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Power Sector Analysis Report 

[Key Points | Financial Year '20 | Prospects | Sector Do's and dont's]

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  • India is the third largest producer and the third largest consumer of electricity in the world.
  • It also has the fifth largest installed capacity in the world. India's power sector has made significant inroads over the last decade, growing its installed capacity from 200 GW in FY12 to 370 GW in FY20.
  • Although there has been a significant increase in the power generation capacity, India still faces challenges to meet the growing demand for power as reliable supply remains low in the country. The plant load factor (PLF) has declined significantly from 78% in FY10 to 56% in FY20. Low PLF means the thermal plants have been lying idle, which could be due to nonavailability of fuel, surplus capacity, or lower off-take.
  • In terms of fuel mix, 62% of the total installed capacity, and 76% of the total generation is thermal, indicating India’s dependence on conventional fuel sources. Coal-fired (including lignite) thermal power plants account for more than 55% of the total installed capacity. While new coal-based power plants are more efficient, with higher flexibility and lower emissions, old coal-based power plants are highly inefficient, requiring expensive retrofits to comply with increasingly stringent environmental standards.
  • In terms of ownership mix, the private sector contributes 46.8% of India’s installed capacity. This proportion has increased from 27.2% in FY12 owing to continued strong growth in demand and initiatives of the government to encourage private sector participation in power generation.
  • Demand for electricity is on the rise as India’s economy gains in global importance. Various factors contributing to the rising per capita consumption, include the improvement of electrification in villages, GDP growth and general economic activity, and growth in consumer electronic device penetration.
  • Over the past few years, India has made substantial progress in the renewable energy sector on the back of conducive policy environment, government support, steady inflow of capital, introduction of latest technologies and several fiscal policy incentives. It has also taken positive strides towards meeting the United Nations (UN) Sustainable Development Goals, especially Goal 7, of ensuring that everyone has access to affordable and clean energy.
  • The Government has allowed 100% FDI in the power segment and renewable energy segment to facilitate easy transfer of capital and technology. Total FDI inflows in the power sector reached US$ 15 billion during April 2000 to March 2020, accounting for 3.5% of total FDI inflows in India.

How to Research the Power Sector (Key Points)

  • Supply
  • Reliable supply remains low in the country. The energy deficit is significant in union territories such as Jammu & Kashmir and the North-Eastern States. Also, states like Chhattisgarh, Odisha, and Uttar Pradesh continue to face peak deficit despite having significant energy generation capacity.
  • Demand
  • Demand for power has seen an upward trend in recent years. It is expected that it will continue on the same trajectory due to economic development, rapid urbanization, growing appliance ownership, and thrust towards rural electrification.
  • Barriers to entry
  • Barriers to entry are high, especially in the transmission and distribution segments, which are largely state monopolies. Barriers include high fixed costs, fuel linkages and payment guarantees from state governments that buy power and retail distribution license.
  • Bargaining power of suppliers
  • Small number of suppliers enjoy monopoly, thereby contributing to the supplier power. However, bargaining power is not very high since the tariff structure is mainly regulated.
  • Bargaining Power of Buyers
  • Low. Even though switching costs are low and electricity is an undifferentiated product, customers don’t tend change their source of electricity often.
  • Competition
  • Low, as there are a smaller number of players. Shortage of inputs such as and natural gas and regulatory hurdles has dissuaded new entrants.
  • Threat of Substitutes
  • Low. The cost of switching to substitutes like solar, wind energy etc. is high.

