Opportunities in the Indian Power Sector for Foreign Players

The Indian power sector presents opportunities for foreign investors due to increased industrial consumption and renewable push for electricity generation. India allows 100% FDI into the sector and has plans to monetize assets in the power transmission and power generation sectors. The Electricity Amendment Bill, 2020 if passed, will allow for new market entrants, favoring private sector players, and increasing scope of green energy. The government is keen to reform the Indian power sector by increasing privatization, inviting technology transfers through greater foreign investment, and reducing the extent of distribution and transmission losses.

The evolution of the Indian power sector, a core pillar of infrastructure, has been the key driver of India’s socioeconomic growth. India’s diverse power sector depends on conventional sources like coal, natural gas, and oil to hydro, nuclear energy, wind, solar, and bio-waste etc. The country is both a leader in global energy production and consumption, next only to China and the US.

In recent times, there has been a visible increase in the deployment of clean renewables and grid-connected distributed generation. Given the expanding demand due to rapid industrialization and urbanization, the Indian power sector presents huge opportunities to global investors. It is forecast that the country’s electricity demand will surge at a compound annual growth rate (CAGR) of seven percent to reach 1894.70 Terawatt-hour (TWh) by FY 2022. At the same time, current annual demand outstrips supply by 7.5 percent, implying the need for more capacity installation.

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The power sector was temporarily hit due to market disruptions caused by the Covid-19 pandemic, but is on its way to a swift recovery, led by a slew of robust measures – such as the of privatization of electricity distribution companies (discoms) in the Union Territories, the special liquidity infusion of INR 900 billion (US$12.16 billion) into distribution utilities, and the increased focus on consumer rights.

Outlook for the Indian power sector for 2022 looks promising propelled by improved investor sentiment shaped by developments like the implementation of Production Linked Incentive (PLI) Scheme for solar photovoltaic modules and gradual replacement of coal by other renewable energy sources. The Electricity Amendment Bill 2020, which will delicense power distribution and open the sector to new players, is currently under consideration by industry experts and bureaucratic bodies. A key push of the bill is obligating discoms to buy a certain percentage of electricity from renewable energy sources. Opposition to the bill raises concerns of national regulators overruling state regulators and fears of a concentration of ‘cherry-picked’ private players.

Opportunities for foreign investment in India’s power sector

India’s electricity consumption patterns are indicative of surging demand, presenting opportunities for foreign investors. The industrial sector accounted for 42 percent of total energy consumption in FY 2019. The sector is projected to attract investment worth INR 9.5 trillion (US$135.37 billion) between FY 2019 to FY 2023. In the last two decades, the power sector in India has attracted foreign direct investment (FDI) worth US$15.36 billion, accelerated by the liberalized FDI policy allowing 100 percent on the automatic route.

As per the federal government’s National Infrastructure Pipeline (2019-2025), energy sector projects accounted for 24 percent of the total expected capital expenditure of US$1.4 trillion, the highest share among all sectors. In addition, the ambitious National Monetization Pipeline (2021-2025) is also a major push in the direction, seeking investments worth INR 452 billion (US$6.12 billion) and INR 398 billion (US$5.40 billion) by monetizing assets in the power transmission and power generation sectors, respectively. The government intends to reap the benefits of foreign investment as well as associated technology transfer for modernization of the Indian power sector, while simultaneously promising mutually beneficial returns.

India’s power sector: An overview

As of June 2021, India is the third-largest producer and second-largest consumer of electricity in the world, with an installed power capacity of 384.11 Gigawatt (GW). India generated 1506 TWh of electricity in 2020, followed by China (7790 TWh) and US (4286.6 TWh). Furthermore, as of 2020, India ranked fourth in wind power, fifth in solar power, and fourth in renewable power installed capacity.

In fact, India’s energy firms have a significant global footing with firms like Reliance Industries Ltd. and Indian Oil Corp. Ltd. ranking 19^th and 25^th respectively, according to the S&P Global Platts Top 250 Global Energy Rankings 2019.

In financial year (FY) 2021, the total electricity generation in India from conventional sources stood at 1234.44 billion units (BU), comprising of thermal energy (1,032.39 BU), hydro energy (150.30 BU) and nuclear energy (42.94 BU). The electricity generation saw a decline of 11.1 percent in 2021 as compared to 1389.1 BU in FY 2020. Between FY 2016 to FY 2021, electricity production in India increased at a CAGR of one percent.

