Power equipment manufacturers ready for expansion, but await enough orders

The only thing Yoshiaki Inayama can do is wait and watch. Toshiba JSW Power Systems India, or TJPS, of which Inayama is Managing Director, has decided to abandon plans to expand its power generation equipment manufacturing capacity in Chennai from 3,000 MW to 6,000 MW. Reason: There are not enough orders.

Some PSU companies are being told to step on the gas by the government, but private power players are just not willing to join in. And with few power plants coming up, equipment manufacturers are twiddling their thumbs. "In the current scenario, we are waiting for recovery to happen before we invest further in capacity expansion," says Inayama.

TJPS is a joint venture (JV) between Japanese company Toshiba and Sajjan Jindal's JSW Energy and JSW Steel. The JV was floated in 2008 to manufacture power generation equipment; capacity came into play in 2012. It has invested more than Rs 800 crore, and is executing three projects of government-owned NTPC. These are steam turbine generator island projects - for 3 x 800 MW Kudgi Super Thermal Power plant, 2 x 800 MW Darlipalli Super Thermal Power Project and 2 x 660 MW Mega Thermal Power project. In September 2015, it bagged an EPC contract from UP's PSU generator UPRVUNL to set up a 660-MW plant in Harduaganj in UP.

But beyond these and some other stray projects, there isn't much action. The order books of most equipment manufacturing companies are drying up.

Last year, Indian power companies ordered equipment for generating 12,000 MW electricity - of which most came from NTPC and state agencies. This year, orders might rise to around 18,000 MW. If that sounds like a lot, here's a dose of reality. Even if orders are placed for 18,000 MW, that will still be half the 36,000 MW power-generating equipment that the industry can produce in a year. Of this, 20,000 MW lies with one player, market leader Bharat Heavy Electricals (BHEL), whose order book has remained flat for over two years - Rs 1,01,018 crore in end-FY15 compared to Rs 1,01,500 crore in end-FY14.

For that matter, even Chinese equipment players such as Shanghai Electric, Dongfang, Harbin and others are struggling. They have queued up for orders at several states, but have not managed a response yet. In the 11th five-year plan, thermal generation capacity of 48,540 MW was commissioned. Of this, equipment for 18,187 MW was imported from Chinese manufacturers. In 2013, the power ministry's watchdog, the Central Electricity Authority (CEA), asked all state and Central government-owned power generation companies to incorporate a condition that companies getting orders for boilers and turbine generators will set up indigenous manufacturing facilities. Thereon, the order books of Chinese players dried up.

However, their exit has not helped the indigenous manufacturers. "Most of the companies are running at 25 to 30 per cent capacity," says the CEO of a top power equipment manufacturing company. "If reforms don't happen quickly, most companies might run out of breath." He adds that most companies in the sector are also present in other verticals such as transmission and distribution (T&D) equipment and railway. "The generators are opting for debt restructuring. If things don't improve for us soon, we may also queue up at banks," he says. No wonder Inayama is willing to wait and watch. One suspects he and his peers don't have much of a choice.

From Powerful to Powerless

Today's situation is a big comedown from the heydays of power, in the period starting 2006/07, when India started adding more than 10 GW generating capacity per year, and then took this to 20 GW. It was a time when GDP growth was going great guns, and all other growth metrics were booming. Private power companies like JSPL, Adani Power, Reliance Power and Tata Power jumped in with gusto, and made big plans to set up power plants. That promised a great future for indigenous power equipment companies like BHEL, Thermax, L&T, BGR and Bharat Forge. These companies formed joint ventures with international biggies and ramped up capacity like nobody's business, investing an estimated Rs 5,000-7,000 crore in aggregate. As a result, these companies today have a cumulative capacity for manufacturing 16,000 MW of power-generating equipment.

