Sustaining Growth-Future of Indian Power Sector

Sustaining Growth – Future of Indian

Power Sector

OCTOBER 2009

A CII — A.T. Kearney Report


Power SectorA CII — A.T. Kearney Report


Power Sector

October 2009

A CII — A.T. Kearney Report

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iv Sustaining Growth: Future of Indian Power Sector - A CII-A.T. Kearney Report

Foreword vii

Message from Chairman of CII's National Committee on Power ix

About the Report xi

Executive Summary xiii

Part A: Indian Power Sector: The Road Ahead 1

Theme 1: Changing Outlook for the Sector 3

Theme 2: Winning in the Future Power Markets 13

Part B: Sector Outlook 21

Thermal Power: Coal Based 23

Thermal Power: Gas Based 31

Hydro Energy 37

Nuclear Energy 43

Renewable Energy 49

Contents

vContents

vi Sustaining Growth: Future of Indian Power Sector - A CII-A.T. Kearney Report

Power sector in India is at a crucial juncture today, with several large investments being undertaken by public and private sectorplayers, and developments promising a significant transformation of the sector. The sector is witnessing a fundamental shiftthat is opening up new business opportunities for the industry. At the same time, the competition for scarce resources isexpected to intensify and support enablers in terms of logistics, T&D, equipment supply will be stretched to the fullest.

The emerging dynamics of the Indian power market would require industry players to realign their strategies and operatingmodels to the changing sectoral trends. The focus would need to be both on project execution as well as efficient operations,in line with the “growth” characteristics of the sector.

With this background, CII had requested A.T. Kearney to probe two key themes that concern the Indian power sector – a) Changing Outlook for the Indian Power Sector and b) Winning in the Future Power Markets in India

The conclusions of the study, which are quite insightful, reconfirm the continued attractiveness of the sector for freshinvestments and growth. However, the business environment will increasingly become competitive as we evolve to a new eraof “Power on Power” competition. Access to reliable & high quality fuel, especially coal, will present one of the biggestchallenge to the sector. For example, as per the current trajectory, India may face shortage of upto 250 MT of domestic coalper annum by 2014-15. Similarly, the downstream distribution infrastructure, characterized by high AT&C losses and inefficientgrid quality is another area of concern. All these issues require immediate intervention from the government through fasttracked reforms & execution. Similarly, industry players also need to take a fresh look at their competitive strategy as theyprepare to participate in the future of the sector.

I would also like to highlight the increasing importance of renewables in the Indian Power Sector. Buoyed by incentives &support from the government as well as advancements in the technology, renewable energy (solar, wind, bio-mass) is all setto play a critical role in defining the future of the industry and ensuring “sustainability” of the Indian energy sector.

Many people contributed to this effort. Several CII members (both Indian companies and MNCs), industry experts andgovernment officials spent time with the A.T. Kearney team, sharing experiences and debating ideas.

Senior A.T. Kearney partners and principals, including Kaustav Mukherjee, Vikas Kaushal, Abhishek Poddar, Anshuman Maheshwaryprovided overall direction. Amit Bhargava, Shelly Kapur, Vipul Jain and Rohan Rijwani led the study on a day-to-day basis.

I would like to extend my appreciation to everyone who helped us in this effort.

Sudhir M TrehanChairman - CII India Energy Conclave and

Managing DirectorCrompton Greaves Ltd.

Foreword

viiForeword

viii Sustaining Growth: Future of Indian Power Sector - A CII-A.T. Kearney Report

A robust and thriving Power sector is central to India’s sustained economic growth. India’s power sector has evolvedsubstantially over the last few decades and is now witnessing unprecedented interest and investments across the value chain.The industry has responded strongly to the reform measures undertaken by the government with a wide spread participationacross Public and Private sector, Indian and multinational companies. Despite these improvements, the sector faces sometough challenges across fuel, infrastructure and finances, which if not addressed immediately, can impede the potential growthof the industry.

In this context, the CII-A.T. Kearney study on the future of power sector in India identifies the key trends impacting the industryas it evolves to the next level of maturity. It also highlights some of the critical concerns & issues facing the power sector anddefines key imperatives and action steps for all stakeholders concerned. The study also deals with changing dynamics acrossvarious fuel types and identifies implications of the same on the overall power sector.

The CII National Committee on Power is committed to working with all stakeholders concerned towards implementing therecommendations from this report.

R S SharmaChairman - CII’s National Committee on Power and

Chairman and Managing DirectorNTPC Ltd

Message from Chairman of CII’s National Committee on Power

ixMessage from Chairman of CII’s National Committee on Power

x Sustaining Growth: Future of Indian Power Sector - A CII-A.T. Kearney Report

Indian power sector has been a mainstay of national growth. As the Indian economy prepares for sustained growth of 8-9%,the importance of the power sector will continue to increase. The power sector itself is going through major changes withunprecedented investments across the value chain.

It is therefore an opportune time, for industry leaders and the government to deliberate upon the path forward and identifyaction steps that enable sustained growth of the sector. Many ideas and thoughts have often been propagated by industryforums and government functionaries to the above cause. This report takes a rigorous view of the emerging trends in the sectorand prioritises the imperatives for industry leaders.

The report is structured in two parts – the first section presents insights on changing outlook for the power sector and clearlyhighlights the key success factors for the future. In doing so, the report addresses some critical questions confronting theindustry:

� How is the opportunity landscape changing in the Indian Power market?� With significant investments being undertaken in the generation sector, what are the future demand-supply expectations?� What role do we see for regulations in sustaining industry growth?� How are the industry enablers shaping up for the future – fuel, transmission, distribution, tariffs, equipment supply, financing

and manpower?� And in light of the above, what are the clear imperatives for different stakeholders?

– Industry players – Government

The second section presents perspectives across all major fuel types viz. thermal (coal & gas), hydro, nuclear and renewables.This section highlights the changes in market dynamics in terms of demand-supply, regulations and operational challenges aswell as key imperatives for the stakeholders, across each of these segments.

About the Report

xiAbout the Report

xii Sustaining Growth: Future of Indian Power Sector - A CII-A.T. Kearney Report

The Indian power market is evolving rapidly from a “nascent/opening” market phase to a “developing” phase. The powerdemand in the base case is expected to grow at a steady7.5%-8% CAGR till 2017. Further, the low “power penetration”levels indicate large latent/unmet demand. The powermarkets will have to achieve consistent high growth rates tobring our per capita consumption to comparable levels ofsome of the other countries. We believe that rate ofinfrastructure development and government led reformswould have a significant bearing on how far thesedevelopmental aspirations are achieved.

Future power markets will present new set ofopportunities and challengesA new era of “Power on Power” competition will emerge.Atleast 80-85 GW of new capacity (90% of them thermal unitstargeting high PLF of 80-95%) will be commissioned by 2014.This will reduce the base load deficit, in the current scenario, toa low of 1-2%. Accordingly, we expect pricing pressures in thegeneration space, with long term prices at-best maintainingtheir current levels in nominal terms. The average shortterm/merchant prices may decline by 40-50% by 2014-15.

The generation landscape will also change significantly.Private sector will account for over 25% of the installedcapacity over next 5-6 years. Over forty to fifty players,many of whom with interests in smaller capacities and/or in 1-2 projects are expected to emerge in the industry. Withincreasing pricing pressures & fragmented industry structure,we may witness some consolidation after 2015.

New business opportunities will arise across the valuechain. New fuel opportunities are expected to emerge in thegeneration space, in addition to coal. Improved domestic gassupply & strenghtening of commensurate pipelineinfrastructure will facilitate increased gas basedgeneration. Government’s thrust on Hydro projects (50,000MW initiative) will provide attractive opportunities, especiallyfor peaking power. Nuclear energy will also witness stronggrowth at the back of Indo-US agreement (target 20 GW by2020).

Equipment manufacturers can leverage derived demandfrom the overall growth in the power sector to drive capacityexpansions. Technology changes (increased role of super-critical plants in thermal stations; large sized reactors fornuclear plants, etc) present opportunities to introduce andabsorb newer technologies and develop market niches.Similarly, T&D equipment suppliers will gain from the ongoingtransmission network strengthening program (~50 GW by2015 with increased use of 765kv and HVDC lines). Otherassociated industries (mining, financing, training & educationetc) also stand to gain significantly as they facilitate andbenefit by the growth in the power sector.

Renewables will strengthen its role in the sector: Windenergy will continue to grow at 15-20% pa with newopportunities in offshore capacities and large capacityturbines (> 3MW). Solar energy will drive next wave growth inrenewables space. Technology improvements are expectedto lead to grid parity costs by 2020-25. Governmentincentives will open up opportunities for solarfarms/distributed generation as well as PV manufacturing.

Constrained fuel supplies present a major threat to sectorgrowth: As per current trajectory, India, inspite of substantialreserves, is expected to confront a supply deficit of ~25%(250 MTPA) of domestic coal by 2014. Similarly, India willrequire 2000-2,500 tpa of Uranium to meet its nuclear energyaspirations by 2020, against a current supply/mining capacityof ~300 tpa.

Distribution and financing concerns will also intensify:High AT&C losses and slow rate of discom reforms will hurtthe industry in the last mile. Financing may also present achallenge to industry growth. About $ 200-250 Bninvestments will need to be undertaken in the power sector inthe next 8-9 years to fuel the planned growth. Sectoral andgroup caps of the financial institutions may be a potentialconstraints in securing such large amount of funds.

Several critical imperatives exist for the industryThe industry needs to significantly strengthen its project

Executive Summary

xiiiExecutive Summary

management and execution capabilities. A comprehensiveand robust project plan developed at conceptualizationstage, would help in identifying potential hurdles up front.Adequate diligence should be undertaken for selection of theproject site, EPC (Indian vs foreign), financing sources,technology, quality control and execution timelines etc.Creation of a strong project management center and set upof robust business processes & control mechanisms arecritical for efficient project execution.

Securing fuel supplies will be another critical success factor.Adequate diligence should be awarded to defining fuel sourcingplan, especially coal (linkage, captive, imported) and itsassociated costs. Fuel logistics planning and implementation iscritical and should be a focus for project leadership. Gasavailability may improve but adequate planning will be requiredto identify the right locations for the plants.

The generators also need to realign their market &customer strategy. Striking the right balance between longterm PPAs and merchant trading will become increasinglyimportant in the future. Reforms will also give rise to customermix options (SEBs, traders, bulk buyers, etc), which will openup different possibilities. Alternate market facing models likepower tolling, distributed generation, peaking power suppliescan also be evaluated.

Capital and Operational excellence will be key to futurecompetitive advantage. CapEx and Operational excellencebegins from selection of right technology and suppliers/manufacturers for the units. The asset availability andutilisation should be maximized through O&M best practices.

Finally, robust organizational enablers need to beestablished for the future. Over 150,000 additional skilledand semi skilled personnel would be required by the sectorover the next 5-7 years. Some organisations will also have tomanage concurrent “projects” and “operations” stages.Accordingly, a flexible organisation structure needs to bedesigned and implemented. Strong HR processes forattracting and retaining employees should be established.Effective training programs should be designed and rolledout by the industry. Efficient knowledge managementmechanisms would also need to be established

The government also needs to play a significantrole in driving and facilitating the sectoral growthA prioritized “six by six” agenda has been drawn out for thegovernment.

