition,

environmental clearance and R&R issues

Shared distribution of coal mines to multiple parties (in

several cases), resulting in delayed execution

Limited “penal action” against players not adhering to

development timelines

Accordingly, only 12%24 of allotted captive mines have beenoperationalised till Mar, 2009.

The emerging coal scenario presents a significant risk to the

growth of Power sector. Accordingly, there are specific steps

that need to be undertaken by the government and the

industry to address the issue.

Imperatives for the stakeholders

Reform agenda for the government

Several steps have been undertaken by the government to

improve the supply situation. These include:

Allotment of ~40 billion tons of coal reserves for

captive mining. There are steps to introduce

competitive bidding/auction based allocation of coal

mines in the future. This will lead to a much more

transparent and market determined distribution of coal.

Improved availability in the open market through

e-auction (~10% of total production). E-auction would

help reduce black marketing/illegal trading of coal and

also enable the government to accrue revenues as per

market prices.

Acquisition of coal mines abroad (currently underway)

by CIL who will channelize the same to customers

However, there is an immediate need for stepping up reform

initiatives in this sector. We suggest a Reform agenda for the

government:

1. Deregulate the sector, allow private investments and

move to market determined pricing: Coal sector should

be opened up to investments from other public and privatesector entities (including MNCs) to improve supply. The de-

regulation can be undertaken in a phased manner wit