Description
This is a report on power sector in india.
INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
IBOK REPORT ON POWER SECTOR
BY:
GAURAV KUMAR KALAL AVIK ROY RAJA K MISHRA
IBOK Review - Power and Energy Sector
Contents
EXECUTIVE SUMMARY .................................................................................................................................. 4 Growth Potential: .............................................................................................................................................. 4 Demand Supply Scenario.................................................................................................................................. 4 SECTOR OVERVIEW ......................................................................................................................................... 5 SECTOR DEFINITION: ...................................................................................................................................... 7 Generation: ....................................................................................................................................................... 8 Generation Segment – Key Features: .............................................................................................................. 9 Transmission ................................................................................................................................................... 10 Transmission Segment – key features ........................................................................................................ 10 Distribution: .................................................................................................................................................... 11 Key issues in Distribution ........................................................................................................................... 12 Equipments/Infrastructure .................................................................................................................................. 13 SECTOR HIGHLIGHT ...................................................................................................................................... 13 Net-Income ..................................................................................................................................................... 13 Implication: ................................................................................................................................................. 14 Investment Argument ......................................................................................................................................... 14 Demand trend.................................................................................................................................................. 14 Implication .................................................................................................................................................. 15 PORTERS’ FIVE FORCES ANALYSIS ........................................................................................................... 16 Threat of new Entrant ..................................................................................................................................... 16 Analysis: ..................................................................................................................................................... 16 Threat of Substitutes ....................................................................................................................................... 17 Analysis ...................................................................................................................................................... 17 Buyer Power ................................................................................................................................................... 18 Analysis ...................................................................................................................................................... 18 Supplier Power ............................................................................................................................................... 19 Analysis : .................................................................................................................................................... 19 Competitive Rivalry........................................................................................................................................ 21 2|Page
IBOK Review - Power and Energy Sector
Analysis: ..................................................................................................................................................... 21 GROWTH/INVESTMENT RATIONALE ........................................................................................................ 22 Parameters for evaluating the sector: .............................................................................................................. 22 Macro economic factors.............................................................................................................................. 22 Financial factors: ........................................................................................................................................ 23 Demand-Supply Gap:- .................................................................................................................................... 25 Supply side Analysis....................................................................................................................................... 27 Analysis: ..................................................................................................................................................... 28 Demand side Analysis .................................................................................................................................... 29 Future Outlook .................................................................................................................................................... 31 Nuclear Deal – Implications ........................................................................................................................... 31 Renewable Sources ......................................................................................................................................... 33 References .......................................................................................................................................................... 34
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EXECUTIVE SUMMARY
India’s economy is progressing at the rate of 8.5%. To sustain that growth rate, infrastructures have to develop. Power plays a major role in development of a country. There is huge potential to tap in power sector. As per latest data, only 56 % households have access to electricity. Rural areas have a dismal scenario, as only 44% household have connectivity to electricity. Urban areas are in better position, as 88% household in urban area has access to power, though this unbalance growth remains a concern.
Growth Potential:
Indian power sector is expected to have net worth of around $118 billion by the end of XIth five year plan , which is more than double than that at the end of Xth Plan.. Also the volumetric growth is forecasted to be around 39% in the XIth five year plan
Demand Supply Scenario
Energy-requirement is growing at a faster rate than energy-availability, resulting in increasing percentage of energy-shortage in successive years. During the year 2007-08, average energy shortage was 9.0 percent and peak energy shortage was 15.2 percent. It is expected that demand for power will increase 6-7% in medium term.
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SECTOR OVERVIEW
Electricity plays a critical role in supporting a sustained growth in almost all facets of economical development of any country. Availability of reliable and quality power with appropriate blend of superior customer care is the key requirement of an ideal electricity sector. Progress in the Indian power sector, with current electricity shortages of over 12% of peak1 and 7% of energy, will be one of the key determinants to future growth. Indian government has long been trying to transform state-led bureaucratic red-tapist monopoly into competitive market attractive for private investors. Indian Government has set itself an ambitious target of doubling the per-capita consumption by 2011 for which it needs investment of Rs 9000 crore or US $ 200 bn to make it possible. India has today become as the fifth largest power market in the world as compared to its previous position of eighth in the last decade, by virtue of the following features:? ? ? Installed generation Capacity of 123 GW Generation of more than 600 billion Kwh Transmission and Distribution network of more than 6.3 million sq. kms.
With the advancement of economy and the rapid industrialization, the consumption of electricity has nearly doubled in the last decade. Following graph substantiates the mentioned trend in electricity consumption:
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SECTOR DEFINITION:
Indian power sector can be split into 4 different parts on the basis of the operational differences. Following figure gives the schematic of the Indian Power Industry:
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Generation:
Electricity can be generated by converting various other forms like Fossil Fuel, Wind, Water, Sun and Nuclear fuels. The power is generated by using up the energy from these sources and suitable generating units like a turbine, solar cell etc.
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Generation Segment – Key Features:
? ? ?
Thermal capacity contributes to 53 percent and hydro 25 per cent of total installed capacity. About 60 per cent of the capacity is with the state (vertically integrated State Electricity board or unbundled State Generating Companies). The private sector accounts for about 11,700 MW in installed capacity comprising lead domestic companies: Tata Power - 2300 MW; Reliance Energy - 940 MW; RPG Group 1155 MW and the Torrent Group - 500 MW, apart from several Independent Power projects.
? ?
The private sector has played an important role over the last decade contributing 21 per cent (6300 MW) of the total capacity added. The Electricity Act is expected to catalyses the growth of the private sector from its present 8 per cent of the total installed capacity to about 20 per cent in incremental capacity additions up to the year 2012. Private players are spreading their presence in value chain, while public sector companies are established in their respective fields
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?