1. Address fuel supplies issues (coal & gas): Coal sectorderegulation should be a high priority agenda for the

government. The government should also promote PublicPrivate Partnership (PPP) for new coal block developmentand set up an independent regulator for the coal sector.Stringent monitoring should be adopted for timelydevelopment of allotted captive coal blocks. Ensuringpriority access to gas for the power sector (especially forpeaking power) at reasonable price-points andstrengthening the gas transmission infrastructure areother key imperatives for the government.

2. Enhance downstream efficiencies (transmission &distribution): A few immediate interventions arerequired on transmission side including streamliningprivate participation, aggressively extending nationalgrid reach & improving quality of the same and buildingflexibilities in BPTA tenures. The government shouldalso define a time-bound implementation plan for thepending discom reforms and accelerate implementationof open access to distribution networks. Finally, thepower subsidy mechanisms for the agriculture sectoralso needs to be reformed.

3. Aggressively promote clean source of energy(renewables and nuclear): Special focus should beprovided to renewables by identifying high intensityrenewable “zones” and establishing all enablers (land,transmission, site approvals etc) therein. The governmentshould ensure effective implementation of the NationalSolar Mission, including clear policy on Feed-In Tariffs.Distributed generation for rural areas (to benefit from solar& bio-mass applications) should be encouraged throughspecial incentives and fast track clearances.

For nuclear energy promotion, the government shoulddevelop a comprehensive nuclear fuel plan for enhancingUranium and Thorium mining & availability for the country.Special incentives should also be provided to encourageparticipation across the nuclear value chain.

4. Facilitate efficient market side development: Thegovernment should accelerate the pace of reforms inpower exchanges and deregulate the trading segment.Initiatives also need to be rolled out to smoothen peakdemand curve and promote peaking power supply.Introduction of flexibilities in PPA tenure and promotion ofreal time market mechanisms, through time of daymetering & pricing could be undertaken to enableefficient market development

5. Strengthen execution and monitoring mechanisms: Acomprehensive “next generation” reform agenda withwell defined implementation timelines should be

xiv Sustaining Growth: Future of Indian Power Sector - A CII-A.T. Kearney Report

developed by the government. There is also a need toestablish an “execution group” for following up on policyimplementations. Creation of an empowered “singlewindow” co-ordination and clearance body and definingclear time-lines for approvals across ministries &agencies will streamline the regulatory process.

6. Streamline industry enablers (equipment, financing &manpower): New equipment capacities should be

encouraged for emerging technologies in the generationspace. Investments should be promoted in renewablecomponents & supplies through special incentives. Thegovernment should also address the financing issues interms of sectoral caps of financial institutions and exploreopportunities for loan re-financing by multi-lateralagencies / foreign institutions. Finally, strengthening ofIndustrial technical institutes is required to enableadequate skilled manpower availability for the sector.

xvExecutive Summary

Sustained growth of the power sector is critical for enabling the high economic growth targets of India. All stakeholders needto put in a concerted effort to attain the above objective and address potential challenges and constraints confronting theindustry. If successful, the Power Sector will directly improve the socio-economic wellbeing of more than a billion people andalso create some world class “energy eco-system” in the country.

� � � �

xvi Sustaining Growth: Future of Indian Power Sector - A CII-A.T. Kearney Report

INDIAN POWER SECTOR:THE ROAD AHEAD

PART A

2 Sustaining Growth: Future of Indian Power Sector - A CII-A.T. Kearney Report

Indian power sector is undergoing a significant change that isredefining the industry outlook. Sustained economic growthcontinues to drive power demand in India. Government’s focuson attaining “Power For All” has accelerated capacity additionin the country. At the same time, the competitive intensity isincreasing on both market side as well as supply side (fuel,logistics, finances and manpower).

The Indian power sector is evolving from a “nascent/opening” market phase to a “developing” phase (Fig 1.1).

There are four attributes that characterize the aboveevolution, over last few years:

1. Steady demand growth and supply deficits: The powerdemand in India has grown at a CAGR of 8% over the lastfive years (Fig 1.2). At the same time, the supply (CAGRof 6.8%) has not been able to keep pace with thedemand. Accordingly, the deficits have increased steadilyfrom ~5% in 2003 to ~11% in 20091. The past few years have seen an increase in the per

Theme 1

Changing Outlook for the Indian Power Sector

3Changing Outlook for the Indian Power Sector

1 Source – Ministry of Power

Figure 1.1

Industry Maturity1 Curve

capita consumption from ~ 410 kwh in 2002 to ~600 Kwhin 2008. Despite the growth, the power consumption ismuch lower than other BRIC countries like China (2150Kwh), Brazil (2100 Kwh) and Russia (6000 Kwh)2,suggesting a large unmet/latent demand in the country.

2. Improved sector attractiveness supported byregulatory reforms: The reforms which were initiated inthe 90’s, got strengthened with the enactment ofElectricity Act 2003, followed by open access regulations,national electricity policy and national tariff & integratedenergy policy. Accordingly, the sector which historicallyhad only a few central & state utilities, is now witnessinginterests from over 75-100 new players looking atinvestments across the value chain.

3. Increased rate of capacity additions: The generationcapacity3 has grown from around 63 GW in 1990 to 149GW in 2009, more than double over last two decades.Infact, over the last few years, India has added an averageof 6-7 GW of generation capacity per annum, highest inthe history of the Indian power sector. This growth rate isexpected to further increase in coming years.

4. Inadequacies in support enablers (equipments,transmission and distribution): Limited domesticcapacity of generation equipment supplies includingboiler, turbine, generator and balance of plant have beenone of the key reasons for delays in power projects.Similarly, transmission and distribution segment still hashigh AT&C4 losses of ~ 30%, despite the reduction over

last 8-9 years. Inadequacy in transmission capacity tomeet peak demand, low grid discipline, difficulties inimplementing unscheduled interchanges andpredominance of low voltage profile of 220 kv are some ofthe challenges confronted by the National grid. On thedistribution side, cross subsidization of consumercategories along with the high grid losses are areas ofserious concern.

Future Outlook: New opportunities within anincreasingly challenging environment We believe five key trends will characterize the future of the Indian Power sector, supported by select industry enablers (Fig 1.3).

At the foremost, significant capacity is expected to come onlineresulting in Power on Power competition in the generationspace. Secondly, the industry landscape will changesignificantly with emergence of the private sector alongwithcontinued importance of central utilities. Third would be theonset of “next generation reforms” throwing open neweropportunities across the value chain. Constrained fuelsupplies is the fourth dimension that would impact theevolution of the sector. Finally, “renewables” will set the stagefor long term “sustainable” growth of the industry.

The above changes will be also be impacted by four criticalindustry enablers viz. transmission, distribution, equipmentsupply, financing. The ability of the sector to gear up on theseenablers will determine future growth of the sector.


Figure 1.2

Historical Supply and Demand Trend (BU)

2 Source: EIA and United Nations3 Only grid based capacity in terms of GW (1GW=1000MW) ; Source: Ministry of Power4 Aggregated technical and commercial losses; Source: Crisil

First: A new era of “Power on Power” competition

Steady demand growth with potential upsidesAs per the CEA estimates, power demand in India will grow at~ 7.5% CAGR during 2009-17, to increase from ~775 BUcurrently to ~1400 BU by 2017 (Fig 1.4). Sustainedeconomic growth coupled with initiatives of providingelectricity for all including rural electrification, will be the keydemand enablers. In addition to the above project growth,

there is a potential upside from the “latent demand” whichhas not been addressed currently due to supply constraintsand infrastructure inadequacies (including distributionaccess, grid reliability, etc.). The potential is immense asreflected in the significantly lower per capita powerpenetration in India, when compared to other developingcountries like China and Brazil. The demand in 2017 wouldneed to grow at a significant higher CAGR of ~ 17%, if Indiawere to even achieve the per capita consumption, similar tothe current levels in these countries.

Large scale capacity additions and efficiency improvementsIndia is also poised for significant supply addition over thenext few years (Fig 1.5). The incumbents and new entrantshave announced large capacity augmentation plans in thesector. The announced grid based projects already sum up toa staggering figure of ~ 300 GW (most of them are of muchlarger unit sizes than historical additions). However, as per thecurrent trajectory5, 80-85 GW of capacity is most likely to becommissioned in the period of 2009-2014 (with another 5-10GW “probable” capacity on the top, depending on the rate ofprogress attained). This in turn will be the highest capacityaugmentation in any block of five/ ten years in India. The rateof capacity addition will increase further in the subsequentyears as India matures in its capabilities for executing suchlarge scale projects.


Figure 1.3

Emerging Sector Trends

Figure 1.4

Expected Demand Scenario, 2009 – 2017(BU)

Figure 1.5

Capacity Addition scenario (GW)

At base case demand scenario, India’s per capita

consumption would be ~ 1100 kwh in 2017, much lower

than even the current consumption level of developing

economies like China (2150 kwh), clearly indicating a

latent/unmet demand, which can be tapped by the industry.

5 A.T. Kearney analysis based on CEA status, project progress and project execution stage including ordering of BTG (for coal basedprojects), under-construction for other fuel types

Additionally, the generation and transmission efficiencies isalso expected to improve in the future. Most of the newthermal plants (accounting for ~90% of incremental capacityaddition) are basing their production at high PLF (80-90%).Accordingly, the average PLF of the generation capacity willincrease from ~56% currently to ~61-63% by 2014-15.Similarly, the adoption of higher voltage lines & strengtheningof the grids will help reduce the T&D losses in the system. Allthese will improve the power supplies to customers.

Narrowing supply-demand gap, resulting in Power onPower competitionThe planned capacity expansion along with efficiencyimprovements will substantially reduce the supply-demandgap in the future. The supply deficit, for the base load couldpotentially reduce to 1-2% over the next 5-6 years in the basecase (Fig 1.6). Even in an optimistic scenario (increasedrealization of latent demand), the deficit could be around 4%-5%.

The above scenario will usher in a new era of “power onpower” competition, early signs of which are already visible inthe market. The advent of bid based power purchase by stateswill further increase the competitive intensity in the market, Forexample, the number of participants (qualified RFP stage) inthe recent Case I bid by Madhya Pradesh, was around 25,unheard of in the past. There have been similar experiences atother bids like Gujarat and Haryana as well. This trend is likelyto continue, and potentially intensify, in future.

A clear implication of the above will be on price realizations.It is expected that the long term PPA prices will continue tobe at current levels (or even decline) in nominal terms overthe next few years. The average trading prices are expectedto peak over next two years and thereafter decline by 40-50%

by 2015.

The peak deficit will however continue to exist in the future.Peaking stations (hydro, gas, solar, etc) would therefore havea large role in addressing this deficit. Demand managementwould also be an essential imperative for the generators aswell as SEBs.

The implications for the sector from the above trend aresignificant. On one hand, it would be essential for the sectorto realize the latent demand, on the other hand, the playerswould need to clearly chart out their business strategies toalign with the emerging market scenario. Some of the criticalimperatives for the industry have been covered in detail in thenext chapter.

Second: Changing generation sector landscape

Increased role of the private sectorPrivate sector is expected to play a much larger role in futuresupply additions, as compared to the past. Over 40% of thecapacity addition, over the next five years will be undertaken bythe private sector. Consequently, the private sector capacityshare will increase from ~16% today to ~26% by 2014,primarily at the cost of state utilities (Fig 1.7). Central utilitieswill continue to maintain their relative position as they too areparticipating aggressively in the capacity expansion programs6.

