Think BRIC! Key Considerations for Investors Targeting the Power Sectors of the World’S Largest Emerging Economies

ENERGY AND NATURAL RESOURCES Think BRIC! Key considerations for investors targeting the power sectors of the world’s largest emerging economies

INDIA

Contents

Contents 3

Foreword 4

Introduction & Methodology 5

Executive Summary 6

1. India: Country in Figures 9

2. Population 10

3. Economy 12

4. Electricity Market 16

4.1. Electricity demand 17

4.2. Electricity supply 23

4.3. Ownership and investments in the Indian power industry 29

4.4. Main determining factors in the development 32 of the electricity industry

5. Investment Opportunities 39

Acronyms 40

KPMG’s ENR Practice Overview 41

KPMG’s ”Think BRIC! Key considerations for investors targeting 45 the power sectors of the world’s largest emerging economies“ publication series

Other KPMG Thought Leadership 46

Foreword

Energy is a global industry, vital to In this publication we have attempted economic development and as such has to turn market data into meaningful strong political and social implications. information and include top-level The world’s largest emerging executives` perspectives on the economies, known in shorthand as the evolution of the Indian power sector BRIC countries – Brazil, Russia, India from political, socio-economical, and China – are in the top 10 global technical, environmental and legal energy consumers and are home to aspects. They offer scenarios they 40 percent of the world’s population. consider adequate to meet the supply-demand balance challenge Péter Kiss The strong correlation between in the short-, middle-, and long term. Partner, KPMG Global Head economic growth, welfare and energy of Power and Utilities use means that future demand levels, Major questions raised during this security of supply, energy mixes, research included how necessary production levels and general market investments in generation, transmission dynamics will increasingly move to the and distribution will be financed in fore as key issues. terms of state support, privatization and foreign direct investments, how Electricity is by nature a unique product. regulation will support the emerging It is indispensable and it has no trends and how global financial turmoil substitute. It is something we realize will affect the pace of development. the importance of only when we experience a shortage. It is just enough I trust that the contents of this report to recall the biggest blackout in U.S. will offer you deep insights into these history in 2003 which struck parts of the unique, emerging energy industry Northeast, Midwest and even Canada, markets. knocking out power to millions of Americans.

This publication is a part of a series of reports titled “Think BRIC! Key considerations for investors targeting the power sectors of the world’s largest emerging economies: Brazil, Russia, India and China” – aiming to highlight major trends and challenges shaping the evolution of these countries’ power sectors over the course of the next decade in light of the global economic crisis.

Introduction & Methodology

This publication has been compiled by During the survey period of March–May In India, the following listed KPMG’s Global Power & Utilities 2009, Ipsos’ senior qualitative companies and their representatives Knowledge & Resource Center, based researchers conducted semi-structured contributed to our survey: in Budapest, Hungary as the Indian personal interviews (based on a country report of the ”Think BRIC! questionnaire prepared by KPMG) Segment Company Key considerations for investors with top-level executives considered Major 1. NTPC targeting the power sectors of to be key stakeholders in the country’s Market the world’s largest emerging power sector. The target groups of the Participants 2. Powerlinks economies“ publication series. interviews comprised: Transmission Limited KPMG conducted comprehensive 1. Major market participants: key 3. Tata Power research both on- and off-site in India players of the electricity industry and our in-depth analysis characterizes bearing a dominant market position 4. AES Corp. the development of the electricity (both state-owned and privately held 5. Oil and Natural Gas industry. integrated electricity companies, TSOs, electricity traders) Regulatory 6. Planning This report is partly based on a survey Authorities Commission conducted by Ipsos, an independent 2. Regulatory authorities: competent 7. Nuclear Power international market research company, ministries, regulatory bodies Corporation of assigned by KPMG to interview key India decision makers of the Indian power 3. Financial institutions: domestic and World 8. WEC sector. Based on these interviews, international investment banks with Energy professional databases, evaluations and dominant market share Council KPMG forecasts, KPMG’s Global Power Financial 9. SBI & Utilities Knowledge and Resource 4. WEC – World Energy Council Institutions Center compiled predictions for the 10. IDFC development of the Indian power 5. Technological suppliers, 11. World Bank sector up to 2020. equipment manufacturers 12. ICICI The sample consisted of 17 prominent 13. Axis Bank experts working throughout the power sector, and whom KPMG would like to Technology 14. ABB Group thank again for the wealth of valuable Suppliers 15. ALSTOM information they shared for this report. 16. Andritz

17. EMCO

Executive Summary

Incredible India! says the slogan of the But such relatively low base figures In 2005 New Delhi announced an Indian Tourist Board in its attempt to lure beg the question as to why? Everyone ambitious plan for every village to have a the foreign visitor to sample the accepts that India, as a developing grid connection by the end of 2007 and for country’s vast array of sights, smells country, inevitably lags behind the west every household to be supplied by 2012. and sounds; but Incredible India! could in key economic indicators, particularly apply to the electricity sector as well, for in view of its huge rural population. But concerns that these plans were its potential to lure foreign investment, flawed began to circulate almost as know-how and equipment to south Asia But India has boasted of economic soon as they were released. For what is equally vast. reform for almost two decades, turning is available theoretically is often not so its back on the socialist model so in practice. Just because a village is India’s population, now around 1.1 billion, beloved by the first generation of connected to the network does not is growing fast, and is expected to post-independence leaders, so that mean it is supplied continuously surpass that of China soon after 2020 – market forces might boost progress. – and despite the progress made, making it the largest in the world. In addition, India has the lowest one respondent of KPMG`s survey Its economy is also expanding, growing electricity consumption per capita estimated that at least 500 million at around 10 percent annually from of the four BRIC countries – so why are Indians still have no access to electricity. 2000 to 2008, and despite a current the electricity development indicators dip due to the global crisis, the pace not more optimistic? What though, of those consumers is expected to be over 9 percent for who are connected? Certainly those most of the next decade. As this KPMG study reveals, while households that are connected have the state and federal governments seen increasing demand; residential All of this bodes well for the electricity have initiated reforms, social programs sector consumption rose from 70TWh sector; consumption, currently at some and legislation designed to supply in 2000 to 100TWh in 2006, almost 20 600TWh annually, is set to double by electricity to all consumer groups percent of the total. Some estimates 2020 – by when it will have surpassed across the country, the many put growth in this sector at between Russian levels. To supply this extra conservative elements, systemic 15–20 percent in the coming decade. electricity, total generating capacity weaknesses and contradictions should jump by 90 GW, to 241GW, with within India frequently combine Industry, which accounted for 210TWh an increased emphasis to stifle progress. of electricity in 2006 – 40 percent of on nuclear, clean coal and renewables, consumed – is likewise expected to including solar and small-hydro. What then, of the position today, expand, with some market observers and what progress can be expected predicting up to 30 percent growth in In line with this, per capita electricity realistically in the next decade? The the next five years, particularly if the consumption, currently at just 520kWh advances made in the recent past can power-dependent steel, coal and annually, is expected to rise to 840kWh not be denied. A rural electrification cement industries perform well. by 2020. Yet, though in relative terms program in the 1980s brought electricity this is an impressive leap of 60 percent, to 200,000 villages for the first time. Agriculture is a special sector, politically the projected figure, if realized, is still Generation capacity hit 150GW in 2006, sensitive in the government’s eyes, as only about one quarter of the global a 40 percent increase on the 2000 figure, it provides jobs for the rural and largely average, meaning these predictions after reforms in 2003 initiated a much- impoverished masses, and farmers would not appear overly optimistic. needed restructuring of the power sector. have the legal right to free electricity.

Yet, in spite of this special treatment, developments as shopping malls, are of generation, with oil and gas making rather awkwardly its share of total all expected to underpin a continuous up another 12 percent. Hydro is another consumption decreased from 20.75 increase in demand for power into the important component, with 15 percent. percent in 2000 to 17.4 percent in 2006. next decade. For the future, thermal plants are likely Observers say that rural electrification Can the power stations supply this new to be the first choice for expansion, programs should result in increased demand? In short, the answer is no. regardless of environmental concerns. demand within the sector, but, as so Indeed, the current generating capacity As one respondent put it: “It’s the often with subsidized or free power, such has failed to keep up with user needs in this fastest means to add power, and at support is often plagued by corruption; decade, with the shortfall being made this stage you cannot wait for the one respondent noting in this study that up by imports, which almost doubled from development of other resources.” “much of the electricity consumption 1.6TWh in 2005 to 3.0TWh in 2006. While classified as agricultural is actually not so.” the latter figure is still only 0.4 percent Although official policy supports a low of total production, it is a trend which carbon economy on paper, most The commercial sector, which includes India can ill-afford to ignore. The observers admit that in the rush for India’s fast-developing IT and off-shore country’s peak power capacity deficit is additional generation capacity environ - back office service companies, has also expected to widen in 2010 to 12.6 percent mental concerns will take a back seat. seen rising demand, accounting for of total capacity, up from 11.9 percent last 7 percent of the total in 2006. year, according to one report this summer. This means the total thermal share of the production cake in 2020 will still be In general, increasing economic activity, India is rich in coal (albeit often of low nudging the 80 percent line, particularly if wealth and population, leading to an quality), so it is no surprise that coal the commercial conditions for retrofitting improved standard of living and such currently accounts for roughly 70 percent old, inefficient plants are introduced.

But market players expect – given the (AT&C) losses are shocking, reaching As one respondent put it: ”Today, right conditions – a strong surge of almost 50 percent in some states and anyone can open a plant; but people do investment into nuclear, with the averaging out at 25 percent across the not want to invest as they are unsure current 3,900MW of installed capacity nation – compared to a global average of when they will get their returns.” potentially rising to anything between some 8 percent. 10,000 – 20,000MW. This could cause There is no doubt that pressure to bring the nuclear share of production, For a start, technical losses across the genuine improvements to the sector – currently less than 3 percent, to double system are higher than average, mostly and to consumers – will increase, and that or grow even more in a time period due to inadequate investment by the investment, whatever the sources will extending to 2030. publicly-owned utilities over the years, have to take place. The IEA estimated India including ad hoc extensions overloading requires a total of USD 960 billion invest- Observers also predict strong interest the system. There is also a lack of ment in its electricity sector between in renewables, particularly mini-hydro motivated technical staff, well-versed now and 2030, with almost half of that in plants, wind, biomass and – if the price in modern technology and “meaningful” generation alone, and more than a third of hardware could be brought down to – as opposed to formal – systems in improved transmission. The domestic competitive levels – solar energy. analysis. Planning Commission estimates are more modest, forecasting the need for between India has already made a start with wind But theft and unauthorized connections USD 150–200 billion – although that is to farms – Suzlon building the world’s are at the heart of these atrocious cover needs for only the next five years. largest installation of 1,000MW in figures. Solving this problem will require Maharastra. Wind, responsible for not only investment in modern metering Some respondents to this survey 1.1 percent of electricity in 2006, should and monitoring systems, but an expressed confidence in government more than triple its share by 2020. India investment into human resources as assurances that a truly independent has identified some 4,000 sites for mini- well. As this report states, summing up regulatory system will be in place as hydro schemes, and the total potential the view of respondents; “This planned in 2010, and that this will support capacity is reckoned to be 15,000MW. business is the most complex among growth in private investment, either in (Large hydro, while offering huge the three [power] segments. Apart from independent merchant projects or, more potential, is not in favor at present due [hardware] investment, it requires likely, in public-private partnerships. to environmental and payback concerns.) significant managerial competencies. There is …… an under-emphasis on They also point to the private investors, As for solar, India receives a daily solar managerial issues.” notably Reliance, who have already energy equivalent of between 4–7 kWh made a start in building independent per square meter, depending on Respondents also point out that power plants, with the share of privately location, or over 5,000 trkWh per year, privatization is one effective means of generated electricity currently at around which far exceeds the total national combating electricity theft, citing 13 percent of the total and rising. consumption. But due to the high distribution in Delhi as being “efficiently capital cost, solar energy is a minimum managed” by private players (although In short, there is no doubt the demand of five times more expensive than coal- no data is given). for an improved and expanding based generation, so for the time being electricity sector exists in India, and that development will be limited. But privatization efforts, begun in primary fuel is available in most cases. 1991, have made little headway in the And while government finances will find Regardless, the energy sources are transmission and distribution segments, it impossible to manage alone, private available for expansion, but can the and only limited progress in generation. finance and skills are largely available if transmission and distribution systems Participants point to the legal and investors feel the regulatory and legal deliver? Or, perhaps more to the point, regulatory uncertainties, along with framework is made to work for a fair can they deliver on a commercially incomplete tariff reforms, as the return. If so, targets such as the need to viable basis? For, as this study reveals, primary causes of this reluctance provide 90GW of new generating capacity the aggregate technical and commercial to enter the market. by 2020 can almost certainly be achieved.

