ECONOMIC ENVIRONMENT OF BUSINESS

2/11/2013

SECTORAL ANALYSIS ON INDIANPOWER SECTOR

SUBMITTED BY: SNEHA NAIR 62 RISHIKA NANGALIA 63 ANKITA PARMAR 68 KINJAL SHAH 85 DIVYA SHARMA 87 ANISHA VICHARE 117

SECTORAL ANALYSIS ON INDIANPOWER SECTOR

INDIAN POWER SECTOR

Power is one of the most important components of infrastructure that affects economic growth and well-being of nations. The origin of the power sector in India dates back to the pre independence period, where the British controlled the Indian power industry firmly. The then legal and policy framework was conducive to private ownership. Immediately after Independence, the country was faced with capacity restraint. India is the fifth largest electricity producing nation in the world and it is the 6th largest energy consumer accounting for 3.4% of global energy consumption. Due to the fast-paced growth of the Indian economy, the countrys energy demand has grown at an average of 3.6% p.a. over the past 30 years. The total installed capacity in India is above 1, 50,000 MW, of which majority of capabilities is with public sector companies. Only 15 per cent capacity is from the private sector, though this is now starting to increase.

SIGNIFICANCE OF THE POWER SECTOR:

The power sector provides one of the most important inputs for the development of a country and availability of reliable and inexpensive power is critical for its sustainable economic development. To sustain GDP growth rate of around 8-9 %, it is imperative that the power sector also grows at the same rate. Even after the considerable growth in the power sector infrastructure and the supply of electricity, many parts of the country continue to face severe power shortages as consumption by commercial and industrial consumers has been increasing at much faster rate than electricity supply. Power is one area of infrastructure where India lags far behind even in comparison to other developing countries. The per capita annual consumption of electricity in India is one of the lowest in the world at approximately 734(2008-09) kwh.

SECTORAL ANALYSIS ON INDIANPOWER SECTOR

The power sector is normally divided into three sub-systems:

Generation: It is done at power plants that converts mechanical, chemical, or nuclear energy into electrical energy. Generation is further divided into central sector (Public Sector Undertakings), state sector, and private sector, which constitutes total installed capacity of 31.21 per cent, 47.49 per cent and 21.17 per cent respectively. Transmission: It is the process of transferring the generated power to a distribution system. Distribution: It is the final stage in the delivery of electricity to end users. It involves providing the transmitted power to individual homes, commercial areas, etc.

SNAPSHOT OF THE POWER SECTOR Size of the industry

The total installed capacity of power in India is calculated to be 145,554.97 mega watts, out of which 75,837.93 mega watts (52.5%) is from States, 48,470.99 mega watt (34%) from Centre, and 21,246.05 mega watt (13.5%) is from Private sector initiatives. The same can be described with the help of the below chart:

SECTORAL ANALYSIS ON INDIANPOWER SECTOR

The various segment of the power segment in terms of the thermal, hydro, nuclear and other renewable sources of energy have a considerable portion in the total installed capacity of the power sector with the majority source of power being thermal sources of energy followed by hydro source of energy, as evident from the below pie diagram:

SECTORAL ANALYSIS ON INDIANPOWER SECTOR

The output per annum of the power sector is approximately Rs. 600 crores per annum with a market capitalization sufficient enough to achieve 8% GDP.

Top leading Players

National Thermal Power Corporation (NTPC) with a market capitalization of Rs. 128,340.58 leads the list of the companies within the power sector. This player is a part of the government project in the power sector. Some of the other players in the sector are National Hydro Electric Corporation (NHEC), Power Finance Corporation of India (PFCI), Nuclear Power Corporation of India Limited, North Eastern Electric Power Corporation (NEEPC), Power Grid Corporation of India Ltd (Power Grid India), Power Trading Corporation (PTC), etc Many government and private organizations have taken up the task of power generation in India. The major Indian power companies playing are: Enercon Systems India, Essar Group, Gujarat

SECTORAL ANALYSIS ON INDIANPOWER SECTOR State Petroleum Corporation Ltd, Jindal Steel & Power Limited, Karnataka Power Transmission Corporation Limited (KPTCL), Reliance Energy Ltd., GE Power Controls India, etc.

GROWTH
Due to rapid urbanization and industrialization, there is a huge demand for power in India. This creates enormous opportunities for private players because of high energy shortage. The Indian Ministry of Power has set a goal, Mission 2012: Power for all. This aims to provide cent per cent access to electricity along with reliable and good quality power to enhance commercial feasibility. This dream of power for every Indian can only come true if we can take our installed generation capacity to at least 2,00,000 MW by the end of this year, from the present level of 1,14,000 MW. A huge expansion in the power generation sector, must also lead to corresponding expansion of the transmission networks. Resources are distributed unevenly in the country, and power needs to be carried over great distances to areas where load centers exist.