Emergence of two distinct player groupsTwo different player groups are expected to emerge in theindustry: The first category will comprise large companies/groups taking significant positions in the sector – likes of NTPC


Figure 1.6

Projected electricity supply deficit(% of demand)

Figure 1.7

Category-wise capacity addition, 2009 – 2014 (GW)

6 Source: A.T. Kearney analysis

(the incumbent), Reliance Power, Sterlite Energy, Jindals, TataPower, Adani, Lanco and others will fall in this category.

Over next few years, as the industry evolves, these top fewplayers are expected to account for 40-50% of new capacitiescoming on-stream. These players are building their presencethrough a portfolio of generating assets with varied fuel mix,spanning across different geographic locations in India andsome of them are taking positions in other parts of the valuechain. They are also at the forefront of newer technologies (egsuper-critical plants) and larger unit sized projects – which inturn will improve generation efficiencies.

The other category of players would be made up of small tomid sized generators with interest in only a few projects.There are more than 40-50 players that fall in this category(excluding the state utilities). In line with a typical industryevolution, presence of such large number of small to midsized operators will accentuate the competitive intensity in thesector. Many of these players are banking on high price shortterm market. As the deficit reduces in the sector on accountof increased supply, we would expect pricing pressures toemerge in the sector both in long term PPAs (a trend alreadyvisible in latest Case I bids) as well as short term merchantpower. As the margins come under pressure, we maywitness some consolidation in this space, after 2015.

Adoption of innovative business modelsEmerging opportunities in the sector along with increasingpresence of the private sector would also drive adoption ofnewer business/operating models. On one hand, largeplayers may move towards integrated presence in the valuechain; at the same time many new entrants are expected toestablish niche presence in the market. Power tolling, directsupply to bulk customers, peak demand based capacities etccould emerge in a big way in the future.

Third: Next generation reforms creating neweropportunities

Several next generation reforms are on the anvil, which ifrealized will change the dynamics of the power sector.

� Reforms in the coal sectorCoal sector reforms will probably have the biggest impacton the power industry. The government is contemplatingopening up of the sector to private participation, beyond

captive blocks. By bringing in market forces, we wouldexpect significant improvements in coal blockproductivities. Setting up of an independent coal regulatorwill also drive efficiencies & transparency in this sector.

� Reforms impacting sales to bulk customersA key reform, on the horizon is effective implementation ofopen access to distribution networks across states. Thegenerators would accordingly have the opportunity totarget bulk consumers as part of the consumer mix, atmarket determined prices. This will significantly improvethe customer options for generators.

� Reforms on merchant power tradingSeveral new products are being introduced in the powerexchanges, which will strengthen its role as the overallmarket clearing mechanism. Recently, in addition to dayahead – spot, week ahead, day ahead contingencyproducts have been approved. Other longer tenureproducts would also be introduced in exchanges in nearfuture. The other initiative that can enhance theeffectiveness of the trading market could be to remove thecap of 4 paise per unit remuneration to the traders. Thiswould incentivize the ~40 number of registered traders toactively participate (currently less than 15 traders areactive) and provide greater options to the generators.Setting up of ‘settlement pools’ for accurate andtransparent reconciliations (energy and monetary)between participants of trading transactions will alsoenhance market efficiencies.

� Incentives and reforms for “clean energy” (nuclearand renewables)The recent Indo-US nuclear deal and ratification by theNuclear Suppliers Group (NSG) is opening up newopportunities for investments in this sector. Governmenthas set a target of achieving 20 GW generation capacityby 2020. This in turn, presents new opportunities acrossthe value chain (equipment supply, generation, EPC etc).Similarly, government is aggressively incentivizinginvestments in the renewables space through feed intarrifs, issue of renewable energy certificates etc. Thesealong with continuous technology advancements willprovide opportunities across solar, wind and bio-masssegments.

� Reforms of the state discomsDistribution continues to be one of the weakest links inthe power sector value chain in India. Unbundling of thestate utilities have improved efficiencies across manystates. However concerns continue on the high AT&Closses and poor financial health of several state discoms.


Given the increasing competitive intensity, it will be

imperative for the incumbents and the new entrants to

identify “levers of strengths” for themselves and base their

business model on the same.

The success of discom privatization in Delhi and otherstates have not been rolled out aggressively to otherregions, though there is an increasing realization for thesame. Discom privatization will usher in new opportunitiesin the sector and significantly improve last mileefficiencies.

Overall, the next generation of reforms would open up newopportunities for the sector in terms of better availability offuel, ability to reach directly to the bulk consumers andgreater role of merchant trading. The government needs toensure timely roll out of these reforms to provide impetus tothe sector.

Fourth: Constrained fuel supplies

Widening coal demand - supply gap: about one-fourth ofthe thermal plant capacities may face constraintsCoal based power plants will account for over 80% of newcapacities to be commissioned over the next five years.Accordingly, the share of thermal power plants (includinggas) is expected to increase from 63% currently to more than70% by 2014. This along with sustained growth in the cementand metal industry is expected to increase coal demand byover 75% by 2014 (Fig 1.8). The domestic coal production7

however is expected to grow slower, resulting in a wideningdeficit (as high as 250 MTPA) by 2014-15.

Increasing demand with relatively constrained productiongrowth has resulted in significant over-commitments byCoal India (CIL) subsidiaries (Fig 1.9). ECL, MCL and

SECL are over committed to the extent of 20%- 40% of their2010 production plans. To align the demand supplymismatch, CIL has been entering into substantially low‘supply commitment’ agreements. For all new FSA/LOAswith the private sector, CIL has been signing undertakingsto provide only upto 50% of annual contracted quantity(ACQ). Accordingly, securing fuel supplies will be a criticalsuccess factor for generators (especially coal based plants).

Secured access to fuel, a critical success factorAs the new capacities will compete for the limited availableresources, establishing secured access for fuel will be criticalfor the players. At government’s end, significant reforms arerequired in the coal sector to improve productivity andenhance coal access to players. The industry players need toidentify mechanisms to secure fuel, including captive coalblock and imported coal. Adoption of efficient technologiesand practicies that reduce specific consumption of theresources should also be encouraged.

Fifth: Strengthened role of Renewables in the sector

Renewables currently comprise only ~8% of total generationcapacity8 in India. Several significant efforts are howeverbeing undertaken by the government for promotingrenewable based energy, including:

� Fiscal incentives, tax holidays, depreciation allowance &remunerative returns for grid capacity

� Budgetary support for research, development anddemonstration of technologies


Figure 1.8

Domestic Coal Consumption in India –Projections (mt)

Demand – Supply Scenario for Coal(mt)

7 CIL, A.T. Kearney analysis8 Includes captive capacity

� Facilitating institutional financing� Creation of a comprehensive National Solar Mission

(NSM), which outlines demand as well as supply-sideincentives for the solar energy

In addition to government incentives, there have beensignificant improvement in the supply side technologies, thatfavourably impact the sector. The solar PV costs have beencoming down steadily and is expected to reduce by 20-25%over the next 3-4 years. Infact, solar power is expected toreach grid parity, in India, in terms of costs by 2020-25.9 Thewind power technology has stabilised and found wide-spreadapplications around the world. Additionally, India has anestimated potential of 16-20 GW of bio-mass power, which isan ideal fuel for distributed generation.

These changes are throwing up several opportunities acrossthe value chain:

� Demand/generation side opportunities: Development ofsolar farms as well as distributed solar power arebecoming attractive propositions. The Gujarat governmentrecently approved 34 solar power projects at an investmentof Rs.12,000 Cr to add 716 MW to the state electricity grid.Similarly, Wind energy players are exploring new windpotential sites including off-shore wind power projects toexpand the available technical potential.

� Supply side opportunities: On the supply side, there isa clear trend of shifting of global centers of manufacturinglocations, especially for solar PV, from Germany, Japan &USA to South Asia including India. India’s costs are

already comparable to other low cost destinations in Asiaand is further expected to be boosted by continuedstrong government support. Industry players canleverage these opportunities to establish world classmanufacturing centers in India

As a whole, renewables will become an important part of thetotal energy space in India. If all plans for renewables arerealised, this segment will account for 10-15% of the totalinstalled capacity over next decade. To realise the sectorpotential, it is imperative for the government to ensurespeedy and effective implementation of policies andincentives. Similarly, the industry players can also look atrenewables as either a potential fuel diversification or a“focused play” strategy.

Key enablers impacting the sector outlook While the power sector is poised for a rapid growth, there arefour critical enablers that need to fall in place to support thefuture of the industry.

1. Transmission network, improving steadilyEstablishment of a strong transmission capability is critical toachieving the ambitious growth in the power sector. Over thepast few years, this has gained momentum and the Nationalgrid is expected to significantly augment capacity. Thecapacity10 is expected to increase to ~50 GW, by 2015, fromthe current level of ~20 GW (Fig 1.10). New links are beingestablished to evacuate power from Eastern regions to deficitregions of West and North.

Multiple measures are also being undertaken to improvetransmission quality, including

� Increasing voltage profile of the network (765kv andHVDC lines)

� Installation of high quality energy meters and capacitors� Improve frequency management and outage prevention

These steps would strengthen the transmission network inIndia and enable the national grid to evacuate the additionalpower effectively. Timely achievement of these goals is criticalto support the growth in the power sector.

2. Distribution presents potential challengesWhile the transmission is witnessing steady improvements,concerns continue on the distribution front:

� Limited reach of distribution: Only 44%11 of rural


Figure 1.9

CIL subsidiary coal commitment vs.production (mt, 2010)

9 Source: A.T. Kearney analysis10 Source: PGCIL, A.T. Kearney analysis11 Source: Ministry of Power

households in India are connected to the grid, pan India.Similarly, various industrial and new urban pocketscontinue to rely on expensive local generation due toinadequacies in distribution network. The growth in keyelements of distribution network has barely kept pace withthe increase in generation, which needs to change in thefuture.

� Losses in distribution: India has high AT&C losses at~30% of supply. About 10%-12% of this loss isattributable to technical reasons while remaining 18%-20% is due to commercial reasons. Such losses will

continue to financially bleed the SEB segment and alsoresult in high the cost of power at the customer’s end12

Achieving improvements in the distribution end of the powervalue chain would be critical to the growth of the sector.

3. Generation Power equipment availability expected to increase The pace of generation capacity addition in India has pickedup, thus increasing the requirement of the power equipment.Responding to these needs, domestic capacity of generationequipment is expected to increase in the next few years.


Figure 1.10

Inter-regional Capacity Additions (2009-2015, GW)

Source: CEA, CRISIL, A.T. Kearney

12 Source: Ministry of Power (Segregation between technical and commercial losses inferred from 2006 statistics)

Currently, domestic capacity for BTG is 8-10 GW per annumwhich is primarily owned by BHEL. This capacity is expectedto increase to 30 GW by 2015 with expansion of BHEL’scapacity and entry of private players like L&T/MHI,Toshiba/JSW, Alstom and Bharat Forge.

Realization of these expansion plans and enhanced domesticcapability of catering to the super critical technology wouldbe important for the future of Indian power sector.

4. Financing constraints may ariseThe planned expansion projects in India, on a broad estimateentail a cumulative investment of ~ Rs 1100,000 cr13. in thenext 8-9 years. The debt component in turn will be around Rs770,000 - 850,000 cr. However, sectoral and group caps byfinancial institutes may be a potential constraint in securingthe required funds, at the overall sector level. Timely solutions

would need to be worked out for ensuring the availability offinancing for various projects. This would be critical forachieving the planned growth ambitions.

