Introduction: To achieve India's robust economic growth (7.2% CAGR of GDP in 2000-10), significant inflow of foreign capital and continued development of the industrial sector have fuelled power demand during the last decade. However, there is still a power shortages continue in the country with peak load deficit of 13.3% in FY10, due to the historic under achievement of power capacity addition targets in successive five year plans (50% underachievement in the last three Five Year Plans). With power demand expected to grow at a robust pace (16% CAGR in FY10-17E and 13% in FY10-22E) according to the Central Electricity Authority (CEA), significant investment is required to develop the power infrastructure in India.
Consequently, the government has set aggressive power capacity expansion targets for the XI Plan (FY07-12) and XII Plan (FY12-17). India planned to increase the total capacity to ~179 GW planned (vs. 132 GW added till X Plan end). Majority of capacity additions will be based on thermal power (~77% in XI and XII Plans).
However, the power sector's addition to the installed capacity has fallen short of targets during the previous five year plans as well as during the XI Plan. In X plan India targeted 41,110 MW & in XI plan 78,557 MW. In 2007-08 out of 16,355 MW capacity additions targeted, only 9263 MW was added (an achievement of 57%).
Based on the projected demand, Integrated Energy Policy projections for Capacity addition requirement is as below.
Graph 1: Projected power demand as per Integrated Energy Projections
(Source: Presentation by Mr.P.K.Agarwal (GM-BHEL) in National Power Conference 2009)
Table 1: Capacity targeted & actual addition in various 5 year plans
(Source: : Neoliberalism and Contested Policies of the Power Sector: Ahmed Waquar)
For XI five year plan targeted capacity of 78,557 MW, India can actually add the capacity will not be more than 45,000 MW. Part of the shortfall in addition to the capacity is attributed to the un-timely supply of power equipment.
Pre-qualification criteria for supply of supercritical technology Equipment & Quality Concerns:
The GoI has approved the bulk ordering of supercritical units intended to develop additional indigenous manufacturing capability within the country with the capability to design, manufacture, install, commission, and retrofit and provide after sales service besides providing economies of scale. According to this, the eligible company should have manufacturing facility as well as a valid technology transfer agreement in place for the entire range of super critical equipment with a Phased Manufacturing Programme (PMP) as a pre-bid qualification. Super critical equipment helps in higher plant efficiencies and economies of scale and is also environment-friendly.
L&T, domestic engineering company, has been lobbying with the government to make it mandatory for the bidders to be incorporated in India, with at least 51% equity held by a domestic company. The clause, if approved by the Group of Ministers, would render JV like Toshiba Corp. of Japan and JSW Group; AnsaldoCaldaie of Italy and GB Engineering of India, ineligible. However, CEA is opposed to the inclusion of the 51% equity clause as it will limit competition.
Out of the total 78,577 MW planned during XI plan, orders for 13235 MW have been placed on Chinese manufacturers. The International Competitive Bidding (ICB) process has initiated the procurement of equipment from foreign companies even though the Government has given clear indication of giving preference to local manufacturers. There are, however, concerns over the quality of the equipment supplied by Chinese manufacturers and it remains to be seen how these equipment function in Indian conditions.
In fact, failure of one of the turbines supplied by Dongfang Electric Corporation for the WBPDC's 300 MW Sagardighi, aggravate these concerns. The turbine plates were broken and the operation of the turbine was held-up for about one and a half months till engineers from Dongfang China rectified the problem. Chinese companies however have rejected the inferior quality argument as their equipment has been successfully working all around the world.
The Opportunity:
The power demand is so immense that the manufacturers are booked for their full capacity for the coming few years. Siemens is booked till 2012. BHEL's order book at the end of March 2008 was almost 3.5 times its full year FY08 sales, the highest ever. Realizing this deficit and the potential offered by this segment, domestic and foreign equipment manufacturers have entered the market and have plans to pump in large amounts of investments towards setting up manufacturing units across the country. Another factor that has led to such strong investments is the high amount of equipment imports, especially from China.