Only 24% capacity of Hydro power has been harnessed so far. It is estimated that 150000 MW can be generated through vast water resource available
?
India is fourth largest country in terms of Renewable Energy Source (RES) based power generation.
Transmission
Transmission of electricity is defined as bulk transfer of power over a long distance at a high voltage, generally of 132 kV and above. In India, transmission lines have grown from 3,708 ckm (circuit kilometers) in 1950 to more than 265,000 ckm at present. The entire country has been divided into five regions for transmission systems, namely, Northern Region, North Eastern Region, and Eastern Region, Southern and Western region.
Transmission Segment – key features
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? ?
To achieve the ambitious goal of “POWER FOR ALL BY 2012”, the total transmission line capacity in India is expected to increase to 60,000 ckm. For this purpose, the country 10th and the 11th five year plan focuses on the creation of the National Grid which will expand the regional transmission networks and enhanced inter regional capacity to transmit power is essential, as resources are unevenly distributed in the country and power has to be carried to great distances, to areas where load centers exist.
?
Total investment required for this plan is around 17.8 billion USD out of which around 12 billion will be contributed by Power Grid Corporation of India limited(PGCIL), while rest will be contributed by Private Investors.
?
Right now private players like Reliance energy, Tata Power, CESC , Torrent power are involved in the Transmission in the various cities of the country. There operations have led to considerable decline in the T&D losses in the past few years.
Distribution:
A distributor of power receives high voltage electricity from the transmission lines and then distributes it to the end customers. These electric voltages are first converted to lower voltages using step down transformers and then delivered to customers’ electrical systems. The distributor also measures the amount of power consumed by each customer and collects the charge from each customer.
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Key issues in Distribution
The capacity to evacuate power at distribution level has been weak and plans to augment the same have been constantly bogged down by weak financials of SEBs and system inefficiencies. Distribution losses coupled with the theft of electricity and low metering levels, in some states, have been the prime reasons for the poor status of the distribution sector. Though some improvement was witnessed in a few states over the last few years, the accumulated losses at an overall level, continues to prevail. Following table indicate the trend of T&D losses for the past 4 years: By looking at the graph we can say although T&D losses have started declining over a period of time, but still considering the worldwide standards it’s still very high. After the implementation of Electricity Act, 2003 reforms have started in the distribution. ? Unbundled/corporatized entities: One of the main reasons for unbundling SEBs (State Electricity boards) was to increase efficiencies, reduce the AT&C losses and improve the financial position of the state utilities. Hence, for our analysis, we have considered the reduction/ improvement in AT&C losses as an important factor to gauge the impact of unbundling. The overall scenario has not been promising with only few states showing an improvement ? Complete privatisation : In the last decade two states privatised there distribution entities o In Orissa, Reliance Infrastructure (erstwhile BSES) holds three out of the discoms given to private players. o In Delhi, Reliance Infrastructure holds two discoms (BSES Yamuna and BSES Rajdhani; catering to central, east and south Delhi) and NDPL (a Tata Power subsidiary) holds one Discom catering to north Delhi. o Out of these two Delhi experiment was a success, while Orissa because of lack of co-ordination among different wings of government couldn’t really achieve its objective.
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Equipments/Infrastructure
There are quite a few companies operating in related businesses, other than power generation, transmission and distribution. It includes manufacturers of power generation equipments, transmission line towers, sub-station structures, antenna towers/masts. Some companies are involved in erection of steel towers for transmission lines and other steel structures, ropeway trestles and railway electrification masts, while some other may be involved in the manufacture of certain electrical fittings and hardware, conductor accessories, spacers, and dampers.
SECTOR HIGHLIGHT
(Ideally P/E should come, but we don’t have data for that)
Net-Income
PBIDTM or Profit Before Interest Depreciation and Tax Margin can be used as an indicator of “Net-income” for the sector. The values over the last few years, when plotted, give the following graph:-
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Implication:
?
? ?
Initially NET-income was very high at 1996, remained almost same till 2001 while a great dip in 2003 followed by a heavy rise in 2004. But in the last 3 years, it is decreasing continuously again. In 2003, the great dip was because of the sudden administrative brought about by the Electricity act 2003. However for the past few years Net Income is declining as currently the sector is in the growing phase and companies are making huge amount of investment.
Investment Argument
The response to GOI’s energy policy has been encouraging. Private sector has installed 10500 MW capacities at the end of 2007-08 and capacity of another 10760 MW has been planned for the XIth plan. One of the important factors which determine the investment potential of the sector is the demand trend and the corresponding step to satisfy it.
Demand trend
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According to CEA survey, peak demand is to be increased at a staggering rate 77% by the year 2012. Energy demand is expected to increase by 274 % to 975,222 MU by 2012. It is estimated that a total of $ 200 billion is required for capacity creation, distribution and transmission.
Implication
?
To cater to this ever increasing demand, Electricity Act 2003 was implemented .According to which private sectors will also be allowed to generate, Transmit ad Distribute electricity.
?
Special emphasis on development of renewable sources of India of energy. It has been estimated that by 2032, renewable energy capacity will be 80000 MW and it will account 10% of India’s electricity generation capacity.
?
Signing of Nuclear Deal with United States which if implemented will lead to continuous supply of raw material for Nuclear Reactor.
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PORTERS’ FIVE FORCES ANALYSIS
Threat of new Entrant
Analysis:
? Presently, regional electricity boards dominate the Indian electricity market However, the Electricity Act of 2003 was introduced to encourage competition in the market and has allowed the private players to enter the market. ? Product differentiation in power sector is generally a difficult task. However in India, providers can do so by providing reliable service. This is a very significant factor as India as a whole is plagued with chronic undersupply, inefficiency of transmission, and unreliability for many years
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? Mostly new entrant will be involved in the power generation, which involves substantial up-front investment and high fixed costs ? Thus overall there is a moderate likelihood of new entrant.