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Financial Year '20

  • The installed power generation capacity in India as on FY20 stood at 370 Gigawatts (GW), marking an increase of 14 GW on a YoY basis. Continuing the previous year’s trend, the capacity addition was led by Renewable Energy Segment (RES), which added 9.4 GW capacity. The net capacity addition in the Thermal segment witnessed a marginal pickup for FY20 at 4.3 GW compared to 3.4 GW in FY19.
  • Within the RES segment, solar energy contributed 6.5 GW of the capacity addition, wind contributed 2.1 GW with others filling the rest. RES installed capacity has seen a big leap in the past few years, with a CAGR of 17.3% from FY16 to FY20.
  • All-India Thermal plant load factor (PLF) for FY20 stood at 56%, down from 61.1% in FY19, primarily due to a decline in State and Central PLFs. Thermal PLF for the Central sector stood at 64.2% compared to 72.6% in FY19. Thermal PLF for the State sector stood at 50.2% compared to 57.8% in FY19. Thermal PLF for the Private sector declined marginally YoY to 54.3% from 55% a year ago.
  • Hydropower generation increased significantly by 15.7% YoY due to better water availability, especially in the Northern region. RES power generation increased 9.1% YoY to 138 BUs from 127 BUs in FY19, led by robust capacity additions.
  • In FY20, the demand for power in India grew by 1.3%YoY. The subdued power demand growth was due to the twin headwinds of overall weakness in economic activity and Covid-19 related impact towards the end of the year.
  • Peak power demand touched an all-time high of 184 GW in FY20, an increase of 3.8% YoY. The Northern region saw the highest increase in demand by 3.2% YoY, followed by the Southern region where demand rose by 1.5% on a YoY basis. The Eastern region witnessed a modest growth of 0.3% on a YoY basis, while the North Eastern and Western regions saw a fall in demand by 0.4% and 0.6%, respectively.
  • In FY20, the Government issued guidelines to all States to convert all existing consumer meters into Smart meters in prepaid mode, which would allow consumers to pay as per their own convenience and consumption requirements, to bring efficiency in power distribution by arresting high losses for DISCOMs.
  • EESL (a joint venture of central PSUs) is pioneering this Smart Meter National Programme to convert around 250 million conventional meters into smart meters. By January 2020, more than 900,000 smart meters were installed in Uttar Pradesh, Haryana, Bihar, NDMC-Delhi and Andhra Pradesh.
  • Under the Ujjwal DISCOM Assurance Yojana (UDAY) scheme, 16 states issued bonds covering approximately 86.3% of the total debt taken by them, resulting in a significantly low cost of finance for those DISCOMs. As a result, Aggregate Technical & Commercial (AT&C) losses reduced to 19% in FY20 as compared to 20.7% in FY16.
  • The volume of power traded at the Indian Energy Exchange (IEX) witnessed a flattish trend in FY20. Volume on IEX for FY20 stood at 49 BUs compared to 50 BUs in FY19. The average merchant tariff fell 22% YoY to Rs 3 per Kilowatt hour (kWh) from Rs 3.9 per kWh in the previous fiscal.
  • India's domestic coal consumption from Coal India (CIL) and Singareni Collieries Company (SCCL), India’s largest coal miners, stood at 644 MnT in FY20, 5% lower than the previous year, with 80% being consumed by the power sector.
  • The total coal consumption in India stood at 972 million tonnes (MnT) in FY20, with a growth rate of 0.3%YoY. Of the total coal consumption, 729 MnT came through indigenous production, with the balance being imported.

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  • While India’s population comprises of 20% of the global population, the energy consumption is mere 6% of the world’s primary energy consumption. Even though the energy consumption in India has more than doubled since 2000, the potential for further growth in the consumption of power is significant.
  • As per the IMF forecast, India is expected to remain one of the fastest-growing major economies in the world in the near future. With overall socioeconomic development and ambitious plan of electrification of every household, demand for power is expected to rise consequently.
  • Rapid urbanization, infrastructure development and need for power assurance for all will continue to drive the demand for power. While the power deficit of the country continues its declining trend, the power generation business is expected to grow owing to the government’s significant emphasis on key segments such as healthcare, infrastructure and commercial real estate.
  • The Central Electricity Authority (CEA) expects India’s electricity requirement (demand plus transmission and distribution losses) to reach 1,566 TWh (peak demand 226 GW) by FY22 and increase to more than 2,047 TWh in FY27 (peak demand 299 GW). This would require investment in capacity additions of more than US$ 304 billion.
  • On the policy and regulatory front, the Government and Regulatory bodies continue the reform process for improvement in efficiency in various aspects of power supply. The Government of India announced that Ujjwal DISCOM Assurance Yojana (UDAY) scheme in November 2015 to financially turnaround and revive electricity distribution companies (DISCOMs) of India with an intent to find a permanent solution to the financial stress that the power distribution sector was facing.
  • The NEF (Interest Subsidy) Scheme was also approved by the Government to promote capital investment in the distribution sector. NEF Scheme has the provision to provide interest subsidy for a period of 14 years on loans availed by distribution utilities in both the public and private sectors.
  • With respect to ensuring supply across the country, the government launched the “Pradhan Mantri Sahaj Bijli Har Ghar Yojana (SAUBHAGYA)” in 2017 to achieve universal household electrification in the country.
  • It also announced the SHAKTI Scheme to centralize the process of allocating coal to thermal power plants. According to the policy, power companies will have to get their Power Purchase Agreement (PPAs) amended within 45 days to factor in the lowered cost of coal attained after bids.
  • Technological advances and reducing capital costs have progressively made Renewable Energy commercially attractive and more affordable than Thermal power. Power capacity addition in India is expected to be primarily driven by the Renewable Energy Segment. The Government of India has targeted to achieve 175 GW capacity by 2022, comprising of 100 GW Solar, 60 GW Wind, 5 GW Small Hydro and 10 GW Bio-power (including biomass).
  • The Green Energy Corridor Project aims to facilitate the integration of large scale renewable energy capacity addition in the power grid. Under the Union Budget 2019-20, the Government of India has allocated Rs 5 billion to increase the capacity of the Green Energy Corridor Project along with Rs 9.2 billion for wind and Rs 30 billion for solar power projects.
  • To overcome land acquisition and connectivity issues, solar parks have been designed as a crucial tool for ensuring continued solar PV deployment. While these have experienced some delays compared to the original schedules, their smooth implementation will be critical for a ramp-up in solar power capacity in India.
  • The Kisan Urja Suraksha evam Utthaan Mahabhiyan (PM-KUSUM) has also been launched by the Government of India in 2019 under which farmers can install solar panels to power water pumps and also sell the excess power generated to DISCOMs. The scheme entails setting-up of about 26 GW of solar capacity by 2022 with a total central financial support of Rs 344 billion.
  • With many bilateral nuclear agreements in place, India is expected to become a major hub for manufacturing nuclear reactors and associated components. Foreign participation in the development and financing of generation and transmission assets, equipment supply and technology collaboration in nuclear and clean coal technologies is also expected to increase.

