Power Conference 2010 held in Hyderabad, Andhra Pradesh. The conference was organized by Confederation of Indian Industry and was attended by over 200 delegates from various central and state utilities like NTPC, NHPC, PGCIL, KPTCL and UGVCL along with prominent system suppliers. In this conference apart from presentation and discussion the most appreciating part was the target achievement made followed with the process of ongoing projects.
The 11th five year plan (2007-2012), which is near about double the 10th five year plan is expected to meet about 80% of its targeted addition of 78,700 MW from conventional sources and 14,000 from renewable sources. From a current level of about 157 GW the installed capacity by end of March 2012 is expected to go up to about 212 GW. The target for the 12th five year plan (2012-17) is addition of 100GW.But still the India’s finance ministry estimates that India produces about 10% less electricity than it needs, and roads, which account for 65% of the nation’s cargo, are plagued by single lanes and irregular surfaces.
We are delighted with the number and the growth achieved by the companies in meeting its target. But among all these the sector reels under certain major issue which acts as a bottleneck for the growth of the industry. We find delay in operation of projects and finally that exerts pressure on the long term outlook of the sector and stock too. In this article I will try to present the few of the major reasons which fails to make the companies to deliver the growth according to the desired plans.Along with this the investment opportunities and PE and Corporate Finance opportunities for the sector in the coming days.
Land Acquisition and Environment Clearance
When a new power projects comes up the statutory guidelines of the government of India poses a big threat to the futures plans of the projects. We have heard earlier that all the infrastructure projects in India have gone up by 35% in terms of cost due to various delays. Among them the prominent reasons for the delays is the clearance of Land Acquisition and Environment Clearance from the governments. The old traditional land reform bill is still pending on the tables of parliament. Land is available but the policy regarding the acquisition is the biggest ball game among starting the plants. The environmental policy is designed to keep the said purpose free and healthy for our livings. But the stringent regulation so getting the clearance makes the projects delayed more than its usual course of operation.
Manpower and human resources for the setting up the projects is another big hurdle which companies have to face in the recent industrial growth. Companies and the Indian government made arrangements of growth of the Indian economy but not the wheel of the growth. As more industrial growth will happens the requirement of SKILLED manpower increases. Currently every industry at every corner is facing the trouble of shortage of manpower. Everybody is interested to work under White color Collar and not blue. India is having one of the 2nd highest populations in the world but that population is illiterate and not capable to meet the demand of the industrial force. Companies are earning more cost due to training and other facilities to improve and develop the skill to match their demands.
Technical Equipment shortage is another big round problem which forces the companies to go for overseas technical know-how. Reliance Power became the first Indian private sector firm to ink a record $8.3-billion deal with a Chinese firm. SEC will supply 36 coal-fired thermal powers. Currently the industry is facing shortage of capital intensive goods from ABB, Larsen and Turbo and Bhel.
Fuel availability is another round of problem which further puts brakes on the plant process. Coal and other fuels requirement is one of the biggest problems. Supply constraints for domestic coal remain and are expected to continue going forward. Consequently, public and private sector entities have embarked upon imported coal as a means to bridge the deficit. This has led to some Indian entities to take upon the task of purchasing, developing and operating coal mines in international geographies. While this is expected to secure coal supplies it has again thrown upon further challenges. The failure to achieve the planned target from the captive coal blocks presents itself as a major challenge to the power sector, as only 24 blocks have become operational out of the total 210. Experts believe that the non-operational status of majority of these blocks is attributed to land acquisition (R&R) issues, permit delays and infrastructure problems.
For example, the main international market for coal supply to India – Indonesia, poses significant political and legal risks in the form of changing regulatory framework towards foreign companies. Again over here the Indian mining policy needs to be changed. Unless this policy gets changed new coal blocks will not be discovered and which will lead to huge increase of coal export followed with steep increase in international market will exert pressure on the POWER PRICING.
Despite of all these hurdles the Indian government have taken steps to boost the growth and plug-in the loopholes of the system.
• The government has introduced a separate visa regime — called `P’ (Project) Visa — within the employment visa for foreign nationals coming to India for “execution of projects in the power and steel sectors”.
