As the government gears up to meet the requirement of power to every household in the country, the investment in power generation and transmission & distribution is bound to increase. This will throw open a window of opportunity for domestic power equipment manufacturers.

In the last couple of years, the Government of India (GoI) has been taking transformative change in the power sector for achieving its ambitious target of providing affordable 24x7 power for all its citizens. It has taken several initiatives such as increasing private participation in the transmission segment, increasing contribution of renewables in the energy basket, developing the National Power Grid to boost growth in the T&D (transmission and distribution) industry, etc. Increase in power generation and transmission capability is likely to lead to fresh demand of about Rs 1 lakh crore for electrical equipment in the next four years.

Power for All leading to demand growth

The demand for power in the country is set to rise, courtesy drive of the Government of India to enable power supply to every household in coming years. “We as a country have already crossed a per capita consumption of power from 1000 kWh and are placed further to gain upon same, however latent demand still being a factor to be adhered to. Having said that, India looks poised to cross the 350 GW in coming couple of years time ie by 2020 following which the demand for power equipment is certain and looks north bound,” says Ravi Shekhar, Partner & Head (Research & Consulting Division), Enincon Consulting LLP.

Though power generation capacity will grow in the coming years, it is expected to be dominated by renewable sources of energy as India is bound by obligations under Paris Accord. The country has ambitious plans to add 100 GW of solar & 60 GW wind power by 2022, which will indeed be rhetoric in terms of power equipment demand.

On the conventional power front though the capacity additions pace have witnessed a slowdown from 2014-15 onwards. But given the economic growth paradigm of the country and growing base load demand, it is an imperative for the country to fall back on coal-based generation even if all the fresh installation come through supercritical technology owing to the climate deal.

Such prolific capacity addition pace will have to be supported with adequate T&D infrastructure which is expected to grow to over $ 75 billion in 2022. “Besides, with dedicated infrastructure creation for green energy corridor (GEC) and subsequently smart grid programme, the demand for power equipment under T&D segment is further slated to get boosted. It is pertinent to note that the power backup equipment market is also expected to grow at a CAGR of approximately 30% and cross a market size of $ 7 billion by 2020,” says Shekhar.

Market segments

Electrical equipment market can be broadly segmented into power generation and T&D segments – with T&D equipment estimated to account for 72% of the total market. Both - generation and T&D equipment - markets are destined to show comparable growth momentum in the near future. While generation equipment segment is expected to show a CAGR of 24.6% in the country from 2016-17 to 2020-21, T&D equipment market is likely to register a CAGR of 25.7%. The T&D equipment sector, though marginally in terms of growth potential, is likely to edge past the generation equipment segment. “If compared to overall market size in terms of monetary value, the relative size of growth witnessed by T&D segment will be at least 3 folds the generation segment at $ 75 billion by 2020 wherein the generation equipment market will be close to $ 27 billion and hence offer more robust opportunities for market players in the business,” adds Shekhar.

Factors driving the growth of T&D segment are the need of replacement of ageing infrastructure, addition of superior technology enabled transmission and distribution networks (factoring sub-transmission) coupled with need to avoid congestion and creation of adequate evacuation infrastructure for the generation units. “Besides, with more renewable energy based power generation need for creating dedicated infrastructure for T&D networks will also be important in order to make these sources of generation completely grid integrated,” states Shekhar.

Challenges before the power equipment industry

There are many hurdles before the power equipment industry in the country. Some of these challenges are:

Domestic content requirement in generation equipment industry: The mandate from GoI to use the domestically manufactured equipment for government and auction based plants under both conventional renewable segment (for solar plants) has made life difficult for the developers. “This in particular is so of the very reason that barring few players in the OEMs (original equipment manufacturers) section, the domestic manufacturing capability is very limited and that is limiting the business case for them. Also, for the foreign OEMs to be eligible they need to set up manufacturing units either on stand alone basis or in JV with a local player for typically a thermal project of CPSU or SEB. For auction based solar projects also a similar DCR provision is there which limits the service capability of the demand requirement posted by the generation segment in coming and without imports it will be difficult to bring down the cost of generation for such projects,” opines Shekhar.