1. India: Country in figures

Area 3.28 million km2

Government type Federal Republic

Capital New Delhi

Population (2009) 1.14 billion (World rank: 2)

Population annual 1.69% growth rate (2009 estimate)

Source: CIA – The World Factbook, 2009 NEW DELHI

2. Population

opulation growth is one of Population growth is significant the main determining factors compared to that of the other three P of energy use in India. BRIC countries or Western Europe. Although the share of the residential The Compound Annual Growth sector in electricity consumption is Rate (CAGR) of the population was only 19 percent, its share is expected 1.69 percent between 2000 and 2008 to increase as a result of population which is predicted to continue until growth and electrification allocation 2020.2 As shown in Figure 1, with this programs. In the overall economic trend, the population of India will growth of India, population is the reach Chinese population levels soon determining factor in domestic after 2020. consumption of goods, as well as in fueling the industrial output The majority of India’s vast population and domestic gross production. lives in rural areas – over 71percent – In this first section, India’s indicating a slight decline due to the main demographic trends and significant level of migration from trajectories are presented to rural areas to cities in the last two show the future opportunities decades. Forecasts show that the in the country’s economy and urban population is going to double energy consumption. by 2030, while in the meantime the population growth of many major Currently, in terms of global cities has slowed.3 The proportion of population India is second to China. the country’s rural population is still The total population of India is about higher than in most Asian countries, 1.1 billion, which accounts for including China. 17 percent of the world’s population.1

1 Source: IEA World Energy Outlook 2007 2 Source: EIU 3 Source: IEA World Energy Outlook 2007

The fertility rate has fallen sharply in Figure 1: Population of India (2000–2020) recent decades, while mortality rates 1 600 have fallen even faster resulting in a rise Forecast in life expectancy from 54 years to 64 1 400 (million) in the period 1980–2005. 1 200

1 000 Currently, the percentage of the population which is economically 800 active is around 40 percent. 600 If India’s demographic trends continue at this pace, the country 400 is expected to gain an additional 200 270 million economically active 0 individuals by the end of 2025.4 2011 2017 2014 2012 2015 2013 2001 2010 2018 2019 2016 2020 2007 2002 2005 2004 2003 2009 2008 2000 2006

In the long run, the growing population India China will present fundamental social, Source: KPMG, Economist Intelligence Unit economic, and environmental challenges for India. Due to the growth of labor participants, and a significant level of migration from agriculture to industry and services, there will be no low or medium skilled workforce shortages.

4 Source: IEA World Energy Outlook 2007

3. Economy

“India’s growth story is irreversible. In the next 10–20 years, despite the global economic crisis, India’s growth story will remain intact and the outlook will probably become even better…” - Major market participant -

Figure 2: Main economic indicators

n important relationship exists India’s growth has been continuous over the GDP (PPP) USD 3,356.9 between a country’s economy last three decades, mostly due to the boom billion (2008) A and its electricity use. Interest in in private investments and in manufacturing. GDP real 6.6% studying this relationship between growth rate (2008 est.) electricity consumption and economic Services, which used to make up the growth arises from the need to understand largest share of India’s economy, are GDP/capita USD 2,924.1 the complex links between the two. expected to remain its main driver in (PPP) (2008 est.) Electricity use depends on technical and addition to manufacturing. The future GDP agriculture:17.2% economic factors, while it also supports growth of India’s economy lies with composition industry: 29.1% advances in technology and stimulates structural and business reforms, fiscal by sector services: 53.7% (2008 est.) economic growth. Gross domestic discipline and removing barriers to trade product, as one of the most important and investment. One of the largest and Labor force 523.5 million economic indicators, correlates with most critical challenges for India is poverty.6 (2008 est.) electricity use and presumably will do Labor force by agriculture: 60% so in the future. Ferguson et al. (2000) occupation industry: 12% found a correlation between electricity Nominal GDP services: 28% (2003) use and welfare5 and numerous studies imply a relationship between the two. India is one of the largest developing Unemployment 6.8% (2008 est.) Our survey looks at the main factors countries, capitalizing on its considerable rate affecting economic growth to consider number of educated people. India’s Level of Total 67.9% the implications and shed light on future GDP rallied in recent years, resulting in electricity (2006) prospects for the electricity industry in India. 13.2 percent growth in 2006 and 12 provision to percent in 2007. In 2008, 8.3 percent households: India’s economy is the world’s fourth GDP growth was boosted by a Industrial 4.8% largest with a GDP (at PPP) of USD manufacturing sector that expanded production (2008 est.) 3,356.9 billion, and the country is the significantly. This strong GDP growth also growth rate fifth largest energy consumer in the world. brought inflation concerns to the fore. Source: CIA – The World Factbook, 2009

5 Source: Ferguson, R., Wilkinson, W., 6 Source:EA World Energy Outlook 2007 Hill, R., 2000. Electricity use and economic development. Energy Policy. 28, 923–934.

India’s economy exhibited growth of to show a 9–9.5 percent increase through than one-tenth of the Western- about 10 percent annually, between 2020. If the trends continue, according European level (USD 34,420) and 2000 and 2008. Nominal GDP was USD to forecasts the nominal GDP of India is 32.8 percent of the world average for 3,356.9 billion at PPP in 20087 which expected to represent 6.4 percent of 2008.8 In spite of having a high represented approximately 5 percent of the total global GDP (at PPP) by 2020. population growth rate, India’s the total world GDP (at PPP) in 2008. GDP per capita growth is still higher This outstanding performance has slown than the global average. This is due to down, partly due to the financial crisis. GDP per capita the fact that the country’s economic Despite this, the country’s nominal GDP growth is proportionally larger is predicted to grow by 5.6 percent until GDP per capita was estimated at than the population growth. 2010. After 2011 that growth is expected USD 2,924.1 in 2008, which is less

Figure 3: India: Nominal GDP (PPP), GDP per capita

10 000 80 000 Primary axis Forecast Nominal GDP of India (PPP) 9 000 70 000 (billion USD)(billion

8 000 (USD/capita) 60 000 7 000 Secondary axis

6 000 50 000 GDP per capita (India) GDP per capita (World) 5 000 40 000

4 000 30 000 3 000 20 000 2 000 1 000 10 000 0 0 2011 2017 2014 2012 2015 2013 2001 2010 2018 2019 2016 2020 2007 2002 2005 2004 2003 2009 2008 2000 2006

Source: KPMG, EIU

7 Source: CIA – The World Factbook, 2009 8 Source: CIA – The World Factbook, 2009

The CAGR of GDP per capita in India is forecasted at 7–8 percent in the period 2000–2020. Overall, India’s GDP is set to reach USD 6,655 in 2020, which would be 34 percent of the world average (up from the current level of 32.8 percent).

Foreign investments

The development of the Indian economy is also supported by the increasing potential of foreign direct investment. The government has reduced controls on foreign trade and investment activities resulting in higher FDI in certain sectors such as telecommunications. Conversely, present tariff systems and the lack of economic reforms are blocking the expansion of foreign investment. Privatization of government- owned industries is not moving Survey respondents also confirm that • There is a total change underway in the forward, remaining a political quandary. India is seen as an attractive candidate country’s economic structure. India for FDI. The fact that India`s growth rate is becoming a developing country in How do you see the attractiveness of is 5 percent and is expected to grow at contrast to an underdeveloped one. India for foreign capital investment the same pace reflects an overall during the course of the next five years? magnetism, which is likely to increase in “India bore the tag of “underdeveloped the future. country” but now it is turning into a According to recently published rankings, “developing nation”, which highlights China and India sit in the top two positions ”India is an attractive destination for the need for better infrastructure.” for most positive investor outlook and foreign capital investment. People are - Survey participant – most preferred offshore investment witnessing the country’s growth. They locations for business processing functions also want to sell their products and are • Developing nations entail changing and information technology services. expecting good returns. They have lifestyles and growing consumption realized that there is a market here and levels which offer a broad scope of ”Though China has been more a huge demand.” opportunities for investors. attractive in the past, India is showing - Major regulatory agency - positive growth now. Investors take • India’s GDP growth is vastly higher their time entering the country but once than most countries’ across the globe. they have entered they stay....” “In a growing economy like India’s where there is an inherent demand, you • Government and private utilities are - Major market participant - have a lot of potential to grow.” endeavoring to set up an infrastructure framework to facilitate investments in - Major technology supplier - India’s strong performance is mainly the country. Some positive examples driven by the desire of manufacturing, cited by the respondents include the telecom and utility enterprises to make Respondents listed the following DMRC9 project, which has changed productivity-enhancing investments in reasons underlining India’s the face of Delhi and the Andhra IT, BPO and R&D. attractiveness for FDI: Pradesh Irrigation Projects.

9 Delhi Metro Rail Corporation (DMRC)

India is in an advantageous position for future Figure 4: Fossil resources of India (2008) investment in production and manufacturing Proved Reserves Production Consumption facilities as production costs should remain comparatively cheap in India. Oil 5.8 billion 0.76 million 2.88 million barrels barrels per day barrels per day “Unlike developed countries like the Natural gas 1,009 billion 30.6 billion 41.4 billion USA, those in Europe and others which cubic meters cubic meters cubic meters have less scope for further investment, India offers a favorable place for future Coal 58.6 billion 512.3 million 608.3 million tons tons tons investment in production and manufacturing facilities.” Source: BP Statistical Review of World Energy, 2009

- Major technology supplier -

Some factors however are negatively Energy economy Oil represents one-third of India’s affecting how India is perceived in terms primary supply mix, while natural gas of the country’s level of attractiveness. Though India is abundant in natural adds a further 8 percent. India’s oil resources, the country’s rapidly refinery capacity of about 3 million The following obstacles were increasing appetite for energy barrels per day exceeds the needs mentioned by respondents: substantially exceeds its current of the domestic market; however, the production. More than 50 percent country buys big amount of crude on • A high dependency on foreign capital of the country’s total primary energy global markets. India has also imported makes the country’s economy weak. supply is covered by coal, of which 10 billion cubic meters of natural gas in India is a major importer, since the recent years, through LNG terminals. “We need to keep a close watch; growing power sector consumes Natural gas fuelled power plants burn foreign investments are leaving our 72 percent of the coal supply. 35 percent of the total gas supply. country, making it a weak economy.” Growing nuclear power and hydroelectricity contribute 8–9 percent - Major financial institution - Figure 5: Main energy indicators to the total primary energy supply of India, 2006 (million TOE) (TPES). Though the renewable energy • Regulatory and political decision sector is growing fast, in terms of Production 435.64 making processes face bureaucracies TPES it is still not significant. instilled with corruption, resulting in Import-Export 134.83 delays in approvals, business disputes Households are the main consumers Dependency 24% and an increased overall country risk (Net Import/TPES) of end production, since residential profile in terms of FDI. consumption accounts for 42 percent Total Primary Energy 565.82 of the total final consumption (TFC). Supply (TPES) • Structural issues, primarily the lack of Industrial share of TFC comprises physical infrastructure (roads, airports, Total Final Consumption 378.48 nearly 30 percent, while transportation harbors, power etc.), are prevalent. (TFC) represents a bit more than 10 percent. Conversion Rate 67% • Specifically in relation to the power (TFC/TPES) sector, some felt that Enron’s CO emission 1249.74 debacle at Dabhol raised some 2 (million tons) doubts in the minds of the investors, resulting in a need for the Source: OECD/IEA Energy Balances of Non-OECD Countries, EIA, CENEf, UNESCAP government to restore some faith for investors.