Threat of Substitutes
Analysis
? ?
The Only viable substitute for electricity is the auto generation The initial switching cost of these auto generation may be negligible, however the long term, the running cost is hugely depended on the prices of fuel used, which is quite volatile in nature.
?
?
Companies may be encouraged to opt for auto generation by the ability to sell their surplus power back to the national grid. Overall again we can say that the Threat of substitute is moderate.
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Buyer Power
Analysis ? ? In India, most of the electricity is supplied by the regional electricity board. Therefore customer1 as such has got very less power. However , among the provisions of the 2003 Electricity Act was the ability of independent power generating companies to sell directly to large industrial customers, and as more competition is encouraged in the market, buyer power is likely to increase
?
1
Overall speaking, we can say that the buyer power is pretty weak.
By the customer we mean to say large industrial houses, as about 60% of the electricity revenues come from that segment only.
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Supplier Power
Analysis :
?
In India suppliers are mainly state owned companies like, like in case of Coal its Coal India Limited. Such sort of structure basically gives rise to oligopolistic tendencies as deduced from the above diagram.
?
Also, market players can find substitute raw materials by varying the primary energy mix they use for generation, but switching completely between one fuel and another would require additional power stations to be built - a costly and expensive process.
?
Overall we can say that although the suppliers have got lot of power, but since most of them are government regulated firms so the wielding power is considerably moderate.
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Competitive Rivalry
Analysis:
?
In India most of the power sector is dominated by the state electricity boards. However with the implementation of the electricity act of 2003, this sector has started witnessing some private competition as well.
?
Bearing in mind factors such as the high fixed costs and exit barriers for companies with significant generation assets, and the central importance of this market to its players, the degree of rivalry is assessed as moderate.
?
However, this is best viewed as a preview of the competitive landscape when the market fully liberalizes: with players currently close to monopolies within their own regions, they actually experience a lower degree of rivalry than this might imply.
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GROWTH/INVESTMENT RATIONALE
Parameters for evaluating the sector:
Macro economic factors
i. Investment environment: Following are the key factors which abet the growth opportunities in the power sector: 1. Foreign Direct Investment up to 100% equity is allowed in the Power Generation and Transmission Sector on an automatic basis without any cap. No prior approval is required and only intimation to RBI Regional office should be given within 30 days of receiving inflows 2. 100% tax benefit for any 10 consecutive assessment years out of 15 years beginning from the year in which undertaking of generation, distribution and transmission of power starts functioning. 3. 14% Return on equity (ROE) in generation and transmission schemes. 4. Government of India envisages two routes for private sector participation in transmission ventures. IPTC route provides 100% fund mobilization by private entrepreneurs as Independent private Transmission Company. The JVC route provide formulation of a Joint venture Company with Central/state by selecting a private investor as a joint venture partner. 5. Formation of Accelerated power development program (APDP) which is formulated for upgrading and strengthening of sub transmission and distribution system with an objective of reducing the T&D losses to 15%. ii. Government policies: Electricity Act 2003 was one of the important clogs in the development of power sector in India. Some of the key implications of that are: 1. Unbundled vertically integrated state utilities and formation of independent electricity regulatory commissions.
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2. No licensing required for establishing Hydro-power project. 3. Allowing of independent power transmission companies and introducing power trading as a separate line of business. 4. Metered supply of electricity and strong anti-theft provisions 5. Rationalization of tariff and reduction of cross-subsidies.
Financial factors:
Observing the Trends of factors like Debt-Equity Ratio, ROCE and many more can help to predict the financial stability of the sector.
i.
Debt-Equity ratio
Implication: Debt-Equity ratio basically is a measure of sector/companies financial leverage. If the ratio is more than 1 , it implies that the ratio is debt is more than its equity , it can be mean greater return as well as greater risk. However it is less than 1, then it’s a stable sector. As we can clearly see, power sector as a whole is pretty stable sector with nearly consistent Debt-Equity ratio.
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ii.
ROCE (Return On capital Employed)
Implication: ROCE is basically used for comparing the relative profitability of any sector/Company. Now in power sector we find that ROCE is continuously declining for past 3-4 years , this implies that the sector is right now is in the growing phase and more and more capital being put in, and the profits or the gains are expected only after certain amount of time.
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Demand-Supply Gap:India is a very fast growing economy and as a result, the demand for electrical power has been growing at a rate of around 7.89% per annum, while the energy availability is increasing at a rate of around 7.66% per annum. As a result, it is evident that the energy-shortage or gap between demand and supply is increasing gradually. So, it is very necessary to correctly predict the demand quantity for a future date and plan in such a way that the supply meets the demand.
The Peak-Demand and Peak-Supply quantity is also going up and the peak-shortage ration is also growing up by leaps and bounds
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Supply side Analysis
The total installed capacity of electric power generation stations in India was 123 GW by 2008. The installed capacity grew at a CAGR of 5.15% over the five-year period from 2002 to 2007. This was mainly possible due to reforms and developments in the power sector as per the Electricity Act passed in 2003. About 87% of the current installed capacity is obtained from public sector companies and rest 13% from private holdings. Some of the key public sector enterprises are central and state controlled generation and distribution companies, such as NTPC, PGCIL, while private sector includes companies, such as Tata Power, Reliance Energy, and Torrent Power. Further, more than 60% of the installed capacity was derived from thermal (coal/diesel/gas) method of power generation. The figure below provides a breakdown of total installed capacity by companies, and by fuel-type.
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Analysis:
During the X Plan (ending 31 March 2007), the installed capacity from the central and state controlled companies increased at a CAGR of 7.89% and 2.27%, respectively, while installed capacity at the private companies increased by approximately 12%. While the installed capacity at state controlled companies decreased by approximately 6 % points, that from central controlled companies increased by 4% points. The higher percent increase in the private sector is due to delicensing of thermal power generation by enactment of the electricity act in 2003. The relatively lower increase in installed capacity at the state-controlled companies is due to poor performance of State Electricity Boards.
