India's Power sector boom : Play of Demand and Supply

Dear Investor,

India’s power sector, shunned by investors for long, is in the spotlight since the pandemic. Economic growth along with technological advancement and electrification threaten a demand surge like never before.

Govt Policy:

The National Electricity Plan for central and state transmission systems has projected a total outlay of Rs 9.2 lakh crore. The plan aims to meet a peak demand of 458 gigawatt (GW) by 2032 -- revised higher from the previous estimate of 380 GW. Power sector veterans foresee that power consumption in India will compound by about 7 percent over the next decade.

A detailed report by brokerage and research house MOFS points out that the peak power deficit used to be as high as 15 GW (13 percent of peak demand) in FY2010 and then declined to only 1 GW (or less than 1 percent) during FY19-21. It has been rising over the past two years; in FY23, it surged to 9 GW (4 percent of peak demand).

Power Consumption and Technology Advancement:

What’s noteworthy is the shift in power consumption away from core manufacturing industries to new demand drivers such as electric vehicles, data centres and electrification of energy demand. Besides, rising per capita income in India is driving higher household ownership of electrical appliances, too.

Then, there is a powerful price to pay for technological advancement. These technologies such as data centres and artificial intelligence systems that are reckoned to be disruptive, improve efficiencies and cut costs in the long run, are also electricity guzzlers. Ironically, every time consumers around the world undergo a technological upgrade, power demand witnesses a leg-up. For instance, “a simple Google search needs 0.3 Wh of power, while a Chat GPT query consumes 10x the amount of power of a Google search”, according to the Motilal Oswal report.

Distribution:

So, with India’s commitment to electrification in mobility and the data centre footprint set to leapfrog, the rising estimates for future power demand appear justified. Details of the NEP indicate significant outlays for transmission systems, storage and distribution and focus on renewable energy and green hydrogen loads into the country's electricity grid.

What is there for Investors:

For investors, the much-neglected power sector could turn into a bright long-term opportunity as we informed last week. Some international equity research houses are positive on power asset developers, generators and transmission and distribution companies that are poised to take advantage of the government capital expenditure in this sector. Energy exchanges, too, could gain as expansion of transmission may see new products being launched.

That said, investors must be mindful of uncertain and fluctuating return ratios in the sector, the impact of commodity and component prices on profitability and regulatory risks that have in the past been a stumbling block to private sector investment.

Regards, GYC by Dinesh Aneja +91 8800 203 200