FCC

Poised for a Turnaround

2019-07-01

Contributions from the power equipment industry is 8.1 per cent of the manufacturing sector in terms of value and 1.35 per cent of India's GDP, providing direct employment to 5 lakh people, indirect employment to 10 lakh people, and employment to over 50 lakh people across the entire value chain. Efficient power supply system is a key requirement for a nation's economic growth and the quality of life of its citizens. Assured availability of quality power at a reasonable cost will not only act as a catalyst for the socio-economic development of the country, but also enhance the global competitiveness of the industrial sector. It will also lead to enhanced employment generation and per capita income levels. By 2022, the installed power capacity in India is expected to reach 350 GW from 243 GW in 2014, on the back of increasing industrialisation and economic development. Thus, rapid development of a robust and healthy domestic electrical machinery and equipment industry, supporting the complete value chain in power generation, transmission, and distribution, is crucial for the economy and is also of strategic importance to India. With a production of 1,423 TWh, India is the third largest producer and the third largest consumer of electricity in the world. India has moved up to the 26th spot in the global electricity accessibility rankings of World Bank's Ease of Doing Business Index 2018. The government's rural electrification programme and some of the administrative measures taken for better accessibility have contributed to improvement. Electrical machinery industry in India is poised for a turnaround with the Government of India de-licensing the industry and allowing 100 per cent foreign direct investment (FDI) to facilitate the entry of global majors, promoting the adoption of advanced technologies and R&D by companies, taking initiatives to increase power generation capacity, lowering tariffs and duties on power generation and transmission and distribution equipment, providing support to the industry to expand export markets, and taking steps to improve infrastructure, among other measures. Electrical machinery sector broadly comprises generation equipment (boilers, turbines, generators) and transmission and distribution (T&D) and allied equipment like transformers, cables, transmission lines, switchgears, capacitors, energy metres, and instrument transformers. T&D equipment industry dominates the sector, making up for 85 per cent, whereas generation equipment sector accounts for the rest 15 per cent. The industry registered a double-digit growth rate of 12.8 per cent over 2017û18 as compared to 2016-17. Contribution to GDP Contributions from the power equipment industry is 8.1 per cent of the manufacturing sector in terms of value and 1.35 per cent of India's GDP, providing direct employment to 5 lakh people, indirect employment to 10 lakh people, and employment to over 50 lakh people across the entire value chain. Significant infrastructure investments have been planned across the generation, transmission, and distribution segments to realise this target. The government, in its "Indian Electrical Equipment Industry Mission Plan 2012-2022," seeks to increase power generation capacity (from 200 GW in 2012) to about 400 GW by 2022 with commensurate T&D capacity enhancement. Indian electrical equipment manufacturers have to meet the demand not only of such huge capacity addition, but also of metros, airports, railways, and other infrastructure projects, apart from increase in domestic consumer demand. The growth of the Indian power sector will entail exponential demand for electrical equipment. The expected investment in the 12th Five Year Plan period was Rs 6,390 billion in generation, Rs 1,800 billion in transmission, and Rs 3,060 billion in the distribution segment. Based on investment estimates and capacity addition targets, the domestic demand for generation equipment (BTG) can be in the range of Ç22-26 billion by 2022, and for the transmission and distribution equipment industry, it may be Ç61-66 billion. Export and Import Exports and imports of electrical equipment have been growing steadily. At the end of FY18, exports stood at Rs 417.92 billion, while imports have reached to Rs 556.03 billion. The government has recognised its high growth potential in the coming years and formulated the Vision 2022 plan for the industry. It identifies five key areas for action: (i) industry competitiveness, (ii) upgrading technology, (iii) skill development, (iv) promotion of exports, and (v) conversion of latent demand. Indian electricity sector has also witnessed tremendous growth in its energy demand, generation capacity, and transmission and distribution networks. India has become world's third largest producer and consumer of electricity with electricity production of 1,201.54 billion units during FY18, up by 3.57 per cent from the previous year. According to IEEMA, the growth in exports helps the industry to grow especially in power transformer and high voltage switchgear products, energy metres, and cables. The major export markets for Indian electrical equipment are United States of America, United Arab Emirates, Germany, United Kingdom, Nigeria, Saudi Arabia, Australia, Brazil, Canada, and France. Major export products are switchgear and control gear, transformers and parts, industrial electronics, cables, transmission line towers, conductors, rotating machines (motors, AC generators, and generating sets), and parts. Current Status As per the data available on CEA website, India's total installed power capacity stood at around 350 GW at the end of December 2018. Thermal power (which includes coal, lignite, gas, and diesel) is the predominant source of power in the country with its cumulative installations reaching 223.5 GW, representing around 64 per cent of the total installed power capacity. Coal power accounts for over 191 GW of the total installed generation, which is 54.57 per cent of the total installed power capacity, followed by natural gas at 7.12 per cent (24.9 GW), lignite at 1.71 per cent (6.36 GW), and diesel with a small 0.18% (0.64 GW) share. Renewable energy (includes wind energy, solar power, small hydro power (SHP), bio-power (BP), and waste to power) accounts