Impact of imports: The raw material availability and price do govern the electrical machinery industry in the same way as it does the other manufacturing industry. The equipment manufacturing industry is also exposed to fluctuations in global raw material prices. “Absence of a suitable price variation clause in contracts leads to manufacturers having to bear the brunt of swinging commodity prices. Moreover, availability of certain critical imported raw materials like CRGO steel, CRNGO steel and amorphous steel has often been a point of concern for the domestic industry, which leads to delays in manufacturing and supply cycle,” adds Shekhar.

Orders booked leading the capacity in India: Burgeoning order books have led to slippage on timely delivery of products. Current phase of growth in the power sector has led to orders being booked in excess of capacity to service them. This is one of the reasons for some project owners shifting to imported products which have been able to maintain timeliness of delivery.

Inadequate qualified professionals in R&D and manufacturing: The sustained rise of the economy on the basis of growth in the service sector has continued to offer opportunities to graduates. The not-so-happy consequence is an increasing struggle for the manufacturing industry to hire and retain talent for jobs which are considered blue collar. Shekhar says, “Quality technical education is expensive and manufacturing is not the first port of call for fresh graduates. Equipment manufacturers have to give increased in-house focus for re-skilling talent hired from the market which adds further burden on the manufacturing organisation.”

Changing dynamics

The demand for electrical equipment in India is expected to encounter significant expansion vis-à-vis growth of the power sector. With the GoI setting high capacity targets of 72 GW and 93 GW for the 12th and 13th FY Plan, respectively, the requirement of BTG (boiler, turbine and generator) and T&D equipment is surely to increase. The Indian electrical equipment (IEE) industry has shown positive prospects of growth in past 5-6 years and is expected to meet the aggressive market expansion target of $ 100 billion by the end of 2022.

In addition, with rise in the acceptance of Indian electrical equipment & machinery (E&M) from the international players, the volume of overseas demand is likely to go up in the coming years. According to Enincon Consulting, the exports of EE/HEE are projected to grow at a CAGR of 17.4% from 2013-17. The estimated requirement of power equipment in India is given Figure 1. “GoI has been very conducive so far in its approach towards the growth of electrical equipment industry. Moreover, the government has adopted several policy measures which has not only boosted the EE industry but the entire E&M industry has been benefitted,” opines Shekhar. Increase in the import duty of power equipment is one such example of government support towards meeting the futuristic electrical equipment requirement in the country. In addition it will provide a level playing field to domestic manufacturers like BHEL, L&T etc.

Indian enjoys a wider industry space for T&D equipment and is expected to grow more in coming years. As in order to meet the increasing power requirements of the country, the demand for electrical equipment will get a boost. The requirement of equipment on the generation, transmission and distribution end are most likely to witness a significant increase 10 years down the line. By the end of 12th FY Plan, the total demand for T&D equipment is estimated to reach up to $ 35 billion. “Beyond 2017, it is projected to grow further at a CAGR of 13.28%. Whereas the demand for boilers, turbine and generators is projected to grow at a CAGR of 15.22%, 15.22% and 15.07% respectively between 12th and 13th FY Plan,” informs Shekhar.

Opportunities in electrical equipment segment

Government support in terms of introducing favorable 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. Increase in the import duty of electrical equipment up to 21% has proved to be a milestone in pushing up the demand for Indian electrical equipment.

“Due to the FTA signed by the Indian government and the additional subsidies provided to the Chinese manufactures, the dragons have captured close to 50% of the Indian EE market thus discouraging the demand for Indian EE. But the increased custom duties will bring back the hold of IEE into the hands of domestic players such BHEL, L&T, Bharat Forge, Triveni etc. Along with this other factors such as ban on the dumping practices from other countries; growth of thermal power plants in India, utmost requirement to increase the T&D capacity, etc are very much responsible in catering the growth in demand of IEE,” says Shekhar.

The growing industry size of the Indian power equipment has huge volume hidden business opportunities for the players associated directly or indirectly with the industry. The Rs 301,662 crores market size projected for the Indian EE industry is expected to expand the business volumes for original equipment manufacturers (OEMs), vendors to the OEMs, raw material providers and transportation service providers etc. Owing to increase demand from state utilities, the market of cables, transformers and switch gears is likely to grow in double digit. Similarly, business for sub-stations, transmission lines, conductors, insulators and transformers etc will also witness steady growth.

In nutshell, GoI’s efforts to facilitate domestic production and its other initiatives like Power to All, Housing for all, smart cities, etc are likely to provide enough power for the electrical equipment industry to witness electrifying growth in the near future.