In recent years, the transmission and distribution (T&D) equipment market’s growth has been driven largely by the government’s thrust on 24×7 Power for All, rural electrification and renewable energy, as well as government schemes such as the Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and the Integrated Power Development Scheme (IPDS). In the generation segment, the equipment industry has benefited from the uptick in tendering activities for FGDs for emission control as well as retrofit opportunities. That said, the power equipment industry has been battling several issues including low capacity utilitisation, financial stress in the sector, a slowdown in renewables growth, and limited raw material availability. Leading manufacturers comment on the state of the equipment market, the growth opportunities and key drivers as well as the challenges ahead….
What is your assessment of the power sector’s progress during the past 12 months?
R.K. Chugh
I have mixed views about the overall key power sector indicators for fiscal 2019 and also for the first half of fiscal 2020. In fiscal 2019, the country achieved an installed power generation capacity of 356 GW, a year-on-year increase of 13 GW. However, we fell short of the targeted addition for the year, meeting only 73 per cent in thermal and 53 per cent in renewables. With renewable energy capacity at around 75 GW, we have a tall task of adding 100 GW in the next three years until 2022 to realise the 175 GW goal. We did well in transmission by adding 22 ckt. km of lines, thereby achieving 99 per cent of the target, and also in transformation capacity, under which we added 72 GVA (including high voltage direct current [HVDC]), thereby overshooting the target by 16 per cent. It is heartening to see that we have already achieved 40-50 per cent of the targeted transmission capacity of the Thirteenth Plan, which is central for interregional power transfer as well as for strengthening of power markets. Peak demand was highest at 182 GW in July 2019 (based on provisional figures) and its deficit reduced from 2 per cent in 2018 to 0.7 per cent in 2020. Energy production grew at 3.6 per cent in 2019 (1,380 BUs), with renewables posting a stupendous 24 per cent growth. We have achieved the Power for All mission in all areas barring some hamlets in Uttar Pradesh and Rajasthan.
Sadly, our per capita electricity consumption is still low at around 1,200 kWh. We have witnessed weak growth in renewable energy capacity addition and generation in the first half of 2020 on account of policy bottlenecks in anti-dumping duty, and goods and services tax in the solar space.
Vimal Kejriwal
Over the past few years, the power sector has witnessed significant growth in energy demand, generation capacity, and T&D networks. The country’s current installed capacity stands at around 360 GW, which is the fifth largest installed capacity globally. Our energy consumption has doubled since the year 2000 and the potential for further growth is enormous. However, in financial year 2019, the sector witnessed lower-than-expected growth vis-à-vis the previous year. It added around 12,000 MW, 22,437 ckt. km of transmission lines and 72,705 MVA of substation capacity. The general elections, held earlier this year, also led to a slowdown with new orders and their execution taking a back seat. Nevertheless, the industry is now seeing signs of recovery with an uptick in tendering activities and the first phase of the Green Energy Corridors (GEC) project being auctioned.
The Union Budget 2019 placed a major thrust on the infrastructure sector, proposing to spend nearly Rs 100 trillion in the next five years, with a target of propelling India to a $3 trillion economy by the end of 2019-20, and a $5 trillion economy by 2024-25. The government has embarked upon numerous initiatives to achieve the objectives of the 24×7 Power for All programme, with special emphasis on rural electrification. Schemes such as the DDUGJY, Saubhagya and the IPDS are directed towards improving power availability in all households. The enhanced push to renewable energy is expected to be a potential game changer for the power sector.
The fast pace of renewable energy capacity addition calls for transmission planning in order to enable the flow of renewable energy into the national grid network, which includes the GEC project. The GEC project is expected to generate a significant volume of work over the next three to four years. KEC has already executed several GEC projects, including the 765 kV Bhuj-Banaskantha and the 765 kV Banaskantha-Chittorgarh transmission lines in Gujarat and Rajasthan, both for Power Grid Corporation of India Limited (Powergrid). Furthermore, the recently announced 7.5 GW solar park in Ladakh is expected to bring in significant opportunities for building transmission networks.