4. Electricity Market

he accelerated growth of In spite of these achievements, Concerns have been expressed about the Indian electricity sector India faced numerous challenges: the long term financial and technical T started when the country sustainability of the program.12 gained its independence. • A significant proportion of villages Since then, one of the main had not yet received access In 2006, the Indian government goals of the Indian government approved an Integrated Energy Policy has been to provide the nation with • Lack of quality electricity supply to achieve coordinated actions among a reliable supply of electricity and to without interruptions and with energy ministries. maintain its economic growth. constant frequency Most of the electricity generating In the 1980s, rural electrification • State Electricity Boards were running capacities remain state-owned, in India made great progress, at huge losses regulated and operated by the State providing electricity for more than Electricity Boards, including 200,000 villages for the first time. • Heavy, double digit transmission transmission and distribution. Private In 1990, around 84 percent of India’s losses and thefts. generation is undertaken mainly by IPPs villages had access to electricity; and by industrial companies fulfilling however, it was only available for In 2005, the Indian Government their own consumption. Nevertheless, certain periods of the day. Cities also outlined an ambitious plan for recent reforms have brought more experienced frequent blackouts.10 reaching a 100 percent level of village private participation to India’s oil and electrification by the end of 2007 and gas sectors. In 2003, India initiated a much-needed total household electrification by 2012. restructuring of its power sector. However, newly connected rural Infrastructure development of power However, the action failed to completely households may be restricted generation will require the mobilization eliminate subsidies on energy unless the ambitious grid expansion of public and private funds within a supplies which are still present plans are accompanied by similarly transparent and predictable investment on the Indian market.11 ambitious distribution reforms. framework.

10 http://www.indianchild.com/electric 12 World Bank 2004 _ power_india.htm 11 IEA World Energy Outlook 2007

4.1. Electricity demand Electricity consumption in particular regarding electricity.14 However, in order to fulfill this demand, The electricity demand of India The Indian economy is growing at one India will face challenges until 2020. was the eighth largest in the of the fastest rates in the world. With per world in 2006, at 517.2 TWh capita GDP rising by about 8 percent per Figure 6 shows the increasing trend of which represented 3.18 percent year in 2000–2008, it is expected to grow India’s electricity consumption and per of the total global electricity by 7.59 percent in 2000–2020. The potential capita consumption compared to the consumption.13 for growth in energy demand is enormous, world average.

Figure 6: Electricity consumption, electricity consumption per capita

1 400 7 000 Primary axis

(TWh) Forecast Electricity consumption 1 200 6 000 (kWh/capita) Secondary axis 1 000 5 000 Electricity consumption per capita (India) 800 4 000 Electricity consumption 600 3 000 per head (World)

400 2 000

200 1 000

0 0 2011 2017 2014 2012 2015 2013 2001 2010 2018 2019 2016 2020 2007 2002 2005 2004 2003 2009 2008 2000 2006

Source: KPMG, EIU

13 IEA 14 EIU

Compared to the other BRIC countries, The transportation sector accounted A mapping out of electricity consumption India had the second highest growth for 1.86 percent of the country’s total reveals an expected compounded rate between 2000 and 2008 with an electricity consumption at 9.6 TWh in 2006. growth rate of 15–20 percent in both electricity consumption of 5.7 percent The consumption of the transportation rural and urban India due to the following: CAGR.15 Additionally, if the current trend sector is set to increase as economic growth lasts, India’s electricity consumption will puts a strain on India’s infrastructure. • Increasing living standards in both exceed that of Russia by 2020. There are also serious investments rural and urban India needed in all infrastructure areas. In spite of India’s significant growth rate • Increasing purchasing power for total electricity consumption, the The total annual consumption of the equates with buying more and country has the lowest electricity residential sector increased from 69.5 more electric devices consumption per capita out of the BRIC TWh in 2000 to about 100 TW in 2006.17 countries. In 2008,16 it was 509.4 kWh The electricity share of households also • Development of the real estate annually, though India’s per capita increased in that period from 18.52 sector is also contributing to the consumption had the second highest percent to 19.3 percent. The share of steady increase in power demand. growth rate between 2000 and 2008 at households is set to increase as rural nearly 4 percent. Despite the continuing electrification programs move ahead ”The standard of living for both urban growth trend, the country’s electricity with connecting the remaining third of and rural populations will definitely consumption per capita is expected the population to the grid. improve, resulting in an increase in to be roughly 841 kWh in 2020, electricity consumption.” representing only about one quarter How do you see the dynamics of - Major financial institution - of the global average. electricity consumption of households during the course of the next five years? According to statistics, currently only Electricity consumption Despite an ambitious rural electrification 44 percent of rural households are by sectors program, some 500 million Indians still connected to the electricity grid and have no access to electricity. The approximately 56 percent still need to be The country’s total electricity dynamics of residential electricity identified and connected, in comparison consumption is divided into six consumption are directly linked to the to the 80 percent connectivity level of major sectors accompanied by other country’s potential economic growth. India’s urban population. miscellaneous areas of consumption. Figure 7 illustrates the share of each sector of the total consumption. Figure 7: Electricity consumption by sectors The major drivers of consumption growth are expected to be the 1 400 Others TWh Forecast Agriculture, industrial, residential and agricultural 1 200 Forestry and Fishing sectors; others are set to remain mostly Commercial and 1 000 constant up to 2020. Public Services Residential 800 Electricity consumption of the energy Transportation Industry sector comprised 9.4 percent of India’s 600 Energy total consumption in 2006. Although 400 the total consumption of the sector increased from 36.5 TWh to 48.6 TWh 200 between 2000 and 2006, the share of 0 the sector did not change significantly 2011 2017 2014 2012 2015 2013 2001 2010 2018 2019 2016 2020 2007 2002 2005 2004 2003 2009 2008 2000 in that period. 2006

Source: KPMG, IEA

15 Economist Intelligence Unit 16 Economist Intelligence Unit 17 IEA

”The increase depends on two things: The biggest challenge in India is the Considerable support is coming from First, the basic necessities of those huge power shortage, especially in the NGOs, the World Energy Council, living in rural areas that did not have states without their own generation and other public and private utilities to electricity until now must be satisfied capabilities. assist the government on the rural and, second, the increased load in urban electrification programs running in India. areas must be provided for.” “We will have the wires/infrastructure but it will still be very challenging to It is assumed that the industry sector - Major market participant - provide electricity for consumption in followed by the residential sector rural areas because India has such a huge will be the main electricity consumers Urban household demand accounts for shortage. Even if they have the physical by the year 2020. about 20 percent of total consumption, infrastructure to supply the villages, and urban consumers expect improved they will not have enough power.” living standards. Rural households are Industrial sector - Major market participant - also increasing their usage of domestic appliances and electronic agricultural Industrial activities are providing an equipment, resulting in a continuous In line with the Rajiv Gandhi Gramin increasing share of the GDP, reaching increase in their power demand. Vidyutikaran Utkal Yojna rural more than half of the commercial sector’s electrification scheme all of the states contribution. India’s industrial sector Today the market is supply driven, where have agreed to deploy franchisees for mainly focuses on textiles, chemicals, “demand chases supply.” To fill the gap, distribution management. The food processing, steel, transportation mega capacity addition projects are government needs to introduce various equipment, cement, mining, petroleum, underway to curtail the deficit, which is models to manage the franchisee system machinery, and software production. currently above 8 percent. Stability can which is expected to grow from 1,000 to The sector is exhibiting an increasing be observed in the government’s policies 100,000, requiring a proper management level of development as a result of and programs like the Rajiv Gandhi Gramin information system to be in place in India’s richness in natural resources. Vidyutikaran Utkal Yojna (RGGVY),18 order to ensure the smooth running of APDP19 and R-APDRP20 (Restructured the concept. In addition to this capacity, Energy efficiency in the industrial sector has Accelerated Power Development & the building of franchises is also being been significantly improved resulting in a Reforms Program), or the UMPP programs pursued by the Ministry of Power. lower intensity level of energy consumption. which are designed to bring development and show remarkable results over the course of the next five years.

How do you evaluate the progress of the rural electrification program from political/institutional/financial perspectives?

Respondents cited the Rajiv Gandhi Gramin Vidyutikaran Utkal Yojna rural electrification scheme, which was established in 2005 with the aim of electrifying villages. The program still has a long way to go and requires further improvements before being able to accomplish its mission to provide power for all by 2012.

18 A program of rural electricity infrastructure and household electrification for the attainment of the National Common Minimum Program goal of providing access to electricity to households in five years. Source: www.rggvy.gov.in 19 Accelerated Power Development Program (APDP) of the Ministry of Power, Government of India had been undertaken from the year 2000–2001 as a last means for restoring the commercial viability of the distribution sector.Source: http://203.193.148.117/apdrp/projects/about_apdrp.htm 20 The focus of the R-APDRP program shall be on actual, demonstrable performance in terms of sustained loss reduction. Source: www.apdrp.gov.in