By understanding the huge need for power equipment supply, many players have planned to have manufacturing base in India. Details of power equipment manufacturing & established and identified emerging players are as below.
S.No
Entity
Equipment Manufacturing
1
BHEL
Power equipment manufacturing capacity
5,000 MW additionally by 2011-12 and other equipment
2
BHEL-NTPC JV
Establish manufacturing capacity of 5000MW,
BOP manufacturing and EPC activities
3
NTPC-Bharat Forge
Establish BOP manufacturing facility and EPC activities
4
L&T Mitsubishi JV
Establish manufacturing capacity of 4000 MW of
supercritical boilers for power plants
5
Jindal-Toshiba JV
Establish manufacturing capacity of 3000 MW of
supercritical turbines and generators
6
Bharat Forge-Alstom JV
1. Establish manufacturing capacity of 5000 MW of
supercritical turbines and generators
2. Manufacture of Aux. units of power plants
7
GB Engg.-Ansaldo JV
Establish manufacturing capacity of 2000 MW of
supercritical boilers
Table 2: Emerging players in Power Equipment Industry
(Source: Presentation by PFC on November 24, 2008)
The Challenges:
In the recent couple of years the activities in the Indian power sector have been pitched up to a level that the focus of attention has shifted from non performance of developers of power projects to the lack of capacities of manufacturers to be able to fulfil their commitments in terms of scheduled deliveries of plant and machinery followed by their smooth and timely execution.
It is true that during the entire period of 90's to 2003, power project developers provided enough reasons to the equipment manufacturers to be not only frustrated but in fact to be sceptical about the promised plans and programmes of power project capacity expansion. For example, just after the announcement of Private Power Policy in 1991-92, there was euphoria for setting up as much as over 50,000 MW of capacity by dozens of power project developers. In a large number of cases, coal linkages were provided, and equipment manufacturers entered into MOU's for equipment supply. But, finally in a period of over ten years not even 7,000 MW of capacity could materialise. This historical truth led all those concerned with power development programmes to believe that perhaps the state of affairs would remain as they were and the new claims of the power sector that the things have changed and that expansions proposals are now more concrete and real were being disbelieved.
Planning for future by BHEL:
Riding on the growth, BHEL plans to be Rs.45, 000 Crore turnover company by 2011-12. BHEL has tied up technology for higher-rating thermal sets based on supercritical technology. Though the focus is presently on coal-based projects in view of the volatility in gas prices, BHEL is introducing Advanced-class gas turbines for which orders have already been bagged against international competitive bidding.
Associated with the growth agenda will be the strengthening of the engineering and technology character of the organisation with enhanced focus on innovation and R&D. BHEL plans to increase its R&D spend to at least Rs.900 Crore by 2011-12.
BHEL's nuclear sets account for 80% of the country's installed nuclear generating capacity and the largest nuclear set manufactured by BHEL so far is of 540 MWe rating. The company is now gearing up for manufacture of higher rating Nuclear turbines & generators and is in discussions with Nuclear Power Corporation for a possible Joint Venture to take up EPC activities for the nuclear power plant business.
Target Completion:
Achieved in Dec 2007
10000 MW
Achieved in Mar. 10
15000 MW
Mar 2012
20000 MW
Capital Expenditure:
Rs 961 crs
Rs 2,940 crs
Rs 1,593 crs
Phase:
Phase-1
Phase-2
Phase-3
Graph 3: BHEL capacity achieved & planned
(Source: Presentation by Mr.P.K.Agarwal (GM-BHEL) in National Power Conference 2009)
BHEL had manufacturing capacity enhancement for Power Plant Equipment from 10,000 MW to 15,000 MW and then to 20,000 MW per annum by Mar'12 & capacity augmentation of transformers from 20,500 to 45,000 MVA with capacity enhancement of Electrical Motors from 1340 nos. to 2250 nos.
BHEL has strategic alliances with NTPC, NPCIL, KEL, & HEC strengthening the supply chain by developing additional sources for critical inputs. BHEL also entered into collaborations for manufacture of Supercritical Units, for Boiler, BHEL collaborated with Alstom & for Turbine Generator with Siemens.
