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India: Give me the power!

May 24, 2005

The power scenario in India seems less bright than what has been portrayed all this while. The ministry of power states that the growth rate for demand of power in developing countries is generally higher than the growth in GDP. In India, this ratio was 3.1 in the first five-year plan, peaked at 5.1 during the third plan and declined to 1.5 during the ninth plan period. What this simply means is that to support a GDP growth rate of 7%, the Indian power sector need to grow by at least 10%. The case has been different, however! The power generation capacity in India during the past two decades has grown at a CAGR of mere 5.1% (from 42,600 MW in 1985 to 115,544 MW by January 2005: Source Ministry of Power), or around 3,650 MW every year. Compare this with China, which adds around 30,000-40,000 MW of generation capacity every year! Considering the slow pace of growth in India, the target of setting up 100,000 MW during the tenth (2002-07) and eleventh (2007-12) plan period seems pretty much unachievable. And this is despite the government allowing the private sector to play a larger role in the sector, which has been dominated by the public sector.

Capacity addition anticipated during 10th Plan (MW): Revised downwards...again!
Sector-wiseOriginal TargetUnits commissionedUnder ExecutionTo be awardedAnticipatedVariation
Central22,832 6,955 11,132 1,730 19,817 -13.2%
State11,157 3,286 8,954 - 12,240 9.7%
Private 7,121 718 3,816 365 4,899 -31.2%
Total 41,110 10,959 23,902 2,095 36,956 -10.1%
Type-wiseOriginal TargetUnits commissionedUnder ExecutionTo be awardedAnticipatedVariation
Thermal25,417 6,519 14,647 2,095 23,261 -8.5%
Hydro14,393 4,440 6,685 - 11,125 -22.7%
Nuclear 1,300 - 2,570 - 2,570 97.7%
Total 41,110 10,959 23,902 2,095 36,956 -10.1%
Source: Ministry of Power, Govt. of India

Where does the problem lie?
One of the biggest reasons why the power generation capacities have seen a slow growth in the country is the lack of reform on the T&D front. As a matter of fact, India's investments in T&D as proportion of the investment in power generation stands as low as 0.3, i.e., for every Rs 100 spent on generation, only Rs 30 is spent towards creating the T&D infrastructure. This is considerably low in comparison to the global ratio of 1:1. As such, due to poor infrastructure and checking processes, a high proportion (around 40%) of power generated is lost during transmission and distribution. This has been one of the biggest disincentives for the private sector to invest aggressively in the sector.

Is there light at the end...?
Despite all the missed targets, fallacious policies of the past, it will be wrong to say that India remains ignorant of the problems and its needs. Reforms are gradually picking up momentum. Corporatisation of state electricity boards (SEBs), the Electricity Act of 2003, the ongoing APRDP (Accelerated Power Reforms & Development Program), focus on reduction of transmission and distribution (T&D) losses, the adoption of new IT based technologies and the development of the national transmission grid are steps in the right direction. But a lot of these plans are still in the initial stages of execution and there is still a long way to go.

Considering the current pace of economic growth in the country, the demand for power is likely to double in the next decade. Further, to meet the aim of providing power for all, the government's plans of setting up 100,000 MW of additional generation capacity will require an investment corpus of Rs 4,000 bn (or Rs 40 m per MW). Also, considering the global average, an equivalent sum of money needs to be invested in upgrading the T&D infrastructure. If the current gaps are not filled, i.e., T&D losses are no reduced from the current levels of around 40%, there will be a substantial burden put on the exchequer that will ultimately effect the government's spending towards other areas of human development.

All in all, fast paced reforms in the Indian power sector are the need of the hour. It will, however, still take at least 4-5 years for the set goals to be achieved. Investors need to take this into account while deciding upon their investments decision in power stocks.

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