For sustained economic growth, long term availability of adequate energy at affordable cost is crucial.
India’s power sector has the fifth largest electricity generation in the world and third largest transmission and distribution network, with an installed capacity of 1,64,508 magawatt (MW), which is about 4% of global power generation. The top four energy consumption countries, the US, Japan, China and Russia, together consume about 49% of the total power generated globally. Over the last five decades, the sector has made significant progress, and the overall electricity generation has increased phenomenally. However, the ever-growing demand from increased manufacturing activities and a rapidly growing consumer base has led to a condition where the supply of energy falls short of the demand.
According to a report by PricewaterhouseCoopers, demand is much higher than supply, with deficit projected to be more than 12% during 2010-11. The reasons are mainly owing to insufficient transmission and distribution system; around 40% of the power generated in India is lost due this inefficient system. The power revolution in India seems to have run out of steam due to transmission and distribution losses. India has one of highest transmission and distribution losses in the world. Power theft is also another major concern which is adversely affecting the sector’s capacity enhancement efforts.
On the other hand, even today, around 57% of rural households and 12% of urban households are yet to get access to electricity. This is the reason why India’s per capita power consumption of around 700 units a year is far below the world’s average of 2,600 units and developed countries’ average of 8,000 units. Moreover, power generation in India is largely coal-based, thus adding heavy pollution. The sector is also battling a chronic shortage of fuel such as coal and gas to fire power plants. A close look at these figures reveals that the road that lies ahead is dotted with innumerable challenges that result from the planned promises versus the sector’s achievements. During FY 2010-11, against the target of 21,441.2 MW, a total of 4,193 MW or 19.6% of the target has been added so far.
On the brink of expansion
In order to provide over 1,000 units of per capita power consumption, it has been estimated that a need-based capacity addition of more than 1,00,000 MW would be required. Various estimates suggest that if India wants to sustain its growth tempo over the longterm, it will need to have 4,00,000 MW of installed capacity by 2020. Historically, India failed to meet its power sector targets by a significant margin (as high as 50%), and the sector continues to be affected by the shortfall both on the generation and transmission fronts.
Against this scenario, massive investments are required to meet the demand-supply mismatch of electricity. Accordingly, the government has set ambitious goals in the 11th plan for the sector, and massive plans are being proposed in the sub-sectors of generation, transmission and distribution. Union Power Minister Sushilkumar Shinde said in the recent 7th Annual India Investment Forum in New York, “The scope for investment in the power sector over the next few years is well over $300 bn, and given our large expansion program in this sector, we would definitely need and welcome a large amount of foreign direct investment.”
The demand for power in India is enormous and is growing steadily, and thus the market offers one of the highest growth opportunities for private developers. It is expected that more foreign investors would participate in the sector, as India is one of the most attractive investment destinations in the world. Over the next two decades, the sector is projected to grow rapidly and increasingly open up to private sector, both foreign and domestic. In fact, there is an indication of the growing interest of FDI in the power generation sector. The Hong Kong-based CLP Holdings Ltd. and US-based AES Corp are the two main foreign stakeholders in India’s power generation sector, along with many others.
Growth Potential
The sector today offers the highest growth potential for private players, with ever-increasing demand-supply gap and government support in the form of incentives to set up power plants. Besides, the recent reforms on distribution network would be the key factor driving the power sector. Similarly, the Electricity Act and National Electricity Policy will give impetus to the Indian power sector. Currently, the State sector dominates the sector with 52.5% share in the total installed capacity, followed by the Central sector contributing 34% of the total capacity. In the recent past, the aggressive investment by private players had increased their contribution to 13.5%, reflecting the robustness of the power sector.
The timely completion of expansion projects like Torrent Power’s 765 MW Gujarat project, Adani Power’s 660 MW Mundra project, CESC’s 250 MW Budge project and JSW Energy’s 600 MW Toranagallu were responsible for the big jump in the private sector’s contribution to the overall capacity addition. Analysts say there are exciting developments in the power generating sector, following the key role played by the private players—also called independent power producers—who totally produced half of the additional capacity in 2009 alone. Anil Ahuja, Asia Head at 3i Asia, is very bullish about the sector’s growth potential. He says, “If there is one sector where you really don’t have to worry about overall demand-supply that is power. If you look at 2012, we are talking about a gap which is at least 80,000 to a 100,000 megawatt and those are very large numbers. We don’t see those numbers coming up anytime soon. We think that India will remain short at least for the next 3-5 years going forward.”
Reining in Renewable Energy
Coal-based power will remain the dominant source of energy in India. But coal is the most polluting fossil fuel and has severe health, environmental and economic effects. Moreover, domestic coal is one of the dirtiest in the world; high ash-quality and lack of infrastructure to clean it early in the process create enormous environmental hazard in India. As coal deposits are depleting fast and climate change concerns rise, it is becoming increasingly indefensible for India to continue relying on coal-produced power, which accounts for 40% of its total greenhouse gas emissions.
This scenario creates huge opportunities for renewable energy generators, amidst the obligation to generate clean energy, as environmental obligations have become top priority for most of the nations, including India. The recent agreement between India and the US to establish a bilateral energy cooperation program to promote clean and energy efficient businesses is all set to help India take a huge stride in the renewable energy sector. On the nuclear front, the country is flourishing and predicted to have 20,000 megawatt electrical (MWe) nuclear capacity on line by 2020 and 63,000 MWe by 2032. It aims to supply 25% of electricity through nuclear power by 2050.
Challenges Continue
According to the Power Ministry, the major challenge to the sector is to provide competitive power to the consumers while improving the reliability and quality of supply. However, several roadblocks remain, which could threaten the investments in power generation, transmission and distribution. Krishna Kumar, Vice-President, Equities, Sundaram BNP Paribas Mutual Fund, opines, “The biggest drawback against achieving targeted capacity additions is the lack of availability of coal for large thermal power plants. Land acquisition, access to coal mines and even water availability are cause for execution delays.
Given the existing deficit in coal, public sector companies such as NTPC Ltd. are importing it.” The road ahead is steep for the sector and the rising energy prices have made it further steeper. However, analysts say that this is a blessing in disguise because it is a wake-up call to prepare for a post-peak oil future. Atanu Dey, Chief Economist, Netcore Solutions, adds, “Independence from foreign energy, whether oil or nuclear fuel, is not an option but an absolute must. That will only happen if India develops the technology for solar energy use in all its forms, such as concentrated solar thermal and solar photovoltaics.”
Powering Future
For sustained economic growth, long term availability of adequate energy at affordable cost is crucial. By 2050, the growth could approach tenfold in developing countries like China and India. This in turn promises economic benefits and huge improvements in people’s standards of living, but also involves much more demand for energy. Meeting the energy challenge is therefore of fundamental importance to India’s economic growth imperatives and its efforts to raise its level of human development. India has to gear up to meet the ever-growing energy needs on a sustainable basis.
N Janardhan Rao, Senior Economist.
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