Growth Drivers for Power from Nuclear, Hydro and Renewable Energy Sources:
With the thermal power generation segment facing the issue of shortages of coal (major raw material), other power generation sources like nuclear, hydro and renewable energy sources will get attention in the coming years. Nuclear power projects account for 2.75% of Indias total installed capacity which is about 4.77 GW. The Planning Commissions expert suggested in its report that there is a possibility of reaching a nuclear power capacity of 21-29 GW by 2020 and 48-63 GW by 2030. The hydro power segment offers investment opportunities as India is considered to have hydro power generation potential worth 1,50,000 MW; of which only 25% has been harnessed till date. Using renewable sources to generate electricity has several advantages like a perennial energy source, potential for lower reliance on imported fossil fuels and lower CO2 emissions. Companies are diversifying their power portfolios to take advantage of opportunities therefore its share in the countrys total generation capacity has increased from 1.1% in 2001-02 to 10.63% as on 31st March, 2011 and is expected to increase in the future.
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SECTORAL ANALYSIS ON INDIANPOWER SECTOR

SWOT Analysis Strength

No barriers to entry Increasing focus on renewable sources of energy Government presence in the sector(encouraging entry of foreign players) The power sector as a whole does not has any substitute, but it can be generated from different sources of energy like coal, thermal, hydro, nuclear and renewable energy sources

Weakness
Unavailability of fuel and unwillingness of fuel suppliers to enter into bankable contracts Lack of necessary infrastructure to transport and store fuel Huge Capital Base is required to establish the power projects The buying position of the buyers is low due to presence of limited number of companies producing power. Also with the number of buyer significantly exceeding the number of the sellers, there are chances of buyer exploitation which to some extend is controlled by the government regulations in the power sector High losses: Low metering efficiency, theft and pilferages are primarily to be blamed for losses of commercial nature.

Opportunities
Huge population base Opportunities in generation of power Coal based plants at coastal regions is still untapped Renovation, modernization, up rating and life extension of old thermal and hydro power plants

Threats
Rise in prices of raw materials
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SECTORAL ANALYSIS ON INDIANPOWER SECTOR Tariffs are distorted and do not cover the basic costs Competition to domestic players from foreign players Increasing emissions regulations

ROLE OF THE GOVERNMENT

The role of the Government in the development of Indian power industry has been very crucial, which aims at protecting consumer interests and making the sector commercially viable. The government provides encouragement to the companies to establish themselves in this sector. As far as regulation is concerned, Electricity Act, 2003 is a very important Act as it allowed private sector participation in the generation of power, thus creating competition. It also allowed 100% FDI participation in the power generation, transmission and distribution, thus inducing investments in the power sector.

Electricity Bill 2001

The Bill seeks to Consolidate and rationalize existing laws. To address the issues of developing industry including regulation, power trading, non

discriminatory open access, choice of dispensing with vertically integrated state enterprises and encouraging private enterprise.

Energy Conservation Act 2001

The Act was enacted by the Indian government to facilitate stringent steps to ensure the efficient use of energy and its conservation. A Bureau of Energy Efficiency was set up to monitor and regulate the Power Industry according to the provisions of the act. Apart from this, the Government is investing in this industry through various development schemes:

The Rural Electrification Program is an effort to lighten up villages which have faced acute shortage of Power over the years.
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SECTORAL ANALYSIS ON INDIANPOWER SECTOR

Power for All by 2012 plan aims at a per capita consumption of 1000kWh by the end of the 11th Five Year Plan (2007-12).

The Accelerated Power Development and Reform Program (APDRP) program is being implemented so that the desired level of 15 per cent AT&C (Aggregate Technical and Commercial) loss can be achieved by the end of 11th plan (Currently it is 30%).

India and Malaysia have agreed to strengthen and promote cooperation in renewable energies, and to take necessary steps to encourage their development for mutual benefits

GOVERNMENT INITIATIVE:
The National Electricity Policy (NEP) in fact, stipulates power for all and annual per capita consumption of electricity to rise to 1,000 units by 2012. The requirement of licenses to set up new power plants in India has been withdrawn by the government to promote more establishments. Indian Government provides income tax holiday for a block of 10 years in the first 15 years of operation and waiver of capital goods import duties on mega power projects (above 1,000 MW generation capacities). Power procurement is permitted through a transparent bidding process. There is no customs duty on the import of capital goods for mega power projects. The Government of India has also constituted independent regulatory commissions in 22 states, so that each State has its own electricity regulatory commission. Distribution reforms have been initiated with distribution being privatized in few states like Mumbai, Orissa and Delhi.

SECTORAL ANALYSIS ON INDIANPOWER SECTOR

GOVERNMENT POLICY IMPACT Positive impact:

The Government of India is adopting constructive steps towards implementing largescale solar power projects and is poised to position itself as one of the world's major solar producer. The Power Finance Corporation of India provides finance to major power projects in India for power generation and conversion, distribution and supply of power in India.