With the push for “Make in India” and a high industrial expansion outlook, the country is all set to become a global manufacturing hub with investments being made across the value chain. As per government reports, the demand for electricity is expected to increase at a compound annual growth rate (CAGR) of 7 per cent to 1,894.7 BUs over the next few years. The growing demand for power and capacity expansion necessitates transmission network augmentation. To this end, timely implementation of transmission lines would be critical in the years to come.
Ashish Khanna
India has been a global leader when it comes to the growth of the power sector. Investments in this sector increased by 12 per cent in 2018 alone, as per International Energy Agency data. A major part of this growth can be attributed to the government’s rural electrification programme under which 100 per cent electrification was achieved. Programmes such as Saubhagya have been instrumental in achieving this. In 2019, a total of 13,752 MW of power generation capacity was installed; of this, 60 per cent was harnessed through renewable energy sources. Even the deficit in peak demand reduced to just 0.4 per cent on account of renewable power generation, with solar power playing a key role. With regard to transmission lines, 99 per cent of targets have been met and a total of 22,437 ckt. km of transmission lines have been added in the current financial year. Current power generation projects such as the Shakti Sthala solar project in Karnataka undertaken by the government looks promising. Spread over 13,000 acres at an investment of Rs 165 billion, it is estimated to have a generation capacity of 2,000 MW and is going to be the world’s largest solar park.
Shailendra Roy
The share of installed thermal power capacity, as of March 31, 2019, was 56 per cent of the total electricity mix and it contributed 75 per cent of the gross electricity generated. As per the Central Electricity Authority’s (CEA) Draft Report on Optimal Generation Capacity Mix for 2029-30, thermal power-based installed capacity is likely to account for about 32 per cent of the total installed capacity and will contribute around 50 per cent to the gross electricity generation. However, this needs to be seen in light of electricity demand in the years to come. The NEP’s electricity demand projection of around 6 per cent CAGR looks conservative, considering the expected growth in per capita energy consumption. In fiscal 2019, the actual growth in electricity demand in India was 5.2 per cent. This demand further picked up in the April-June 2019 quarter with a growth of 6.7 per cent over the same period in 2018. Considering the government’s initiatives such as Make in India and the Smart Cities Mission, the power demand is likely to grow. The increasing adoption of electric vehicles in the next 10 years will also spur electricity demand.
L&T Power has always emphasised the need for retiring old and inefficient thermal power plants and replacing them with efficient supercritical units. This has been incorporated in the NEP, under which around 48 GW of coal plants have been planned for retirement by fiscal 2027, with corresponding addition of supercritical plants. In the past three years, around 9 GW of coal plants were retired and supercritical units for replacing these have been either ordered or planned. In August 2019, the Ministry of Power issued the draft of a new coal allocation methodology under the SHAKTI scheme. The new methodology proposes to conduct auctions of coal linkages at more frequent intervals, and to allow plants without PPAs to participate in these auctions. It is expected that this step would help developers revive around 15 GW of projects that are without coal. The power ministry is currently working on UDAY 2.0. The accountability of discoms is set to increase in terms of meeting their loss reduction targets for the continuation of government funding. Introducing the provision of letter of credit for power purchase by discoms is yet another step towards increasing accountability.
Renewables (solar and wind) could not achieve their capacity addition targets in the past 12 months. While domestic solar manufacturing issues will need redressal, in the case of wind power, the government might consider laying the thrust on repowering of old plants and fast-tracking of offshore installations. In the nuclear power sector, 8.4 GW of indigenous projects (pressurised heavy water reactors) have received administrative approval and financial sanction. These projects will improve the manufacturing of key equipment in the domestic industry, and are expected to play a vital role in enhancing the country’s nuclear power capacity to around 22 GW by 2031. Despite a delay, the CEA has been able to finalise a plan for phased implementation of FGD by fiscal 2022. As a result, we have seen FGD ordering of 28 GW in fiscal 2019 and the balance ordering being expedited to adhere to the December 2022 deadline.
