BUSINESS STRATEGY

Foresight of the Power Industry

Submitted By: Submitted To:

Ruby Jangra Prof. K.K.Jain
(2009-11)
Enrollment No:
09BS0001964
Introduction:

The growth in electricity consumption over the past decade has been slower than the GDP‟s
growth. This could be due to high growth of the services sector or it could reflect improving
efficiency of electricity use. Moreover, captive generation has also increased. However, as
growth in the manufacturing sector picks up, the demand for power is also expected to increase
at a faster rate. Demand will also increase along with electrification. The power generation
capacity has to grow by at least 10 percent to sustain the current GDP growth of 9 percent, say
industry experts. Ideally, they say, the ratio of energy generation and GDP growth should be 1:1.

A World Energy Council report has indicated that 44% of Indian household does not have
electricity connection at all and nearly 90% of rural habitations rely on forest woods for primary
energy.

The prime force of energy generation in India is through thermal generation including gas which
accounts for 70% of total generation. Nuclear energy constitutes only 2.4% and 26% is through
hydel power. India is highly dependent and relying on fossil fuels for power generation and it has
to concentrate in the coming years to focus on non-conventional method. The government has
signed the nuclear deal in 2008 with USA to increase it production of energy through nuclear
reactors, which are the cleanest form of energy. However, the impediment in this sector is the
high cost involved in erection and maintenance of the installation of nuclear reactors and
availability of nuclear fuel. In this front, the most important development achieved is the co-
operation being extended by almost all major nuclear fuel supply group of countries.

With the Indian government signing the nuclear deal with the US, the power sector is all set to
witness an explosion in the coming years in the country.

Signs of this were clear when Prime Minister Manmohan Singh said the deal will help India tide
over its energy crisis as the country needs a lot of investments in the energy sector.

India will need around $250 billion investments in the power sector over the next 8-9 years,
according to a CII-AT Kearney Study on „sustaining growth: future of Indian power sector.

The Indian power market is evolving rapidly from a ‘nascent’ market phase to a ‘developing’
phase. The power demand in the base case is expected to grow at a steady 7.5%-8% CAGR till
2017. Further, the low “power penetration” levels indicate large demand. The power markets will
have to achieve consistent high growth rates to bring per capita consumption to comparable
levels of some of the other developing countries like China and Brazil.

The emerging dynamics of the Indian power market would require industry players to realign
their strategies and operating models 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.

A new era of power on power competition will emerge by 2014 that will bring in at least 80-85
GW of new capacity - 80- 90% of them thermal units targeting high PLF of 80-95% - reducing
the base load deficit to a low of 1-2%. Accordingly, we expect pricing pressures in the
generation space and a 40-50% decline in average short term/merchant prices by 2014-15.

Wind energy will continue to grow at 15-20% pa with new opportunities in offshore capacities
and large capacity turbines. Government incentives will open up opportunities for solar
farms/distributed generation as well as PV manufacturing.

However, constrained fuel supplies present a major threat to the sectors growth: As per current
trajectory, India, in spite of substantial reserves, is expected to confront a supply deficit of 25%
(250 MTPA) of domestic coal by 2014. Similarly, there will be a seven fold increase in uranium
requirement for meeting nuclear power ambitions of India.

Distribution, financing and manpower are other concerns that require immediate attention: High
AT&C losses and slow rate of discom reforms will hurt the industry in the last mile. Financing
may also present a challenge to industry growth. About $ 250bn investments will need to be
undertaken in the power sector in the next 8-9 years to fuel the planned growth. Similarly, over
150,000 additional skilled and semi skilled personnel required over the next 5 - 7 years.

Some critical success factors for the industry are: Strengthen project management & execution
capabilities, to ensure on-time, at cost execution. Secure fuel supplies through well defined fuel
sourcing plan especially coal (linkage, captive, imported) and its associated costs. Fuel logistics
planning and implementation is also critical and should be a focus for project leadership.

Realign market & customer strategy, by striking the right balance between long term PPAs and
merchant trading. Reforms will also give rise to customer mix options (SEBs, traders, bulk
buyers, etc), which will open up different possibilities. Alternate market facing models like
power tolling, distributed generation, peaking power supplies should also be evaluated.