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Demand side Analysis
Electricity consumption is strongly governed by the type of economic activity in a country. Manufacturing-based economies generally consume more electricity as compared to servicesbased economies. As the percentage of services sector in the GDP has increased in the last 15 years, the growth rate in electricity consumption has been much contained. Elasticity, a measure of change in electricity consumption with 1% change in GDP, has reduced from 1.47 to 1. Another factor, resulting into the decrease of elasticity, is improved energy efficiency. At a cumulative rate, the demand for energy has increased at a CAGR of approximately 5% during the last five years. The charts below illustrate the demand pattern for the last five years.
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The power consumption scenario in India can be attributed to three key sectors – Agricultural, Industrial, and Domestic sector.
a) Agricultural Sector: With the electrification of villages, the demand for electricity has increased at a CAGR of approximately 3% since 1995. The share of agricultural sector was more than 23% by the end of 2005. Moreover, power sector reforms in the X plan has led to efficient utilization of power in the agricultural sector compared to the previous plans in which the share of the sector even reached approximately 31%. This demand is going to increase even further with newer reforms in agriculture.
b) Industrial Sector: The demand for electricity by Industrial sector has increased at a CAGR of approximately 3% since 1995. However, the share of the industrial sector in total electricity consumption fell from 39% in 1995 to 36% in 2005. This is due to increasingly more dependence on captive power facilities by power-intensive industries due to increased industrial power tariffs, irregular power supply and shutdowns due to shortages. With the GDP growth of 8-9% each year, the industrial demand for power is poised to grow at even faster rate.
c)
Domestic Sector: The demand for electricity by domestic sector has increased at a CAGR of approximately 7.1% since 1995. The share of the domestic sector in total electricity consumption increased from 18% in 1995 to 25% in 2005, mainly driven by urbanization.
As more and more cities are being developed and the influx of people from rural areas to urban people, this demand is also going to increase at a faster rate.
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Future Outlook
Nuclear Deal – Implications
With the possibility of Indo-US nuclear ties becoming a reality in the near future, there is a huge potential to be tapped in this sector. There are still some grey areas like the Left Front opposition to the proposed treaty, but once the deal goes through a lot of action is expected on this front. Companies like Tata Power Company Ltd could enter the Nuclear power arena provided the Government gives the approvals. Tata Power has already aligned itself with major nuclear equipment suppliers and is ready to go. It also has plans of partnering with Areva SA. This is just the beginning of a host of companies planning to jump onto the bandwagon. The Atomic Energy Act which regulates the entry of private players into Nuclear Power is likely to be amended in the near future, allowing all these companies to play a significant role. The Government of India is pursuing Nuclear energy as a long term solution to the country’s energy problems. One key advantage of Nuclear power is that it is non carbon emitting and with the depletion of coal resources India needs to have a strong primary source of power which the Government strategize to be the nuclear power. The growing significance of nuclear power in India’s long term strategy can be gauged from the following Nuclear power plant targets according to Department of Atomic Energy (DAE)
? ? ? ? 10,280MWe by 11th five-year plan 20,000MWe by 2020 50,000MWe by 2030 2,50,000Mwe by 2050
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The final implementation of the Hyde Act and 123 agreements will bring India out of the Nuclear isolation of over 30 years and enable her to trade in Nuclear fuels for civilian purposes with other nations. The treaty can bring in the following gains ? ? ? ? It assures uninterrupted supply of fuel to reactors placed under the IAEA safeguards It can solve the short term energy crisis and also improve the energy mix in favour of the nuclear based plants. Nuclear cooperation will stimulate the indigenous research programme Private and foreign investments will take away the problem of paucity of funds
Some of the key challenges to be faced by the private sector are as follows, ? ? ? Managing the decommissioning of an aging plant Storage of radioactive waste and fuel resource management procedures Unlimited liability arising out of an accident can be too much for a private firm to handle
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Renewable Sources
Another significant section which is going to see a lot of action is that of the Renewable Energy sources. Wind companies like Suzlon Energy have shown considerable growth and profitability, leading to more and more investment in the sector. There have been many alliances and partnerships being built up in these areas between national and international companies. Another key area is that of Solar Energy. Tata BP Solar is the major player in that sector now, but there ear ea larger number of companies wanting to enter into o the sector. It is also bound to see a lot of action in the future. The Renewable Energy Sources (RES) play a strategic role in India’s energy programme. It is the first country to have a Ministry dedicated to developing and promoting non-conventional energy sources. The primary reason being its strategic role in being able to provide power to remote locations. In India the sections like Wind, Small Hydro and Biomass have already made an impact with the way they are generating power. The private sector is responding positively to the policy initiatives of the government and the results can also be seen. The major issues that the sector is likely to face are
?
High capital costs and low plant load factors make renewable energy more expensive. Technical innovation and probably the carbon credit benefits which accrues due to the environment friendly nature of the renewable energy sources might offset this problem Regulatory certainty of tariff is essential to maintain private sector interest in this area This might lead to increased competition in land-use patterns as more and more people adopt this form of power generation Lack of transmission networks will hamper the evacuation of power from one place to another
? ? ?
The current installed capacity of India in Wind energy is 9220MW which is just 7.3% of the total capacity. So this presents a big opportunity for private companies to participate in a big way. The improvements in solar technology are making it a very viable option for large scale domestic power demand. India has on average 300 clear sunny days a year which means that solar energy can be a key source of power.
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References
? ? ? ? ? ? ? ?
www.datamonitor.com www.euromonitor.com www.indiastats.com www.crisil.com www.gmid.com www.capitaline.com www.indiainfoline.com www.myiris.com
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doc_369642200.pdf
This is a report on power sector in india.