In FY 2022 (until June 2021), the total thermal installed capacity in India stood at 234.05 GW. The installed capacity of renewable, hydro, and nuclear energy totaled 96.95 GW, 46.32 GW, and 6.78 GW, respectively. By 2022, India also has a target to achieve total production of 227 GW from renewable resources, of which 114 GW will be produced from solar power. As part of the green corridor project, power lines would transmit 20 GW of power capacity from 34 solar parks across 21 states.

Sources of power in India

• Thermal: The thermal sector contributes 60.9 percent of total electricity generation in India.
  • Coal: India has vast reserves of coal. By June 2021, the total installed coal thermal power capacity in India stood at 202.00 GW. By 2022, it is expected to witness total installed capacity addition of 47.86 GW. By 2040, this capacity is expected to reach 330-441 GW.
  • Gas and lignite: India’s gas thermal power capacity stood at 24.9 GW, as of June 2021. By 2022, it is expected to witness total installed capacity addition of 0.41 GW. Lignite thermal power capacity stood at 6.62 GW as of June 2021.
  • Diesel: India’s diesel thermal power capacity stood at approximately 0.51 GW, as of June 2021.
• Renewable: The renewable sector contributes 25.2 percent of total electricity generation in India, with wind energy being the largest renewable energy source. Projects like the Jawaharlal Nehru National Solar Mission, which aims to generate 20,000 MW of solar power by 2022, are creating a positive environment among investors keen to exploit India’s renewables potential. There are plans to set up four solar power plants of 1 GW each. As of June 2021, India had 96.95 GW of renewable energy capacity. The target is to achieve installed capacity of 227 GW by FY22.
• Hydro : Given the large number of rivers and water bodies in the country, India has massive potential for developing hydropower. The hydro sector contributes 12.1 percent of total electricity generation in India. As of June 2021, India’s hydro power generating capacity stood at 46.32 GW. By 2022, it is expected to witness total installed capacity addition of 6.82 GW.
• Nuclear: The nuclear sector contributes 1.8 percent of total electricity generation in India. As of June 2021, India had 6.78 GW of installed nuclear capacity. With one of the world’s largest reserves of thorium, India has immense untapped potential in nuclear energy. By 2022, total installed capacity addition of 3.30 GW is expected.

Space for startups in the energy sector

The urgent push for renewable energy capacity expansion has thrown light on various inefficiencies in the sector and exposed the long-standing challenges plaguing India’s power transmission infrastructure.

Over the last few years, several technology startups have emerged in this space, providing end-to-end solutions for market providers and final consumers.

Some prominent examples are:

• ReNew Power
  Funding US$2 billion
  A wind energy firm with various projects under development, including a 25 megawatt wind farm in Gujarat.
• Bounce
  Funding US$252.7 million
  Bangalore-based startup that manages over 17,000 electric and gasoline scooters.
• Avaada Energy
  Owned by Vineet Mittal, the former promoter of Welspun Energy. Mittal left Welspun Group after selling the entire 1.1 GW renewable energy portfolio of Welspun Energy to Tata Power for US$1.4 billion. As reported by MoneyControl, Avaada Energy is “front-runner to acquire around 340 MW of solar power assets owned by the Subhash Chandra-backed Essel Group.” The assets are housed in nine special purpose vehicles (SPVs) of Essel Infraprojects located in the states of Maharashtra, Odisha, and Uttar Pradesh.
• ZunRoof
  Based in Gurugram, the clean energy startup leverages unutilized rooftops of houses and offices to set up panels to tap solar energy. It claims to have grown 3-4X year-on-year to hit US$1 million in monthly revenue in February 2020 as reported by YourStory. As of August 18, 2020, the startup had “assessed over 250,000 homes, designed more than 30,000 rooftop solar systems across 75+ cities in India…[and] installed 15 MW+ of rooftop solar and 50,000+ IoT devices.”
• MYSUN
  Delhi based, founded by Gagan Vermani. End-to-end solar rooftop solar solutions provider and has tied-up with various manufacturers for the procurement of solar systems. MYSUN has reportedly completed solar projects for Du Pont and Godrej and several SMEs across multiple states. In 2020, MYSUN said it had more than 80,000 registered customers in commercial, residential, and retail spaces.

