Growth Positive: Infrastructure sector to drive demand for DG sets

Infrastructure sector to drive demand for DG sets

Despite the declining power deficit, the demand for diesel generator (DG) sets and engines is expected to stay strong, led by an increase in backup power requirements due to growing urbanisation and higher government spending on the infrastructure sector.

DG sets are typically used for meeting backup power requirements to support critical operations in industrial and commercial units. The relative ease of availability of fuel and low upfront cost vis-à-vis other captive power sources (coal, gas, renewable energy power plants) has made DG sets a preferred option for consumers. DG sets offer other advantages as well, such as a shorter installation period, higher efficiency (43-45 per cent), quick start-up time, minimum cooling water requirement and fuel flexibility.

Key user segments

The Indian diesel genset market is broadly classified into four segments on the basis of kVA rating: low (5-75 kVA), medium (75.1-350 kVA), high (350.1-750 kVA) and very high (750.1–3,000 kVA). Low-rating diesel gensets constitute a major share of the market and are used in the telecom sector for backup power in grid-connected areas and as baseload power in off-grid areas. The telecom sector accounts for 55-60 per cent of sales in the segment. Other user segments include small-scale industries, petrol pumps, small commercial establishments, etc.

The medium to high kVA rating DG sets are mainly deployed in the hospitality, healthcare, information technology (IT) and IT-enabled services (ITeS), construction, real estate and large industrial segments. The very high kVA rating DG sets are used to provide emergency backup, critical standby, or baseload power to segments such as data centres, health care, manufacturing, government bodies, mining and large commercial units.

Market trends

The DG set market has witnessed turbulent times in recent years. Sales declined between 2012-13 and 2016-17 owing to a reduction in power demand from industries as well as weak demand from the telecom tower segment. The latter is a key consumer of DG sets as telecom/cellular base transceiver station (BTS) sites depend on DG sets to power various communication devices and equipment. Consequently, the sale of DG sets declined from Rs 78,260 million in 2012-13 to Rs 56,364 million in 2015-16, recording a decline of 10 per cent at a compound annual rate (source: Motilal Oswal Securities Research).

Further, the announcement of demonetisation in November 2016 and the roll-out of the goods and services tax (GST) in July 2017 also affected the business environment and negatively impacted the sales of DG sets and engines. However, a gradual improvement in the macroeconomic environment in 2017-18 and a record high allocation of Rs 3.96 trillion for the infrastructure sector in the Union Budget 2017-18 bode well for the DG set and engine industry. As a result, the sale of DG sets has picked up and is estimated to reach about Rs 63,679 million in 2017-18, recording a year-on-year growth of nearly 13 per cent.

Installed capacity

As per the Central Electricity Authority, as of December 2017, the installed diesel-based generation capacity in the country stood at 838 MW. It accounts for a minuscule share of 0.25 per cent in the country’s total installed capacity of over 330 GW (across all fuel sources). Almost half or 412 MW of diesel-based capacity is concentrated in Tamil Nadu, 19 per cent (160 MW) in Kerala, 18 per cent (153 MW) in Karnataka, and the rest in the Andaman & Nicobar Islands (40 MW), Andhra Pradesh (37 MW) and Manipur (36 MW). DG sets are an important source of power in remote areas as well as in islands such as Andaman & Nicobar where grid connectivity is lacking.

In addition, a small proportion of captive power generation capacity is fuelled by diesel/liquid fuel-based plants. According to India Infrastructure Research, DG sets/liquid fuel-based power plants accounted for 4 per cent share or nearly 2,500 MW in the total tracked captive capacity of 63 GW in the country, as of March 2017. Most of this capacity is accounted for by projects of less than 10 MW size.

Regulatory developments

The regulatory requirements for DG sets are centred on reducing emission and noise levels. In 2016, the Ministry of Environment, Forest and Climate Change notified the noise limits for various dual-fuel engines including those based on diesel as a primary combustion fuel and natural gas or liquefied petroleum gas as supplementary fuel. Accordingly, the maximum permissible sound pressure level for gensets with a rated capacity of up to 800 kW is 75 dB(A) at 1 metre from the enclosure surface. In addition, the gensets should be provided with integral acoustic enclosures at the manufacturing stage itself. The noise norms came into effect on January 1, 2017. Further, the Central Pollution Control Board-II (CPCB-II) norms, which came into effect on April 1, 2014, have tightened the emission limits for DG sets of up to 800 kW.

Technology update

In recent years, research and development (R&D) efforts by manufacturers have been focused on introducing gensets with reduced noise and emission levels, and higher energy efficiency. Today, most manufacturers offer silent DG sets in line with regulatory requirements and consumer demand, especially in the hospitality and healthcare segments.

Also, energy efficient DG sets that offer better fuel efficiency are finding greater demand from consumers. Under the energy efficient labelling programme of the Bureau of Energy Efficiency, DG sets with specific fuel consumption of 220 grams per kWh are given a maximum rating of five stars while those between 302 grams per kWh and 330 grams per kWh are given the minimum rating of one star. Further, solar-diesel hybrid generator sets and multi-fuel technologies are key emerging options to improve reliability and efficiency, and achieve cost savings.  Hybrid power plants combine at least two different sources of energy and may or may not have a storage facility.

In addition, with the growth of smart grid technologies and smart cities, manufacturers have started offering DG sets with remote monitoring capabilities. Consumers can monitor DG set parameters related to fuel consumption, annunciator, alternator and engine, and the loading and switch connection status. Advanced modules can provide additional monitoring and controlling capabilities. Further, the use of analytics and internet of things for monitoring DG sets can immensely help in preventive maintenance and ensure maximum uptime.

Issues and challenges

Following the implementation of the CPCB-II norms, the price of DG sets has increased by 15-20 per cent, which has affected sales as consumers are taking time to accept the price increase. In addition, growing competition from international and domestic players has led to a significant discount in prices, affecting manufacturers’ profit margins.

Also, the high generation cost of power from DG sets (at Rs 15-Rs 17 per unit) and increasing diesel prices is a challenge as the cost of generating electricity from other sources, especially renewables, has declined to below Rs 3 per unit in recent times. The cost of generation from coal also varies from Rs 3 to Rs 4 per unit. Further, the growing concern of citizens and statutory authorities regarding pollution in cities may result in a temporary ban on DG sets by the state governments. A case in point is Delhi where the Environment Pollution Control Authority has imposed a ban on DG sets till March 2018 on account of high pollution and smog levels in the city.

The way forward

The DG set and engine market is expected to grow at 10 per cent between 2016-17 and 2019-20 (source: Motilal Oswal Securities Research). Industry experts believe that the growth of the DG set and engine market has largely decoupled from the traditional power demand-supply gap and quality power supply is the key demand driver. Despite the reduction in power deficit, the demand for DG sets is expected to grow in the short to medium term with transmission and distribution constraints continuing to cause interruptions in power supply.

Further, the implementation of tax reforms such as GST will gradually reduce the share of smaller unorganised players in the market, thereby benefiting large organised ones.  Also, a revival in infrastructure and industrial growth will yield positive results for the DG set and engine market. Going forward, investments in the IT/ITeS (especially data centre capacity), railways, roadways, commercial and real estate segments are expected to provide an impetus to the growth of the DG set market.