“Often – especially in the aluminum, steel and Agriculture cement industries – it is expected that the capacity will be doubled.” One of the major sectors of India’s economy, agriculture comprises - Major market participant - traditional village farming, modern agriculture, handicrafts, a wide range of However, this sector is still the most This in turn will increase their electricity modern industries and a multitude of significant consumer of electricity in consumption. For example, in the steel services. India at 211.5 TWh annual consumption, and aluminum industries, 60 percent of accounting for about 41 percent of total the cost base is composed of the cost of Agriculture is the most dominant consumption in 2006. In addition, the the power. Industrial companies are sector in terms of occupation, industrial sector showed significant looking for a reliable, uninterrupted whereas it only provides approximately growth of 6.4 percent annually between power supply and may opt for their very 17 percent of the country’s GDP. 2000 and 2006, from 145.6 TWh annual own captive power generating units. A continuously increasing number consumption to the 2006 level.21 of people are engaged in agriculture, • Additionally, the Power Grid which is also supported by How do you see the development of Corporation of India Limited plans to government programs targeting power-intensive industrial activities install many substations to meet the creation of basic infrastructure and its expected effect on electricity increasing demand. and aiming for improvement of consumption over the next five years? living standards. However, the following disadvantages Electricity consumption of power intensive linked to risks and returns in the sector The share of the agriculture, forestry industrial activities is expected to grow must be noted: and fishing sector decreased from due to increasing demand for industrial 20.75 percent in 2000 to 17.4 percent in goods. Respondents envisage a growth • Indian industries are currently at a 2006.22 As the application of technology of 25–30 percent within five years. disadvantage because they pay and automation spreads in this sector, much higher tariffs compared to the level of consumption is forecasted The present program for the installation their counterparts in other countries. to grow. On the other hand, the sector’s of additional generation in the next five This is a global disadvantage as far as inefficiencies and collateral activities years is perceived as facilitating investments the power intensive industries are must be monitored and separated in the power intensive industries due to concerned. So, the increase in power from actual agricultural activities, as the following characteristics: consumption in power intensive these should not fall under support industries will be dependent on how programs. • India’s economy bears huge much tariffs are reduced to achieve potential for growth. global competitiveness. How do you see the development of agricultural electricity consumption • India has significant natural • The unpredictability quotient is in the country (India) over the next resources for the aluminum, copper significant: the electricity sector is five years? and steel industries within the same volatile and requires a high level of region (e.g. Chatisgarh, Bihar, Orissa, investment, with returns showing The rural electrification programs West Bengal and Jharkhand) where only after 7–8 years. and various other programs executed abundant coal reserves exist. by the government to provide free “Investors want quick bucks so no one electricity for agriculture will boost the • With the growth of the core industries would want to venture into this sector growth of agricultural and agricultural – aluminum, coal and cement – and where one needs to wait for 7–8 years for power consumption. An increase in an increase in the demand for their results to show and profits to be earned.” population will add to current agro products, more and more capacity product demand and in turn will - Survey participant - additions are likely. impact electricity consumption.

21 IEA World Energy Outlook 2007 22 IEA

It is a big challenge for India to satisfy programs, most villages are still not Commercial and Public the increasing demand of this sector, electrified and experience severe power Services sector but with proper execution of programs shortages. like the Andhra Pradesh Irrigation Compared to the agricultural sector, services Project,23 which is supported by The “Today we have villages with are the major source of GDP (by World Bank, and strong political will connections but no power to supply contributing more than half to it), while behind the initiative, the various rural them, and also villages that are not even employing only 28 percent of the labor force. electrification programs should be able electrified. So, there is a lot of to meet the challenge. unexplored potential.” Electricity consumption of the commercial and public services sector showed the - Major market participant - “There are many challenges such as most significant growth between 2000 that of population, and managing and 2006, from approximately 21 TWh schemes to provide free electricity in Government should properly guide the to 36 TWh, which resulted in 10 percent the sector.” sector’s consumption. Much of the annual growth. The sector accounted for electricity consumption classified as nearly 7 percent of the country’s total - Major technology supplier - agriculture is actually not agricultural, consumption in 2006, boosted by the demonstrating a need to segregate core development of special economic zones According to respondents there is a agricultural electricity consumption from (SEZ), government incentives, and huge potential for development in this that of its associated activities, thus special conditions provided to this sector.24 area as, despite the rural electrification reducing the potential for power theft. India’s business services comprise information technology, information technology enabled services, and business process outsourcing. India provides offshore back office services that are highly attractive for international companies searching for outsourcing alternatives. The outsourcing of services is one of the fastest growing activities in India, which is due to the specialization and availability of low cost, highly skilled and fluent English speaking workers. However, as salaries rise, those services that are easily replaceable are expected to disappear. Therefore India’s economic growth is heavily dependent on the presence of international companies.

How do you see the development of the SME (small and medium-sized enterprise) and the commercial sector and its expected effect on electricity consumption in the next five years?

As current global centers of growth, India and China are attracting significant investments. They are possible markets for MNCs, SMEs, and shopping malls. From this aspect, their overall growth profiles are very promising, similarly to all of the BRIC economies. 23 Source: Andhra Pradesh is the fourth largest state in India with a population of 72.7 million and a geographical area of 27.44 million hectares. The primary objective of the Andhra Pradesh Irrigation Project is to complete ongoing irrigation development and scheme rehabilitation works and thus realize the potential for increasing agricultural productivity and rural incomes in two economically backward regions of Andhra Pradesh. 24 IEA World Energy Outlook 2007

Two main factors are contributing to the appear which consume high levels The latter still generally pay 30–60 growth of this sector: of power. However, given today’s percent above the average level. power shortage scenario, these Moreover, tariffs set by the Central • Increasing living standards resulting in facilities are likely to be heavily Electricity Regulatory Commission more disposable income which favors dependent on their own internal and State Electricity Regulatory an increase in the demand for malls captive generation. Commissions greatly vary by regions, municipalities and generator/supply • Tremendous growth in the IT sector Almost all survey respondents companies. has seen the development of many expressed optimism towards the IT cities which also impact electricity development of the SME and The table below shows the actual total consumption. commercial sectors and their average revenues collected from end- impact on electricity consumption users vis-à-vis the official cost of supply. The effect of the sector’s development which is expected to double in on electricity consumption will be the next five years. A modernized regulatory framework industry specific: based on the Electricity Act of 2003, the National Electricity Policy and • SMEs are typically not as energy Power pricing National Tariff Policy seeks to promote intensive as the core industries private investment in the sector, (aluminum, coal and cement). They India established a cost-plus tariff notwithstanding the strong inertia of are concentrated more in the service system more than 60 years ago. the politically driven, state-owned, oriented sector where energy intensity Nonetheless, the power sector monopolistic bodies throughout the is low, but as the SME sector grows, traditionally has not been able to cover supply chain. and the overall rate of economic its costs relating to electricity supply. growth increases, this will act as a Power companies are owned and Eight to 10 percent of total generation is catalyst for consumption. However, operated by the central government, traded on short-term markets (bilateral, for small manufacturers and service or by individual states (State Electricity unscheduled interchange, and power providers, it may not be viable to set Boards) making losses, even if the exchanges). Recently established up their own captive power unit, thus central and state electricity regulatory power exchanges (IEX, PXIL) still their dependence on the main grid commissions heavily cross-subsidize handle minor quantities, but they also would remain and possibly even the various consumer groups when contribute to transparency, reflecting increase in the following years. setting tariffs. Typically, residential and prices in the range of 6.50–8.0 agricultural consumers (24 percent and INR/kWh25 in December 2008. • Conversely, as India becomes more 22 percent of the total supply in 2007) commercialized, organized retail, in enjoy cross-subsidies from industrial the form of huge shopping malls and (38 percent of total supply) and entertainment complexes, will commercial users.

Figure 8: Average electricity prices in India

2005 2006 2007

INR/kWh USD/kWh INR/kWh USD/kWh INR/kWh USD/kWh

Cost of Supply 2.54 0.0573 2.58 0.0571 2.76 0.0685

Total average price 2.09 0.0472 2.21 0.0489 2.27 0.0563

Agriculture 0.757 0.0171 0.794 0.0176 0.713 0.0177

Source: CERC India, Deutsche Bank Research, KPMG calculations

25 INR: Indian Rupee, currency of India

4.2. Electricity supply The envisioned capacity investments According to our survey respondents, until 2020 would generate approximately India’s target is to increase its nuclear India is rich in coal resources, even 90 GW and comprise 75 percent capacities to 20 percent by 2020. However if the country’s coal is of low quality. thermal, 21 percent hydropower India is facing difficulties with reaching As the third largest coal consumer in and 4 percent nuclear power units. this target since development of nuclear the world, India’s economy relies heavily generation is time consuming and currently on coal and 70 percent of its electricity In 1970, India acquired a nuclear weapons India is barred internationally from trade generation is based this resource. capability that lead to its exclusion from in nuclear materials and equipment. Oil and gas reserves are running short, the Nuclear Non-Proliferation Treaty (NPT) while the increasing consumption of which has hampered its nuclear energy According to estimates, the country’s oil and gas is driving up GHG emissions. development to date. Due to these trade share of thermal power should not change Overall energy imports are continuously bans, India has been developing a nuclear significantly; it is likely to account for 79 growing, dominated by oil imports. fuel cycle to exploit its reserves of percent of India’s total electricity generation Renewable energy sources bear thorium, of which India has about in 2020; only oil is foreseen to lose its share promise except for traditional biomass one quarter of total world reserves, in the power generation mix, while and hydropower, which are limited.26 amounting to 290,000 tons.28 natural gas is set to see a slight increase.

As outlined earlier, the Indian economy is growing at fast pace, which is also “Right now the share of nuclear is minimal, but it will driving up electricity demand. According go double digit. Twenty percent is our aim in the next to industry experts, power generation capacity must reach double digit growth 10 years.” to maintain the current GDP growth trend. - Major technology supplier -

Generation mix

Currently, thermal generation accounts for roughly 81 percent of India’s electricity production, followed by hydropower with approximately 16 percent, while nuclear power had a share of approximately 3 percent in 2006.27

In order to meet the growing demand the Government developed the country’s 11th 5-year economic plan period (2007–12) defining an additional capacity investment of 78.6 GW.

This significant increase of generating capacities appears optimistic in the current financial and economic state of affairs. Consequently, these investments are expected to be postponed and the Government’s plan may be revised.

26 IEA World Energy Outlook 2007 27 IEA 28 Nuclear Power in India, World Nuclear Association, July 2009

By 2020, it is anticipated that the share Figure 9: Generation mix of wind energy will increase to about 2006 2020 3.7 percent, up from 1.1 percent in Total: 703.32 TWh Total: 1 107.77 TWh 2006.29 Figure 9 illustrates India’s current and projected generation mix.

How do you foresee the future balance of power plant fuel consumption? What changes do you expect in the generation mix?

Coal, 68.2% Coal, 67.8% Respondents agreed that in the coming Oil, 4.2% Oil, 1.9% decade coal would remain the country’s Natural gas, 8.3% Natural gas, 9.1% main source of power, despite being Nuclear, 2.6% Nuclear, 5.3% associated with disadvantages like pollution Hydro, 15.3% Hydro, 11.4% and global warming, and its contribution Biomass and waste, 0.3% Biomass and waste, 0.6% would be around 60–75 percent. Wind, 1.1% Wind, 3.7% Geothermal, 0.1% “In the next five years an increase in thermal Solar, 0.1% power of 5 percent is expected as this is the fastest means to add power, and at Source: KPMG, IEA this stage of development one cannot wait for the development of other resources.” With clean coal technology advancements Nuclear power may be the only - Survey participant - and the refurbishment of existing units, option left for India to fulfill its increasing coal’s performance is likely to improve and power demand. “Coal, gas, and oil will be the staple this may eventually help determine the fuels for India for the next 50 years” efficiency of the power generation business. “Nuclear power is the major source of energy to come.” - Survey participant - The rest of the generation mix is likely “Nuclear energy will likely provide to be shared among hydro, nuclear, energy security to India in the future.” “Coal leads to pollution and global warming, wind and solar (nuclear and hydro - Survey participant - but there is still a huge dependency on coal.” accounting for about 20 percent and the remainder comprised of wind and solar) - Survey participant - on a 15–20 year time horizon. The US-INDO agreement signed by the Government shows the advent of “There is no threat to coal and oil resources What are the expectations on the nuclear technology in the country. for at least the next 20 years; hence, the development of nuclear power The partnership of NTPC with production of electricity through these generation during the course of Nuclear Power Corporation of India means will continue to increase.” the next decades? is also seen as a significant step towards development of the sector. - Major technology supplier - Survey respondents were enthusiastic optimistic about the role of nuclear power At present, installed nuclear power India must monitor the efficiency generation in the next decade. Nuclear capacity is 3,900 MW, accounting for of the technology it is using as it power’s potential in India is characterized 3.1 percent of the total installed power moves toward supercritical coal by the fact that fossil fuel resources are generation capacity; however, in the plants achieving a conversion becoming depleted and are not likely to future respondents envisage double efficiency of some 42–45 percent. be available in 50 years’ time. digit growth in this sector.

