A 'power'ful billion dollar opportunity

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The grass just got greener for one of the most promising sectors of India Inc. Slated to benefit from one of the highest allocation during the eleventh and the twelfth 5 - year plans, the power sector has more coming its way. Infact billions of dollars to be precise.

The Central Electricity Regulatory Commission has enacted policies that will enable trading of instruments for energy credits. Meant to encourage power generation from clean energy, this move will also bring in additional revenues to the more efficient players.

The power sector is the largest contributor to carbon emissions in India. It is the fourth-largest emitter of greenhouse gases in the world. This is because a majority of the electricity is generated from fossil fuels such as coal. However, with the new policies in place, the sector may get greener and wealthier.

A utility or power producer that exceeds its renewable energy targets will be able to sell surplus credits to ones that fail to meet their goals. The value of a credit will be equal to one megawatt of electricity injected into the grid from renewable sources. More importantly, these will not rely on the carbon credits, which are subject to a lot of international protocols and timelines. On the contrary, the new policy will make renewable energy projects within the country self funded. India, which currently has an installed generation capacity of about 156 gigawatts, plans to add another 13 gigawatts every year. Such additions over the next few years are set to bring in the demand for greener energy.

Further, renewable energy sources are not evenly spread across different parts of the country. The energy credits are therefore expected to address this mismatch. For the players that are not energy efficient it may also mean some penalties coming their way.

Currently central institutions like NTPC and the State Electricity Boards (SEBs) dominate the power scene in India. India has adopted a blend of thermal, hydel and nuclear sources with a view to increasing the availability of electricity. Thermal plants at present account for 65% of the total power generation. Hydro-electricity plants contribute 25%. And the rest comes from nuclear, solar and wind. With the new guidelines we may see a major overhaul in this revenue sharing.

Another question that begs itself here is - which renewable source will be most favoured? What cannot be forgotten while implementing the green energy resources is the associated cost and affordability. With costs of more traditional sources of energy fast rising, solar power is once again coming into prominence. As per Mckinsey, if harnessed properly, the technology could add as much as 206 giga-watts of power generating capacity by 2020 globally. To put things in perspective, this is a little more than 1.5 times India’s total power generation capacity as it stands now. Currently though, the industry is still in its infancy with a lot of players competing to win accolades on the cost front.

The cost structure assumes importance, as the main reason the technology got into the backburner was its high cost. Mckinsey believes that costs have come down by as much as 20% in the last few years. However, it still has a long way to go before it can deliver energy at the same cost as the other contemporary sources. We are indeed waiting with bated breath as this will not only reduce dependence on fossil fuels but will also make the world greener.

For investors in the power sector, the guideline means opportunity to invest in players that have more sustainable and profitable business models. Moreover, as the sector matures in terms of efficient power distribution and lower T&D losses, investor can also hope for higher returns.