Policies governing the Indian power sector

The India power sector is mainly governed by the Electricity Act, 2003. Other policies and projects impacting the sector are:

• National Policy on Biofuels (2018): The Indian federal government approved the National Policy on Biofuels in 2018 to aid the transition to a clean environment, generate employment, reduce import dependency, and boost infrastructural investment in rural areas.
• National Electricity Policy, 2021: In April 2021, the Ministry of Power released the draft National Electricity Policy (NEP) 2021.
• Green Energy Corridor Project: Under the Union Budget 2021-22, the government has allocated INR 30 billion (US$40.54 million) to increase the capacity of green energy production under the Green Energy Corridor Project, along with INR 11 billion (US$148.65 million) for wind and INR 23.69 billion (US$ 320.15 million) for solar power projects.
• Ultra-Mega Power Projects (UMPPs): Tariff-based competitive bidding to facilitate ease of land possession, provision of fuel, water, and necessary clearances for enhancing investor confidence.
• R-APDRP: This platform links the disbursement of federal funds to states, with actual reduction in transmission and distribution losses. So far, projects worth more than US$5.8 billion have been sanctioned under it.
• In 2018, a draft amendment to Electricity Act, 2003 was introduced to ensure separation of content & carriage, direct benefit transfer of subsidy, 24×7 power supply as an obligation, penalization on violation of power purchase agreement (PPA), setting up smart meter and prepaid meters along with regulations related to the same.

Additionally, other policy measures like Feed-in Tariff scheme for promoting generation of electricity from renewable energy sources, Smart Meters, Direct Benefit Transfer Scheme etc., have contributed to the growth of the sector.

Moreover, the Bureau of Energy Efficiency (BEE) notified its latest regulation, dated October 2021, about the “Manner and Intervals for Conduct of Energy Audit in Electricity Distribution Companies”. This is expected to ensure better measurement and tracking of the transmission and distribution (T&D) losses of electricity distribution companies (discoms). See New Audit Norms for Indian Electricity Distribution Companies to Reduce Transmission and Distribution Losses.

Major players in the Indian power sector

• NTPC, a statutory corporation under the jurisdiction of Ministry of Power, is the largest power producer in India and is also the sixth-largest thermal power producer in the world. It has diversified into hydro power, coal mining, power equipment manufacturing, oil and gas exploration, power trading and distribution. With a total installed capacity of 65.81 GW, NTPC has 73 power stations comprising 24 coal, seven combined cycle gas/liquid fuel, one large and small hydro and 14 renewables, along with 26 subsidiary and joint venture (JV) power stations.
• Tata Power is India’s largest integrated power company with presence in solar, hydro, wind and geothermal energy. The company accounts for 52 percent of the total generation capacity in the private sector.
• Adani Power is one of India’s largest private thermal power producers, with total capacity at 12.45 GW in 2019; the company aims to generate 20 GW of power by 2020.
• NHPC, the Indian government hydropower board under the ownership of Ministry of Power, is the largest hydro power utility in India with extensive plan to add about 6 GW of hydropower capacity by 2022.
• CESC Limited is a vertically integrated player engaged in coal mining and generation and distribution of power.

Renewable energy pivot to drive new investments, capacity generation

India’s commitment to transitioning to green energy is consistent with its recent pledge at the 26^th Conference of Parties in Glasgow. India aims to achieve net zero emissions by 2070 and is swiftly shifting its policies to reduce heavy dependence on coal.

The importance of such objectives comes in the aftermath of an unprecedented power outage experienced in October 2021 due to supply shortage of coal in the thermal power plants in the states of Gujarat, Haryana, Jharkhand, Punjab, and Rajasthan. The power crises crippled some of the most energy hungry industries, highlighting the urgent need to switch to alternative non-depleting sources of power generation.

According to the statutory policy advisory body Central Electricity Authority (CEA) estimates, by FY 2030, the share of renewable energy generation will increase from 18 percent to 44 percent, while that of thermal is expected to reduce from 78 percent to 52 percent. With respect to India, wind energy is the largest contributor to renewable energy, accounting for 41.23 percent of total installed capacity. It is followed by solar power, which is the second largest source of renewable energy in India. The Indian government intends to achieve 100 GW of installed renewable energy capacity by 2022. Additionally, 15 GW of hybrid capacity of wind-solar energy is expected to be installed by 2025.

In July 2021, the federal government-owned GAIL earmarked INR 50 billion (US$675.14 million) for setting up two plants each for producing ethanol and compressed biogas (CBG) from municipal waste. Simultaneously, the Nuclear Power Corporation of India Limited (NPCIL) is also expected to construct five nuclear energy parks with a capacity of 10,000 MW.

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