29 IEA

Figure 10: Installed capacity (GW) Nevertheless, nuclear power is still The estimated potential in India for seen as a relatively distant option mainly generation of power from wind, small 2000 108 due to the following: hydro, and biomass is around 80,000 2001 112 MW. Renewable power capacity is • Long preparatory phase for nuclear likely to double every five years, 2002 122 projects which can take 8–10 years reaching approximately 20,000 MW by 2003 126 2012, accounting for 10 percent of the • At present, the government is in country’s total installed capacity. 2004 131 favor of allowing private investors to Currently its portion ranges from 4,000 2005 137 enter into this sector, although its to 5,000 megawatts. All renewable efforts are progressing slowly. energy matters are under the 2006 151 jurisdiction of the Ministry of Non- 2015 204 Respondents believe that once the Conventional Energy. Source (MNES). nuclear power sector is open for 2020 241 private participation, with the proper The renewable power industry in India CAGR (2000–2006) 5.71% safeguards in place there will be enough can be broadly categorized into wind, players to join. Nuclear power is likely solar, small hydro, and biomass. CAGR (2000–2020) 3.39% to contribute 10–20,000 MW, but the

Source: KPMG, IEA, EIU 80–90,000 MW India needs will mostly Sources estimate that about USD 7.5 be fulfilled by coal, which will retain billion have so far been invested in the its leading role within the country’s renewable power sector in India. About “Right now its share is minimal, but it generation mix. 90 percent of the investment has come will go double digit. Twenty percent is from the private sector.30 our aim in the next 10 years.” To what extent do you see further development of the renewable Wind - Major technology supplier - power generation segment (taking India has already made a significant into account the related incentive investment in wind mills and is among Respondents believe that liberalization schemes) in the next five years? the top 5 in the wind energy industry. In of the sector will hasten its development Maharashtra, Suzlon Energy is building in India, considering the following: Respondents believe that India has a one of the world’s largest wind farms good capacity for renewable energy. with a capacity of 1,000 MW. • Currently the sector is completely in the Government’s hands, but in the future private participation should be allowed.

• The Government should devise policies to promote a proper mix of public and private participation in the sector.

• Participants from countries like France possess the technology and are keen to develop nuclear projects.

Apprehensions over safety comprise the only misgivings in regard to nuclear power. However, rapid technological developments and improved safety measures can assuage those concerns according to respondents.

30 Source: http://kn.theiet.org/magazine/issues/ 0807/india-renewable.cfm

However, according to some experts wind power has been over exploited and not harnessed efficiently.

Solar India receives a solar energy equivalent of over 5,000 trKWhr/yr, which is far more than the total energy consumption of the country. The daily average solar energy intake varies from 4–7 KWhr/m2 depending upon the location.31 Only a tiny proportion of the aggregate potential in solar energy is being used due to the high cost of generation, which is 5–6 times more expensive than coal based generation. Therefore, solar cannot be considered a major power source for India until a technological breakthrough emerges which makes its cost structure efficient for India.

”People are considering these distinct options. Solar is a more attractive proposition. We are very fortunate that the country is blessed with an Biomass • providing power for pumping abundance of solar potential.” Over 70 percent of the Indian population irrigation water and agro-processing lives in villages without proper electricity (e.g. flour milling) - Survey participant - or a steady supply of water. Biomass is available in these settlements and • improving healthcare, education Small Hydro Power systems should be tapped to provide electricity. and the quality of life. In India, hydro projects up to 25 MW have been categorized as small hydro MNES has estimated the biomass What are the expectations on the power (SHP) projects. Depending on power potential in the entire development of large-hydro capacity capacities, they are categorized as country as 19,500 MW. expected to be during the next micro, mini or small hydro projects. decades? Biomass is considered a sustainable Mini hydro – 10 kW to 99 kW option to meet the rural power needs India is considered one of the best places in of India, therefore, the government is the world in terms of hydro potential, with Micro hydro – 100 kW to 999 kW strongly encouraging the utilization of 60,000 megawatts of hydro power available biomass energy. for harnessing. The share of hydro capacity Small hydro – 1,000 kW to 25,000 kW within the country’s total generating capacity Biomass gasification offers immense stands at 25 percent. This figure has declined The estimated potential of small hydro scope and potential for: from 34 percent in the past two decades. power in India is about 15,000 MW. Respondents expressed an optimistic view More than 4,000 potential sites have • providing electricity to remote on the future development of large hydro been identified totaling a capacity of villages for basic services like capacity in India, but felt that development of 10,000 MW -showing the tremendous lighting, pumping drinking such projects will be subject to controversy potential of small hydro power in India.32 water etc. which could be an obstacle to its growth:

31 Source: http://kn.theiet.org/magazine/issues/ 0807/india-renewable.cfm 32 Source : http://www.greenbusinesscentre.com/ Documents/smallhydro.pdf

• There are human, environmental, “Large hydro projects need a lot of investment zoological and geological risks and take 8 to 9 years for returns to show up. involved in the process of setting This must be handled by the government.” up new large HPPs. - Major financial institution - • Issues of land acquisition, resettlement of people and environmental returns to show up. The private sector is Supply – demand mismatch rehabilitation are significant. looking for profit and cannot wait that long for results. This can only be The electricity production of India grew • Issues related to climate change are handled by the government.” by 3.33 percent annually between 2000 sensitive, as the Himalayan glaciers are and 2008, which was lower than the - Major financial institution - the fastest melting glaciers in the world. consumption growth rate (5.7 Therefore, huge reservoir-based hydro percent).33 It is expected that the peak energy plants should be constructed in “It is a long term project, say 15–20 demand capacity deficit will be more the north and the Gangatic plain, which years, and people who have invested than 12 percent in 2009–2010. Despite means a large number of people would will have to wait a few decades to start this, electricity production is expected be displaced to build reservoirs. recovering their principal and profits.” to grow further by 5.5 percent annually until 2020. The supply-demand - Major technology supplier - • Licensing is lengthy and difficult. mismatch is one of the most crucial issues to be solved. • There is a high construction risk. In order to overcome the obstacles, efforts are now being made to develop a proper The levels of transmission and • Despite the private sector’s framework for the settlement and distribution losses in India are among the participation, the government must resettlement of people, and to adhere to all highest in the world. There is a wide play a major role in financing these of the environmental restrictions. variation of losses between states, even projects due to their long preparatory Additionally, the National Hydroelectrical exceeding 50 percent; the combined phase and long pay-off period. Power Corporation (NHPC) is interested in rate across India was approximately 25 developing a project which, with good percent in 2006, deriving from insufficient "Large hydro projects need a lot of strategic management and investment, investments, poor network maintenance, investment and it takes 8–9 years for should be able to drive the effort efficiently. and power theft.

The T&D losses in India are at the same Figure 11: Electricity production and distribution losses level with those of several countries in Sub-Saharan Africa and in Eastern- 1 600 40% Forecast Primary axis Europe, while the world average was (TWh) Electricity 1 400 35% significantly lower: 8.5 percent in 2006. production India is now making efforts to monitor 1 200 30% Distribution losses and reduce losses. High loss levels lead 1 000 25% Secondary axis to significant unpaid generated 800 20% Rate of distribution electricity, diverting resources from losses (India) 600 15% investments. Reduction of losses and Rate of distribution thefts is expected to result in a 400 10% losses (World) significant consumption growth rate. 200 5%

0 0% Figure 11 illustrates the growing electricity production of India compared 2011 2017 2014 2012 2015 2013 2001 2010 2018 2019 2016 2020 2007 2002 2005 2004 2003 2009 2008 2000 2006 to the significant losses of the electricity Source: KPMG, IEA network.

33 IEA

What kind of network developments The Government has already taken steps It is very difficult to motivate them to including metering need to be taken to curtail these losses. It has launched the achieve an organization that is focused on over the next five years to reduce APDRP (Accelerated Power Development the future. This is the missing link on the power outages and electricity losses and Reforms Program) whose goal is bringing distribution side that needs to be addressed.” during the transmission and distribution? AT&C losses down to less than 15 percent - Survey participant - by the end of the Eleventh Five Year Plan Respondents believe that the Indian in urban and high population density areas. power sector will not become viable Thus, by using an appropriate mix of until transmission and distribution Additionally, as mentioned previously technology and management, and losses are brought down significantly. the distribution of franchises should be encouraging privatization, India can spread across all states to reduce effectively reduce its technical as well The Aggregate Technical and outages and help ensure proper and as non technical losses. Commercial (AT&C) electricity losses in smooth distribution to the end user. India are almost 40 percent, whereas the international norm is around 15 percent. To achieve this, there needs to be Electricity import, export transparency and accountability. Overall, These high technical losses are primarily the focus should be on energy audits, As supply is unable to meet demand, design and engineering related due to metering, billing and the entire collection electricity is being imported. As illustrated, inadequate investments over the years for chain. Managerial excellence, i.e. the electricity imports are increasing in parallel system improvement works, resulting in availability of good middle management to total electricity production, which is due unplanned extensions of distribution lines, in distribution companies, is a key to the strong economy and population overloading of the system elements like success factor in developing the sector. growth. Still, India’s total electricity transformers and conductors, and a lack imports accounted for only 0.4 percent of adequate reactive power support. “In India what is really missing is… of total domestic production in 2006; the someone analyzing all the information increasing trend and continued power Commercial losses are mainly due to that is coming in and preparing meaningful deficit implies that the development of low metering efficiency, theft and management information reports and supply is not able to keep up with pilferages. These may be eliminated by following up with actions. This pertains booming electricity demand. As India improving metering efficiency, proper to the entire organizational structure. does not want to stay dependent on energy accounting and auditing and Most state companies have not recruited electricity imports, a long term solution improved billing and collection efficiency. for the last 15–20 years and the average would be the strengthening of electricity age of employees is 54–55 years. supply and the reduction of T&D losses. Towards those ends, the following actions are needed: Figure 12: Electricity import, export and total electricity production • Improvement in the quality of equipment (TWh) (TWh) 4.0 800 Primary axis • Improvement in the infrastructure 3.5 700 Electricity import Electricity export (separate feeders for agriculture) 3.0 600

2.5 500 Secondary axis • Technology upgrading Electricity 2.0 400 production • Transparency, accountability and 1.5 300 penalization of power theft and pilferage 1.0 200