INDIAN INSTITUTE OF MANAGEMENT KOZHIKODE
IBOK REPORT ON POWER SECTOR
BY:
GAURAV KUMAR KALAL AVIK ROY RAJA K MISHRA
IBOK Review - Power and Energy Sector
Contents
EXECUTIVE SUMMARY .................................................................................................................................. 4 Growth Potential: .............................................................................................................................................. 4 Demand Supply Scenario.................................................................................................................................. 4 SECTOR OVERVIEW ......................................................................................................................................... 5 SECTOR DEFINITION: ...................................................................................................................................... 7 Generation: ....................................................................................................................................................... 8 Generation Segment – Key Features: .............................................................................................................. 9 Transmission ................................................................................................................................................... 10 Transmission Segment – key features ........................................................................................................ 10 Distribution: .................................................................................................................................................... 11 Key issues in Distribution ........................................................................................................................... 12 Equipments/Infrastructure .................................................................................................................................. 13 SECTOR HIGHLIGHT ...................................................................................................................................... 13 Net-Income ..................................................................................................................................................... 13 Implication: ................................................................................................................................................. 14 Investment Argument ......................................................................................................................................... 14 Demand trend.................................................................................................................................................. 14 Implication .................................................................................................................................................. 15 PORTERS’ FIVE FORCES ANALYSIS ........................................................................................................... 16 Threat of new Entrant ..................................................................................................................................... 16 Analysis: ..................................................................................................................................................... 16 Threat of Substitutes ....................................................................................................................................... 17 Analysis ...................................................................................................................................................... 17 Buyer Power ................................................................................................................................................... 18 Analysis ...................................................................................................................................................... 18 Supplier Power ............................................................................................................................................... 19 Analysis : .................................................................................................................................................... 19 Competitive Rivalry........................................................................................................................................ 21 2|Page
IBOK Review - Power and Energy Sector
Analysis: ..................................................................................................................................................... 21 GROWTH/INVESTMENT RATIONALE ........................................................................................................ 22 Parameters for evaluating the sector: .............................................................................................................. 22 Macro economic factors.............................................................................................................................. 22 Financial factors: ........................................................................................................................................ 23 Demand-Supply Gap:- .................................................................................................................................... 25 Supply side Analysis....................................................................................................................................... 27 Analysis: ..................................................................................................................................................... 28 Demand side Analysis .................................................................................................................................... 29 Future Outlook .................................................................................................................................................... 31 Nuclear Deal – Implications ........................................................................................................................... 31 Renewable Sources ......................................................................................................................................... 33 References .......................................................................................................................................................... 34
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EXECUTIVE SUMMARY
India’s economy is progressing at the rate of 8.5%. To sustain that growth rate, infrastructures have to develop. Power plays a major role in development of a country. There is huge potential to tap in power sector. As per latest data, only 56 % households have access to electricity. Rural areas have a dismal scenario, as only 44% household have connectivity to electricity. Urban areas are in better position, as 88% household in urban area has access to power, though this unbalance growth remains a concern.
Growth Potential:
Indian power sector is expected to have net worth of around $118 billion by the end of XIth five year plan , which is more than double than that at the end of Xth Plan.. Also the volumetric growth is forecasted to be around 39% in the XIth five year plan
Demand Supply Scenario
Energy-requirement is growing at a faster rate than energy-availability, resulting in increasing percentage of energy-shortage in successive years. During the year 2007-08, average energy shortage was 9.0 percent and peak energy shortage was 15.2 percent. It is expected that demand for power will increase 6-7% in medium term.
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SECTOR OVERVIEW
Electricity plays a critical role in supporting a sustained growth in almost all facets of economical development of any country. Availability of reliable and quality power with appropriate blend of superior customer care is the key requirement of an ideal electricity sector. Progress in the Indian power sector, with current electricity shortages of over 12% of peak1 and 7% of energy, will be one of the key determinants to future growth. Indian government has long been trying to transform state-led bureaucratic red-tapist monopoly into competitive market attractive for private investors. Indian Government has set itself an ambitious target of doubling the per-capita consumption by 2011 for which it needs investment of Rs 9000 crore or US $ 200 bn to make it possible. India has today become as the fifth largest power market in the world as compared to its previous position of eighth in the last decade, by virtue of the following features:? ? ? Installed generation Capacity of 123 GW Generation of more than 600 billion Kwh Transmission and Distribution network of more than 6.3 million sq. kms.
With the advancement of economy and the rapid industrialization, the consumption of electricity has nearly doubled in the last decade. Following graph substantiates the mentioned trend in electricity consumption:
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SECTOR DEFINITION:
Indian power sector can be split into 4 different parts on the basis of the operational differences. Following figure gives the schematic of the Indian Power Industry:
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Generation:
Electricity can be generated by converting various other forms like Fossil Fuel, Wind, Water, Sun and Nuclear fuels. The power is generated by using up the energy from these sources and suitable generating units like a turbine, solar cell etc.
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Generation Segment – Key Features:
? ? ?
Thermal capacity contributes to 53 percent and hydro 25 per cent of total installed capacity. About 60 per cent of the capacity is with the state (vertically integrated State Electricity board or unbundled State Generating Companies). The private sector accounts for about 11,700 MW in installed capacity comprising lead domestic companies: Tata Power - 2300 MW; Reliance Energy - 940 MW; RPG Group 1155 MW and the Torrent Group - 500 MW, apart from several Independent Power projects.
? ?
The private sector has played an important role over the last decade contributing 21 per cent (6300 MW) of the total capacity added. The Electricity Act is expected to catalyses the growth of the private sector from its present 8 per cent of the total installed capacity to about 20 per cent in incremental capacity additions up to the year 2012. Private players are spreading their presence in value chain, while public sector companies are established in their respective fields
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?