Ponniah Sankarakumar
The power sector is undergoing a sea change and this has further redefined the industry outlook. The demand for power saw a steady growth of up to 6 per cent in the past quarter, even during the economic slowdown in the country. To support this demand, the government has implemented various schemes such as UDAY and 24×7 Power for All to maximise power generation capacity and improve distribution. Technologies such as artificial intelligence and internet of things are transforming the power sector rapidly and, in the process, enabling it to maximise and improve the power generation capacity, as well as T&D networks across the country.
What are the key issues and challenges impacting the power equipment industry?
R.K. Chugh
All of us are aware of the current economic slowdown, both cyclical and structural, as well as that is externally induced. There are slowdown indicators in the T&D space. We need to be cognisant of the same and take efficiency measures to stay afloat. In the first quarter of fiscal 2020, on a year-on-year basis, transmission lines and transformers registered a negative growth of -7 to -8 per cent, while cables and switchgear, which witnessed a double-digit growth a year ago, slowed to 1-6 per cent. With the end of UDAY 1.0 and Saubhagya, the industry is looking forward to new reforms to spur the growth momentum. Power distribution continues to be the Achilles heel of the power sector, despite the intervention by UDAY 1.0. Power distributors’ cumulative losses in 2019 stood at Rs 280 billion, an 80 per cent year-on-year increase. Many distribution system operators (DSOs) in the northern and eastern regions as well as in Tamil Nadu are in the red again. UDAY 1.0 had challenges in reducing AT&C losses. For instance, aggregate technical and commercial (AT&C) losses of Uttar Pradesh DSOs are still as high as 25-40 per cent. DSOs’ financial stress reflected on generation companies with low PLFs of around 60 per cent. Manufacturing companies have dues of over Rs 80 billion with utilities. Of this, a good chunk is on account of DSOs. Many manufacturing organisations will turn healthier in their balance sheets, if utilities pay them on time.
Vimal Kejriwal
Over the years, the power equipment industry has kept pace with the growth in the power sector. The industry, which is predominantly unorganised with several small players, is slowly graduating to the medium-sized category, thus making the market more competitive and price sensitive. However, the slowdown in the manufacturing segment has led to a slump in new as well as existing expansion projects, which is a major concern for the industry. Renewable energy projects, too, especially solar energy based, have witnessed a serious slowdown. This has hampered transmission project spending, resulting in delays in project approvals and project cancellations. The imposition of safeguard duty on solar cells is expected to slow down the already ailing solar segment. Several other issues continue to impact the sector. These include the lack of domestic availability of critical inputs/ raw material, the lack of infrastructure, logistics challenges, right-of-way and forest clearance issues, and land acquisition issues.
Ashish Khanna
The 100 per cent electrification of rural India has brought good news for the power equipment industry, with a 10 per cent growth being projected for 2019. Exports are expected to grow up to 20 per cent in the current fiscal year. The reduced dependence on fossil fuels has added to the growth of the power equipment industry in the renewable energy sector. Under the Jawaharlal Nehru National Solar Mission, the Indian government aims to achieve 100 GW of solar power capacity through rooftop and large-scale grid-connected solar power projects by 2022. These large-scale solar power projects require AC/DC converters and switching systems which will give a further boost to the power equipment market. Products that have seen significant domestic growth include motors and AC generators (9 per cent), distribution transformers (21.5 per cent), low tension (LT) switchgear including panels (8.9 per cent), high voltage (HV) and low voltage (LV) power cables (23.2 per cent) and energy meters (26.3 per cent). In terms of challenges, domestic growth has declined in product groups such as power transformers (-3.1 per cent), HV switchgear including panels (-7.2 per cent), insulators (-16 per cent), transmission line towers (-11.8 per cent) and conductors (-12.9 per cent).
Given that India’s transformer market is unorganised and contains several small players, competitiveness has brought down the price and the quality; this needs to be addressed. The supply of cold-rolled grain-oriented sheet steel is another challenge that needs to be dealt with since most of it is imported due to low supply. The renewable energy sector is another area we need to focus on. Safeguard duty on imported solar panels needs to be further reduced.