• The new regime will pave the way for foreign companies to bring “highly skilled or skilled” foreign nationals to India for executing projects of their Indian clients (companies) for a maximum period of one year without getting into the nitty-gritty of the two existing work-related visa regimes — Business (B) and Employment (E) Visas.
• Only these two sectors have been given the grants to meet the shortage of skilled technical manpower.
• Hence India needs huge pool of talents and in house manufacturing hubs of this technical know-how so that overseas talent don’t eat up our talent pools .It’s a serious invisible threat for the long term.
100% FDI permitted in Generation, Transmission & Distribution – the Government is keen to draw private investment into the sector
• Policy framework: Electricity Act 2003 and National Electricity Policy 2005Online GST Certification Course by TaxGuru & MSME- Click here to Join
• Incentives: Income tax holiday for a block of 10 years in the first 15 years of operation; waiver of capital goods’ import duties on mega power projects (above 1,000 MW generation capacity)
• Independent Regulators: Central Electricity Regulatory Commission for central PSUs and inter-state issues. Each state has its own Electricity Regulatory Commission
Cash the Dues.
If we make a quick look towards the probable investments opportunities and the growth there of in this sector we find:
• Hydel power potential of 150,000 MW is untapped as assessed by the Government of India
• Over 78,000 MW of new generation capacity is planned in the next five years
• A corresponding investment is required in Transmission and Distribution networks
• Power costs need to be reduced from the current high of 8-10 cents/unit by a combination of lower AT & C losses, increased generation efficiencies and added low-cost generating capacity
• Large demand-supply gap: All India average energy shortfall of 9% and peak demand shortfall of 14%
• The implementation of key reforms is likely to foster growth in all segments
o Unbundling of vertically integrated SEBs
o “Open Access” to Transmission and Distribution networks
o Select distribution circles to be franchised/privatised
o Tariff reforms by regulatory authorities
• Opportunities in Generation for:
o Ultra Mega Power Plants (UMPP) – 9 projects of 4000 MW each
o Coal based plants at pithead or coastal locations (imported coal)
o Natural Gas/CNG-based turbines at load centres or near gas terminals
o Renovation, modernisation, up-rating and life extension of old thermal and hydro power plants
• Opportunities in Transmission network ventures – additional 60,000 circuit km of Transmission network expected by 2012
o Private sector participation possible through JV and 100% equity mode
• Total investment opportunity of about US$ 150 billion over a 5 year horizon
I think huge quantum of private equity and corporate finance will be required in this sector as the day’s progresses.
• The value of these 15 investments is estimated at $ 751.2 million (Rs 3,600 crore). Private equity (PE) players to park their money, with close to $1.64 billion worth of infrastructure funds, mainly in power, awaiting their launch.
• According to Venture Intelligence, a research service focused on PE and mergers and acquisitions, investments in this sector for a comparative period in 2006 were $122 million, which increased to $495 million in 2007. Some of the funds currently in India are IDFC Private Equity, 3i India Infrastructure Fund, IL&FS Investment Managers Limited, SBI Macquarie Infrastructure, IDFC Project Equity and ICICI Venture are doing the major investments as private equity and corporate finance in Power sector.
• GVK Energy Ltd, a subsidiary of GVK Power & Infrastructure Limited, has raised Rs 1,200 crore (~ $274 million) in private equity funding round led by 3i India Infrastructure Fund. The deal to pick up a 21.1% stake in the power arm of the infrastructure group values the unit at nearly Rs 5,700 crore ($1.3 billion).
• 3i would be investing Rs 800 crore in what will be the infrastructure firm’s second investment the power sector after Adani Power.
One can clearly understand the growth of ROI one will get from doing investments in the Indian power sector. The hurdles mentioned above are subject matter of time and will get over under the flagship of UPA-II.
Once these hurdles are overcome Indian power sector will see one of the brightest days of its history. Investors should stay invested in this sector for longer time frame as delays in operation are subject matter of time. Once they are on the verge of getting over one may not get the chance to invest at these levels. One might have to accept at higher levels. Stay invested for a long ride which will be sweet at the end. One more thing I would like to add is that one can understand how Indian economy will achieve the GDP growth Dreamt by Pranab Mukherjee our Finance Minister of India. It’s possible? Very Much possible.
Indraneel Sen Gupta
Financial, Economic Writer and Research Analyst.