While the power transmission segment has done reasonably well in the past few years, it needs more vigour in terms of new project awards and greater capex to ensure that the government’s “Power for All” targets are met, believes Pratik Agarwal, CEO, Sterlite Power. In a recent interview, Agarwal spoke about the state of the transmission segment in India, the key challenges, and Sterlite’s growth plans…
How has the transmission segment evolved in the past few years? What has been the role of private transmission developers in segment growth?
In the past three years, the government has made a significant impact on the power sector. While each segment of the power sector value chain has progressed, the transmission segment has seen rapid progress. Realising that the middle layer (transmission) is likely to be the bottleneck from the gestation and fund mobilisation perspectives, the government has started to address both the aspects swiftly. A robust policy and regulatory framework is in place for the sector. The tariff policy mandates tariff-based competitive bidding for interstate as well as intra-state transmission projects. Independent transmission companies and merchant transmission developers are stepping in to provide the necessary stimulus. New sources of finance such as infrastructure funds and pension funds are beginning to target the electricity transmission sector. International funding and development institutions are widening their scopes to include transmission projects. The government’s vision of Power for All by 2019 is a strong initiative towards enhancing the grid network and expanding connectivity to remote locations. This initiative will lead to huge investments in the transmission and distribution segments. Some solutions to facilitate development of the transmission segment are:
- Fast-tracking the implementation of the public-private partnership model at the state level in order to meet the capex required for grid investments.
- Streamlining the process of award of tariff-based competitive bidding projects.
- Infrastructure investments that are created ahead of demand play a vital role in spurring demand and lead to better economic growth. Upfront investments in creating a strong and reliable power transmission network will ensure that the grid is ready to take on the new renewable energy-based generation paradigm.
What are the new and emerging challenges for the transmission grid?
If India grows at 7.5 per cent, our per capita power consumption will triple or quadruple over the next 10 years. The installed power capacity will grow from 300 GW to 700-800 GW during this period. Renewables will grow from 60 GW at present to 200 GW in four years. The last time we did something like this, it took 25 years. Various schemes will revive the distribution sector. Although transmission is the infrastructure of infrastructure, there are no big-bang announcements being made in the segment. No new interstate transmission system (ISTS) project approvals were witnessed in 2017-18, which is concerning given that the gestation period from planning to commissioning of a transmission asset is 36-50 months. The country’s transmission vision has to match the vision that we have for renewable energy and Power for All. The impact of power generation on the transmission grid in India is expected to change significantly with a greater share of renewable energy generation. The grid failure in July 2012 affected nearly half of the population. We cannot afford a similar situation in digitally connected India. Hence, it is important that investments are done not only for meeting or spurring demand, but also for ensuring better quality and higher reliability of power. In this context, planning contingency lines along important corridors becomes critical. Some of the related challenges are:
- While solar projects can come up in 6-12 months, transmission projects take 50-60 months on an average (including standard delays). This underlines the need for planning early.
- State grids are the weakest links. There is no point investing upstream if the downstream remains weak. State grids are already the central agenda whether we accept it or not.
- Another challenge pertains to delays in obtaining environmental clearances and the lack of incentives. Forest clearance for a transmission project typically takes 18 months. There are no incentives in place for early commissioning. Bidders must get a “window” for the commercial operation date and a large bonus for finishing early. Today’s bid documents are discouraging early commissioning.
What is Sterlite Power’s current portfolio of transmission assets? Which are some of the key projects under execution?
Sterlite Power is a leading developer of power transmission infrastructure with 16 projects of nearly 10,000 ckt. km line length in India and Brazil. With the core purpose of “empowering humanity by addressing the toughest challenges of energy delivery”, we have bid for and won some of the toughest and most significant projects. Be it our Northern Region Strengthening Scheme XXIX project, which will connect Jammu & Kashmir to Punjab and enable it to access reliable power for the first time, or the project in Kerala where, due to land unavailability, we are working on more than double the existing transmission lines capacity, each of these are equally significant.
What has been the growth in Sterlite’s overseas business? What are some of the markets that the company is looking at?
