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India's power sector - The next big thing

Thomex.com 

Every age has its business paradigm, its own growth and its own fortune hunters. Every age also has one idea,

which clicks and gives maximum returns to investors. And if you happen to speak in the same breathe, you can

say that India has entered into an age of maximising its infrastructure and giving highest benefits to those linked

with it. Power sector is one such area which, by its sheer magnitude, holds a significant potential. It wastherefore, not surprising when the government in its post-interim-budget announced an exemption of 1% customs

duty on naphtha import for power plants. The step was necessitated to prevent hike in retail electricity prices.

India, with an installed power generation capacity of 147,403 megawatt (MW), has 14,734 MW (10%) fuelled by

gas. Power generating companies, however, are forced to use naphtha, a much costlier fuel, due to lack of easily

availability gas. The move is expected to give some relief not only to power generating companies but also to

consumers. In fact 1% cut in custom duty results in 4 to 5 paisa tariff reduction per unit.

In fact, India has added 12,000 MW capacities at an investment of Rs. 48,000 crore in the 11th Five Year Plan. India’s power generation business is

booming as 70,000 MW is under execution. This will help to achieve the additional target of 90,000 MW capacities under the 5-year Plan.

The power requirement in India is expected to grow manifold in coming years as a result of industrial and urban expansion. According to McKinsey

report, India’s demand for power will soar to as much as 3,15,000 MW by 2017, requiring an investment of $600 billion (Rs 25,80,000 crore) if the

economy keeps its pace of growth at 8%. To fulfill power requirement of about 3,15,000 MW, an extra 1,00,000 MW is needed because of plant

availability adjustments. At present, India has an installed capacity of only 1,44,565 MW.

The key drivers of an increased power demand is growth in household consumption, electrification of rural areas, rapid manufacturing growth etc.

Household consumption itself is expected to grow at the rate of 14% per annum. According to experts, such massive targets can be achieved only by

distribution reforms, including separation of agricultural feeders and reduction of transmission losses.

An important derivative of the power sector reform process has been the importance accorded to the renewable sources of electricity. India is the

second biggest power producer in the renewable energy source. The policy framework for investment in renewable energy sources for electricity

generation has been supported with fiscal incentives, and preferential procurement and pricing. This has largely been a voluntary approach guided

by guidelines of the Ministry of Non-conventional Energy Sources (MNES), now known as the Ministry of New and Renewable Energy (MNRE).

For encouraging investment by the private and public sector companies in power generation through renewable energy, a set of guidelines have

been issued by the MNRE for consideration of the states. As a result, a number of states have announced policy packages including Wheeling,

Banking, Third Party sale and Buy-back. In addition, some of the states are providing concession/exemption in State Sales Tax and Octroi, etc. The

State Electricity Regulatory Commissions (SERC) of some states has notified preferential tariffs for wind power, biomass power, and small

hydropower.

Most of the investment in the renewable sources of electricity has been made by the private sector. About 40% of the installed capacity of the private

sector is in this domain. The power sector reforms have created space for private entry as only 0.85% of the public sector installed capacity is in

renewables. 

However, this investment crucially depends upon the incentives that are provided to the developers as renewable sources find it hard to compete in a

competitive market due to technological constraints. Given that the private sector has a comparative advantage in the renewable electricity

generation, it is best that the government encourages the private developers for some time to come. 

Renewable energy

Over 8% of total installed capacity in India is contributed by renewables. 

9147 MW Grid Interactive power added from renewables (out of 13,878 MW cumulative achievements so far).•

Wind Power: 7273 MW out of 9756 MW•

Small Hydro Power: 742 MW out of 2345 MW•

Biomass: 1104 MW out of 1717 MW•

Waste to Energy: 28 MW out 60 MW•

 

In recent times, the development of Ultra Mega Power Projects (UMPPs) has been identified as a major thrust area to meet the capacity addition

target in the Indian Power sector. The UMPPs are very large sized projects, approximately 4000 MW each, involving an estimated investment of Rs

16, 000 crore. Each of these projects would supply power to a number of power distribution entities located in different States and are being

developed on a Build, Own, and Operate (BOO) basis. 

The Central Electricity Authority (CEA) in consultation with the States has identified nine UMPPs so far. The pithead projects will have captive coal

blocks and the coastal projects will use imported coal. During the last 60 years since Independence, the total capacity addition has been only

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136,889 MW. Total capacity addition through 14 UMPPs in next six years is expected to be 56,000 MW, which is about 40% of the total capacity

added in last 60 years. UMPPs would help us in achieving significant growth in capacity addition, which in turn would help in achieving the mission of

‘Power for all’. 

Thus UMPPs will generate ‘affordable power’ and would help in lowering electricity tariffs in the country. Till now four projects have been awarded

and all have gone to the private sector. With Reliance Power winning three of the four projects and one project being won by Tata Power, there are

room for more to come and join the bandwagon.

India has a huge installed power generation capacity of 1,43,061 MW, of which the private sector projects constitutes a meagre 14%. The

Government of India had earlier envisaged a massive capacity addition plan of 100,000 MW by 2012 to meet its mission of power for all. The 11thPlan has targeted additional power generation capacity at 78,577 MW, which is more than the total capacity added during the last three Plans. India

has planned "Mission 2012: Power for All", to provide adequate, reliable, affordable and quality power. The power generation strategy will now focus

on low cost generation, optimisation of capacity utilisation, controlling the input cost, optimisation of fuel mix, technology upgradation and utilisation of

non-conventional energy sources.