Shailendra Roy
Slow movement in the installation of new and efficient coal-based thermal power plants has been a concern. The lack of boiler-turbine-generator (BTG) ordering is a big challenge for the industry. In fiscal 2019, the ordering for domestic coal projects almost came to a standstill with only one unit of 660 MW being ordered. This was a drop from the already low ordering of around 5 GW in fiscal 2018 and 6-7 GW average annual ordering in the preceding years. L&T and other organisations had invested heavily in setting up manufacturing capacities for supercritical BTG equipment. However, with the huge drop in the ordering, annual capacity utilisation of these manufacturing plants has deteriorated.
Moreover, in the engineering, procurement, and construction (EPC) segment, working capital is taking a hit mainly because of the non-release of retention due to conditions that are beyond the contractors’ control.
We may see some trend reversal in fiscal 2020 with 2.6 GW ordering so far and another 3.2 GW in the offing. However, even with 6-7 GW ordering every year, the manufacturing capacity utilisation will continue to remain subdued.
I feel there is a need for a balanced approach in generation capacity planning. While renewable energy growth shall be a focus area, the hidden costs of integrating renewable energy into the grid, load balancing and underutilised thermal capacity need to be factored in. Further, these plants have a long gestation period and unless planned now, we may face a scenario of energy shortage over the next 5-10 years.
Regulatory overhaul and financial restructuring have helped stressed assets. However, a successful resolution with a clear roadmap eludes us. Efforts made by the government to revive these assets have shown some results. Of around 40 GW of identified stressed assets, only 9 GW capacity has been brought to the table for resolution and only projects of around 3 GW have been resolved. Again, the haircut to be taken by banks has been a continuous point of concern.
Due to high exposure, banks have stringent financing norms for power projects, including for FGD installation. FGD installation necessitates a rise of Re 0.30-Re 0.40 per unit in tariff, which is a concern for lenders.
Ponniah Sankarakumar
According to a report by Seconded European Standardisation Expert for India, the Indian electrical equipment industry accounts for 8.1 per cent of the manufacturing sector in terms of value and 1.35 per cent of India’s GDP, providing direct employment to 0.5 million persons and indirect employment to 1 million people and over 5 million across the entire value chain. The sector is anticipated to grow faster across all the major economies in the world, however, it is facing challenges in areas of safety regulations, strict trade policies, IT/OT integration and ageing infrastructure.
Some of the other challenges faced by the industry include declining private sector investment along with lower foreign direct investment (FDI) in the power sector, market-driven policies and the poor financial condition of state distribution companies. Thus, the need of the hour is to introduce superspecialised services.
What are the market opportunities that you foresee in the power equipment industry in the next one to two years?
R.K. Chugh
Unlike the fast moving consumer goods (FMCG) space, our industry has a longer gestation and business cycle. Therefore, we should always look at a long-term perspective and not limit ourselves to only a near term of one or two years.
In our sector, the “deepening of power markets” pursued by the power ministry is perhaps the largest and the most radical policy intervention since the introduction of the Electricity Act, 2003. The policy framework to be rolled out under UDAY 2.0 and the new tariff structure will make DSOs responsive, accountable and cost efficient. DSOs will be able to buy more power from the trading platform, at a lower cost. This will also put pressure on DSOs to license and franchise their circles even more. Without a clearly demonstrable efficiency improvement, they will no more be entitled to grants.
After a likely subdued 2020, post the introduction of these measures, electrical equipment manufacturers would see a resurgent market for electrical components as well as digital solutions over a five-year horizon. Metering will remain buoyant considering the tremendous scope for smart meter penetration.
Our decarbonisation mission through higher renewable energy penetration and electric mobility by 2030 will open up huge markets for new products. Grid-scale storage will become a necessity as renewables begin to penetrate to levels beyond 25-30 per cent. There are some aspects that are impacting the security of the sector. Our sub-transmission system below 132 kV is vulnerable to malware/ransomware cyberattacks. DSOs in West Bengal and Rajasthan have witnessed some incidences in the past 18 months. Although we tackled these attacks well, we should recognise the potential impacts, as, if left unchecked, they can be more devastating than what we have experienced so far. The threats present opportunities for specialists in the space to create a security shield.