� � � �

ConclusionIn summary, the Indian power sector is at a stage thatprovides significant opportunities for growth and investment.However the environment is increasingly becomingchallenging. While the government will need to ensure timely and effective implementation of next generationreforms, the industry will need to re-orient their businessstrategies to align with changing market dynamics. The nextchapter highlights a few success factors for “winning in thefuture power markets” and lays out imperatives for all keystakeholders.


13 Based on A.T. Kearney analysis and Industry standards for capital expenditure; Source: Planning Commission, A.T. Kearney analysis


Based on the emerging trends, a comprehensive set of actionimperatives have been identified for the industry and thegovernment. It is important that individual players customisethe approach based on their respective business strategies.Similarly, the government needs to institutionalize amechanism for effective roll out & implementation of thedefined action steps.

A “five pronged” approach for the industryThere are five critical imperatives for the industry players to“win in the future” in the Indian power industry (Fig 2.1).

1. Strengthen project management & executioncapabilitiesAt a sector level, India has fared poorly in terms of project

deliveries. Over the last two 5 year plans, India has addedless than 60%14 of the total planned capacities in the sector.As of April 2009, about 64% of the ongoing projects weredelayed (Fig 2.2).

Power projects have been delayed due to number of issues.The four key factors that are causing delays for over 40% ofthe ongoing projects include EPC and BOP issues,regulatory (environmental and state government) issues,fuel issues (discussed in detail later in the report) andfinancial closure issues.

Inability to secure EPC and BOP, in a timely manner isamongst the most significant challenge resulting in delay ofnearly 25% of the projects. Historically, domestic EPC

13Winning in the Future Power Markets

Theme 2

Winning in the Future Power Markets

Figure 2.1

Imperatives for the Industry

14 Source: CEA, Analyst reports

companies were confronted with capacity constraints andcould not meet the sudden surge in demand from thegeneration sector. Recent capacity expansions by domesticsuppliers and increasing presence of international EPCcompanies is improving the situation.

Delays in environmental clearances and other approvals isalso a key area of concern. Power being on the concurrent listresults in coordination inefficiencies between the State andCentral authorities. Similarly, with the involvement of multipleministries at Central level (power, coal, environment), manyprojects confront delays in obtaining requisite approvals. It iscritical for the government to address this issue urgently(discussed later) and for the industry players to plan forcontingencies incorporating the above.

Financial constraints are expected to emerge as a significant challenge in future. India would need ~ Rs1100,000 cr.15 of investment in the next 8-9 years in the PowerSector. The high magnitude of investments may confrontissues in terms of sectoral and group caps of large fundinghouses. SBI for instance has a sectoral cap for funding inInfrastructure (including sectors like Power, Telecom) of Rs55,000 cr16.

Finally, the unprecedented scale & number of projects in thesector may cause execution issues due to limited experiencein India.

In the above context, there are clear action items for theindustry:

i. Develop a comprehensive project plan addressingmajor potential hurdles: Adequate diligence should beundertaken for selection of the project site, EPC (Indian vsforeign), financing sources, technology, quality controland execution timelines. Planning for project andoperational logistics should be done right upfront to avoidimplemantation delays. Initiate regulatory approval stepsearly in the process and assign responsibilities internally.

ii. Establish a strong project management center forcoordination and monitoring: Establish an empoweredteam of technical and business executives for projectmanagement. Develop a detailed activity schedule andmonitor the same centrally. Identify potential risk factorsearly in the cycle and adopt suitable risk mitigationstrategies.

iii. Develop robust business processes & controlmechanism: Detail out the processes & systems forproject management & execution. Define clear approval& authorization mechanisms for capital investments &plan change. Clearly define delegation of authority &internal decision making to expedite decision making.

iv. Define a right operating model for projects: Assess


Figure 2.2

Power Plant Capacity Development Status (April – 2009, MW)

15 Based on A.T. Kearney analysis and Industry standards for capital expenditure; Source: Planning Commission, A.T. Kearney analysis16 Source: Company website

and define the right mix between in-house vsoutsourced activities (for project execution early.Structure the roles & responsibilities between thecompany and service providers clearly with defined co-ordination mechansims.

2. Secure fuel suppliesDifferent fuels are experiencing varying levels of growth andrelated issues. While coal presents a cost-competitive fueloption, concerns exist about reliable supplies. Gas andnuclear fuel availability on the other hand is expected toimprove in the future. The industry therefore needs to definea well thought out strategy for its fuel portfolio.

Coal – significant challenges exist: As per the currenttrajectory, there may be a shortfall of ~25% in terms ofdomestic coal availability over the next 5-6 years. Captive coalmines have also not ramped up production as desired, onaccount of various issues including delays in approvals &limited initiatives from many mine owners to expedite theproduction.

Coal logistics is also a critical challenge confronting theindustry. Issues exist across two dimensions:

a. First Mile issues: Unavailability of rapid loading systems,few railway sidings and transport contractor/ union issuesare amongst the factors that limit the quantum of coal thatcan be produced and evacuated.

b. Transportation issues: Low availability of rakes, highturnaround time (5-7 days), limited share of mechanizeddischarge wagons, low wagon payload etc present longdistance transportation issues

Gas – improving availability: Significant increase indomestic production is expected through new gas finds,development of CBM fields & expansion of LNG capacities.As per A.T. Kearney estimates, the gas availability in India -both from domestic sources and LNG, will increase to 70-80bcm by 2015, up from 37 bcm in 2008 (CAGR of 10-11%).Over 11,000 km of new transmission infrastructure is alsoexpected to be commissioned by 2015 to enable pan Indiasupply. This would facilitate increased gas availability forpower generation.

Nuclear – fuel constraint presents a big challenge:Government has set a target of achieving 20 GW generationcapacity by 2020 (up from ~4 GW currently), buoyed by the

recent Indo-US deal. The targeted generation will require ~2000-2500 tpa17 of uranium (to sustain the first phase ofnuclear growth from PHWRs). India has estimated reserves of~64,00018 tons, the commercial & technical mining, howeverviability of the same needs to be assessedcomprehensively.The current mining capacity in India is only ~300 tpa19 ofuranium. Increase in uranium requirement by nearly sevenfolds would urgently need enhancement in mining capabilitiesin India coupled with seamless sourcing from internationalmarkets.

The industry can take a few steps in response to theemerging fuel scenario:

i. Develop a comprehensive fuel portfolio strategy:Clearly evaluate and select fuel type for generation basedon availability, costs & reliability. Gas may present a viableopportunity near transmission pipelines. Nuclear isemerging as an interesting opportunity as well (clearpolicy needs to be defined by the government) A multi-plant generator can look at fuel diversification as a meansto controlling risks. Renewables may also present a goodopportunity for diversification beyond conventional fuel.

ii. Invest in infrastructure development for logistics/transportation: As part of project design, fuel logisticsshould be given special consideration. For coal, end to endhandling including first mile evacuation, rail/road basedmovement to plant site and in-plant movement should bedesigned efficiently. The port infrastructure also needs tobe expanded. Similarly for gas, adequate transmission andlast mile connectivity needs to be put in place and secured.

iii. Specifically for coal, clearly define the sourcing plan:

� Source domestic coal wherever possible, which willbe the main and cheapest source of fuel for coalpower plants

� Enhance access to imported coal, especially for portbased/near port plants – define procurement planthrough long term contracts or own mines globally

� Aggressively source & develop captive coal blocks asavailable

� Invest in technologies that reduces fuel requirement

3. Realign market/customer strategy Future power markets would be much more dynamic than theexisting ones in terms of customer options. The tradingmarket will evolve with strengthened role of power exchanges


17 Based on current industry benchmarks18 Source: Department of Atomic Energy, GoI19 Source: Uranium.info

for short term transactions (Fig 2.3). Open access would beoperating at different contract tenures (3 years, 15 years, 25years, etc.). Sales to bulk customers will be made easierthrough reforms in local grid policies. As a result, the optionsfor buying & selling power would increase both from the typeof customers and nature of sales contract.

There are a few other emerging trends that will influence thesales strategies of generators:

� Case I/ II bidding emerging as dominant form of longterm transactionCase I and II bidding is becoming the dominant route forsecuring long term PPAs with SEBs for the privateplayers. A bid based strategy will result in highcompetitive scenario and potential pricing pressures.

� Trading market expected to increase multifoldTrading market or transactions through traders andexchanges is expected to increase by 3-4 times in the next5-6 years. New products (including structured derivatives)are expected to be introduced in the exchange, which willincrease the potential options for generators.

� Average merchant power prices expected to decline The short term prices are expected to peak over the next 1-2 years (Fig 2.4) and then decline steadily (in response tothe market supply situation). The generators accordinglyneed to evaluate the profitability of their plans focused onmerchant power, and also define sales portfolio thatbalances long term sales and short term trading.

In light of these market trends, generators would need todevelop suitable sales strategies

i. Balance the portfolio between long term and shortterm allocations (depending on the size andcommissioning timelines): Long term PPAs will continueto be the dominant sales option for generators, withsecured market but controlled returns. Merchant powerprovide upsides but present high variabilities

ii. Define a customer mix plan: Evaluate various customeroptions viz. SEBs, traders and bulk buyers (based onquantum of purchase, financial stability, cost of deliveryetc) and define a plan accordingly.

iii. Explore alternative market facing models: Evaluateopportunities for alternative models like peaking powercapacity, power tolling, distributed generation & suppliesas part of the overall strategy


Figure 2.3

Trading Market Projections(BU)

Figure 2.4

Merchant Power Prices have increasedin recent past due to increasing deficit(Rs/Unit)

Merchant Power Prices May Moderateas Supply Increases (Rs/unit)

4. Develop Operational ExcellenceManaging operations efficiently will be critical for all players todevelop a sustained competitive advantage in the futuremarkets.

There are several aspects that need to be considered &incorporated by the generators as part of operationsefficiency:

1. Select the right technology: Choice of technology andfuel mix is critical for achieving higher efficiencies. Newplayers are increasingly designing their plants based onsuper-critical technology (Fig 2.5). This also helps inconstructing large scale plants more efficiently (requirescomparatively lesser units, than sub-critical technology).At the same time, super-critical technology is still evolvingin the country and the EPC & skilled manpoweravailability is limited. It is therefore imperative to weigh thepros & cons of the same, before selecting the technologyfor generation. The plant design should also incorporatecost efficiencies in terms of auxiliary energy, logistics flowand other associated costs.

2. Maximise asset availability through maintenance bestpractices: Efficient O&M practices need to beinstitutionalized including condition-based monitoring ofequipments and robust maintenance practices. Traditionalmaintenance practices need to be bolstered by reliabilityimprovement initiatives.

3. Minimize “total cost of delivery” to customers: In

addition to low cost production, the transmission costsshould also be minimized. In the current scenario, agenerator selling power to a SEB located in a differentregion (through a national grid) will need to incorporate35-40 paisa per unit for transmission costs20. PGCIL issignificantly strengthening the national grid which willprovide better access to generators and also potentiallyreduce the inherent losses in the system. The generators,at the same time, should also evaluate the option of usingpublic grid vs. creating a dedicated grid network from theperspective of total transmission costs.