JV Between BHEL & NTPC:
NTPC-BHEL Power Projects Pvt Ltd (NBPPL) is a 50:50 JV firm between power producer NTPC and equipment maker BHEL for carrying out engineering, procurement and construction contracts, besides manufacturing and supplying equipment for power plants. NBPPL falls under the administrative control of the Ministry of Heavy Industries and Public Industries. The JV has an order book of about Rs 450 crore in July 2010 & is targeting an order book of Rs 7,000 crore by the end of the current fiscal.
At present, NBPPL is working on the 100-MW Namrup Power Station in Assam and the 726-MW combined cycle power plant being set up by ONGC Tripura Power Corporation at Palatana, in Tripura. It is also executing the 500-MW Singrauli thermal power plant and the 600-MW thermal power plant of Andhra Pradesh Power Generation Corporation Ltd (APGENCO) at Rayalseema.
JV between Bharat Forge & NTPC:
BF-NTPC Energy Systems Limited (BFNESL), a joint venture between Bharat Forge Ltd (51% stake) and NTPC Ltd (49% stake) began construction with the laying of the foundation stone of its joint venture manufacturing facility at Solapur in South-Eastern Maharashtra. The plant proposes to manufacture products to support thermal, hydro and nuclear power sectors besides oil and gas, petrochemicals, steel and mining industries. The product line will include products like advanced class pumps, high pressure piping, castings and forgings and other critical equipment involving high-end engineering and state-of-the-art manufacturing processes. The plant will be supported by a design & engineering centre and its main focus would be to offer a complete package solution for power and other industries in India and abroad.
The JV set up by the two organizations aims at primarily serving power sector (thermal, hydro and nuclear, etc.) with its technology-intensive product range having wider application across other sectors like oil and gas, petrochemicals, steel and mining.
JV between L&T and MHI:
Larsen & Toubro (L&T) would be investing about Rs 3,600 crore in the power equipment manufacturing units in India. L&T's joint ventures in the power sector with Mitsubishi Heavy Industries (MHI) and Mitsubishi Electric Corporation (MELCO) have started production of turbine generators and boilers at the recently set up factories in Hazira, Surat. Both the factories are located within the integrated power equipment manufacturing complex that is spread over 800 acres. Each factory can produce up to 4000 mega watt of power generating equipment, annually.
Besides the turbine generator and boiler factories, L&T is also setting up factories for production of axial fans, air-preheaters, electrostatic precipitators, high pressure piping and a forge plant.
The new company will manufacture, sell and provide after-sale service for steam turbines and generators for the Indian market. Sales targets are set near 15 billion yen in 2010 and 33 billion yen in 2012. MHI will progressively license design and manufacturing technologies for supercritical pressure steam turbines with generating capacities of 500-1,000 megawatts (MW), and for 150 and 300 MW steam turbines used in the bottoming cycle in gas and steam turbine combined-cycle power generation systems.
The JV capitalized at 3.1 billion rupees (approximately USD 75 million), with MHI owning 39%, L&T 51%. Mitsubishi Electric Corporation (Mitsubishi Electric), licenser of design and manufacturing technologies for turbine generators, will also make a 10% investment. A factory comprising two buildings some 36,000 and 13,500 square meters (m2) in floor area will be built to manufacture the steam turbines and generators, respectively. Currently some potential factory sites are being considered: Hazira on India's west coast, and Ennore on the southeast coast, and so on. Approximately 25 billion yen will be invested into the plant and equipment. Initially, the JV will start with 530 employees, to be expanded to about 900 once production achieves momentum.
The establishment of the new JV on the heels of the earlier boiler JV represents a favorable meshing of the aspirations of both MHI and L&T. MHI has been seeking a foothold in power generation operations within India's rapidly growing market while L&T has been looking for a partner possessing advanced technologies.
