Economic growth in India, the world’s second fastest growing major economy, could be crimped by a shortage of power, a sector where the country hasn’t had much success in adding generating capacity, attracting private sector investment, reforming distribution and reducing losses in transmission. The government has tried to increase power generation capacity through several initiatives, including a much-hyped ultra mega power project (UMPP) programme, where a government arm sets up a company, acquires land and other clearances, and then transfers ownership to the winning bidder. Several states have also sought to reform the distribution side of the business. However, legal and other issues have resulted in delays in the first and political opposition has all but derailed the second. The situation also hasn’t been made easy by the shortage of fuel as coal and natural gas. India’s economic growth will be at risk if these issues aren’t addressed.

Much progress is evident in sectors like telecommunications, roads, airports and ports. But the power sector continues to lag behind despite the introduction of progressive measures. Shortages, tariffs and the dependence on imported fuels are on the rise, while the poor health of distribution continues to inhibit the inflow of investments.

India’s power demand is likely to cross 300 GW, in the next 10 years earlier than most estimates. Meeting this demand will require a fivefold to tenfold increase in the pace of capacity addition. The profile of planned capacities will also need to be suitably modified to fulfill peak demand, keep emissions under check, reduce dependence on imported fuels and provide affordable power. A step-up of this magnitude is unlikely to materialize with a traditional approach.

A new fundamental approach is required

The power sector will provide one of the biggest avenues to participate in the development of India’s infrastructure. Undoubtedly, it is fraught with multiple challenges and risks. To overcome these, players will need to craft different business models that will allow them to capture value in such an environment. The payoff of making an early entry will be significantly higher compared to entering when the sector has development industries serve as evidence of this.

Rise in power demand by 2017

By 2017 demand will be substantially higher than expected. If India continues to grow at an average rate of 8 percent for the next 10 years, the country’s demand for power is likely to soar from around 120 GW at present to 315 to 335 GW by 2017, 100GW higher than most current estimates. Four key factors will drive this demand:

(i) India manufacturing sector growing faster than in the past.

(ii) Residential consumption growing at 14 percent over the next 10 years.

(iii) The connection of 125,000 villages to the grid through several programmes that aspire to provide power for all by 2012.

(iv) The realization of demand suppressed due to load shedding.

India pace of capacity addition must increase fivefold to tenfold

To fulfill its power requirement of 315 to 335 GW by 2017, India will require a generation capacity of 415 to 440 GW, after adjusting for plant availability and a modest 5 percent spinning reserve. This implies a tripling of installed capacity from the current level of about 140 GW, Which, in turn, translates into an annual addition of 20 to 40 GW. This is fivefold to tenfold the 4 GW per year that was achieved in the last 10 years.

Capacity shortfall due to delays

Delays in acquiring sites and obtaining necessary approvals, as well as equipment shortages and EPC bottlenecks are constraining the pace of capacity addition. Continued global tightness in capital equipment is resulting in further delays. To accomplish a step change in the rate of capacity addition, it is imperative to accelerate captive mine development and create the requisite infrastructure capacity.

Secure fuel supplies

In the past few years, India’s fuel imports have increased substantially and are likely to continue to do so if the current situation prevails, subjecting electricity prices to volatile international fuel prices and shortages.

Thorough carbon check needed

The estimate says that the country’s energy imports will double by 2017. And there will be a similar increase in the India’s carbon emission over the same period.

USD 600 billion investments required in generation, transmission & distribution

To meet India’s growing power demand investments of US$600 billion will be required across the value chain. Of this, around US$300 billion will be necessary for generation about US$110 billion for transmission, and the balance US$190 billion for distribution.

Opportunities available in T&D

Transmission: Transmission will offer a limited number of opportunities with stable returns, many of them in partnership with central or state transmission utilities.

Distribution: As and when partial or complete privatization gathers momentum, distribution will become a very large and potentially profitable opportunity separation and metering could provide. There will also be demand for turnaround specialists-players with expertise in specific areas like network management, billings and collections, and for smart technology providers-players who can develop, commercialize and support technologies Such as prepaid cards, real-time meters, tamper-proof meters and smart grids.

Inherent risks that are need to be managed

Significant development risks, uncertainty of key regulations and potential market failures are inherent risks in the power sector – it is critical to recognize and proactively manage these risks. The evolving cost curve, volatility in fuel markets, uncertainty of nuclear capacity creation, and potential transmission bottlenecks will create dispatch risks. Continuing losses in distribution could lead to payment security risks. Bottlenecks across the value chain including delays in obtaining sites and approvals, coupled with committed fixed tariffs will create project execution risks. Similarly, there will be fuel supply risks resulting from restricted access to fuel supplies, underexplored sedimentary basins and soaring demand. Managing these risks will require a clear understanding of the impact of each risk on the project.

Powering India is imperative to sustaining economic growth and will require a concerted effort by all stakeholders, if successful, the power sector will contribute to the well being of more than one billion Indian citizens and in the process it will also create some of the world’s largest energy companies.

Source: Powering India: “The road to 2017” by Mckinsey & Co. & Media Reports