5. Establish robust organizational enablers Access to and retention of right skill set will be one of themost critical success factor for the future. A broad brushestimate suggests that over 150,00021 additional skilled andsemi-skilled personnel would be required by the sector overthe next 5-7 years. The new entrants in the sector would alsoneed to plan for effective transition from projects organisationto operations organization as the plants come on-stream. Keyenablers are therefore essential to support the future growth.

i. Develop a flexible organization structure whichmaintains the balance between technical specialists,management expertise and execution. Clearly define levelof centralized vs decentralized decision making.

ii. Establish strong HR processes to attract and retainemployees, manage their career development andensure job satisfaction.

iii. Design and roll out effective training program, whichprovides the new recruits with the skills required at eachlevel. Multi-skill training may also be necessary tomanage requirements across functional areas.

iv. Develop a strong performance management systems,with well defined KPIs, clear linkages between rewardsand performance.

v. Define an efficient Knowledge Managementmechanism, which captures learnings’ and disseminatesthem across the organization & project sites.

A “Six by Six” agenda for the governmentTo facilitate sustained growth of the industry and enhance itscompetitiveness, we have drawn out a prioritized agenda forthe government across six dimensions, each with 6 actionsteps (Fig 2.6).


Figure 2.5

Coal based power plants by technologyand player (2009-14, MW)

20 Source: Ministry of Power, PGCIL21 Estimates based on expected capacity addition and industry norms

1. Address fuel supplies issues (coal & gas)Most of the action items for the government are in the area ofcoal availability. A few interventions are required for improvedgas availability as well

i. Deregulate the coal sector, allow private investmentsand move to market determined pricing: Coal sectorshould be opened up to investments from other publicand private sector entities (including MNCs) to improvesupply. The de-regulation can be undertaken in a phasedmanner with learning drawn from the Oil & Gas E&Pindustry.

ii. Promote Public Private Partnership (PPP) with CoalIndia: For coal blocks outside CIL’s immediatedevelopment program, encourage PPP model withcustomers.

iii. Set up an independent industry regulator for coal: An independent regulator, in lines of Telecom and Power sectors, is necessary to oversee coal block

allocations and monitor its development. The regulator canoversee reform implementation as they are undertaken inthe sector.

iv. Adopt a stringent stance on development of allottedcaptive coal blocks: Punitive measures, includingwithdrawal of blocks, should be adopted if a time basedproduction schedule is not followed (for reasons directlyattributable to the developer).

v. Ensure priority access to gas for power sector(especially for peaking power): Provide higher priorityto the power sector for gas allocation. Encourage use ofgas for power generation in geographical areas withaccess to gas transmission pipelines.

vi. Strengthen logistics for coal movement &transmission infrastructure for gas: a. For coal movement, first mile connectivity should be

strengthened through involvement of stateauthorities. Indian Railways should be mandated to


Figure 2.6

‘Six by Six’ Action Program

improve rail sidings, take on-board high payloadcoal wagons and de-congest major coal corridors (inOrissa, Chhattisgarh, Jharkhand, West Bengal andMadhya Pradesh). Ports authorities should berequired to drive strengthening of imported coalhandling facilities at ports.

b. Similarly for gas, the transmission pipelinerequirements should be adequately met to ensuregas availability across the country

2. Enhance downstream efficiencies (transmission &distribution)Interventions are required on both transmission anddistribution end by the government.

Transmissioni. Streamline private participation in transmission grid:

Enhance transparency in project award throughcompetitive tariff based bidding process. Streamline approval process for exclusive transmission lines of generators and support in obtaining“right of way”

ii. Aggressively extend national grid reach and improvequality: Establish/strengthen grid connectivity to remotelocations eg. North East (Hydro); interiors of westernregion (Solar and wind). Continue strengthening gridquality through higher voltage network

iii. Extend flexibilities in BPTA tenures, supported bysimilar reforms in PPA: Provide easy access to flexible“single/multi-year” BPTA contracts to fuel marketinnovation at generator’s end. Support the same withsimilar reforms in PPA tenure

Distributioniv. Define a time-bound discom reform plan: Set out the

plan for privatization or franchising of all poorlyperforming discoms, in a time-bound manner.

v. Accelerate implementation of open access todistribution networks across states: Provide seamlessaccess to bulk & gradually non bulk customers directlyfrom generators

vi. Reform power subsidy mechanism for the agriculturesector: Provide for subsidies to the sector under state budgets rather than loading costs to the discoms. Aggressively support agricultural feeder separation across states through centralinterventions.

3. Aggressively promote clean source of energy (nuclear and renewables)

Renewablesi. Define high intensity renewable “zones” and establish

all enablers therein. Work along with state governmentsto define priority zones for renewables. Ensure landavailability and establish grid connectivity from the same

ii. Ensure effective implementation of the National SolarMission, including clear policy on Feed-In Tarriffs.Incentivise renewables to match expensive peak loadrequirements/unmet demand, so that it complementsthe significant investments in base load that are alreadybeing undertaken through conventional energy

iii. Encourage distributed generation for rural areas (tobenefit solar & bio-mass applications) through specialincentives and fast track clearance. Promote adoption ofrenewable energy by mandating use of rooftop PV ongovernment buildings, and applications to replace Diesel/Kerosene where solar power is cost competitive.

Nuclear energyiv. Develop a comprehensive nuclear fuel plan: Detail a

plan for enhancing Uranium and Thorium mining(exploration, development & production) capacities by 4-5 times. Gradually open the sector up for other players(including PSUs like NMDC and private players). Secureuranium mines in the international markets.

v. Establish a detailed fuel policy to clarify modes andprocedures for fuel fabrication, spent fuel treatmentand waste management by private players.

vi. Provide special incentives (including tax & other fiscalbenefits) to encourage participation across the Nuclearvalue chain i.e.. components, construction andgeneration. Introduce a special status for nuclear energyfor ensuring easy availability of funds.

4. Facilitate efficient market side developmenti. Accelerate the evolution of power exchanges: Provide

independence to exchanges to introduce innovative“power products” (time based, tenure based, futures &options) for generators, customers & traders.

ii. Deregulate the trading segment to enhance marketefficiencies: Gradually increase/remove the tradingmargins for power traders. Introduce reforms in PPA toprovide flexibility to traders for “aggregation &distribution” (flexibilities to supply power from multiple


sources based on market efficiencies)

iii. Smoothen peak demand curve through introduction ofmulti-year “time of day” tariff, where possible and DSMinitiatives

iv. Aggressively promote peaking power supply: Providespecial support & incentives to hydro projects (launchUMPP like models), renewables and ensure priority gassupply to peaking thermal capacity

v. Introduce flexibilities in PPA tenure: Coordinate withERCs and state governments to introduce shorter / multi-period tenures for PPAs

vi. Promote real time market mechanisms, through time ofday metering and pricing.

5. Streamline execution and monitoring mechanisms

i. Define a comprehensive “next generation” reformagenda, with well defined implementation timelines

ii. Establish an “execution group” for aggressivelyfollowing up on policy implementations: Create anempowered group to oversee policy implementation, co-ordinate with different stakeholders, facilitateinterventions in case of delays and monitor/report progress

iii. Create a “single window” co-ordination & clearancebody: Such a body is necessary to co-ordinate activitiesamong various government entities including Ministry ofCoal, Railways, Ministry of Environment & Forest, Stategovernment agencies etc.

iv. Define clear time-lines for various approvals acrossministries & agencies and monitor adherence to the same

v. Streamline new power project execution throughaccelerated adoption of Case I bids/UMPPs/centralprojects, incorporating all site related approvals andfacilities (land, water, logistics, fuel, regulatoryclearances)

vi. Develop broad based performance metrics andparameters for various agencies, monitor performanceagainst the same and address issues therein if any.

6. Streamline industry enablers (equipment, financing &manpower)

Equipment supplyi. Encourage new capacities for emerging technologies

in the generation space: Provide support to equipmentmanufacturers for setting capacities in areas of super-critical technology, larger sized nuclear reactors etc

ii. Promote investments in renewable components &supplies through special incentives: Develop a plan(entailing fiscal & non fiscal benefits like land allocation,tax breaks, R&D breaks etc) for making India as the hubof component/ equipment supply for renewables (solar& wind)

Financingiii. Address the issues confronting sectoral caps of

financial institutions: Work along with RBI to revisitsectoral cap limits/redefine clubbing with otherinfrastructure projects.

iv. Explore opportunities for loan re-financing by multi-lateral agencies/foreign institutions

v. Provide special focus for financing hydro and nuclearprojects through priority lending: These segments havelong gestation periods and require special long term loanfacility

Manpowervi. Strengthen Industrial technical institutes: Promote new

institutes especially in high intensity investment regions,enhance the quality of training through certificationstandards and increase exposure to the industry

� � � �

ConclusionIt is critical that all stakeholders put in a concerted effort toenable sustained growth of the power sector. If successful,the power sector can enable rapid economic growth of thecountry and improve the well being of more than a billionpeople.


SECTOR OUTLOOK

PART B

THERMAL POWER: COAL BASED

THERMAL POWER: GAS BASED

HYDRO ENERGY

NUCLEAR ENERGY

RENEWABLE ENERGY


THERMAL POWER: COAL BASED


Coal is the most widely used fuel in the Indian power sector.Nearly 52% of the installed generation capacity currently coalbased. The share of coal as part of the overall sector fuel mixis only expected to increase over the next two plan periods.The high relevance of coal for the power sector is alsoreflected by the fact, that nearly 3/4th of the coal consumptionin India is accounted by the power sector. Coal supply hasnot been able to keep pace with the demand resulting in highdeficits, a situation expected to worsen in the future. This isdespite significant domestic coal reserves to meet over 200years of consumption at the current rate.

Such a situation calls for urgent interventions by theGovernment and the Industry to address the constraints.Accordingly, a six point agenda has been defined for thegovernment for immediate action.

Coal Demand-Supply Scenario

Supply gap reaching alarming levelsCoal demand in India has grown at a CAGR of ~ 6.1%,during the last 7-8 years (Fig 3.1). Power sector is thedominant consuming sector, accounting for over 75% of thecoal consumption. Steel and cement are the other majorconsuming industries.

Cement sector’s coal demand has grown the fastest, owing tothe strong emphasis being laid on infrastructuredevelopment. Demand from steel sector is relatively lowerdue to increasing share of high grade imported coal.

India is the third largest producer of coal in the world, withabout 90% of the domestic production being controlled by public sector units (CIL, SCCL and NLC)22. However, at5.7% CAGR production growth, domestic supply has not been able to keep pace with the growing demand, leading to a demand-supply gap of about 50 million tons in 2008 (~9%) (Fig 3.2). The allocated captive

Coal – Dominant Fuel for Power Plants

25Coal – Dominant Fuel for Power Plants

Figure 3.1

Coal demand in India – Historical(mt)

Figure 3.2

Domestic coal production in India –Historical (mt)

22 Balance coming through captive coal blocks and other sources

coal blocks have also not ramped up as fast and efficiently asrequired.

Going forward, coal demand is expected to increase to 993mt by 2014 (at a CAGR of 11.9%) driven by large scale coalbased power capacities, and strong impetus from the cementand metal expansion plans (Fig 3.3). As per CIL’s plans,domestic coal production is expected to grow only at 7.3%CAGR. This in turn will significantly widen the demand supplygap – It is expected that by 2014, India will face a deficit ofover 250 million tonnes of coal (25%), as per the currenttrajectory.

Major on – the – grounds challenges exist that need to beaddressedThere is a short supply of coal in India, despite large provencoal reserves, enough for ~200 years at current productionlevels (Fig 3.4).