0.5 100 • Political commitment 0.0 0 2000 2001 2002 2003 2004 2005 2006

• Privatization. Source: KPMG, IEA

Figure 13: Investment needs of the electricity sector up to 2030

Total: USD 960 billion

Power generation 45% Transmission 17% Distribution 38%

Source: IEA

Long-term solutions

In absence of long term investment and improvement activities, India will be increasingly dependent on foreign imports. Long term investment to a self sustaining electricity sector in through its own investments, especially programs for generation, transmission India, thus reducing future import on the scale India should, the and distribution are expected to be led dependency. In order to succeed, involvement of private capital is a by government initiatives. considerable effort will be needed to necessary step to keep the technology improve the investment climate, to stream flowing into the country. As a result of promised improvements reduce transmission and distribution This also requires controlled support and efforts towards reducing losses and losses and to modify relevant legislation. from the state. theft, the high distribution losses are likely to be significantly decreased by Additionally, India is facing significant 2020. Based on current trends and 4.3. Ownership and population growth and economic expectations, losses should be lowered investments in the development, which necessitate to roughly 16 percent by 2020, which Indian power industry continuous significant investments in would still be double the global average. both the electricity sector and other Approximately half of power theft could Worldwide experience and best supporting services and infrastructure. be turned into legal consumption, practices support the concept that which would result in an increase of decentralization and privatization lead to Based on IEA estimates, the investment consumption by 6 percent per year; market liberalization and sustainable needs of the Indian energy sector until lower production growth of 3.7 percent development. To facilitate these, a 2030 total approximately USD 960 per year would likely be able to cover supporting legislative environment is billion. As shown in Figure 13, most future consumption to a greater extent. required, which is one of the main investments are needed in the constraints on the development of a generation sector, amounting to USD Overall, the synergies of the extensive country’s electricity system. 435 billion, followed by USD 360 billion generation capacity addition program into distribution and USD 165 billion into and the envisaged reduction in As states are usually unable to maintain development of the transmission distribution losses are expected to lead their electricity systems sufficiently network.34

34 IEA

What are the top investment installed capacity of 78,000 MW in place, and • T&D losses have been consistently priorities in the electricity sector over another 35,000 MW (of private investment) high, and are presently in the range the next five years? is in the implementation phase, but the of 18–50 percent in various states. desire for more electricity still continues. According to respondents an equal Those placing generation (capacity addition) • Maximum losses are accounted for emphasis should be placed upon each of the in first place believe that mega power at the distribution end and need to be three segments – generation, transmission, projects are the most critical to carry out curtailed to make this sector profitable. distribution – to prevent a imbalance. in order to keep up with increasing power However, as top investment areas, demand and decrease the country’s • This business is the most complex generation and distribution were highlighted power deficit of 12.6 percent in FY10.35 among the three segments. Apart as both require significant injections of capital. from investment, it requires Significant capacity additions have been significant managerial competency. “All three segments – generation, planned within the Eleventh Plan and The investment portion of distribution transmission and distribution – are around 30–40 percent of the total is overemphasized while managerial parallel and investment in them should investment coming into the power issues are underemphasized. happen simultaneously.” sector will be concentrated in generation. • Delhi is managed efficiently on the - Major technology supplier - “Right now everyone is concentrating distribution side by private players. on generation. If generation came and As per the policy of “Power for all by we do not have distribution to the end “Distribution will be more focused in 2012” approximately USD 14.4 billion user, that would cause dissonance.” the days to come and based on that, was set aside by the government for generation will receive investment in - Major market participant - investment in the country’s high voltage the next five year plan.” transmission sector. - Major technology supplier - Distribution has also been mentioned as In power generation, India is still in a stage an area of concern, and is a top priority of capacity addition. Currently there is an for most of the respondents. “Investment in one without the other does not make sense.”

- Major technology supplier -

Currently, in terms of transmission systems India is divided into five regions: northern, north eastern, eastern, southern and western. Efforts are being made to create a national grid, something which would require investment. There is also a need to implement new technologies.

India requires huge equipment manufacturing capabilities and the requisite investment for its capacity addition projects.

As per Planning Commission estimates approximately USD 150 to 200 billion of investment is required for India’s power sector development in the next five years.

35 India’s peak power deficit is expected to deepen in the fiscal year 2010 to 12.6 percent from 11.9 percent in the fiscal year 2009 ended in March, union minister of state for power Bharatsinh Solanki said on 10 July 2009. According to the minister the Central Electricity Authority has projected an energy shortage of 78,429 mega units and peak power shortages of 14.98 GW in 2009–2010. Source: http://www.livemint.com/2009/07/10182535/India8217s-peak-power-defic.html

Moreover, the ability to find these resources Nevertheless the government is expected to How is the privatization process expected and companies’ ability to absorb these play an important role in supplementing the to unfold in the Indian electricity sector? funds in an effective manner is doubtful. efforts of state utilities and maintain an ongoing Accelerated Power Development and The power sector’s privatization started in ”Enterprises have huge investment plans, Reform Program (APDRP) to provide invest- 1991–1992, but no significant degree of but their managerial and organizational ability ment assistance in the form of incentives. investments has actually been reached in to manage that scale of resources is extremely the transmission and distribution segments. constrained in India and adequate focus is required to set up good management Reorganization of the The major cause of this is the high level (information) systems and accountability generation, transmission, of investment risk which makes private systems to manage those investments.” distribution and trade sectors companies reluctant to enter.

- Survey participant - Current trends show more emphasis ”Privatization has been in place since on private participation than 1991. Today anyone can open a plant. Will the State be able to finance government investments. Moreover But people do not want to invest as they investments in the electricity sector government policies are formulated are not sure when they will get returns.” over the next five years? towards private participation, in turn - Survey participant - reducing pressure on the state to Currently most of the power generated generate large funds. in India comes from its states and Currently the Aggregate Technical approximately 10–13 percent comes Private investments, which might and Commercial36 (AT&C) losses in India from private investors. However, be realized in various forms including account for USD 6–8 billion annually, respondents unanimously believe that privatization, are also required in and are a major deterrent to private private sector financing will be needed the distribution sector. The scale of players entering the sector. If the to finance future investments in the expansion is so great that a proper Government was able to reduce the electricity sector as the states alone are not organizational capacity needs to be in AT&C losses to 10 percent then able to manage this alone. Public-private place in order to manage it successfully. privatization would be more feasible. partnerships are considered distinct possibilities for future development. On the generation side, the ”Transmission is open for private Government of India and state participation, but in 10 years it will “The state does not need to finance the governments have taken numerous accelerate, whereas distribution is one projects entirely; there is sufficient steps to attract private sector area which is still lagging behind.” enthusiasm from the private sector to participation. Based on market - Major financial institution - invest and earn substantial returns.” screening, approximately 30 GW is - Major financial institution - currently being proposed in India by the private sector and another 30–40 The distribution sector must be opened GW is in the implementation stage. up for participation with the introduction “The state alone cannot finance such New initiatives in power sector of different models in the private sector, projects… So the Government will need development such as large scale of which privatization may play a role. to depend on new investments, mainly power plants, merchant power plants, The scale of expansion is so great that a private ones.” and captive power plants are expected proper organizational capacity needs to to trigger capacity development in the be in place in order to manage it - Major technology supplier - private sector over the next few years. successfully. However, it will be difficult to sustain Apparently private sector players like this trend in generation unless there On the generation side the Government Reliance Power, Tata Power, etc. are is a corresponding increase in the of India and state governments entering the market and setting up their transmission and distribution have taken many steps to attract plants in various states. segments. private sector participation.

36 Aggregate Technical and Commercial losses captures technical as well as commercial losses in the network and is a true indicator of total losses in the system.

In India approximately 30,000 megawatts “Transmission is open for private participation, but in is currently being proposed by the 10 years it will accelerate. Distribution is one area private sector and another 30–40,000 which is still lagging behind.” megawatts is in the implementation stage. New initiatives in power sector - Major financial institution - development such as UMPPs, merchant power plants, and captive power plants are expected to trigger capacity addition Currently the public sector retains the India is looking forward not only to high in the private sector over the next few larger share of 75 percent, and unless technology, but also to refurbishing its years. However, it will be difficult to issues are resolved, not many private aging units. According to some sustain this trend in generation unless players will be interested in investing. respondents there will be quick capacity there is a corresponding increase in the Respondents also claimed that unless additions at optimal or minimum cost. transmission and distribution segments. there is clarity in government policies, Many underperforming (coal) power guidelines and a single window clearance stations will be acquired – taken over by Some respondents have suggested that system, the sector is unlikely to see private enterprises to turn around and the Government should consider limited major participation from private players. make a profit. privatization so that full control over hydro and nuclear could be maintained, Distribution companies gravitate “Refurbishment of underperforming while privatizing thermal power in a less naturally to privatization, but they face units will become a priority in the restricted manner. Additionally, huge challenges: AT&C losses of most coming decades.” according to respondents, state of the State Power Utilities (SPUs) - Survey participant - electricity boards should make the remain as high as 40 percent, making whole process more commercial, by this business financially sick. For this offering a suitable rate to attract private reason, these utilities have only had 4.4. Main determining investors. limited success in attracting private factors in the investors to set up power plants. In conclusion, private sector investment development of the will primarily flow into power The fact that private players cannot sell electricity industry generation, followed by transmission directly to consumers is also a and distribution, while respondents drawback due to their vulnerability in As the global crisis affects India, a foresee the Government as the major the event that the state refuses to buy limited slowdown of investments can sector stakeholder in the coming years from a private player. A private player’s be expected in the electricity sector with a growing emphasis on public- only option would be to close down. since country risks are increasing and private partnerships. the budgeting of private companies is However, some domestic players like becoming stricter. Even though the What are the expectations on the Reliance are keen on investing and are crisis is not expected to adversely affect level of public and private sector already setting up power plants with all areas of the economy, the temporary investments going into the electricity improved efficiency. slowdown is expected to last for sector in the course of the next five some time. years? “If you look at the mega power projects, out of four, two have gone to Reliance. In general, India is in good shape The level of public and private Reliance is building two plants, one at despite the fact that the global crisis is participation will greatly depend on the Sasan and Krishna patnam. The other affecting the country. In India the pace financial viability of the sector in the plant that has also gone to Reliance is of development is linked to increasing coming years. Private capital will Tilaiya. Apart from these projects, more GDP growth and rising electricity primarily focus on generation while the are pending.” demand. As India is currently facing a public sector will continue to have a high power deficit, its entire electricity - Major regulatory agency - stake in transmission and distribution. production is utilized within the country.

This implies that India’s attempt to shift the electricity sector into private hands will definitely need some adjustment and far more public sector spending will be required.

It is most likely that the financial turmoil will not have a major adverse effect on the big players of the power sector like NTPC and NPCL due to the assurance of repayment, but smaller players are likely to be affected as banks might be reluctant to fund them.

“The financial turmoil will affect smaller players. For bigger consumers like NPC and NTPC, there will be no problem in As a result of this high demand, the • Some of the private players’ revenue getting loans as they are sure to repay.” economy is expected to return to its model of tapping the stock market to - Major market participant - original growth path in a short period of make money, either through IPOs, public time, if the necessary terms are provided. issues or private equity, will not be viable for the next year given the global liquidity However, looking at the future, One of the major concerns of both crisis. So raising equity for investment in respondents are fairly optimistic and believe domestic and international investors is the power sector by private sector that India will quickly overcome the crisis the country’s fuel supply, which is a players is not going to be easy. and return to its previous growth levels. prerequisite for the continuous operation of large scale power plant • Similarly on the debt side, getting Evidence to support this includes: investments. As previously mentioned, ECBs or other finance may not be easy natural gas was a limited source in India for private sector players because in • Indian stock markets boomed after the until a discovery off the east coast by the risk averse environment of an formation of the new government. Reliance. This new source is expected economic slowdown lenders prefer to provide an uninterrupted gas supply public sector institutions as they are • India’s economic growth is not for the next 10–15 years making room perceived as less risky. dependent on a single sector and even for new natural gas based power plants if some sectors are negatively affected, as well the existing plants which are “There is a shortfall in equity. If we the overall outlook for the economy’s underutilized or lying idle due to lack consider infrastructure or power, there growth will counter balance it. of gas. is no surplus cash to invest. This is linked to the capital marketsand their “My personal opinion is that this global What are the expected effects of revival depends on global cash; it is a turmoil is a temporary phenomenon. Its the global financial turmoil on question of proper allocation.” impact is limited to countries like the USA.” India’s electricity market in the next - Major financial institution - - Survey participant - five years?