Another area is foreign policy under the Regional Comprehensive Economic Partnership (RCEP). In Budget 2019, it was reported that under the current RCEP regime there has been a local revenue loss of Rs 260 billion, more than double that in the previous year. The electrical industry is still export deficient, with Rs 200 billion of deficit in 2019.
Vimal Kejriwal
The total market size of electrical machinery in India is anticipated to grow from $24 billion in 2013 to $100 billion by 2022. The rising standard of living in India has contributed to the increasing per capita consumption of power, leading to the growth of the industry.
Several factors such as the increase in domestic demand and export of transformers, cables, conductors, insulators, etc. has resulted in the growth of this sector. For large EPC players, such as KEC, nearly 50 per cent of the revenue comes from transmission exports to regions such as SAARC, Africa, the Middle East and the Far East.
Additionally, various government infrastructure initiatives such as the GEC project, 100 per cent electrification, HVDC lines and 100 per cent FDI in the sector as well as increased focus on renewables will continue to fuel the growth of the equipment industry. The government’s plan to set up the Electrical Equipment Skill Development Council (EESDC) is also expected to give a boost to the sector.
Ashish Khanna
Current installation plans show the country’s steady shift from fossil fuels to renewable energy. By 2022, the government plans to achieve 175 GW of renewable energy capacity comprising 100 GW of solar power, 60 GW of wind power, 10 GW of biopower and 5 GW of small-hydro power. This increase in power generation and transmission will lead to a new demand of more than Rs 1,000 billion worth of electrical equipment over the next four years. What’s also worth noting is that between 2000 and 2018, the electric industry attracted $14.18 billion in FDI, accounting for 3.64 per cent of total FDI inflows in India. There are immense opportunities for India in areas like sensing, communication, data management and data analytics. The addition of new power generation capacity and the adoption of technologies such as smart meters and smart grids offer immense opportunities.
Shailendra Roy
It is heartening to note that Nuclear Power Corporation of India Limited has, for the first time, tendered out large packages like steam turbine generators on an EPC basis. Fast tracking of these projects will promote India’s domestic manufacturing drive and enhance the utilisation of original equipment manufacturer (OEM) facilities. Further, around 19 GW of foreign collaboration-based light water reactor (LWR) projects are at the planning stage.
Next, FGD has become a major opportunity. With around 50 GW of FGD retrofit orders decided, the implementation of the CEA plan picked up pace in fiscal 2019 and the first two quarters of fiscal 2020. The momentum is likely to continue. The Central Electricity Regulatory Commission’s tariff order for treating FGD cost as pass-through under “change in law” should push its implementation.
A recent report by the Institute for Energy Economics and Financial Analysis, and Applied Economics has flagged the water scarcity issue in India and has highlighted that this will further worsen due to climate change. Hence, water efficient technologies like air-cooled condenser and zero liquid discharge will find greater acceptance and gradually become the norm.
Globally, there has been a significant thrust on offshore wind power generation. It is good to know that the Ministry of New and Renewable Energy’s expressions of interest for the first 1 GW offshore wind project evoked keen response from global and domestic industry players. India is one of the largest prospective markets for battery storage technologies due to its ambitious renewables addition targets. The construction of the first grid-scale energy storage and grid stabilisation system of 10 MW capacity has already been completed. The CEA estimates indicate that around 34 GW/136 GWh of grid-scale battery energy storage systems would come up in India by 2029-30. Background work on the electric vehicle policy front is in progress. It has the potential to grow electricity demand by 3-4 per cent.
Ponniah Sankarakumar
A developing country like India needs improvement in electrical industry infrastructure to maintain the consistent performance of its power sector, which will ensure constant economic development. In the coming years, technology will play a huge role in expanding opportunities in the power sector. It will help in improving operational efficiencies with new business models and in aligning with the sector’s sustainable business strategy. In the years to come, the electrical equipment industry is expected to lead the market with increasing innovations in battery-operated products.