Develop Capital and Operational excellence through selection of right technology and
suppliers/manufacturers for the units. The asset availability and utilisation should be maximized
through O&M best practices.
Establish robust organizational enablers, across people - processes and systems. Many
organisations will have to manage concurrent “projects” and “operations” stages. -Accordingly, a
flexible organisation structure should to be designed and implemented. Overall, the report is
cautiously “optimistic” about the Indian power sector and its ability to support Indias growth
aspirations.
Estimates by the Expert Committee on Integrated Energy Policy (Government of India [2006a]),
indicate that the national power requirement (in billions of units (Kwh) generated) will triple
over the next 15 years.

India has the potential to show the fastest growth over the next 30 to 50 years. Growth rate could
be higher than 5 percent over the next 30 years and close to 5 percent as late as 2050 if
development proceeds successfully. Growth in capital stock together with growth in factor
productivity will yield output growth of 5.4 percent. Over the next 20 years, the working age
population is projected to grow at 1.9 percent per year. If educational attainment and
participation rates remain unchanged, labor growth will contribute another 1.3 percent, yielding
an aggregate growth rate of 6.7 percent per year, or a per capita growth rate of 5.3 percent. This
is a lower bound estimate and, even so, would be significantly greater than the per capita growth
rate of 3.6 percent achieved in the 1980s and 1990s. Over a 40-year period, a 5.3 percent growth
rate would increase the income of the average person nearly 8-fold.

Energy intensity of GDP, defined as the ratio of the energy consumption to the GDP, has been
observed to follow a certain trend worldwide. Below a certain level of development, growth
results in increase in energy intensity. With further growth in economy, the energy intensity
starts declining. Based on data by International Energy Agency , overall energy intensity of GDP
in India is the same as in OECD countries, when GDP is calculated in terms of the purchasing
power parity (PPP). Energy-GDP elasticity, the ratio of the growth rates of the two, remained
around 1.3 from early fifties to mid-seventies. Since then it has been continuously decreasing.
Electricity is the most important component of the primary energy. Electricity-GDP elasticity
was 3.0 till the mid-sixties. It has also decreased since then. Reasons for these energy–economy
elasticity changes are: demographic shifts from rural to urban areas, structural economic changes
towards lighter industry, impressive growth of services, increased use of energy efficient
devices, increased efficiency of conversion equipments and inter-fuel substitution with more
efficient alternatives. Based on the CMIE data , the average value of the Electricity-GDP
elasticity during 1991-2000 has been calculated to be 1.213 and that of the primary energy- GDP
elasticity to be 0.907. Estimating the future GDP growth rates of India from the projections
taking the primary energy intensity fall to be 1.2 percent per year, extrapolating the electricity
intensity fall from past data till 2022 and subsequently a constant fall of 1.2 percent year, the
growth rates of the primary energy and electrical energy have been estimated as follows.

Period Primary Energy (Percent Electricity (Percent Annual

Annual Growth Rate) Growth Rate)
2002-2022 4.6 6.3
2022-2032 4.5 4.9
2032-2042 4.5 4.5
2042-2052 3.9 3.9
These rates are the basis of the projections reported. It may be recalled that historical primary
energy and electricity growth rates during 1981- 2000 were 6 percent per year and 7.8 percent
per year respectively.

Based on the growth rates given in the above table, per capita electricity generation would reach
about 5300 kWh per year in the year 2052 and total about 8000 TWh. This would correspond to
an installed capacity of around 1300 GWe. Annual primary energy consumption would increase
from about 13.5 EJ in 2002-03 to about 117 EJ in 2052-53. By then the cumulative energy
expenditure will be about 2400 EJ.

Strategies:-

 Power Generation Strategy with focus on low cost generation, optimization of capacity
utilization, controlling the input cost, optimisation of fuel mix, Technology upgradation and
utilization of Non Conventional energy sources.

 Transmission Strategy with focus on development of National Grid including Interstate

connections, Technology upgradation & optimization of transmission cost.

 Distribution strategy to achieve Distribution Reforms with focus on System upgradation, loss
reduction, theft control, consumer service orientation, quality power supply commercialization,
Decentralized distributed generation and supply for rural areas.

 Regulation Strategy aimed at protecting Consumer interests and making the sector
commercially viable.

 Financing Strategy to generate resources for required growth of the power sector.

 Conservation Strategy to optimise the utilization of electricity with focus on Demand Side
management, Load management and Technology upgradation to provide energy efficient
equipment / gadgets.