According to most survey participants “Globally, stock markets have taken “Global financial turmoil is hype in India. from the financial sector, the financial a beating. New deals and IPOs are We do not have any problems as no crisis has primarily affected private not going to be very viable in the Indian company has filed for bankruptcy sector investments, both on the equity private sector.” nor have any declared huge losses.” and debt sides. - Survey participant - - Major technology supplier -

“…too many subsidies should not be given or they How is the end-user electricity tariff should be minimized. There is no motivation to invest structure expected to be during the otherwise.” course of the next five years? Will the regulator be able and committed to - Major governmental authority - reduce subsidies and cross-subsidies in the existing end-user tariffs and 4.4.1 Regulatory climate Another vital step has been taken by gradually move towards a cost-reflective India, namely the opening up of power tariff regime in the next five years? The structure of the electricity industry exchanges to stimulate the electricity was rather monopolistic before the market place. In this process legislation This politically tinged question involves reforms in 1991. Reforms were is being formed – carefully reviewing protecting certain consumer groups and implemented to improve the regulatory examples in more advanced markets passing the costs over to other sectors, regime, including abolition of the public like that of the United States or of reducing their competitiveness. sector monopoly delegating regulations European countries – with which it may to regulatory commissions, and best serve the needs of the market in “It will vary from state to state; privatizing of certain public the long term. regulators have their own political and enterprises.37 social pressures.” By continuing the implementation of - Major market participant - In the process of the electricity market’s such vital moves, and considering best liberalization and development, free practices, India should be able to competition on a free market should successfully handle rising energy The present tariff system comprises be the desired goal, which requires prices, the sale of newly added and many subsidies and cross subsidies precise legislative planning and careful planned generation capacities, the coming from public and the private organization. India has already shown complexity of electricity distribution, utilities. This is expected to be phased willingness to bring in more experienced the requirements for state subsidies, out gradually in moves towards a cost- know-how through international market and issues regarding end-user prices. reflective tariff mechanism. players, as demonstrated by increasing private ownership in the generation The tariff question is closely linked “We feel that too many subsidies should not sector and the planned electricity to cross subsidization of households be given or that they should be minimized. market opening in 2010. and farmers. The tariff structure should reflect costs – right now it does not. Otherwise, there will be no motivation to invest.”

- Survey participant -

As fuel prices rise, the Government will not be able to resist pressure and eventually tariffs will increase. There is an expected increase of 5–7 percent per year which the end consumer will have to bear.

“Regulation should be totally independent as open access is going to start very soon, by 2010.” - Major governmental authority -

37 Infrastructure Regulation and Institutional Endowments in India, Devendra Kodwani

Investors want to earn money and the The per capita emissions rate of India “We have a fraction of the survival of the sector depends on the represents a tiny fraction of those in the environmental CO2 emissions profits it reaps for investors. developed world. However, looking at compared to the US and UK and with the future, economic growth is likely to our commitment towards constant Respondents, however, pointed out that result in a parallel rise in emissions. improvement we are not likely to be subsidies needed to be reduced or aligned India, along with China, will account for bigger contributors than they are.” to those sectors which genuinely need it. most emissions in the coming decades, owing to their rapid industrialization and - Survey participant - “There is a lot of energy poverty. economic growth. Out of the world’s 2 billion energy poor, However, looking at the future, India 500 million are from India. We have to What are the effects of health, along with China will account for most ensure a minimal amount of electricity climate change and environmental of the emissions in the coming is available to them. For this reason, issues/concerns on the current and decades, owing to their rapid subsidies cannot be totally phased out.” planned power-related projects? industrialization and economic growth.

- Survey participant - Although India is a signatory of the Respondents pointed out that there is Kyoto Protocol, it is exempted from the always a trade off between growth and “Government must protect small power framework of the treaty, and expected environment. Today, India’s top priority generating units through subsidies or they will to gain from the protocol in terms of the is generating enough power to fuel the not be able to compete. Currently they play a transfer of technology and related country’s economic development at an vital role in supplying power to the state.” foreign investments. optimum cost.

- Major technology supplier - ”There is always a tradeoff between Respondents highlighted the “3A theory”: growth and environment. The growth 4.4.2 Environmental is sustainable to a country but the Accessibility: Everyone should have concerns environmental effects caused by that access to electricity growth are not limited to geographical boundaries.” Availability: Appropriate capacity In order to reduce global warming, the generation and distribution to meet - Major market participant - industrialized countries (with the demand exception of the US) signed the U.N.’s Kyoto Protocol which sets targets for The per capita emissions rate of India Acceptability: Environmentally friendly national greenhouse gas emissions. represents a tiny fraction of those in the /acceptable in terms of the environment developed world. Therefore, following India ratified the Kyoto Protocol in the principle of common but A balance must exist among these, August 2002 and thus actively participates differentiated responsibility, India according to participants: in the fight against climate change. Since maintains its position that the major India is a developing country, it belongs responsibility of curbing emissions • Some felt that environmental issues to the “Non Annex I” countries that do rests with the developed countries, were taken into consideration in not have official targets for reducing which have produced emissions over power generation as there is an their emission levels. India is one of the a longer period of time. increased emphasis on the quality of main beneficiaries of the project based emission reduction mechanism, namely the Clean Development Mechanism “The government should conduct intensive programs (CDM) of the Protocol. The majority of at small and end user levels. This will help attaining CDM projects are partly based on India having achieved almost 69 million tons maximum benefits.” of emission reductions to date.38 - Major technology supplier -

38 United Nations Framework Convention on Climate Change

coal and a shift towards higher efficiency • National Mission on strategic pricing mechanism needs to be in terms of applied technology Knowledge for Climate Change. developed to drive consumer behavior (supercritical technologies, clean coal). towards saving energy. How strong is India’s commitment “We are employing new technology but it towards fostering carbon sensitive “If you are not paying for the electricity is not our top priority. On a commercial and economy over the next five years? consumed…you will not switch off fans viable basis, we have to see that we are able when you leave a room.” to meet the basic priority of energy access.” While keeping a low carbon economy in - Survey participant - mind it is crucial to note the fact that in India - Survey participant - half of the population does not have access to electricity. Hence, it becomes very In addition, emphasis has been placed • Furthermore, some felt that by difficult to balance growth in the electricity on the states’ and regulators’ roles in setting up more nuclear power sector with concerns for the environment. supporting the development of energy plants, the negative impacts on the saving technologies by creating more environment would be reduced. “We have a verbal commitment, which awareness and, if needed, giving subsidies is not feasible because it sounds like: to specific areas, such as CFL40 usage. The • Others highlighted the importance of Stop your growth. The discussion is Government is conducting campaigns to keeping a renewable energy target in about growth versus the environment.” create awareness among the public, but coming years, if not in absolute terms at this point that awareness is not yet - Major financial institution - then at least in percentage terms. apparent among average citizens.

Major support initiatives exist which are “The fact is that in India half of the Respondents applauded the role of the clearly defined in “Eight Missions”, the population does not have an electricity Bureau of Energy Administration who as government’s priorities in addressing climate connection…So creating more per the Energy Conservation Act 2001 is change. The Eight Missions identified in the generation programs, and focusing on doing energy audits for companies to National Action Plan on Climate Change an adequate system to take care of provide them with information showing are currently being elaborated and the transmission and distribution is key. If differences between energy saving exercise is drawing to a close.39 that is done sufficiently in a low carbon appliance use and conventional appliances. way, this will be the best strategy.” The Eight Missions in India comprise: However, some respondents were - Survey participant - pessimistic about the subject and think • National Solar Mission that such topics are more suited to What kinds of energy saving seminars and white papers. They • National Mission for Enhanced technologies are expected to be believe that even though much has Energy Efficiency implemented during the next five been said on the concept of energy years? What levels of support will the conservation, no serious concrete steps • National Mission on Sustainable state provide in this respect? How have been taken, in contrast to Habitat will it influence the consumption? countries like China which is growing in accordance with proper planning. • National Water Mission A majority of respondents consider energy conservation a very important “This is a topic of discussion among • National Mission for Sustaining the issue as evidenced by the popular slogan those in the seminar circuit. People like Himalayan Ecosystem “Energy saved is energy generated”. to discuss such issues, there will be The successful implementation of various seminars held, but nothing • National Mission for a Green India energy saving technologies, however, concrete comes out of it, no action is will most likely be purely based on cost. taken. It is all only on paper.” • National Mission for Sustainable Although energy conservation is an - Major market participant - Agriculture important concept, an appropriate

39 Government of India – National Action Plan on Climate Change 40 CFL is an abbreviation for compact fluorescent lamp

4.4.3 Key challenges The main issues considered to be • Increasing transparency and critical regarding the future accountability of responsible India faces challenges on many fronts, development of the electricity sector regulatory and government bodies being in the process of a significant mentioned by respondents were: development boom in terms of • Creating a high level authority to population, economy, and as a result of • Reducing AT&C losses resolve domestic issues and also electricity consumption. In the coming federal versus state issues, to avoid decades, it is of vital importance that India • Distribution sector reforms to be delays between responsible be well organized, as the smallest missing accelerated ministries component could set back its development. Collection efficiency to be improved • Increasing government flexibility Based on the survey, the most important to take private players’ opinions challenges determining the long term Introduction of stringent measures into consideration when drafting development of the country are connected to against power theft and pilferage policy skills development, regulatory effectiveness, corporate governance, electrification, • Gradually setting up a cost-reflective • Promoting renewable energy sources, and the ensuring of investments. tariff mechanism shifting the sector with a special focus on solar energy towards market based operation and as India has abundant sunlight What are the issues/ matters of the increased competition highest importance, those that are the • Promoting energy efficiency and most influential regarding the future of • Encouraging private players to energy conservation technologies the electricity sector? What will determine further participate in thermal the next five years of the sector? generation (via privatization) • Approvals relating to environment and land acquisition should be granted within a stipulated amount of time, ensuring that projects can be finished on time.

What can be the solutions for India to fulfill the increasing demand for equipment and technology services of the electricity sector over the next five years? How will suppliers be able to serve this demand?

Considering the fact that India’s power generation sector is expected to grow by 40–60 percent, India is going to face challenges in meeting the demand for equipment and technological services. Respondents mentioned that although huge investments are being made in the sector, this part of the industry remains neglected.

India’s dependence on technology imports has significantly increased over time, as local producers are not able to fulfill domestic demand for equipment and technological services.