There are three main issues constraining the productiongrowth:1. Rehabilitation and resettlement (R&R) issues: India

does not have unified R&R policy with each stategovernment, CIL, Railways and central ministry havingseparate R&R23 guidelines. Multiplicity of policies and


Figure 3.3

Domestic Coal Consumption in India –Projections (mt)

Demand – Supply Scenario for Coal(mt)

Figure 3.4

Domestic Coal Proven Reserves (BT, 2005)

23 Source: State Government Policy Documents, Coal Ministry

disputes relating to them lead to long delays in landacquisition and initiation of mining activity. Employmenthas to be guaranteed to all displaced people whichdelays resolution of R&R issues.

2. Productivity issues: Limited adoption of new miningtechniques has resulted in manpower intense operationsin India. This in turn restricts the coal mine productivity.Compared to an average productivity of 57 (Australia) and45 (USA) MT of output per man shift, the output per manshift in India is only 4 MT (Fig 3.5). Similarly theproduction per employee in India is almost one-tenthcompared to leading coal producers in the world. Someof the coal mines in Indonesia and South Africa produceover 20-30 mtpa, while the maximum production inIndia is still in 10-15 mtpa range.

3. Logistics issues: Coal evacuation and transportationis also a major factor constraining production.

First Mile issues: Unavailability of rapid loading systems, fewrailway sidings and transport contractor/ union issues oftenlimits the quantum of coal that can be produced andevacuated. Recently MCL, one of the fastest growingsubsidiaries, has an inventory of over 10 million tons of coal,even while there was a significant unmet demand in themarket, due to evacuation issues.

a. Transportation: Coal being a bulk commodity is largelytransported by railways which suffers from variousbottlenecks like – low availability of rakes, highturnaround time (5-7 days), low share of mechanizeddischarge wagons, low wagon payload etc. All theseresult in significant evacuation issues from the mines.

Getting coal linkages not adequate; captive mines notyielding resultsIncreasing demand with relatively constrained productiongrowth has resulted in significant over-commitments by CILsubsidiaries (Fig 3.6). ECL, MCL and SECL are overcommitted to the extent of 20%- 50% of their 2010 productionplans.

To align the demand supply mismatch, CIL has beenentering into substantially low ‘supply commitment’agreements. For all new FSA’s / LOA’s with private sectoroperators, CIL has been signing undertakings to provideonly upto 50% of annual contracted quantity (ACQ). Withwidening of the demand- supply gap, there is a risk of furtherreduction in committed supply as more FSAs are issued forthe planned projects. Accordingly, power projects with


Figure 3.5

Output per man shift (MT) Production per employee per year (MT)

Figure 3.6

CIL subsidiary coal commitment vs.production (mt, 2010)

linkage supply need to plan for alternatives (like captivesand imports) to secure fuel.

Similarly, the captive coal mines have not ramped upproduction as desired, on account of various issues:

� Delays in mining plan approvals, land acquisition,environmental clearance and R&R issues

� Shared distribution of coal mines to multiple parties (inseveral cases), resulting in delayed execution

� Limited “penal action” against players not adhering todevelopment timelines

Accordingly, only 12%24 of allotted captive mines have beenoperationalised till Mar, 2009.

The emerging coal scenario presents a significant risk to thegrowth of Power sector. Accordingly, there are specific stepsthat need to be undertaken by the government and theindustry to address the issue.

Imperatives for the stakeholders

Reform agenda for the governmentSeveral steps have been undertaken by the government toimprove the supply situation. These include:

� Allotment of ~40 billion tons of coal reserves forcaptive mining. There are steps to introducecompetitive bidding/auction based allocation of coalmines in the future. This will lead to a much moretransparent and market determined distribution of coal.

� Improved availability in the open market through e-auction (~10% of total production). E-auction wouldhelp reduce black marketing/illegal trading of coal andalso enable the government to accrue revenues as permarket prices.

� Acquisition of coal mines abroad (currently underway)by CIL who will channelize the same to customers

However, there is an immediate need for stepping up reforminitiatives in this sector. We suggest a Reform agenda for thegovernment:

1. Deregulate the sector, allow private investments andmove to market determined pricing: Coal sector shouldbe opened up to investments from other public and privatesector entities (including MNCs) to improve supply. The de-

regulation can be undertaken in a phased manner withlearning drawn from the Oil & Gas E&P industry.

2. Promote Public Private Partnership (PPP) with CIL:For coal blocks outside CIL’s immediate developmentprogram, encourage PPP model with customers.

3. Create a “single window” co-ordination and executionbody: Such a body is necessary to co-ordinate activitiesamong various government entities including Ministry ofCoal, Railways, Ministry of Environment & Forest, Stategovernment agencies etc. A time-bound process shouldbe defined for clearances & approvals.

4. Set up an independent industry regulator: Anindependent regulator, in lines of telecom & Power sector,is necessary to oversee coal block allocations and monitorits development. The regulator can oversee reformimplementation as they are undertaken in the sector.

5. Adopt a stringent stance on development of previouslyallotted captive coal blocks: Punitive measures, includingwithdrawal of blocks, should be adopted if a time basedproduction schedule is not followed (for reasons directlyattributable to the developer)

6. Develop a comprehensive logistics improvement planfor coal movement: First mile connectivity should bestrengthened through urgent involvement of stateauthorities. Indian Railways should be mandated toimprove rail sidings, take on-board high payload coalwagons and de-congest major coal corridors (in Orissa,Chhattisgarh, Jharkhand, West Bengal and MadhyaPradesh). Ports authorities should be required to drivestrengthening of imported coal handling facilities at ports.

Multi-pronged strategy required by the industry tosecure fuelIn addition to reform measures from the government, theindustry also needs to undertake various initiatives to securefuel for future growth. A multi-pronged approach will need to be adopted by the sector in the emerging demand supply scenario.

1. Plan new projects taking into consideration coalavailability and its logistics: As part of feasibilityassessment, access to coal and logistics should beconsidered as a high priority. New projects should seek toreduce the risks associated with fuel availability earlier inthe project life cycle and not leave them to be resolved


24 Source: Ministry of Coal

mid-way during project execution.

2. Source domestic coal wherever possible: Domesticcoal will continue to be the main & cheapest source offuel for the power plants. As new reform measures areundertaken in the sector, the domestic production shouldincrease and ease up the pressure on the supply side.

3. Enhance access to imported coal, especially for portbased/near port plants: Players can increasedependence on imported coal especially in the short tomedium term. Various options exist for procuringimported coal in India – spot trading, long term contracts,acquisition of mines etc. Acquisition of coal minesoutside India has gained prominence in the last 2-3years.

4. Aggressively source and develop captive coal blocks:Captive coal block development, through aggressiveliaisoning with government agencies should be a priorityactivity for generators.

5. Plan for efficient coal logistics: As part of projectdesign, coal logistics should be given specialconsideration. End to end handling including first mileevacuation, rail/road based movement to plant site andin-plant movement should be designed efficiently toensure reliable & low cost logistics.

Other sources like e-auctions and washeries will be used tomeet short-term shortfall in coal requirements

ConclusionSignificant coal based capacity addition envisaged in the XIthand XIIth plans would make domestic coal availability acritical success factor for generators. Government support isrequired to expedite the policy reforms in the coal sector andease the supply pressure. The industry also needs to adopt amulti-pronged approach to secure fuel for future growth.Inability of India Inc to address the coal availability issue canbe a major deterrent to power industry growth.



THERMAL POWER: GAS BASED


Natural Gas sector in India is undergoing significant gamechanging developments. Significant volumes of gas from newfields have recently come on-stream and lot of activity isunderway in the E&P side. While these are leading to newopportunities for the power sector, there are also a new set ofchallenges that need to be addressed to tap the demandpotential in the country.

Indian gas market – rapid changes underwayPrior to the 1980’s, associated gas produced at Mumbai Highwas largely flared. Development of transmission pipelineinfrastructure, esp. the HBJ line in mid-1980’s, fuelled growthand reach of gas consumption from near the source to otherdemand centers (Fig 4.1).

There are five dimensions that are shaping up the futureof gas industry in India:

1. Improved availability through new gas supply sources:Significant increase in domestic production is expectedthrough new gas finds in KG Basin, development of CBM

fields & expansion of LNG capacities. RIL is expected to startproducing ~80 mmscmd by the end of this year. With otherNELP finds commencing production and more LNG re-gascapacity, gas availability in India is expected to improvesubstantially going forward. As per A.T. Kearney estimates,the gas availability in India will increase to 70-80 bcm by2015, up from 37 bcm in 2008 (CAGR of 10-11%).

2. Changing demand landscape: India’s gas demand isprojected to grow at more than 7% CAGR over the next10-15 years. Power sector currently contributes to ~36%of the overall gas demand and is expected to be a key contributor to this demand growth in short to medium term. With commissioning of the delayed gas-based projects, conversions from alternate fuels such as Naphtha and Fuel Oil, and addition of new capacities would increase the gas offtake from thepower generation sector. Developments in the Powersector, allowing for increased trading will also drivedemand for Gas as the preferred fuel for merchant-basedcapacities (Fig 4.2).

Natural Gas – Emerging fuel for the future

33Natural Gas – Emerging fuel for the future

Figure 4.1

Evolution of Natural Gas Market in India

3. Expanding pipelines/LNG terminals: To enable supplyof gas to demand centers spread across the country, over11,000 km of new transmission infrastructure is expectedto be commissioned by 2015. The pipeline infrastructurehas been proposed to be developed as ‘Natural GasHighway’ inline with NHAI and international gas highway.New pipelines required under the Natural Gas Highwaysmay be of the order of 6000 Kms, requiring ~Rs. 30,000crore as capex in addition to Rs.50,000 crore alreadycommitted by GAIL/RIL under the authorized projects(Fig 4.3).

Over and above these, capacities of LNG terminals arebeing expanded and new contracts for LNG imports arebeing signed. PLL Dahej terminal recently doubled itscapacity to 10 mtpa while new contract for 1.5 mtpa hasbeen signed for Kochi terminal, due to be commissioned


Figure 4.2

Gas consumption – Expected Share ofPower Sector (bcm)1

Figure 4.3

Proposed Gas Transmission Infrastructure in India

in end of 2011. These initiatives are expected tosubstantially improve gas availability near consumptionpoints, thus positively impacting the availability of gas forthe power generation sector.

4. Favorable regulatory changes: Regulatory reforms havecontinued to drive and support market development.Significant regulatory changes have been witnessedacross three key dimensions:

– Encourage Investments – Allowed 100% FDI in E&P,Transmission and LNG

– Streamline Authorizations – Establishment ofindependent regulator for guiding operations andtariff setting

– Increase Competition – Instituted competitivebidding for E&P blocks through NELP and CBM.

Shift away from administered pricing towards market-driven – Going forward, market mechanisms rather thangovernment policies are expected to determine theoptimal/affordable gas price. Diversifying fuel sources,specifically replacement of low-priced APM bycompetitively priced NELP supply and increase in crude-oil prices are expected to drive the increase in theaverage price of gas.

Overall, by 2015, the Indian gas market is expected to be70-80 bcm and $15-20 bn revenue industry (Fig 4.4). Thesector presents unique opportunities not only for incumbentsbut also opens up the multiple opportunities, across the gasvalue chain, for new entrants to carve out a space for

themselves. Transmission sector itself is expected to seeinvestments of $ 15-20 bn in the next 5-8 years (Fig 4.5).

