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Will 12th plan period be more 'power'ful?? - Views on News from Equitymaster
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  • Jul 16, 2013

    Will 12th plan period be more 'power'ful??

    As India progressed, so did the ambitions in five year plans to fuel the economic growth of the country. An arduous task was set up in five year plans to address the growing need for power by industries and consumers at large. As a result; the power ministry has long been making efforts to ensure that by 2020; every household in India has electricity. For this purpose, plans were made to invest billions in new generating capacity and development of transmission and distribution (T&D) network at the same time. However, India's ambitious mission of 'power for all by 2020' has not delivered the desired results. This can be validated from the fact that almost every five year plan has had slip ups in power capacity addition.

    Source: Central Electricity Authority (CEA)

    Likely reasons for slip ups

    There are several factors which are essential for the sustainable development of power sector. These include infrastructural support like adequate transport, land and water availability. Availability of finance is another crucial contributor to rapid capacity addition. Add to that the poor financial condition of state utilities due to high transmission losses and no flexibility in raising power tariffs. Fuel availability is another significant constraint on the power sector growth. Then there are other obstacles such as environment and forest clearances to further add to the woes.

    Earlier lower capacity for equipment manufacturing with domestic players was also a constraint till the 10th plan period (upto 2007). As a result, Chinese imports were allowed to meet the equipment demand. There have also been delays in capacity addition because of lack of balance of plant contractors (BOP). BOPs are a support system such as coal handling plants, ash handling plants, water treatment facilities, cooling towers, chimneys to any main power plant equipments-Boiler, Turbine and Generator (BTG). Thus, BOPs are essential for smooth running of any power plant and timely erection of these plants have to be ensured before the main plant is up and running. Also, on an average BOP constitutes 40-45% of the total power plant cost. All these constraints collectively led to slippages in the capacity addition.

    What are the possible measures to mend the situation in 12th plan?

    First and foremost, availability of key inputs which are necessary for timely completion of projects should be ensured. This includes equipment, material, fuel, land and water.

    Infrastructural support in form of railways, port facility, as well as erection machinery and erection agencies including civil and BOP contractors are very important. Apart from developing BOP market, timely award of plant equipment orders are equally important to ensure that there are minimum slippages in the plan.

    For the 12th plan, out of total planned capacity of 76,000 MW, around 63,000 MW is going to be coal based projects. So, adequate availability of domestic coal has to be ensured. Coal imports are getting increasingly expensive and unviable for power producers. Hence besides allowing flexibility in power tariffs, the domestic production of coal should be increased so as to meet the requirement of the 12th plan.

    Funding is another issue that power sector has to grapple with. Funding requirement for the 12th plan is estimated to be Rs 13.7 trillion; shortfall is estimated to be Rs 1.8trillion. If gross budgetary support and other schemes come to the aid of power sector; funding may be relatively easy for 12th plan.

    Despite the hurdles there is a silver lining in the cloud

    No doubt, there has been a lag in capacity addition over the five year plans. However, a silver lining in the cloud is that the capacity addition achievement rate has increased considerably from 10th plan to 11th plan from 52% to 88%. This means at least few of the issues such as BOP plant requirements, increase in domestic capacity of power equipments and technical expertise were sorted to a certain extent.

    How the investors should perceive it?

    Power generators and power equipment manufacturers (Engineering companies) benefit the most from timely power capacity addition and also suffer the most in delays. are the two sectors that benefit the most from timely power capacity addition and also suffer in delays. In past two years, companies with good management and fundamentals have also suffered on account of weak business prospects due to delay in capacity addition and consequently; lack of orders in generation as well as T&D. Therefore, we recommend buying only those engineering and power stocks that have the financial strength to tide over these temporary headwinds.



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