This takes a toll on most of the projects, On the contrary they should encourage ”No, unfortunately India does not have delaying them unnecessarily. NRIs and other global investors to come much labor available. Even those and invest in plants. graduating from college have to be “We need to expand our manufacturing retrained. The education system has capacity and assimilate and upgrade On the generation side, India needs to still not evolved.” technology from sub critical to super work on clean coal technology as coal - Survey participant - critical as the generation of power remains the primary source of power capacity has gone up to 16,000 megawatt generation. The concern here is that and this demands upgraded technology. these technologies are extremely “We have a shortage because the The kind of ramp up we have in mind specialized and advanced and, demand is going to go up.” means we need more players in this currently, scarce in India. - Survey participant - sector to set up the plant and equipment base.” To overcome this, more vendors apart from BHEL should be given The following limitations were brought - Major financial institution - incentives to bring the technology to light: into the country. Secondly, expansion At present BHEL is the country’s major of the vendor base all across the • There is a lack of universities and manufacturing unit. They have a generation, transmission and training centers to develop skilled monopolistic advantage and outside distribution segments is needed. labor, emanating from the fact that of them, there are few vendors, namely Thirdly, more focus on research and focus on organizational structure and only Tata, Jindal, Larsen & Toubro are development would be necessary, accountability is missing throughout setting up production capacities. according to respondents. the country.

Survey respondents suggested that In order to also be able to meet the • Organizations in the sector employ the government and regulatory bodies growing needs of equipment and an aged workforce who are not should encourage new companies to technological services domestically, motivated towards betterment or venture into the sector, providing them the availability of Indian skilled labor developing their skills. with support, while maintaining quality is crucial in addition to capacity standards. Respondents mainly pointed investments. • There is a need to re-set internal out the prerequisite standards restricting educational system and create new vendors from entering the sector. Does India have enough skilled and incentives for training programs. available labor to lead and execute “The rules and regulations should be the necessary investments into Compared to China, which provides the same and strengthened to ensure the electricity sector in the next training institutes in almost every quality, but for first timers there should five years? province, India has only a few training be no prerequisite standards.” centers like NPTI (National Power A majority of respondents maintain that Training Institute) to support the increasing - Major technology supplier - there is a shortage of skilled labor in the demand for manpower in the sector. energy sector. “Facilitate the entrance of more global Key investment opportunities may lie in players.” This is one issue which has been left the development of training centers to overlooked and requires immediate improve and train skilled workforce, and - Major technology supplier - attention. expanding manufacturing capacities supporting state-of-the-art technologies. Some respondents also said that it was ”The paradox is this: We have essential for the Government to refrain unemployment but the unemployed from strong-arm methods when someone have no skills.” does not want to buy Chinese products. - Survey participant -

5. Investment Macro-economic trends • Population is forecasted to grow significantly and even bypass China’s after 2020. Opportunities • Electricity consumption is predicted to grow continuously as a result of the electrification program and increasing living standards. • The electricity sector is a top priority on the political agenda; the government’s goal is the expansion of the sector through supporting programs. • Electricity regulation is erratic, but electricity sector regulatory policies are s described in this publication, undergoing improvements regarding compliance with rules, changing regulation, India’s electricity sector bears unregulated issues, cross-subsidies, liberalization and open access. A enormous potential for growth • A strong and growing domestic market mainly led by the commercial and and business development, but industrial sectors. exploitation of these opportunities • Improvements in operational and pricing efficiency to support further growth. requires tailor-made investment Investment characteristics strategies and careful planning processes. • High investment opportunities for vendors and suppliers because of the increase in the demand for generation, distribution and transmission as: This study aims to help both domestic Expanding and improving installed capacity is attractive for many private and international financial investors in players entering the sector with huge investments. identifying business opportunities in the Supplying new metering and control technologies and equipment. Indian power sector throughout the Supplying components required to expand transmission lines. asset lifecycle. • Overall, huge investments are expected in India: Large capacity additions are planned The main results of our assessment of Privatization of SEBs the Indian power sector are outlined in A large portion of the country’s rural area has yet to receive access to electricity. the chart which follows. • There is a high level of support from the central government. Electricity is in focus as a basic component. India is rich in coal reserves and natural gas has recently been discovered. Privatization is on the way, limited private equity is already present in the country. India has the potential for further development wind energy. India has a large volume of unexploited hydro resources throughout the country. India's power system is under revision. • The issues of high subsidies to the rural sector and cross subsidization are not yet settled. There is a possibility that cross-subsidies will be maintained over the next five years. • The lack of skilled labor in the electricity sector and manufacturing must be addressed. There is an increasing market for training centers to improve employee training.

Market factors • Growing pressure for expanding the use of renewable, non-polluting and environmentally friendly energy sources. • High quality standards issued by the regulatory body present challenges to new investments. • Increasing focus on capacity additions, utilizing the country’s vast unexploited potentials, like hydro power sources. • There is increasing demand for specialized know-how, which can hardly be satisfied. Unemployment exists, but few skills among those out of work. There is pressure to install training centers similarly to China. • Politically sensitive issues like cross-subsidies are present in the electricity sector. • An alarming level of T&D losses is dissuading private investments into the electricity sector.

Acronyms

APDRP – Accelerated Power NRI – Non Resident Indian Development and Reform Program NTPC – National Thermal Power AT&C – Aggregate Technical and Corporation Commercial PPP – Purchasing Power Parity BPO – Business Process Outsourcing PSU – Public Sector Undertaking BRIC – Brazil, Russia, India, and China SEB – State Energy Board CAGR – Compound Annual Growth Rate SEZ – Special Economic Zones CDM – Clean Development Mechanism SME – Small and Medium Enterprise CFL – Compact Fluorescent Lamp SPU – State Power Utilities ECB – External Commercial Borrowing T&D – Transmission and Distribution EIU – Economic Intelligence Unit UNFCCC – United Nations Framework GDP – Gross Domestic Product Convention on Climate Change

GHG – Greenhouse Gas WEC – World Energy Council

IEA – International Energy Agency

IPO – Initial Public Offering

IPP – Independent Power Producer

MNE – Multinational Enterprise

NHPC – National Hydroelectric Power Corporation

NPCL – National Power

NPT – Non-Proliferation Treaty

NPTI – National Power Training Institute

© 2009 KPMG International. KPMG International provides no client services and is a Swiss cooperative with which the independent member firms of the KPMG network are affiliated. KPMG’s ENR Practice Overview 41

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KPMG’s ”Think BRIC! Key considerations for investors targeting the power sectors of the world’s largest emerging economies“ publication series

”Think BRIC! Key considerations for investors targeting the power sectors of the world’s largest emerging economies“ publication series aim to highlight major trends and challenges shaping the evolution of the BRICs countries` power sectors over the course of the next decade in light of the global economic crisis. Perspectives of top-level executives and stakeholders of the BRICs power sector are included in these country reports which are based on a qualitative research and KPMG analyses.

Think BRIC! – Key Brazil’s electricity The Russian considerations for sector bears market is one of investors targeting enormous the largest on the the power sectors potential for planet. Scores of of the world’s growth and power plants feed largest emerging business almost 1 million economies – development, but gigawatt hours of Comparative accessing the electricity into a study opportunities vast grid that requires tailor-made investment comprises some 3.2 million kilometers This KPMG report sizes the investment strategies and careful planning of cables that stretches across 11 time needs of the power sectors in Brazil, processes. This study aims to help both zones. More recently, the global Russia, India and China; including domestic and international investors in financial crisis, along with the fall in the historical analyses from 2000–2008 and identifying business opportunities in the price of oil, has hit Russia hard but the also projected investment needs until Brazilian power sector throughout the Russian electricity sector is still a target 2020 by assessing socio-economical, asset lifecycle. for foreign investments. technical, environmental and legal aspects. India’s population China invested around 1.1 billion some USD in 2009, is 83 billion in the growing fast, and electricity sector is expected to in 2008. Longer surpass that of term estimates China soon after predict that China 2020 – making it will need to invest the largest in the USD 2,765 billon world. To fuel its economic growth, which into the industry by 2030 to cope with is expected to be over 9 percent for most its power demand – an estimated one of the next decade, with electricity, total quarter of the total global energy sector generating capacity should jump by 90 GW, investment within that period. How will to 241GW, with an increased emphasis such a gigantic sum be spent, and what on nuclear, clean coal and renewables, opportunities will it offer investors and including solar and small-hydro. suppliers?

Authors and co-authors of the ”Think BRIC! Key considerations for investors targeting the power sectors of the world’s largest emerging economies“ publication series:

Péter Kiss, Global Head of Power & Utilities, Attila Szepesi, Judit Pintér, Balázs Zambó and KPMG`s Global Power & Utilities Knowledge & Resource Center, Budapest, Hungary; IPSOS

Other KPMG Thought Leadership

To receive electronic copies or additional information about any of the documents below please contact your local KPMG firm. Alternatively, please visit the following web sites:

KPMG.com: http://www.kpmg.com/Global/WhatWeDo/Industries/Energy/Pages/default.aspx

China`s Energy Sector Central and Eastern European – A Clearer View Nuclear Energy Outlook

The following KPMG report shares our A discussion of the nuclear energy observations on key trends in each area industry in Central and Eastern Europe, of the energy sector, from upstream oil this document discusses both the and gas to power generation region as a whole and individual nations.

Bridging the Global The Application of IFRS – Infrastructure Gap: Views Power and Utilities from the Executive Suite The publication examines trends and Global research commissioned by challenges in implementing true IFRS KPMG International and conducted in across the Power and Utilities industry cooperation with the Economist and is based on the reports of various Intelligence Unit companies across a variety of countries.

The Winds of Change Indian Power Sector – Rising up the Curve The Winds of Change is the 2009 version of an annual publication which The Indian power sector is going discusses trends in M&A in the through an exciting growth phase-high Renewable Energy Industry. Over GDP growth lead to increased demand, 200 executives were surveyed, and generation capacity, transmission supplementary interviews were carried and distribution. out by the Economist Intelligence Unit.

The KPMG Global Energy Institute has been established to provide an open forum where industry financial executives can share knowledge, gain insights, and access thought leadership about key industry issues and emerging trends.

Power a nd utilities financial, tax, risk, and legal executives will find the GEI—and its Web-based portal—to be a valuable resource for insight on emerging trends.

To register for your complimentary membership in the KPMG Global Energy Institute, please visit www.kpmgglobalenergyinstitute.com.

For more information about the GEI, please e-mail us at [email protected].

Comments and questions Global ENR Contacts Global Infrastructure Projects in relation to the Think BRIC! Group Key Contacts publications series and their Michiel Soeting content are welcome and Global Chair Dr. Timothy Stone should be addressed to: Energy & Natural Resources Chairman Global Infrastructure Projects Group KPMG in the UK E-mail: [email protected] Tel: +44 20 7694 3052 KPMG in the UK E-mail: [email protected] Tel: +44 20 7311 8244 Péter Kiss E-mail: [email protected] Global Head of Power & Utilities Pamela O`Leary KPMG’s Global Power & Utilities Global Executive Nick J. Chism Knowledge and Resource Center Energy & Natural Resources Global Head of Infrastructure Global Infrastructure Projects Group KPMG in the UK KPMG in Hungary Tel: +44 20 7311 8438 KPMG in the UK Tel: +36 70 333 1400 E-mail: pamela.o`[email protected] Tel: +44 20 73118603 E-mail: [email protected] E-mail: [email protected]

Media relations: ENR and Power & Utilities Jai Mavani Contacts in India Executive Director Judit Pintér Head of Infrastructure Business Development Coordinator Arvind Mahajan Executive Director KPMG in India KPMG’s Global Power & Utilities Tel: +91 22 39896000 Knowledge and Resource Center KPMG in India E-mail: [email protected] Tel: +91 (22) 3983 6206 KPMG in Hungary E-mail: [email protected] Tel: +36 1 887 7118 E-mail: [email protected] Manish Agarwal Executive Director

KPMG in India Tel: +91 22 3090 1770 E-mail: [email protected]

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