Negative impact:
Government giveaways such as free electricity for farmers, partly to curry political favor, have depleted the cash reserves of state run electricity distribution system and financially crippled the distribution network. This situation has been worsened by government departments of India that do not pay their bills. Poor pipeline connectivity and infrastructure to harness Indias abundant coal bed methane and shale gas potential.

FUTURE GROWTH OF POWER SECTOR

India, being one of the fastest growing economies with ever increasing demand represents an attractive destination for the power industry. The Indian power sector will add nearly 45,000 megawatt (MW) to its total installed capacity by 2013-14 to the existing production, according to a RNCOS research report, 'Indian Power Sector Analysis'. Renewable energy is the new keyword in the Indian power sector and most of public and private players are coming up with plans to tap the potential market, on back of favorable government policies and initiatives. India is endowed with vast potential of solar energy and is quickly developing itself as a major manufacturing hub for solar power plants. With a large swathe of rivers and water bodies, India has enormous potential for hydro power. Twelfth Five Year Plan (2012-2017) includes additional 30,000 MW of hydro-electric power generation. India currently has 4.4 GW of net electricity generation capacity using nuclear fuels
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SECTORAL ANALYSIS ON INDIANPOWER SECTOR (across 20 reactors) and aims to increase it up to 20 GW by 2020; with one of the world's largest reserves of thorium, India has huge potential in nuclear energy. Wind energy is the largest renewable energy source in India; projects like the Jawaharlal Nehru National Solar Mission (which aims to generate 20,000 MW of solar power by 2022) is creating a positive environment among investors keen to exploit India's potential. India has large reserves of coal; estimates for FY11 put the figure at about 285.8 billion tonnes. India's proven natural gas reserves measure about 1,074 billion cubic meters. The government is providing subsidy of up to 30-50 percent to companies engaged in solar power generation.

Road Ahead
India Ratings believes that the implementation of reforms at the state power utility (SPU) level as well as of those initiated to mitigate fuel shortages remain key to power sector growth. The agency expects that its rated entities will manage the key sector risks in 2013 considering a favorable tariff mechanism, their comfortable liquidity and support from the central and state governments. Therefore, India Ratings has maintained a Stable Outlook on its rated power sector entities for the year. In India, there will be a significant growth in the Transmission & Distribution systems as the per capita power consumption increases to global levels and the per capita GDP moves closer the developed nations. The state-owned company has ambitious plans to establish 63 GW generations capacity by 2032, as a safe, environmentally benign and economically viable source of electrical energy to meet the increasing electricity needs Growing Indian Economy coupled with Indian governments goal of Power for all by 2012, opens up tremendous opportunities for electrical companies, both domestic and international, in India.

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SECTORAL ANALYSIS ON INDIANPOWER SECTOR

SPECIAL ISSUES Electricity boards start calling bids for long-term power supply
State electricity utilities of Andhra Pradesh and Uttar Pradesh have started calling bids for long term supply, ending a nearly two-year-long dry spell for power generators. But developers are seeking almost double the tariff. The per unit price in their quotations are between Rs 4.3 and Rs 7.1, citing uncertainty over fuel supply.

Country's largest power producer NTPC is likely to get back mining licenses for three coal blocks
Licenses for the three blocks- Chatti-Bariatu, Kerandari and Chatti-Bariatu (South) - were revoked by the coal ministry in 2011 as NTPC failed to meet the set milestones for development. A final decision to this effect will be taken after an approval from the law ministry is obtained. "The three coal blocks of NTPC would be re-allocated to the company after law ministry's approval, the power and finance ministries have asked coal ministry to re-allocate the three mines to NTPC to boost the power producer's valuation ahead of its Rs 12,000 crores divestment next month. The government plans to divest 9.5% of its 84.5% stake in NTPC through auction. ChattiBariatu and Kerandari coal blocks were allocated to NTPC in 2006, while ChattiBariatu (South) coal block was given to public sector firm in 2007. The three blocks hold 836 million tonnes of reserves.

Sluggish power sector could hit economic growth: India Ratings

Fuel supply risks and precarious financial health of electricity distribution companies continue to pose challenges for the power sector, whose slow progress could impact the country's economic growth, a report said.

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SECTORAL ANALYSIS ON INDIANPOWER SECTOR For every one per cent increase in Gross Domestic Product (GDP), the power generation needs to increase by one per cent. Otherwise, there would be inadequate electricity supply that can impact not just the power sector but also other industries. "The progress of reforms in the power sector is happening at a slow pace. The sector is expected to suffer this year (also) and investors are not likely to be enthused to put money into the sector," Garg noted.

Capacity Addition trips in FY13 too (ET 29th January 2013)

Overall, power generation doubled over 10 years; renewables & hydel share up at 31%. However, during the 11th plan, only 31% of the originally targeted capacity was added - 54,000 MW achieved out of the targeted 78,700 MW. Major Reasons for delay and the inability to achieve the set targets were Clearances for coal mining( for thermal plans) Land acquisition Equipment delivery Gas availability

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