Indian power sector at a glance

The process of electrification commenced in India almost with the developed world, in the 1880s,
with the establishment of a small hydroelectric power station in Darjeeling. However, commercial
production and distribution started in 1889, in Calcutta (now Kolkata). In the year 1947, the country
had a power generating capacity of 1,362 MW. Generation and distribution of electrical power was
carried out primarily by private utility companies such as Calcutta Electric. Power was available only
in a few urban centres; rural areas and villages did not have electricity. After 1947, all new power
generation, transmission and distribution in the rural sector and the urban centres (which was not
served by private utilities) came under the purview of State and Central government agencies. State
Electricity Boards (SEBs)

were formed in all the states. Legal provisions to support and regulate the sector were put in place
through the Indian Electricity Act, 1910. Shortly after independence, a second Act – The Electricity
(Supply) Act, 1948 was formulated, paving the way for establishing Electricity Boards in the states of
the Union.

In 1960s and 70s, enormous impetus was given for the expansion of distribution of electricity in rural
areas. It was thought by policy makers that as the private players were small and did not have
required resources for the massive expansion drive, the production of power was reserved for the
public sector in the Industrial Policy Resolution of 1956. Since then, almost all new investment in
power generation, transmission and distribution has been made in the public sector. Most of the
private players were bought out by state electricity boards.

China and India—the fastest growing economies—will be key contributors to world energy
consumption in the future. Over the past decades, their energy consumption as a share of total
world energy use has increased significantly. In 1980, China and India together accounted for less
than 8 % of the world’s total energy consumption. In 2005 their share had grown to 18 %. Even
stronger growth is projected over the next 25 years, with their combined energy use more than
doubling and their share increasing to one-quarter of world energy consumption by 2030. In
contrast, the U.S. share of total world energy consumption is projected to contract from 22 % in
2005 to about 17 % in 2030.

From the installed capacity of only 1,362mw in 1947, has increased to 97000 MW as on March 2000
which has since crossed 100,000 MW mark India has become sixth largest producer and consumer
of electricity in the world equaling the capacities of UK and France combined. The number of
consumers connected to the Indian power grid exceeds is 75 million. India's power system today
with its extensive regional grids maturing in to an integrated national grid, has millions of kilometres
of T & D lines criss-crossing diverse topography of the country.
Size of the market
Total installed capacity for power in India as on date is over 145,000 MW and Government of India
plans to add capacity of 78,000 MW by 2012. India had been traditionally depending on thermal
power as a major source of power generation, which constitutes about 65% of current capacity.
Balance is contributed by Hydel power (26%), Nuclear (3 %) and Renewable energy (6%)

Over 87% of the current installed capacity in the country is by the government; with the state
governments having lion’s a share of over 52% and the balance by central (federal) government. Due
to the initiative of government of India to encourage Public Private Partnerships in power sector,
share of private companies’ power generation capacity has gone up to steadily to 17,112.62 MW,
about 13 % of the installed capacity. With Government of India opening up Ultra Mega Power
Projects (UMPP) for private investments, a number of private companies, including overseas
companies, have been increasingly showing interest in investing in power projects. State-owned
Power Finance Corporation, which is the nodal agency for the UMPP, has set up nine Special Purpose
Vehicles (SPVs) to conduct preliminary studies and obtain government approval for the planned
projects. Once these SPVs will become operational it will generate a capacity of 36,000 MW power.
Renewable energy offers a huge potential as a physical target of 15,000 MW with an outlay of Rs.39,
250 million is proposed for grid interactive/ distributed renewable power generation during 2007-
12. The total investment required would be about Rs600 billion. This report covers the overall
industry scenario, demand & supply, growth drivers, critical success factors for the industry.

Major Players and estimated market share.

Bharat Heavy Electricals Limited (BHEL) was set up in 1959 by the Government of India with the
objective of creating indigenous manufacturing base for power plant equipments. Today, BHEL is the
12th largest company in the world in Power Plant Equipments manufacturing and the largest in
India. The company has the ability to manufacture the entire range of power plant equipment and
has one of the largest capacities of power plant equipment in the world. This enables the company
to bid for large power projects. BHEL's cost-competitiveness vis-a-vis international competition in
the power sector can be attributed to the factors like fully depreciated manufacturing facilities,
lower labour and freight costs and economies of scale. Apart from being the lowest cost producer,
BHEL also possesses the infrastructure that can supply power equipment for 4,000 MW of
generating capacity annually.