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FAQs on the Power Sector

How has the power sector performed in the past decade and when is a good time to invest in the sector?

The power (utilities) sector has provided investors healthy returns in certain time periods during the past decade but overall, the performance of the sector has been underwhelming.

As the demand for power is closely linked to the economy, power stocks are usually riskier - their fortunes are prone to economic booms and busts. For this reason, they are often called cyclical stocks. Generally considered an offensive tactic in investing, cyclical stocks can be used to generate high returns when the economy is doing well.

Therefore, the best time to buy such stocks (power stocks) is at the start of an economic expansion, when capacities are undervalued and the best time to sell them is just before the economy begins to slow down.

To know more about the sector's past and ongoing performance, have a look at the performance of the NIFTY Energy Index and BSE Utilities Index

Where can I find a list of power stocks?

The details of listed power companies can be found on the NSE and BSE website. However, the overload of financial information on these websites can be overwhelming.

For a more direct and concise view of this information, you can check out our list of power stocks.

Which power stocks were the top performers over the last 5 years?

Power Grid Corporation of India was one of the top performers over the last 5 years in terms of sales and profit growth.

Power Grid Corporation of India' performance derives strength from the majority ownership by the Government of India (GoI), the company's pivotal role in the Indian power transmission sector and its low-risk business having a cost-plus-tariff structure for majority of its projects. The company's high operating efficiency, strong project execution skills, and adequate liquidity position have also boosted its performance.

To know which other companies performed well over the last 5 years, check out our entire list of top performers.

What kind of dividend yields do power stocks offer?

There is no consistent trend of dividends across the industry, with different companies having different dividend policies.

For more details, check out our list of top power stocks offering high dividend yields.

Which are the power stocks with the highest return on capital employed (RoCE)?

Return on capital employed (ROCE) is a financial ratio that can be used in assessing a company's profitability and capital efficiency by determining how well the management is able to allocate capital for future growth. An RoCE of above 15% is considered decent for companies that are in an expansionary phase.

Tata Power is one of the top power stocks right now on the Return on Capital Employed (RoCE) parameter.

To know which other power stocks offer great return on capital employed, you can check out the top power stocks offering the best RoCE here.

Which are the best power stocks to invest in currently?

Investing in stocks requires careful analysis of financial data to find out a company's true worth. However, an easier way to find out about a company's performance is to look at its financial ratios.

Two commonly used financial ratios used in the valuation of stocks are -

  • Price to Earnings Ratio (P/E) - It compares the company's stock price with its earnings per share. The higher the P/E ratio, the more expensive the stock.

    To find stocks with favorable P/E Ratios, check out our list of power stocks according to their P/E Ratios

  • Price to Book Value Ratio (P/BV) - It compares a firm's market capitalization to its book value. A high P/BV indicates markets believe the company's assets to be undervalued and vice versa.

    To find stocks with favorable P/BV Ratios, check out our list of power stocks according to their P/BV Ratios

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