Only 24% capacity of Hydro power has been harnessed so far. It is estimated that 150000 MW can be generated through vast water resource available
?
India is fourth largest country in terms of Renewable Energy Source (RES) based power generation.
Transmission
Transmission of electricity is defined as bulk transfer of power over a long distance at a high voltage, generally of 132 kV and above. In India, transmission lines have grown from 3,708 ckm (circuit kilometers) in 1950 to more than 265,000 ckm at present. The entire country has been divided into five regions for transmission systems, namely, Northern Region, North Eastern Region, and Eastern Region, Southern and Western region.
Transmission Segment – key features
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To achieve the ambitious goal of “POWER FOR ALL BY 2012”, the total transmission line capacity in India is expected to increase to 60,000 ckm. For this purpose, the country 10th and the 11th five year plan focuses on the creation of the National Grid which will expand the regional transmission networks and enhanced inter regional capacity to transmit power is essential, as resources are unevenly distributed in the country and power has to be carried to great distances, to areas where load centers exist.
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Total investment required for this plan is around 17.8 billion USD out of which around 12 billion will be contributed by Power Grid Corporation of India limited(PGCIL), while rest will be contributed by Private Investors.
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Right now private players like Reliance energy, Tata Power, CESC , Torrent power are involved in the Transmission in the various cities of the country. There operations have led to considerable decline in the T&D losses in the past few years.
Distribution:
A distributor of power receives high voltage electricity from the transmission lines and then distributes it to the end customers. These electric voltages are first converted to lower voltages using step down transformers and then delivered to customers’ electrical systems. The distributor also measures the amount of power consumed by each customer and collects the charge from each customer.
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Key issues in Distribution
The capacity to evacuate power at distribution level has been weak and plans to augment the same have been constantly bogged down by weak financials of SEBs and system inefficiencies. Distribution losses coupled with the theft of electricity and low metering levels, in some states, have been the prime reasons for the poor status of the distribution sector. Though some improvement was witnessed in a few states over the last few years, the accumulated losses at an overall level, continues to prevail. Following table indicate the trend of T&D losses for the past 4 years: By looking at the graph we can say although T&D losses have started declining over a period of time, but still considering the worldwide standards it’s still very high. After the implementation of Electricity Act, 2003 reforms have started in the distribution. ? Unbundled/corporatized entities: One of the main reasons for unbundling SEBs (State Electricity boards) was to increase efficiencies, reduce the AT&C losses and improve the financial position of the state utilities. Hence, for our analysis, we have considered the reduction/ improvement in AT&C losses as an important factor to gauge the impact of unbundling. The overall scenario has not been promising with only few states showing an improvement ? Complete privatisation : In the last decade two states privatised there distribution entities o In Orissa, Reliance Infrastructure (erstwhile BSES) holds three out of the discoms given to private players. o In Delhi, Reliance Infrastructure holds two discoms (BSES Yamuna and BSES Rajdhani; catering to central, east and south Delhi) and NDPL (a Tata Power subsidiary) holds one Discom catering to north Delhi. o Out of these two Delhi experiment was a success, while Orissa because of lack of co-ordination among different wings of government couldn’t really achieve its objective.
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Equipments/Infrastructure
There are quite a few companies operating in related businesses, other than power generation, transmission and distribution. It includes manufacturers of power generation equipments, transmission line towers, sub-station structures, antenna towers/masts. Some companies are involved in erection of steel towers for transmission lines and other steel structures, ropeway trestles and railway electrification masts, while some other may be involved in the manufacture of certain electrical fittings and hardware, conductor accessories, spacers, and dampers.
SECTOR HIGHLIGHT
(Ideally P/E should come, but we don’t have data for that)
Net-Income
PBIDTM or Profit Before Interest Depreciation and Tax Margin can be used as an indicator of “Net-income” for the sector. The values over the last few years, when plotted, give the following graph:-
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Implication:
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Initially NET-income was very high at 1996, remained almost same till 2001 while a great dip in 2003 followed by a heavy rise in 2004. But in the last 3 years, it is decreasing continuously again. In 2003, the great dip was because of the sudden administrative brought about by the Electricity act 2003. However for the past few years Net Income is declining as currently the sector is in the growing phase and companies are making huge amount of investment.
Investment Argument
The response to GOI’s energy policy has been encouraging. Private sector has installed 10500 MW capacities at the end of 2007-08 and capacity of another 10760 MW has been planned for the XIth plan. One of the important factors which determine the investment potential of the sector is the demand trend and the corresponding step to satisfy it.
Demand trend
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According to CEA survey, peak demand is to be increased at a staggering rate 77% by the year 2012. Energy demand is expected to increase by 274 % to 975,222 MU by 2012. It is estimated that a total of $ 200 billion is required for capacity creation, distribution and transmission.
Implication
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To cater to this ever increasing demand, Electricity Act 2003 was implemented .According to which private sectors will also be allowed to generate, Transmit ad Distribute electricity.
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Special emphasis on development of renewable sources of India of energy. It has been estimated that by 2032, renewable energy capacity will be 80000 MW and it will account 10% of India’s electricity generation capacity.
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Signing of Nuclear Deal with United States which if implemented will lead to continuous supply of raw material for Nuclear Reactor.
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PORTERS’ FIVE FORCES ANALYSIS
Threat of new Entrant
Analysis:
? Presently, regional electricity boards dominate the Indian electricity market However, the Electricity Act of 2003 was introduced to encourage competition in the market and has allowed the private players to enter the market. ? Product differentiation in power sector is generally a difficult task. However in India, providers can do so by providing reliable service. This is a very significant factor as India as a whole is plagued with chronic undersupply, inefficiency of transmission, and unreliability for many years
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? Mostly new entrant will be involved in the power generation, which involves substantial up-front investment and high fixed costs ? Thus overall there is a moderate likelihood of new entrant.