for over 74 GW, representing around 21 per cent of the total installed power capacity, as compared to 62.8 GW during the same period last year. Solar power accounted for approximately 25 GW of the total installed generation, which is 7.14 per cent of the total installed power capacity. The share of solar energy in energy generation mix grew from approximately 5.1 per cent in December 2017 to 7.14 per cent in December 2018. Among the renewables, solar accounted for approximately 34 per cent of the installed capacity. Wind accounts for 35.1 GW of the total installed power capacity and nearly 10 per cent of the overall power capacity mix as of December 2018. Small hydro had a cumulative installed capacity of 4.5 GW, representing 1.28 per cent of the total installed capacity at the end of December 2018. At the end of December 2018, bio power (BP) (which includes biomass power/cogeneration and waste to energy) stood at 9.2 GW as compared to 8.5 GW in December 2017. Hydro power's cumulative installations stood at 45.4 GW, making up 12.97 per cent of India's total installed capacity, a decline compared to its share of 13.5 per cent at the end of 2017. The share of nuclear power has declined from 2.01 per cent at the end of December 2017 to 1.91 per cent as of December 2018. Current installation trends show the country's steady transformation from fossil fuels towards renewable energy. The Government of India has released its roadmap to achieve 175 GW capacity in renewable energy by 2022, which includes 100 GW of solar power and 60 GW of wind power. The union government of India is preparing a ærent a roof' policy for supporting its target of generating 40 GW of power through solar rooftop projects by 2022. According to the Indian government, the aggregate technical and commercial losses (AT&C), which reflect transmission and collection efficiency, came down to 18.75 per cent from 20.7 per cent in FY16 and the plan is to reduce it to below 12 per cent by 2022, and below 10 per cent by 2027. To reduce AT&C losses, it is necessary to implement smart grid and smart metering. India is aiming at fast deployment of smart grid and smart meter concepts at distribution as well as transmission levels. Smart Meters With electricity demand expected to rise by 79 per cent in the next 10 years, India is on a path of transforming its energy mix with innovation. Along with enhancing energy production, the nation also needs to cut aggregate technical and commercial (AT&C) losses to below 12 per cent by 2022, and below 10 per cent by 2027. Enabling India to achieve this imperative is the smart grid, the first step of which is the creation of Advanced Metering Infrastructure (AMI). The National Tariff Policy 2016 had mandated that consumers with monthly consumption of over 500 units (or kilowatt hour) had to switch to smart meters by December 2017; and those with monthly usage above 200 units are expected to switch to smart meters by December 2019. The India Smart Grid Forum (ISGF)-BNEF has published a knowledge paper on "Advanced Metering Infrastructure: Rollout Strategy for India' to help power distribution companies tackle the challenge of capital availability to implement projects. According to the paper, distribution companies should be stipulated to buy smart meters only from vendors whose smart meters and communication devices adhere to BIS standards. The paper states that if India is to have a successful rollout of the new metering system, the country needs to implement projects using either the leasing or service model. The government is procuring smart and prepaid meters to be deployed across the country. It has urged electricity meter manufacturers to scale up production in India, as it plans to shift all connections to smart prepaid meters over the next three years, starting from April 2019. This initiative by the Ministry of Power (MoP) is expected to reduce the AT&C losses, improve the financial health of distribution companies, incentivise energy conservation, and make bill payments hassle-free and environment-friendly by doing away with paper copies. Many state governments have begun installing smart meters under the Smart Cities Mission programme. This programme aims at urban renewal with the mission to develop 100 cities across the country that are energy-efficient, citizen-friendly, and sustainable. For instance, recently, the Uttar Pradesh Electricity Regulatory Commission (UPERC) approved a petition filed by Uttar Pradesh Power Corporation (UPPCL) regarding the roll out of smart meters in the state. UPPCL has roped in energy efficiency service (EESL) for the installation of smart meters due to their expertise in low-cost bulk procurement and working as demand aggregators. The UPPCL is targeting 4 million consumers across five distribution companies (DISCOMs). In Phase I, smart meters will be installed in towns with high energy input >500 million units (MU) and high AT&C losses. In Phase II, towns with energy input >=250 MU will be benefited and in Phase III, towns with energy input >=150 MU and <250 MU will be benefited. In October 2018, Indore Smart City Development had issued a tender for 30,000 smart meters to be installed under Indore Smart City project. The estimated cost is Rs 157.9 million and the time for completion of contract is 24 months. In August 2018, the EESL, a joint venture of the public sector units of the Ministry of Power and the Government of India, signed two memoranda of understanding (MoU) with North Bihar Power Distribution Company (NBPDCL) and South Bihar Power Distribution Company (SBPDCL) to deploy smart meters in 130 towns and adjacent rural areas covering approximately 1.8 million customers in the state. In July 2018, EESL signed a memorandum of understanding (MoU) with Haryana state DISCOMs to install 1 million smart meters across the state. Back in March 2018, EESL issued a tender to procure 5 million smart electricity meters. The meters were deployed pan India and the bid submission deadline was April 12, 2018. The smart meters procured by EESL will utilise GPRS technology to allow two-way communication between the DISCOMs and consumers. Strategies Adopted New technologies - High-voltage technology is being developed in the electrical equipment industry, for economic power transmission. Firms are