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Week Jan 18 - Jan 22, 2016

‘Power for All’ – The major driver for T&D investments

The government of India has embarked on the ‘Power for All’ initiative, which envisages affordable electricity for all households by 2019. Towards this goal, the government has formulated a number of policies and initiatives which should help in power accessibility to all population in the next 4-5 years. We reckon, while the generation segment poses less of a challenge since the country has seen significant capacity addition (~50% of current installed generation capacity has been added in the last six years). What is pertinent is making this power available to the population and industries at large and therein lies the opportunity for the Transmission and Distribution (T&D) segment.
 

Schemes and policies fostering power for all

Source: PIB,  ICICI Securities
 

The T&D segment has been seeing steadier investments from the leading inter-state transmission player as well as the private sector players, which we expect to get ramped up as the inter-state network is strengthened. Intra-state and distribution segment capex has been lacking given the precarious state of SEB finances. However, with government policies and incentives in place, we reckon, the situation should see meaningful improvement. Overall, investments in the T&D sector is expected to be heady and, as per government estimates, the segment will see investments to the tune of Rs 2.50 lakh crore..

 
 T&D capex has been lagging generation capex in relative terms T&D capex of Rs2.5 lakh crore envisaged in 13th
Five-Year Plan
Source: Working group report on 12th FYP,  ICICI Securities Source: CEA,  ICICI Securities

 

Macro conditions favour growth in T&D spends

Skewed geographical demand and supply to aid T&D investments

India’s generation resources are geographically skewed with thermal coal resources primarily concentrated in the East, hydro power potential (parts of North India and North East), while demand centres are in the rest of India. Further, generation stations are naturally in far-flung areas and, post the formation of a seamless national grid, the need for a robust and ever-evolving transmission infrastructure is quintessential. Transport of fuel resources (in case of thermal plants, which form 61% of installed capacity and account for ~80% of generation), is much more expensive than transport of power, hence the focus on T&D network augmentation has gained focus.
 

Discrepancy in resources and demand calls for T&D network augmentation

Source: CEA, Company data, ICICI Securities

 

Past under-investment in T&D sector to play catch up

In the previous decade, India saw a tremendous addition in generation capacity, with total installed capacity in FY05 of 118GW jumping to over 284GW as of Dec’15. Particularly, capacity addition in thermal (coal) has been the chief driver of the installed capacity (63% of incremental capacity) wherein plant sizes are chunkier and the need for long-distance power evacuation is a necessity. In contrast, investments in the T&D sector have lagged as focus was more on the generation capacity. While in the past 2-3 years, transmission capex (primarily interstate) has picked up, distribution capex and last-mile connectivity has been severely lagging. We believe, going forward, generation capex will be subdued (as we are in a likely over-capacity situation for the near term at least), transmission capex will be stable, and distribution capex will pick up. Further, increasing network efficiency by bringing down AT&C losses would also entail network strengthening and related capex amongst other things.
 

Generation capacity has grown 1.4x in the past 10 years

Source: CEA, Company data, ICICI Securities
 

Transmission lines

Transformation capacity addition

Source: Company, ICICI Securities
 

Further, the circuit kilometre addition and MVA capacity does not fully depict the level of past under investment. Given the augmentation of higher-capacity units in generation and the need for large scale power evacuation, the move has been towards setting up higher-capacity networks (from 220-400kV to 765 and possibly to 1,200kv in the future). The need for network strengthening is imminent, particularly in the distribution segment wherein the need would be more severe as the national grid is incrementally moving towards 765kV network. In developed nations, for every MW of generation capacity, 7MVA of power transformation capacity has been seen – which in India stands at <3MVA, pointing at slack in the T&D infrastructure. The absolute amount of investment also depicts the same story. As a rule of thumb, for every Rs 100 of generation investment, a fully strengthened network would require Rs 50 in transmission and Rs 50 in distribution and last-mile connectivity. In reality, investment in the T&D network has been half of what was required in the 11th Five- Year Plan (FYP) period (FY08-FY12) and is expected to improve marginally in the 12th FYP period (FY13-FY17). We expect a major improvement in the investment ratios in the 13th FYP period (FY18-FY22) led by increasing T&D spends.
 

Transformation capacity in India is less than the global benchmark of 7MVA/MW

Source: Working group report on 12th FYP,  ICICI Securities
 

Inter-regional transmission capacity addition plans

Source: Ministry of Power, ICICI Securities
 

Move towards high-voltage line to strengthen network

India has steadily moved to high-voltage lines in transmission networks. Incrementally, most of the transmission networks are on 400-765kV AC lines while HVDC networks are at 800kV. For the future, plans are to shift to 1,200kV AC lines, given the higher requirements of power flow across long distances and the need for a robust and efficient network. The shift to higher voltage lines would entail regular capex and would augur well for T&D companies. Given the vast and somewhat non homogeneous network (especially in distribution), it would also entail investments in grid stability systems such as FACTS (flexible AC systems) and static compensators (STATCOM).
 

Transmission systems shifting to higher voltages

Source: CEA,  ICICI Securities

 

Transmission lines (400kV and above systems)

Source:  ICICI Securities
 

Substations (AC & HVDC) (400kV and above)

Source: ICICI Securities
 

Conclusion

We believe the T&D sector should see continued investments (Rs 2.5 lakh crore opportunity size over the next 6-7 years) as it is one of the focus areas of investment (others being, rail, water and transportation infrastructure) by the government (led by “Power for All” initiative). The T&D sector itself is in a sweet spot wherein, past underinvestment in the sector (as against generation) is expected to catch up and states are expected to improve their T&D infrastructure to: i) match with leading inter-state transmission player's higher voltage infrastructure, and ii) reduce T&D losses. Further, large scale renewable generation capacity plans (180GW by FY22), augur well for the space as grid integration and stability would be a major challenge, which can only be overcome by focused T&D investments.

 
 
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