Threat of Substitutes
Analysis
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The Only viable substitute for electricity is the auto generation The initial switching cost of these auto generation may be negligible, however the long term, the running cost is hugely depended on the prices of fuel used, which is quite volatile in nature.
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Companies may be encouraged to opt for auto generation by the ability to sell their surplus power back to the national grid. Overall again we can say that the Threat of substitute is moderate.
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Buyer Power
Analysis ? ? In India, most of the electricity is supplied by the regional electricity board. Therefore customer1 as such has got very less power. However , among the provisions of the 2003 Electricity Act was the ability of independent power generating companies to sell directly to large industrial customers, and as more competition is encouraged in the market, buyer power is likely to increase
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Overall speaking, we can say that the buyer power is pretty weak.
By the customer we mean to say large industrial houses, as about 60% of the electricity revenues come from that segment only.
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Supplier Power
Analysis :
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In India suppliers are mainly state owned companies like, like in case of Coal its Coal India Limited. Such sort of structure basically gives rise to oligopolistic tendencies as deduced from the above diagram.
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Also, market players can find substitute raw materials by varying the primary energy mix they use for generation, but switching completely between one fuel and another would require additional power stations to be built - a costly and expensive process.
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Overall we can say that although the suppliers have got lot of power, but since most of them are government regulated firms so the wielding power is considerably moderate.
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Competitive Rivalry
Analysis:
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In India most of the power sector is dominated by the state electricity boards. However with the implementation of the electricity act of 2003, this sector has started witnessing some private competition as well.
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Bearing in mind factors such as the high fixed costs and exit barriers for companies with significant generation assets, and the central importance of this market to its players, the degree of rivalry is assessed as moderate.
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However, this is best viewed as a preview of the competitive landscape when the market fully liberalizes: with players currently close to monopolies within their own regions, they actually experience a lower degree of rivalry than this might imply.
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GROWTH/INVESTMENT RATIONALE
Parameters for evaluating the sector:
Macro economic factors
i. Investment environment: Following are the key factors which abet the growth opportunities in the power sector: 1. Foreign Direct Investment up to 100% equity is allowed in the Power Generation and Transmission Sector on an automatic basis without any cap. No prior approval is required and only intimation to RBI Regional office should be given within 30 days of receiving inflows 2. 100% tax benefit for any 10 consecutive assessment years out of 15 years beginning from the year in which undertaking of generation, distribution and transmission of power starts functioning. 3. 14% Return on equity (ROE) in generation and transmission schemes. 4. Government of India envisages two routes for private sector participation in transmission ventures. IPTC route provides 100% fund mobilization by private entrepreneurs as Independent private Transmission Company. The JVC route provide formulation of a Joint venture Company with Central/state by selecting a private investor as a joint venture partner. 5. Formation of Accelerated power development program (APDP) which is formulated for upgrading and strengthening of sub transmission and distribution system with an objective of reducing the T&D losses to 15%. ii. Government policies: Electricity Act 2003 was one of the important clogs in the development of power sector in India. Some of the key implications of that are: 1. Unbundled vertically integrated state utilities and formation of independent electricity regulatory commissions.
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2. No licensing required for establishing Hydro-power project. 3. Allowing of independent power transmission companies and introducing power trading as a separate line of business. 4. Metered supply of electricity and strong anti-theft provisions 5. Rationalization of tariff and reduction of cross-subsidies.
Financial factors:
Observing the Trends of factors like Debt-Equity Ratio, ROCE and many more can help to predict the financial stability of the sector.
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Debt-Equity ratio
Implication: Debt-Equity ratio basically is a measure of sector/companies financial leverage. If the ratio is more than 1 , it implies that the ratio is debt is more than its equity , it can be mean greater return as well as greater risk. However it is less than 1, then it’s a stable sector. As we can clearly see, power sector as a whole is pretty stable sector with nearly consistent Debt-Equity ratio.
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ROCE (Return On capital Employed)
Implication: ROCE is basically used for comparing the relative profitability of any sector/Company. Now in power sector we find that ROCE is continuously declining for past 3-4 years , this implies that the sector is right now is in the growing phase and more and more capital being put in, and the profits or the gains are expected only after certain amount of time.
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Demand-Supply Gap:India is a very fast growing economy and as a result, the demand for electrical power has been growing at a rate of around 7.89% per annum, while the energy availability is increasing at a rate of around 7.66% per annum. As a result, it is evident that the energy-shortage or gap between demand and supply is increasing gradually. So, it is very necessary to correctly predict the demand quantity for a future date and plan in such a way that the supply meets the demand.
The Peak-Demand and Peak-Supply quantity is also going up and the peak-shortage ration is also growing up by leaps and bounds
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Supply side Analysis
The total installed capacity of electric power generation stations in India was 123 GW by 2008. The installed capacity grew at a CAGR of 5.15% over the five-year period from 2002 to 2007. This was mainly possible due to reforms and developments in the power sector as per the Electricity Act passed in 2003. About 87% of the current installed capacity is obtained from public sector companies and rest 13% from private holdings. Some of the key public sector enterprises are central and state controlled generation and distribution companies, such as NTPC, PGCIL, while private sector includes companies, such as Tata Power, Reliance Energy, and Torrent Power. Further, more than 60% of the installed capacity was derived from thermal (coal/diesel/gas) method of power generation. The figure below provides a breakdown of total installed capacity by companies, and by fuel-type.
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Analysis:
During the X Plan (ending 31 March 2007), the installed capacity from the central and state controlled companies increased at a CAGR of 7.89% and 2.27%, respectively, while installed capacity at the private companies increased by approximately 12%. While the installed capacity at state controlled companies decreased by approximately 6 % points, that from central controlled companies increased by 4% points. The higher percent increase in the private sector is due to delicensing of thermal power generation by enactment of the electricity act in 2003. The relatively lower increase in installed capacity at the state-controlled companies is due to poor performance of State Electricity Boards.
