Saturday, January 20, 2007

Why Invest in India - Power Generation Infrastructure

Indian economy is going through a period of remarkable transformation. Economic growth is now reaching 10% mark. In the last 15 years - it has been IT sector which has led India’s economic transformation. But in the next decade, economic growth will be led by infrastructure development companies. The growth in India’s infrastructure is inevitable today. As the economy grows, the current transportation infrastructure: Roadways, railways, airports & seaports are in need of rapid expansion to support a sustained economic growth. Government of India has realized the need for investment and is inviting private companies to invest in the infrastructure space. The need for private investments in transportation & energy sector is very acute.

Energy sector - Electricity

India now needs investments to setup new power plants - 100,000MW of additional capacity by 2010.

Taking this as a clue, several companies are investing in infrastructure space. These investments are mainly greenfield ventures where the risks are high - but so is the payoff. Enron was one of the first foreign investor to invest in the energy sector. Enron ventured into India with a greenfield power plant in the state of Maharashtra. However, Enron had not planned for handling the Indian politics and dealing with Indian government. Coupled with its inexperience and the following political controversy - forced Enron into bankruptcy in India.

Enron’s failure has not deterred other investors in power sector. Tatas & Reliance groups have invested in power generation and distribution in Maharashtra - the very state where Enron had failed.

Reforms in Indian Energy sector and the critical shortage of power in India has attracted several new players to invest in India. Continued energy sector reforms in 2007 will aid the rapid growth of this industry. By April 2007, private sector will be allowed to enter into power transmission and distribution business.

Companies like GMR, GVK, Lanco, Suzlon, Graphite India, AV Birla Group, Essar, and whole lot of companies are on an investment spree. The spurt of private investments does not mean that foreign companies do not have opportunity in India. On the contrary, these very Indian companies are eager to tie-up with foreign firms and expand in India. The need for capital, technology and business experience drives Indian companies to look for collaboration with external investors.

Supporting this massive growth in power generation, opportunities are now opening up in manufacturing sector. The demand for power generation equipment, power transmission equipment etc., is also very high. Currently Indian market for power generation equipment is dominated by local companies: BHEL, Triveni Engineering, etc., and a few MNC’s such as ABB, Shnider Electric etc. But as the demand grows - particularly in Nuclear power plants, opportunities for new entrants will be very high. Indian government is looking forward to see companies such as Westing House, Hitachi, GE and others to invest in India to build/Sell nuclear power plant equipment. The recent agreement on nuclear cooperation between India & USA has created an advantage factor for American firms to tap into Indian market in civil nuclear energy space.

Potential Risk Factors

The biggest risk of investing in power sector are the political risks. Since power is on the concurrent list - i.e., the administrative & regulatory authority in electricity generation, transmission & distribution is governed by two sets of laws:- Both the State governments and the Central Government. This makes it difficult to expand operations beyond one state, and takes a longer time to clear all the regulatory hurdles. Government still has a monopoly over power distribution networks and provides adhoc subsidy for farmers - these subsidies are often unfunded and power distribution companies have to take a hit on the profits.

Another bigger risk in power sector is shortage of raw materials: coal, natural gas & other hydrocarbons. Coal mining is a state owned monopoly of Coal India Limited - where corruption in coal supply has ensured that mafia controls the distribution of coal in India. Private electricity generators using coal as fuel will either have to oil the political machinery and the mafia to ensure coal supplies or rely on imported coal. The supply of natural gas is also a monopoly of the government and the pipelines to distribute natural gas to all parts of the country does not exist. This implies that power generation plants will have to build the infrastructure needed to get adequate supply of natural gas.

A side effect of monopoly in energy raw material supplies (coal & Gas) has created a situation where these monopolies operate with little regard to efficient transportation. This implies that power plants must build a huge buffer stock to overcome any disruption in supplies. Often times, it is cheaper to import coal & gas rather than rely on government monopolies.

Closing Thoughts

Economic reforms in India are now touching the power sector. Given the high growth rate of Indian economy - the demand and the shortage of power has skyrocketed. Continuing reforms is ensuring that private players are being encouraged to enter the power sector. The potential for growth and wealth creation in power sector are enormous - as seen in telecom sector. Reforms usher in new wealth creation opportunities for those willing to take the risk of being an early entrant. Power sector is now being primed for a massive expansion - and wealth creation.

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Amogh said...

hi Arun,

Your article on Power Generation was very informtive.

I feel that we still need to design and develop better ways for Power transmissions after generation as according to survey currently 23 - 30 % of power is wasted as transmission leakages due to harmonics generated. Has some study done on these leakages?

I know of some capacitor filter designs which help reduce in harmonic transmission.

Amogh Dhamankar
Tech Mahindra

Arun Kottolli said...

Power distribution and Power transmission is a state monoploy in India. And in all monopoly situations there is no pressure for the company which enjoys a monopoly to improve on effiency. Therefore power losses in transmission and distribution is high in India.

In Maharashtra, we can see lots of contradictions. In Mumbai, where reliance has the distribution network, the effiency is about 97%, where as in Pune & Nagpur where MSEB has a monopoly, the effiency is only 67-72%.

Power transimission between states is a monopoly of Power Grid Corporation of India - again there is low effiency.

The technology to reduce transmission losses is there - but the business need to implement technology is not there. (the situation in power sector today is similar to that of the telecom sector prior to 1994) Privitazation and competition is the only way out. By April 2007, the state monopoly in power distribution & transmission will come to an end. This will result in private companies entering this sector and we will see benefit in terms of better power supply.

Bobby said...

Hi Arun,

I am doing a sector anlysis on Power in India.
Can you give me some names of new entrants in this sector?? India only,
Next, Kindly provide me some idea about 100% FDI in Power trading likely, India Power fund and Investments from World Bank.

Thanks ,

jassi said...

Hi Arun,

I just read your article on power sector. You are saying that distribution and transmission is state monopoly which is not the case. In any states government try to disinvest but no buyer came.
It is majorly because of huge capital investment and low return on capital.