diversifying into the nuclear reactor business, as the government wants to increase its nuclear power base. Capacity addition - India plans to increase investment in infrastructure (including electricity), as it lags behind other countries. With more capacity addition in the power sector, demand for electrical machinery would rise, prompting companies to increase their production capacity. Promotion of R&D - The government is helping companies to enhance the level of research to match the best in the world. It has relieved customs duties on some equipment. Companies too are enhancing their R&D departments to take advantage of the situation. Skill upgradation and incentives - Skill upgradation is necessary as firms need to have the desired talent pool. The government plans to set up Electrical Equipment Skill Development Council (EESDC), which would focus on identifying critical manufacturing skills required for the electrical machinery industry. It is enhancing export incentives by removing export barriers. Vision 2022 Vision statement - To make India the country of choice for the production of electrical equipment and reach an output of USD100 billion by balancing exports and imports. Focus on industry competitiveness - To focus on technology and R&D and bring them on par with the global benchmark, the government has lowered customs duties on a range of equipment. Identify skills to support industry requirement - The government plans to set up the Electrical Equipment Skill Development Council (EESDC) which would focus on identifying critical manufacturing skills required for the electrical machinery industry. Develop and strengthen support infrastructure - The government plans to establish electrical equipment industry clusters. It plans to take steps to enhance product-testing infrastructure in the country. Increase share in export market - The government plans to provide credit support to economically less-developed export markets. It aims to create a dedicated fund for EXIM bank to support exporters in the electrical machinery industry. EEPC India, under the aegis of the Ministry of Commerce and Industry, Government of India, has identified the electrical machinery, equipment, and components sector as one of the four focus sectors under "brand India engineering." Growth Drivers Growing demand of electricity: Increasing population and growing penetration of electricity connections, along with per-capita usage would add impetus to the power sector. Addition of superior technology: Addition of superior technology-enabled transmission and distribution networks (factoring sub-transmission) coupled with the need to avoid congestion and create adequate evacuation infrastructure for generation units are driving the growth of T&D segment in power sector. Besides, the need for more renewable energy-based power generation is creating dedicated infrastructure for T&D networks. It is important to make these sources of generation completely grid-integrated. Policy support: Government support in terms of introducing favourable trade policies for protecting the domestic EE market is one of the key reasons for such high demand projections of domestic power equipment in the country. Other initiatives like Power to All, Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS) etc., are expected have a significant positive impact on the market in the ensuing years. Higher Investments: India's power sector is anticipated to attract investment worth USD 179.31 billion between "2017-22" in thermal, hydro, nuclear, and renewables segments. Some interesting facts about the electrical machinery sector <ul> <li> In 2017-18, the total production of the electrical equipment industry stood at USD 27.3 billion.</li> <li>Contributions from the sector is about 8 per cent to the manufacturing sector in terms of value, and 1.5 per cent to the overall GDP.</li> <li>By 2022, the domestic demand for generation equipment, and transmission and distribution sector is expected to be in the range of USD 25-30 billion and USD 70-75 billion, respectively.</li> <li>Market-oriented reforms, such as the target of "Power for All,' plan to add 93 GW during 2017-2022. They will further generate huge demand for power transmission and distribution equipment. </li> <li>A large pool of human resources and adequate workforce will be available. Also, the sector is projected to provide direct employment to 1.5 million people and indirect employment to 2 million people by 2022.</li> <li>The government also plans to establish electrical equipment industry clusters, along with building strong support infrastructure.</li> <li>The industry registered a double-digit growth rate of 12.8 per cent in 2017-18 as compared to 2016-17.</li> <li>A subsector of heavy industry provides direct employment to 0.5 million people, indirect employment to 1 million, and employment to over 5 million people across the entire value chain. Additionally, India has state-of-art technology that is at par with the global standards.</li> <li>Major export markets for the sector are USA, UAE, Germany and UK. India is a major exporter of Switchgear and control gear, transformers and parts, industrial electronics, cables, transmission line towers, conductors, rotating machines (motors, AC generators, and generating sets) and parts, within the sector.</li> <li>Within the sector, high output growth subsectors are power generation systems and cables, having an industry size worth USD 6.92 billion and USD 6.34 billion respectively.</li> <li>The demand for inter-regional transmission system (transmission lines and associated substations) is projected to have a peak demand of 226 GW in 2021-22 timeframe. </li> <li>Making electricity accessible has been the key concern. With various initiatives taken, India has managed to scale itself up to the 26th position in terms of electricity accessibility, from the 99th position in 2014. Alongside, transmission lines witnessed a 26 per cent increase from 291,336 ckm in March 2014 to 366,634 ckm in March 2017.</li> <li>The government has approved 15 SEZs for the engineering sector, of which electrical machinery is a part. Further, development of Delhi-Mumbai Industrial sector is expected to provide a big boost to the engineering and hence, electrical equipment sector.</li></ul>