We bid, design, construct, own, operate and maintain power transmission assets across multiple geographies. Given our expertise in project execution and experience in leveraging cutting-edge technology, we have achieved a track record of commissioning projects ahead of schedule. Brazil is one of the most attractive markets globally for a power transmission developer. There is a strong contractual framework, including long concession tenures (30 years), inflation-protected revenues (which help lower the forex risk), and auction-based bidding for projects. These factors, along with a project pipeline of $30 billion in the transmission segment, attracted us to the country. The other countries that are expanding their power access infrastructure and opening up to private investment are Kenya, Nigeria, Chile, Argentina, Peru and Mexico.
Which are some of the new transmission technologies inducted by the company?
We extensively leverage technology at every stage of the project – from planning to execution and maintenance. In order to achieve early commissioning and effectively execute projects in difficult terrains, we have been adopting the following solutions:
- Digital platforms for route planning, elevation models and resource optimisation technology leadership
- Aerial technology such as heli-stringing and helicrane-based tower erection
- Automated inspection and data analytics
- Innovative tower designs (such as multi-circuit multi-voltage towers, monopoles) to address RoW challenges in densely forested areas and heavily congested cities.
How have the InvIT and the IPO helped Sterlite’s operations and finances? What are your fund-raising plans and capex needs?
Sterlite Power has built a strong operations and maintenance team to manage assets post commissioning. The recent successful listing of IndiGrid, India’s first power sector infrastructure investment trust (InvIT), provides a potential avenue for Sterlite Power to raise capital by transferring mature, fully operational assets to the trust and redeploying the capital for new assets. We have a four-pillar strategy for growth. First, our business model focuses on owning and operating transmission assets with long-term cash flows and low operating risk. Second, we follow the value accretive growth approach, wherein we look to acquire similar assets through our right-of-first-offer agreement with our sponsor as well as third-party asset, and aim to deliver 3-5 per cent distribution per unit (DPU) growth on a year-on-year basis. Third, we look at maintaining an optimal capital structure and maximising distribution for our unit holders. It has been about nine months since the launch of our initial public offering (IPO) and I believe we have delivered on the three key promises.
- The first one is consistent and timely distribution as per our guidance and sometimes above our guidance.
- Second, we have increased the DPU through value accretive transactions. We have surpassed our original target of 3-5 per cent growth and delivered close to 9 per cent DPU growth.
- Lastly, we have signed our first-ever third-party acquisition.
What are Sterlite Power’s growth plans and key focus areas?
Our track record of addressing the key constraints of time, space and capital gives me the confidence that we will be able to create a transformative impact on societies and livelihoods. Sterlite Power is demonstrating leadership in the transmission segment by effectively leveraging its core strengths – technology, excellence in project delivery, expertise and financial innovation. In the transmission business, we will continue to expand our presence in India and our chosen global markets. In the solutions business, we will strive to further increase our presence in over 40 countries.
What is your outlook for the power sector over the next few years and Sterlite’s role in it?
The Indian economy is at an interesting juncture, with significant long-term reforms being undertaken amidst a stable macro environment. According to the International Monetary Fund’s forecast in January 2018, India is expected to grow at 7.4 per cent in 2018-19 against 6.7 per cent in 2017-18, reaching 7.8 per cent in 2019-20. Hence, power demand should increase rapidly in the years to come. Preparing for the future, the country faces an energy trilemma: energy equity, energy security and commitment to sustainability. The government is addressing these through various programmes including the availability of quality power for all, emphasis on a stable and secure grid, and massive expansion of renewable energy. With India pursuing aggressive renewable targets, the possibility of tying up with private sector renewable companies for providing power evacuation services in the upcoming rounds of ISTS-connected solar and wind auctions will further change the paradigm for the sector. The development of efficient, economical and integrated transmission will be an imperative for the success of these initiatives. It is, therefore, essential to relook the planning philosophy, attract adequate investments and encourage competition in the transmission space. Sterlite Power will continue to partner with the government in its mission to provide 24×7 power to all citizens.