Currently, India's thermal power generation equipment market is nearly monopolized by Bharat Heavy Electricals Ltd (BHEL), but satisfying the rapidly growing power generation equipment demand that is projected will be impossible by just one company. The two JVs are expected to meet India's robust demand through manufacture and sales of high-efficiency and high-performance products leveraging their most advanced technologies.
JV between JSW & Toshiba, Japan:
Toshiba JSW is a joint venture between JSW (25%) and Toshiba (75%) that will manufacture and market super-critical steam turbines and generators for thermal power plants in India. Toshiba JSW was established in September 2008, and is expected to start operation in January 2011. The Toshiba JSW facility is located about 18 kilometres north of central Chennai, the major gateway to south-east India. The site has a ground area of approximately 400,000 square meters. Over the five years from fiscal year 2009, Toshiba JSW expects to invest approximately US$160 million in the plant and its manufacturing equipment and essential facilities, including waste-treatment facilities.
Toshiba JSW will manufacture and market mid- to large-sized steam turbines and generators ranging from 500-megawatts (MW) to 1,000MW, for highly efficient super-critical thermal power plants in India. Keihin Operations, Toshiba's power equipment production facility in Yokohama, Japan, will support Toshiba JSW in ramping up manufacturing, and in working toward establishing an independent production scale of 3,000MW a year by 2014.
Toshiba JSW expects its steam turbines and generators to contribute to the generation of cleaner energy, and to help meet a surge in demand for power expected in India in the near future. Toshiba JSW anticipates sales in the region of US$400 million by the end of fiscal year 2015.
The Government of Tamil Nadu is extending full support to Toshiba JSW and is promoting infrastructure development that include power and water supply, and strengthening roads and bridges between the plant and the port of Ennore.
JV between Bharat Forge & Alstom:
Kalyani Group flagship company Bharat Forge has formed a joint venture with Alstom to manufacture power equipment and the JV will invest Rs 2,400 crore to set up a plant at Mundra in Gujarat. The plant, spread over 120 acres, will have an annual production capacity of equipment for 5,000 MW and will be operational by 2013.
Alstom, the global leader in equipment and services for power, will hold 51 per cent stake & the two partners are looking at synergies and leverage from Bharat Forge's metal-forming capabilities and Alstom's global power equipment manufacturing expertise.
They are under discussion to form another JV, Kalyani Alstom Power, in which the Indian group will have majority stake of 51 per cent to manufacturer auxiliary power equipment like condensors and heaters.
JV between Thermax, India, Babcock-Wilcox Boiler, USA:
Power solutions provider Thermax has signed an agreement with US-based Babcock & Wilcox Power Generation Groups for forming a joint venture to manufacture supercritical boilers for the Indian power sector. Pune-based Thermax will own 51% stake while Babcock will control the remaining 49% in the venture which will have an initial annual capacity of 3,000 MW equivalent. The supercritical boilers will be manufactured in a new facility that is being planned. The plant will indigenise the technology and contribute to local component development. The venture will have an initial capital of Rs 700 crore, split equally between equity and debt.
JV between BGR Energy Systems & Hitachi, Japan:
BGR Energy Systems would set up two joint ventures with Japan's Hitachi Ltd to make power equipment in India, with investment totalling about Rs.4,400 crore ($956 million). In a deal that would allow Hitachi to expand its presence in India's growing power market. BGR Energy will hold 74% in the turbine JV, which will have a total investment of Rs.3,000 crore. The rest of the equity will be held by Hitachi firms.
JV between GB Engineering & Ansaldo, Italy:
Ansaldo, a boiler manufacturer, in partnership with GB Engineering Enterprises (GB) is planning to set up a manufacturing facility at Tiruchi with an initial investment of Rs 100 crore. The new facility would manufacture pressure parts for the boiler industry and would be set up by Ansaldo GB Manufacturing Company, in which the two partners will have equal stake. The facility will have a capacity of 2000 MW for super critical equipment.