Imperatives for the stakeholders

Imperatives for the GovernmentWith large investment plans announced by private players, itis critical that government continues its efforts for marketdevelopment in the sector. There is immediate focusrequired across three key areas:

1. Expansion of infrastructure: Government needs toensure fulfillment of infrastructure requirements bycontinued focus on expansion of gas-transmissionpipelines. This is essential to support marketdevelopment and enable the players to gain effectiveaccess to the gas market in India

2. Facilitating funding requirements: Regulatory policiesand incentives are needed to ensure ease of investmentand actualization of announced plans across the valuechain – from E&P to distribution to utilization

3. Ensure access to gas for gas-deprived sectors atreasonable price-points: Specifically, in the powersector, generators have had limited access to gas. As isevident in the recent gas utilization policy, it is imperativethat further regulations ensure access to gas acrossdifferent sectors.

Imperatives for the Industry As per the current scenario, a large part of the marketdemand needs to be developed. Players in the sectorneed to take a comprehensive view of the industry and

35Natural Gas – Emerging fuel for the future

Figure 4.4

Gas Demand-Supply Projection – India (bcm)

take steps to effectively support the government formarket developments.

1. Invest in infrastructure development and marketeducation: As discussed earlier, gas supply is expectedto increase significantly in the near future. Hence, it iscritical to identify key gap areas such as infrastructuredevelopment and market education to ensure the gasproduced is supplied to the consumption point and isutilized to the benefit of the consumer

2. Invest in gas based power generation: On the otherend of the value chain, players can leverage the improved

gas supply to diversify fuel mix and establish gas-basedcapacities

ConclusionWith a large expected increase in supply, gas-sector in Indiais at an inflexion point. Government support is required tocontinue reforms towards market development to ensureeffective growth in the sector. Players need to take proactiveinterest in the development of the market by ensuringinvestments across the value chain, specifically for theinfrastructure and gas-utilization requirements. All thesechanges present opportunities for the Indian Power Sector toincreasingly leverage gas as a fuel for power generation.


Figure 4.5

Risk Tariff Trade-Off for Gas Based Plants

HYDRO ENERGY


Hydroelectric power currently accounts for about one-fourthof the total power generation capacity in the country. With70% of the exploitable potential yet to be leveraged, there isa huge potential for hydro power in India. This sector howeverconfronts various socio-environmental issues including landacquisition, R&R and environmental clearances, which haveconstrained sector development. The recent initiatives of thegovernment like ‘50,000 MW Hydro Initiative’ and policyreforms (Hydro Power Policy, 2008) are expected to opennew opportunities in this segment.

Significant potential but limited realisationsIndia is endowed with significant hydroelectric potential and ranks 4th25 in the world in terms of economicallyexploitable hydroelectric potential. As per CEA, the country has hydroelectric power potential of about 148 GW. However, only ~25% of the potential (36 GW in total) has been developed and only about 10 -15 GW is under construction. Overall,

about 70% of the exploitable power potential is yet to bedeveloped.

From a regional perspective, over 95% of the total potentialin the North Eastern region is still untapped, primarily inparts of the Brahmaputra river basin. The scenario is in starkcontrast to the southern and the western region where morethan 50% of the potential has been harnessed.

Due to the limited progress in this sector over the last fewdecades, its share in country’s total installed grid capacityhas redueced from about 40% in 1980 to about 25% in 2009. Aggressive targets for the future, but challenges remain.

In order to accelerate the hydro power generation capacity,the Government launched ‘50,000 MW Hydro Initiative’,targeting assessment of 50 GW of the 148 GW hydropower potential. About 34 GW of capacity has been furthershortlisted for detailed survey and execution. As of June

Hydro Energy: Large Untapped Potential

39Hydro Power: Large Untapped Potential

Figure 5.1

Development of Hydroelectric PowerPotential (GW, 2009)

Figure 5.2

Hydroelectric Power Potential in India(GW, River / Basin)

25 CEA report on Hydro Power Development 2006

2009, detailed project reports (DPRs) have been preparedfor about 8 GW of the capacity and DPRs is in progressfor another 15 GW of capacity (Fig 5.1 and Fig 5.2). Thesteady progress on the ‘50,000 MW Hydro Initiative’provides a significant opportunity for industry players toparticipate in this untapped segment. Over the next decade,India can target to exploit its hydro potential to the levelsof atleast 40-50% like many developed nations.

Additionally, India has an exploitable potential of ~15 GW ofsmall and mini-hydro power projects which is emergingas a significant opportunity for rural electrification.

However, there are several socio-environmental issueswhich may constrain development of this segment:

1. Resettlement and Rehabilitation (R&R) Issues: Landacquisition and the problems of R&R is the single largestproblem faced by most of the large hydro power projects.It has not only resulted in project delays but alsosignificant cost escalations.

2. Regulatory delays: Involvement of several regulatoryagencies (Ministry of Environment & Forest, Ministry ofPower, Ministry of Water, Pollution control board, Stateagencies etc.) has typically resulted in approval delays.

3. Environmental Issues: Even-though hydroelectric poweris a non-polluting energy source, it is usually associatedwith harmful impact on the ecosystem. The large waterreservoirs or dams associated with the hydro powerproject lead to submergence of huge forest land and can

cause adverse down-stream effects on the rivers.

4. Financing Issues: The duration of most long term loansis 10-15 years which is quite short compared to the lifeof a hydro power project (over 50 years). Most banks arenot able to lend for a longer term due to the asset-liability mismatch.

5. State/Region specific issues: Other issues like lack ofadequate transmission infrastructure to evacuate powerfrom North-eastern region, inter-state water disputes onsharing the project costs & benefits, differing allotmentcriteria by states for award of hydro projects, are addingto the overall project delays (Fig 5.3 and Fig 5.4).

Imperatives for the Stakeholders

Aggressive execution of policies by the governmentThe recent steps undertaken by the government are movingin the right direction. However, to realize the opportunitieswithin defined timeframes, focus has to be on execution:

1. Involve Project Affected Families (PAFs), GramPanchayats & local administration during landacquisition and R&R package formulation

2. Create a uniform policy for allotment of hydro power andsharing of benefits, across states

3. Create a single window clearance mechanism for allprojects to avoid regulatory delays.


Figure 5.3

Hydel power – installed capacity(GW)

Figure 5.4

Hydro power potential – Global scenario(GW)

4. Launch UMPP like models for hydro-power, bestowedwith special incentives and comprehensive solution (land,regulatory clearances, transmission)

Pro-active steps by the industry1. Explore new business models like hydroelectric

merchant power plants: The inherent flexibility ofinstantaneous start, stop and load variations make hydroplants best suited for merchant trading/peaking power

2. Tie up with multi-lateral agencies and development

funds for long term financing options and avoid issuesrelated to asset –liability mismatch

3. Develop a detailed Comprehensive Catchment AreaTreatment (CAT) Plan for the whole river basin, to reduceecological impact.

4. Provide for environmental cost and take pro-activemeasures for resettlements

41Hydro Power: Large Untapped Potential


NUCLEAR ENERGY


Nuclear as a source of energy accounts for ~16% of totalpower generated, globally. Nearly 84% of the world’s nuclearpower capacity is concentrated in OECD countries includingUSA, France and Japan, However, Asia-Pacific countriesespecially India and China are likely to be the growthcenters for the future.

Nuclear power is also cleaner, more environment friendly andless sensitive to fuel price hikes as compared to traditionalfossil fuel based plants. However, concerns about safety,waste management and nuclear proliferation are likely tolinger in the future as well. The sector has bright prospects inIndia in the long term. However the real impact is expected toemerge only after 6-7 years from now.

Recent market developments present new opportunities for the sectorGovernment has set a target of achieving 20 GW generationcapacity by 2020 (up from ~4 GW currently). In the longterm, nuclear power generation capacity is expected toexpand to nearly 9-10 times by 2032, as per IntegratedEnergy Policy projections.

The recent Indo-US nuclear deal has opened avenues forpartnership between India and Nuclear Suppliers Group(‘NSG’) for technology, components, fuel procurement,project management and financing. As a follow-up to thedeal, agreements have also been signed with Mongolia,Russia, France, Kazakhstan and Namibia to increasecollaboration in the areas of civil nuclear cooperation;especially for fuel procurement. These international treatieshave significant implications for India:

� Indian players have an opportunity to import fuel andtechnology from NSG

� Foreign players can collaborate with Nuclear PowerCorporation of India Limited (NPCIL) to set up nuclearplants in India

� Global nuclear players can enter into MoUs with Indiancompanies to explore business opportunities across fuelsupply, technology and components (Fig 6.1).

These positive developments have already evinced interestfrom and initiatives by a number of players in the sector:

� Large players like NTPC, NALCO are exploring JVopportunities with NPCIL for setting up nuclear powergeneration plants

� Private players like Reliance Industries are exploringopportunities in uranium exploration and mining ininternational markets

� Equipment manufacturers including BHEL and L&T are augmenting their domestic capacities andstrengthening their technical capabilities through JVs withglobal majors

In addition, global majors like Areva, General Electric,Toshiba’s Westinghouse Electric and Russia’s atomic energy

Nuclear Energy – Improving Future Prospects

45Nuclear Energy –Improving Future Prospects

Figure 6.1

Nuclear power – installed capacity(MW)

agency Rosatom have also expressed keen interest toparticipate in the Indian market.

Critical challenges exist which need to beaddressedAlthough the nuclear power market is opening up in India,several challenges exist that need to be addressed:

1. Limited fuel availability: The targeted 20 GW ofgeneration capacity by 2020, will require 2,000 – 2,500tpa26 of uranium ore (to sustain the first phase of nucleargrowth from PHWRs27). While India has an estimatedreserves of ~64,000 tons, the commercial & technicalmining viability of the same needs to be assessedcompletely. The current mining capacity in India is only~300 tpa28 of uranium. Owing to strategic nature ofuranium, mining rights have been restricted to UraniumCorporation of India Limited (UCIL) which has taken limitedinitiatives to expand production. Increase in uraniumrequirement by nearly seven folds would urgently needenhancement in mining capabilities in India coupled withseamless sourcing from international markets.

2. Generation technology constraints: NPCIL hasdeveloped indigenous technology for nuclear reactors. Itcurrently has 15 PHWR, 2 BWR in operation. Globally,however there has been a rapid evolution of more efficientgeneration technologies such as EPR, VVER, AHWR29 etc.Sector growth and efficiencies will be impacted if these

technologies are not accessed.

3. Equipment capacity constraints: Construction of keyequipments for PWHR based plants in the unit segmentsize upto ~ 500 MW has been developed indigenouslyin the past (Fig 6.2). However going forward, while theinstalled capacity is planned to increase 4-5 folds, thetrend is also towards larger sized reactors. Adequate capacity therefore needs to be put in place for right technologies.

4. Manpower: Currently, there are ~13,00030 strong skillednuclear workforce in the country. There needs to be asteep jump in quality and size of the workforce, expectedto increase by atleast 3-4 times31 in number.

5. Financing: Indian nuclear generation segment would needinvestments of more than INR 1,500 Bn32 over the next fewyears, to achieve the target of setting up 20 GW. This wouldincrease manifold considering the investments required toaugment fuel supply and equipment capacity in India. Inabsence of a well defined financing plan for nuclearprojects, this may become a constraint.

It is imperative to address the above issues through astructured mechanism to realize the full potential of thesector.

Imperatives for the government

A new reform agenda to be pursuedThere are key action steps that need to be undertaken bygovernment to promote this sector:

1. Develop a comprehensive nuclear fuel plan: Uraniummining (exploration, development & production) needs tobe increased by atleast 4-5 times. UCIL needs to upgradeits capabilities & mining technologies for the same.Mining should also be gradually opened up for otherplayers (including PSUs like NMDC and private players).The government should also secure uranium mines in theinternational markets.