 Communication Strategy for political consensus with media support to enhance the genera;
public awareness.
Sector Specific Opportunities:

Coal:-

 At 51%, Coal is the single-largest source of energy at the disposal of the power sector.
 By 2011– 12, demand for coal is expected to increase to 730 MMT p.a., creating a supply
shortage of over 50 MMT.

 India has the fourth largest proven coal reserves in the world, pegged at 96 billion tones,
creating an investment opportunity of US$ 10 – 15 billion over the next 5 years.

Oil:-

 The demand for Oil – which is currently the second most important source of energy - is
expected to grow from 119 MTOE in 2004 to 250 MTOE in 2025 at an annual growth rate of
3.6 %..

 However, domestic production for the corresponding period is expected to increase at

approximately 2.6% only.

 As a result, our reliance on oil imports is likely to increase from its present level of 72% to
90% by 2025.

 To combat this issue, the government has opened up the domestic oil sector for private
participation under the New Exploration Licensing Policy (NELP).

 Under the competitive bidding process prescribed under the NELP, investment commitments
of US$ 8 billion towards oil exploration projects have already been received. Bidding for
more such projects is currently in progress and is expected to result in further investment
inflows into this sector.

Natural Gas:-

 India has vast reserves of natural gas. More than 700 billion cubic meters of natural gas have
been discovered in the last decade alone.

 Demand for Natural Gas is expected to grow at a CAGR of 12% over the next 5 years to
reach 279 MMSCMD by 2012.

 The importance of natural gas as an energy source has witnessed a significant increase over
the past decade on account of the following two reasons:

 Rising popularity of compressed natural gas (CNG) as an alternative source of automotive

fuel;

 Increased penetration through availability of “piped gas” at residences; and

 Imminent depletion of traditional energy sources such as coal and oil.

Hydro Power:-

 With it intricate network of rivers, substantial opportunities for generation of hydro-power

exist in India.

 Only 22% of the 150 GW hydroelectric potential in the country has been harnessed so far.

 Private participation will play a key role in meeting the target requirement of an additional 45
GW over the next 10 years.

Wind Energy:-

 India is the 4th largest country in the world in terms of installed wind energy.

 India potential of wind power is pegged at 45,000 MW while its current capacity stands at
only 7,660MW.

 Tax incentives, including availability of accelerated depreciation @ 80% under WDV method
on cost incurred on setting up of wind turbine generators have resulted in significant private
investment in this area.

 It is estimated that 6,000 MW of additional wind power capacity will be installed in India by
2012. Wind power accounts for 6% of India's total installed power capacity, and it generates
1.6% of the country's power.

 The Ministry of New and Renewable Energy (MNRE) has fixed a target of 10,500 MW
between 2007-12, but an additional generation capacity of only about 6,000 MW might be
available for commercial use by 2012.

Solar Energy:-

 Despite the prevalence of an inherent advantage in the form of solar insulation, the potential
for solar energy is virtually untapped in India.

 India installed solar – based capacity stands at a mere 100MW compared to its present
potential of 50,000MW.
 Based on the substantial investment opportunities that exist in this sector, it is estimated that
by 2031 – 32, solar power would be the single largest source of energy, contributing 1,200
MTOE i.e. more than 30% of our total expected requirements.

 High capital investment has kept solar power away from mass applications. However, capex
has been steadily declining and is likely to touch $2 per watt by 2010 and, perhaps, hit $1.5
per watt by 2012 on account of high efficiency solar cells. By 2012, solar power could
become more attractive than non-pithead coal and gas. Only hydro and nuclear will have
lower delivered costs.

 In July 2009, India unveiled a $19 billion plan to produce 20 GW of solar power by
2020.Under the plan, solar-powered equipment and applications would be mandatory in all
government buildings including hospitals and hotels.

Nuclear Energy:-
 By 2032, the government plans to raise the contribution of nuclear energy from the current
level of less than 3% to around 10% of the country's installed capacity.

 The signing of the Indo – US nuclear deal has created significant opportunities for several
players across the entire power supply chain, with an estimated investment opportunity of
US$ 10 billion over the next five years.

 Further, India has among the worlds largest reserves of alternative nuclear fuel – thorium.
Accordingly, substantial investment opportunities are also likely to arise once commercial
production based on thorium becomes feasible.

 When the Indo-US nuclear deal goes through, India is expected to generate an additional
25,000 MW of nuclear power by 2020, bringing total estimated nuclear power generation to
45,000 MW.