Chinese Invasion:
China's power equipment manufacturers have begun hitting Indian majors like BHEL by leveraging their lower costs and shorter delivery periods and are walking away with orders worth thousands of crores of rupees. Not only Private players but also government-owned utilities are using Chinese equipments. West Bengal and Haryana already have plants powered by Chinese equipment. While Chinese companies have bagged contracts for an estimated 18,000-20,000 MW of equipment to be supplied over the next 8-10 years, BHEL's market share actually fell by a little over a percentage point to 63.68 per cent in 2007-08. Reliance Power is developing around 32,000MW of power projects in India has roped in Shanghai Electric Corporation to manufacture BTG equipment.
Chinese equipment is attractive because of huge savings right at the start. A report by CLSA, a brokerage firm, noted that Chinese equipment reduces capital costs per MW by as much as 30 per cent. As per Mr. S.L. Rao, who was the first chairman of the Central Electricity Regulatory Commission (CERC), the Chinese have an edge in costs and speed, while BHEL is limited by capacity constraints. Given regulatory pressures to keep tariffs low, Indian power producers having any option but to go to Chinese equipments.
Sections of the UPA government are out to dampen the China craze. The Power Ministry has moved the Prime Minister's Office about the need for a policy that allows only local manufacturers-including the Indian arms of foreign majors-to bid for projects. The ministry has also proposed that the government give domestic coal linkages only to projects being built with equipment made in India.
As per CLSA report even though capital cost of BHEL's equipment is higher than those supplied by Chinese companies, they are more competitive over the lifecycle costs. A CLSA team that visited China found that NTPC plants built on BHEL equipment have far lower power tariffs than Chinese power stations. The reason: the Chinese plants have higher running costs (excluding fuel).
The biggest worry about Chinese companies is over the issue of enforcing contracts. Government owned agencies like the Rural Electrification Corporation (REC) and the Power Finance Corporation (PFC), which together account for two-thirds of the money lent to the sector, can recover their money only if the equipment performs and lasts. Both are reluctant to fund projects that import equipment from China. In the event of a dispute over any performance guarantee, Chinese companies insist on arbitration in China, while European, American, Japanese and Russian firms are comfortable with arbitration in India. Private Banks, on the other hand, are not worried about the source of the equipment.
Some developers have opted for Chinese suppliers simply to build units with supercritical equipment and to keep tariffs low. Reliance's Sasan project, for instance, is committed to delivering power at Rs 1.196 per unit only because it will have supercritical boilers. BHEL, too, has stepped into the space and has won its first order for supercritical boilers (2x660 MW) from NTPC for Barh Stage II (UP) and has signed up with Tamil Nadu for its first 2x800 MW supercritical thermal power project. It is also taking other measures to face the challenge.
Competitive quotes by the Chinese will spur Indian manufacturers like BHEL to tweak their productivity and be in a position to become global vendors. BHEL's market share will depend on its ability to expand and offer state-of-art technology solutions.
Conclusion:
To maintain GDP growth rate above 9%, India requires huge amount of energy. To fulfil the India's demand of energy, indigenous manufacturing of equipment is necessary to avoid any delays in supply of equipment & to avoid issues related to after sales support. Currently even though most of additional supply (other than BHEL) is done through Chinese equipments, but considering the quality concerns & growing demand of power equipments, government policies & regulations focus should be on encouraging the domestic manufacturing of power equipment.
Joint ventures between L&T and Mitsubishi, JSW & Toshiba, Bharat Forge & Alstom, Ansaldo & GB Engg., BGR Energy & Hitachi, Thermax & Babcock-Wilcox, BHEL-NTPC are stepping stones in the development of Indian power sector with indigenous supply of power equipments. These JV's & BHEL have a strong competition by Chinese equipment suppliers in terms of cost & lead time. The power supply & demand gap is increasing therefore along with BHEL & all JV's have to increase their capacity down the line. There is a huge opportunity for developers (Reliance Power, Tata power etc.) along with suppliers (like Shanghai Electric, GE etc.) to set up manufacturing facility & fulfil their own power project needs.
The manufacturing facilities in India not only help Indian power sector growth but also increases the employment opportunities, improve the GDP & increase the foreign investments.