With the advent of globalisation, many other foreign private players set up manufacturing units all
across India. Notable among them which are still in operation are namely Siemens, ABB, Areva, GE,
Alstom, Schneider Electric etc. Companies like Crompton Greaves, Larsen and Toubro which were
started by Indian entrepreneurs with the technological collaborations with foreign JV Partners have
now fully established themselves as true Indian MNC’s. Today other than the big players mentioned
many Indian companies have started operations for manufacturing Power transmission and
distribution equipments. Though the individual contribution from each of them wouldn’t be
comparable to the major players, all of them put together do amount to a sizable contribution. Some
notable among this Tier – II companies can be listed out as Kirloskar, EMCO, Bharat Bijlee,
Transformers & Rectifiers, IMP Power etc.

Based on the revenue sharing the market share can be illustrated as follows:

Company Market Share (%)

Bharat Heavy Electricals Limited (BHEL) 24
Crompton Greaves Ltd 19
SIEMENS 15
ABB 12
Areva 07
Others 23

For the purpose of evaluating market share only companies producing Power Transmission and
Distribution equipments have been considered.

Market Growth Rate.

The liberalization, privatization and globalization policy implemented in 1991 is solely responsible for
the revival and exponential rise of the Power Sector in India. The Government has emphasized the
importance of adequate power resources in maintaining the targeted GDP growth of 7% through the
recession. This is reflected in the Budget 2009-10, which has increased the allocation under
Accelerated Power Development and Reform Program (APDRP) by 160% over the previous year. The
measures planned by the Government as part of its POWER FOR ALL BY 2012 scheme, if
implemented properly,
will enable explosive growth in all levels of the industrial sector

The Market Potential to sustain the GDP Growth rate of India @ 8% plus per annum needs the
power sector to grow at 1.8 - 2 times the GDP rate of growth as espoused by economists, planners
and industry experts. This would mean a YOY capacity addition of 18,000 - 20,000 MW to achieve
this ambitious plan of moving India to a Developed Economy status. The Demand for Power
Transmission and distribution equipments had shown a tremendous growth rate in the years
preceding the recessionary period i.e. before 2008. This was due to the fact there was tremendous
impetus by the government for making India a self sufficient in Power requirement. The market was
seen growing at around 15% - 17% annually. However on account of the recession the growth rate
saw a rapid decline as many projects were put on hold.
Analyzing industry attractiveness using Porter’s 5 forces model
The nature of competition in the industry in large part determines the content of strategy,
especially business level strategy .based it is on the fundamental economics of the industry,
the very profit potential of an industry is determine by competition interaction. Where
these interactions are intense, profit tends to be whittled away by the activities of
competing.

Porter’s model is based on the insight that a corporate strategy should meet the
opportunities and threats in the organizations external environment. Especially, competitive
strategy should base on and understanding of industry structures and the way they change.
Porter has identified five competitive forces that shape every industry and every market.
These forces determine the intensity of competition and hence the profitability and
attractiveness of an industry. The objective of corporate strategy should be to modify these
competitive forces in a way that improves the position of the organization. Porter’s model
supports analysis of the driving forces in an industry. Based on the information derived from
the Five Forces Analysis, management can decide how to influence or to exploit particular
characteristics of their industry.

Threat of new
Entrants

Competitive rivalry
Bargaining within the Industry Bargaining
power of power of buyers
suppliers

Threat of
substitutes
Threat of new entrants – Relatively less:

Owing to high level of technical expertise required, it is not very easy to set up a Power Equipment
manufacturing company overnight. Lot of R & D and technological expertise is required for entering
into manufacture of Power system equipments. Another detrimental factor is heavy capital
requirement for setting up the business initially. To add to all these, buyers i.e. mostly electricity
boards and central PSU’s have very stringent quality norms.

Bargaining power of suppliers – Very high:

There are very few suppliers of good quality raw materials required in the manufacture of
Power System equipments. The major raw materials required include copper, CRGO (Cold
rolled grain oriented) laminations, Insulating material, Oil etc. Most of these raw material
bases are imported after which they are processed in India. These factors give the foreign
suppliers a very high bargaining power.

Bargaining power of Buyers – very less:

Considering the fact that India is still a power deficit country necessitates the demand for
power system equipments. Also the fact that all major suppliers have order backlog for
almost two years increases the autonomy of suppliers.

Threat of Substitutes – Nil:

As such the basic equipments which contribute to major part of the revenue in power
system equipments have no other feasible alternatives as of now.

Competitive rivalry within the Industry – Moderate:

Due to the fact there are very few Tier - I companies there is not much rivalry within the
technologically advanced companies. However the market catered by Tier – II companies is
very price sensitive and intense rivalry exists between them.