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Demand side Analysis
Electricity consumption is strongly governed by the type of economic activity in a country. Manufacturing-based economies generally consume more electricity as compared to servicesbased economies. As the percentage of services sector in the GDP has increased in the last 15 years, the growth rate in electricity consumption has been much contained. Elasticity, a measure of change in electricity consumption with 1% change in GDP, has reduced from 1.47 to 1. Another factor, resulting into the decrease of elasticity, is improved energy efficiency. At a cumulative rate, the demand for energy has increased at a CAGR of approximately 5% during the last five years. The charts below illustrate the demand pattern for the last five years.
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The power consumption scenario in India can be attributed to three key sectors – Agricultural, Industrial, and Domestic sector.
a) Agricultural Sector: With the electrification of villages, the demand for electricity has increased at a CAGR of approximately 3% since 1995. The share of agricultural sector was more than 23% by the end of 2005. Moreover, power sector reforms in the X plan has led to efficient utilization of power in the agricultural sector compared to the previous plans in which the share of the sector even reached approximately 31%. This demand is going to increase even further with newer reforms in agriculture.
b) Industrial Sector: The demand for electricity by Industrial sector has increased at a CAGR of approximately 3% since 1995. However, the share of the industrial sector in total electricity consumption fell from 39% in 1995 to 36% in 2005. This is due to increasingly more dependence on captive power facilities by power-intensive industries due to increased industrial power tariffs, irregular power supply and shutdowns due to shortages. With the GDP growth of 8-9% each year, the industrial demand for power is poised to grow at even faster rate.
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Domestic Sector: The demand for electricity by domestic sector has increased at a CAGR of approximately 7.1% since 1995. The share of the domestic sector in total electricity consumption increased from 18% in 1995 to 25% in 2005, mainly driven by urbanization.
As more and more cities are being developed and the influx of people from rural areas to urban people, this demand is also going to increase at a faster rate.
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Future Outlook
Nuclear Deal – Implications
With the possibility of Indo-US nuclear ties becoming a reality in the near future, there is a huge potential to be tapped in this sector. There are still some grey areas like the Left Front opposition to the proposed treaty, but once the deal goes through a lot of action is expected on this front. Companies like Tata Power Company Ltd could enter the Nuclear power arena provided the Government gives the approvals. Tata Power has already aligned itself with major nuclear equipment suppliers and is ready to go. It also has plans of partnering with Areva SA. This is just the beginning of a host of companies planning to jump onto the bandwagon. The Atomic Energy Act which regulates the entry of private players into Nuclear Power is likely to be amended in the near future, allowing all these companies to play a significant role. The Government of India is pursuing Nuclear energy as a long term solution to the country’s energy problems. One key advantage of Nuclear power is that it is non carbon emitting and with the depletion of coal resources India needs to have a strong primary source of power which the Government strategize to be the nuclear power. The growing significance of nuclear power in India’s long term strategy can be gauged from the following Nuclear power plant targets according to Department of Atomic Energy (DAE)
? ? ? ? 10,280MWe by 11th five-year plan 20,000MWe by 2020 50,000MWe by 2030 2,50,000Mwe by 2050
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The final implementation of the Hyde Act and 123 agreements will bring India out of the Nuclear isolation of over 30 years and enable her to trade in Nuclear fuels for civilian purposes with other nations. The treaty can bring in the following gains ? ? ? ? It assures uninterrupted supply of fuel to reactors placed under the IAEA safeguards It can solve the short term energy crisis and also improve the energy mix in favour of the nuclear based plants. Nuclear cooperation will stimulate the indigenous research programme Private and foreign investments will take away the problem of paucity of funds
Some of the key challenges to be faced by the private sector are as follows, ? ? ? Managing the decommissioning of an aging plant Storage of radioactive waste and fuel resource management procedures Unlimited liability arising out of an accident can be too much for a private firm to handle
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Renewable Sources
Another significant section which is going to see a lot of action is that of the Renewable Energy sources. Wind companies like Suzlon Energy have shown considerable growth and profitability, leading to more and more investment in the sector. There have been many alliances and partnerships being built up in these areas between national and international companies. Another key area is that of Solar Energy. Tata BP Solar is the major player in that sector now, but there ear ea larger number of companies wanting to enter into o the sector. It is also bound to see a lot of action in the future. The Renewable Energy Sources (RES) play a strategic role in India’s energy programme. It is the first country to have a Ministry dedicated to developing and promoting non-conventional energy sources. The primary reason being its strategic role in being able to provide power to remote locations. In India the sections like Wind, Small Hydro and Biomass have already made an impact with the way they are generating power. The private sector is responding positively to the policy initiatives of the government and the results can also be seen. The major issues that the sector is likely to face are
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High capital costs and low plant load factors make renewable energy more expensive. Technical innovation and probably the carbon credit benefits which accrues due to the environment friendly nature of the renewable energy sources might offset this problem Regulatory certainty of tariff is essential to maintain private sector interest in this area This might lead to increased competition in land-use patterns as more and more people adopt this form of power generation Lack of transmission networks will hamper the evacuation of power from one place to another
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The current installed capacity of India in Wind energy is 9220MW which is just 7.3% of the total capacity. So this presents a big opportunity for private companies to participate in a big way. The improvements in solar technology are making it a very viable option for large scale domestic power demand. India has on average 300 clear sunny days a year which means that solar energy can be a key source of power.
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References
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www.datamonitor.com www.euromonitor.com www.indiastats.com www.crisil.com www.gmid.com www.capitaline.com www.indiainfoline.com www.myiris.com
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doc_369642200.pdf