2. Establish a detailed fuel policy to clarify modes andprocedures for fuel fabrication, spent fuel treatment


Figure 6.2

Nuclear Power – Key Challenges

26 Based on current industry benchmarks27 Pressurized Heavy Water Reactor28 Source: Uranium.info29 EP: European Pressurized Reactor, VVER: Water-Water Energetic Reactor AHWR: Advanced Heavy Water Reactor30 Nuclear Power Corporation of India Limited Annual Report31 Based on expected increase in productivity by 30-40%32 Assuming cost of PHWR ~Rs 7 Cr/MW and Thorium based reactor as ~Rs 8 Cr/Mw

and waste management by private players

3. Provide special incentives (including tax & other fiscalbenefits) to encourage participation across the Nuclearvalue chain i.e. components, construction and generation.

4. Establish an “execution group” for aggressivelyfollowing up on bilateral agreements with othercountries and channelizing fuel, technology & equipmentavailability in India

5. Support manpower availability and training for nuclearsector

6. Introduce a special status for nuclear energy for ensuringeasy availability of funds

7. Aggressively promote NPCIL to undertake larger projects(strengthen the balance sheet if required), to drive growthin the sector in line with NTPC (for thermal power).Encourage JVs with other PSU and private sectors toprovide an impetus to the sector

Industry needs to take a long term view of the sectorThe changes in the nuclear power sector provide long termattractiveness to industry players. Some of the steps that canbe undertaken by the players include the following:

1. Evaluate nuclear power as part of the overallgeneration portfolio mix: Nuclear power may present aviable diversification opportunity for large generators

2. Develop a strategic plan for investments across thevalue chain: Business opportunities exist in fuel supply(from international markets), equipment supply,technology sourcing, EPC, financing

3. Aggressively explore strategic alliance and partnershipswith global players to strengthen capabilities and establisha competitive advantage in the sector

4. NPCIL and new entrants should aggressively managecosts and enhance operational efficiencies, to reducethe cost differential vis-à-vis thermal power

47Nuclear Energy –Improving Future Prospects


RENEWABLE ENERGY


Significant interest & investments globally and in IndiaRenewable energy33 (non combustible sources like solar, wind,geo-thermal & biomass) currently accounts for a smallproportion of the world energy market (Fig 7.1). The sector hashowever witnessed significant interest and investmentsglobally (Fig 7.2). Recent regulatory interventions like therenewables bill in the USA and EU’s 20/20/20 plan have putfurther thrust in this area.

China, India and other Asian countries ramped up spendingin renewables even as investment faltered slightly in Europeand the US due to the recent economic crisis.

Indian efforts for promoting renewable energy are in harmonywith the global move towards environmentally friendly fuels.The government has clearly laid out specific objectives forpromotion of renewables and is looking at supporting thesame through multiple measures including:

� Feed-in-tariffs for renewable power, with RenewablePortfolio Standards varying from 1% to 10% for 5-20 years(varying by state and source of renewable energy)

� Renewable Energy Certificates (RECs) to provide thegenerator or the buyer an option of cost compensationthrough sale of such certificates.

As a result, over the last six years, renewable energy in Indiahas witnessed an annual growth of 25% in installedcapacity from 3.4 GW in 2002 to 11.5 GW in 2007 andfurther to over 13.2 GW in 2008. In terms of targets, thegovernment has laid out a target of 26 GW by the end of 11thFive-Year Plan.

The mix of renewable energy in the Indian context has alsobeen gradually changing. Small hydro power has been atraditional renewable source, while wind power has in therecent past experienced high growth driven by

Renewable Energy: Sustained Source for the Future

51Renewable Energy: Sustained Source for the Future

Figure 7.1

World Total Primary Energy Supply by Source (2006, Million Tonnes of Oil Equivalent)

33 Other renewable sources include small hydro, wood, bio-fuels, waste

government support (Fig 7.3 and Fig 7.4). With focus andincentives in solar and biomass, these sectors areexpected to witness an accelerated growth going forward.

Solar energy: A “sunshine” segment Asia is increasingly becoming the hub of new solar PVactivity. Apart from the high demand growth, it is becomingthe go-to destination for manufacturing and development ofemerging technologies. By 2030, Asia is expected to accountfor ~40% capacity share of solar energy.

India has traditionally lagged in exploiting its significantsolar potential. With ~300 days of sunshine, India has a solar

potential of 2.5 trillion MWp (5000 trillion kWh/yr) but thecurrent installed total PV power generation capacity in India isbarely ~100 MWp. About 98% of this is in off-grid applications,a situation very different from what is observed worldwide.

High generation cost and the lack of sufficientgovernment incentives have been the most significantdeterrents in adoption of solar technology in the past.The limitation on the amount of subsidy that can be given hasdiffused interest on the demand side. However, policy levelinitiatives are now underfoot to tap the solar potential in India.

At the national level, a comprehensive National SolarMission (NSM) has been developed, which outlinesdemand as well as supply-side incentives, along with astrong government investment program (Fig 7.5).


Figure 7.3

Renewable sources of energy (2007)(MW)

Figure 7.4

Investments in Renewable Energy, 2008(USD Bn)

Figure 7.5

Projected Installed Solar Capacity asper National Solar Mission (NSM) (MW)

Figure 7.2

Global Annual Renewable Investments(Billion USD)

The draft for National Solar mission, which is expected to befinalized later this year, proposes a number of incentives suchas Feed-in-Tariffs, tax holiday, timely & mandatory provision ofgrid connectivity, obligation of states to buy 1-3% of totalpower from solar while compensating SERCs up to 70% ofcost. These moves address some of the most significantconcerns that have been faced by private players.

Solar energy is also benefitting from sustained reduction incosts, through technology improvements. It is expected thatif the targets set by NSM are achieved, solar energy will attaingrid parity by 2020-25.

Several opportunities emerging across the value chain, astructured approach necessary to leverage the same

A number of opportunities are emerging for industry playersin the solar value chain:� Demand/generation side opportunities: With technology

improvements and incentives, large scale installationsincluding solar farms are emerging as new opportunities.Multiple announcements have already been made byplayers to install generation farms – e.g. Acme Energy andZebsolar plan to set up large solar thermal energy powerplants. The Gujarat government recently approved 34solar power projects at an investment of Rs.12,000 Cr toadd 716 MW to the state electricity grid. Solar energy canalso be a viable opportunity for “distributed power”especially in rural areas.

� Supply side opportunities: On the supply side, there isa clear trend of shifting of global centers of manufacturinglocations from Germany, Japan and USA to China,

Taiwan, India, Singapore and Malaysia. India’s costs arealready comparable to other low cost destinations in Asiaand lower than costs in Europe & USA, due to competitiveenergy and labor costs & taxes. India’s position is furtherexpected to be boosted by continued strong governmentsupport, through schemes such as Special IncentivePackage Scheme (SIPS) and NSM’s ManufacturingPromotion Strategy.

Opportunities will also increase in the auxiliary equipmentspace to support the above growth. It is however importantfor the players to take a structured approach to leverage theabove opportunities:

� With short-term oversupply expected in the global solarPV market, scale and timing of entry are critical

� Choice of the right technology and a low-cost modelwill be important – wrong selection can tie the players intouncompetitive business scenario (Fig 7.6).

� Acquiring presence across the value chain throughalliances/acquisitions could be a critical element incornering demand

Wind energy: Proven model for sustained growthGlobally, USA, China and India have emerged as the threelargest countries in terms of new capacity additions in windenergy (Fig 7.7). However, cumulative wind energy capacityis still highly concentrated in developed countries, with US,Germany & Spain accounting for 55% of the installedcapacity.

India has ~9.7 GW of installed wind energy capacity,which accounts for ~70% of the total renewable energy in thecountry. Despite the significant investments, India has notbeen a very big wind energy producer. The nature ofgovernment support has been based on installed capacityrather than generation, resulting in low utilization of installedcapacity. Inadequate evacuation infrastructure has also beenconstraining harnessing of wind potential.

As Generation-Based Incentives (GBI) for grid connectedprojects are put in place, the scenario is expected to favorpower generation players with a long-term focus andwillingness to upscale, rather than “tax-break seekers”.Currently, the profile of wind asset owners primarily includeslarge Indian corporates and high net worth individuals who availdepreciation benefits. With more number of utility players suchas ONGC, GAIL, Tata Power and Reliance Energy including windin their overall power portfolio, the player profile in the sector isnow expected to align itself to the global trends (Fig 7.8).


Figure 7.6

Sustained reductions in cost throughtechnology (USD/Wp)

With over 45 GW of wind-energy potential in India, the markethas the potential to grow at 15-20% p.a. increasing capacityby 10-15 GW over next 5 years. For players in the sector,exploiting further demand in the country will bedependent on a number of factors:

� Ability to identify high potential sites throughimproved wind resource assessment

� Improvements in technology to increase availability andgeneration

� Focus on new growth avenues – Offshore wind turbines,larger capacity wind turbines (>3MW), smaller capacity

wind turbines (<600 kw)

� Lobbying to improve grid infrastructure inunconnected high wind potential areas

Biomass: Opportunity for niche play Availability of biomass in India is estimated at ~540 mtpa, ofwhich 25-30% can be made available for power generation.This translates to an estimated potential ~16 GW power,with a potential upside of 5 GW, using modern techniquesof co-generation.

Government has been offering fiscal incentives andcapital subsidy for generation projects based on biomass.


Figure 7.7

Significant Capacity Addition in Wind Energy by USA, China and IndiaCapacity Addition in 2008 — Ranking and Share of Countries

Figure 7.8

Most large players in the wind energy sector have an integrated presence acrossthe value chain

Several SERCs have also announced preferential tariff andRenewable Purchase Obligation (RPO) for biomass powerand bagasse cogeneration.

However, there are multiple deterrents preventing expansionof biomass power ranging from inadequate information onbiomass availability, to unorganized biomass market,technical limitations to transportation and storage issuesfor biomass. MNRE has recently taken up Biomasspower/cogeneration program, a UNDP/GEF assisted Projecton “Removal of Barriers to Biomass Power Generation inIndia”, to accelerate the adoption of biomass technologies, andlay foundation for large scale commercialization of biomasspower through increased access to financing. MNRE plans toestablish Model Investment Projects (MIPs) acrosstechnologies to demonstrate the viability of new investmentand financing models (Fig 7.9).

Sustaining growth of the renewables sector – imperatives for the governmentRenewable energy has significant growth potential in India. Italso enhances the “sustainability” of the power industrythrough “green” energy. It is however imperative for thegovernment to keep supporting the sector through severalinterventions:

1. Ensure effective implementation of the National SolarMission, including clear policy on Feed-In Tariffs

2. Incentivise renewables to match expensive peak loadrequirements/ unmet demand, so that it complementsthe significant investments in base load that are alreadybeing undertaken through conventional energy

3. Define high intensity renewable “zones” and establishall enablers therein. Work long with state governmentsto define priority zones for renewables. Ensure landavailability and establish grid connectivity from the same.

4. Encourage financial institutions (both government &private) to lend to this sector as a priority industry.

5. Encourage distributed generation for rural areas (tobenefit solar & bio-mass applications) through specialincentives and fast track clearance

6. Promote adoption of renewable energy by mandatinguse of rooftop PV on official & PSU buildings, andapplications to replace Diesel/ Kerosene where solarpower is cost competitive


Figure 7.9

7.5 MW Biomass power project in Chhattisgarh

Source: MNRE website


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