But by the time these capacities had come up, the power sector had nosedived due to issues like fuel shortage, dip in domestic gas production, coal scam, bad contracts, poor financial structuring and the subsequent era of policy paralysis. Finally, in July 2013 came a Presidential Directive asking Coal India to sign fuel supply agreements (FSAs) for 78,000 MW of capacity to be commissioned by March 31, 2015. There is no commitment for fuel for any plant beyond this. All these factors combined to deflate the enthusiasm of private investors. "I don't want to build plants if I am bombarded with all these problems," says Rajiv Rattan, Chairman, RattanIndia Group, and promoter of RajivRattan India Power Ltd - erstwhile Indiabulls Infrastructure and Power. As a result, today, power equipment manufacturers are stranded with huge unused capacities.

At this point, orders are only coming from either NTPC or generators from states such as Telangana, Uttar Pradesh and Kerala.

Take Thermax. The Pune-based company joined hands with US-based Babcock & Wilcox (B&W) in 2012 to manufacture super-critical boilers in Maharashtra. But the company has not got even one order from India so far. It has only executed three projects sourced by B&W from the international market. "The JV made investments of Rs 800 crore, and is making losses of Rs 100 crore every year. We have little option but to wait for the reforms to happen," says M.S. Unnikrishnan, CEO & MD of Thermax. "We have to service our debt from next year, and have to do it from our parent company's cash."

Then, Alstom has a 5,000 MW capacity JV with Bharat Forge, at Sanand in Gujarat, which was commissioned this year. It has landed three EPC contracts from, again, NTPC for three power plants, with seven units aggregating 660 MW. "In the next three years, I don't see private players coming into play," says Rathin Basu, Country President, Alstom India and South Asia. "I only expect them to come in the second half of the next five year plan, not before that."

NTPC's new Chairman and Managing Director, Anil Kumar Jha, is clear about the company's role. "When private players are not adding capacities, it is more important for NTPC to go ahead and add new plants," he says. Noble intentions, but despite its strength (see box The Importance of Being NTPC), NTPC can't be expected to carry the industry forever. The fear is that if the private players don't join in quickly, the government's dream of exponentially adding power generation capacity could turn into a nightmare. The government's objective is to take India's power generation capacity from the current 276 GW to 600 GW by 2022 - of which 70 per cent would be from traditional fuels such as coal and gas, and the rest from new and renewable fuels.

Meanwhile, another facet is playing out - instead of action on the ground, much of the action is happening in the deals market.

Deal Play

In August last year, Adani Power announced acquisition of Lanco Infrastructure's 1,200-MW plant in Udupi for Rs 6,000 crore. In November, it sealed a deal with Avantha to buy a 600-MW Korba West power plant for Rs 4,200 crore.

The year ended with Tata Power's announcement about acquiring a 540-MW thermal plant from Ideal Energy for an estimated Rs 3,500 crore. Industry sources suggest that Tata Power and ICICI Bank are in talks to set up a joint venture to buy stranded or distressed power plants.

There are enough other power plants on sale to choose from, but not all are finding buyers, despite the government's assurances of better coal availability. (Coal supply is crucial to most power plants because 62 per cent of India's power plants are coal-based.) BGR Energy Systems Ltd is looking for buyers for its stakes in two BGR-Hitachi joint ventures. Each JV can manufacture 3,000 MW turbines and boilers annually. BGR has majority stake in both companies, but till date, has not found a buyer.

Then there are those who do not necessarily want to sell, but aren't willing to invest more either. "I can easily scale up my second phase of the Amravati plant, but I am not in a hurry to do it," says Rattan of RattanIndia Group. "I need a good PPA, and insulation from imported coal prices along with clarity on availability of coal."

Rattan's company is developing 5,400 MW of coal-based thermal power projects in two locations (2,700 MW each) at Amravati and Nashik in Maharashtra. "I have all the clearances for water, environment et al; in fact, the railway line for the second phase is also ready. But I need more visibility of regulated returns before I build the second phase," he says.

Says the CEO of another power generation company: "In the past, private players have burnt their fingers. It could be because they signed wrong contracts or quality of decision making was bad, but today India has 46,000 MW of stranded (power generation) capacity, and in many cases the payments of the equipment manufacturers are stuck."

Banking on the Minister

If you're wondering what - or who - is pushing NTPC and other state power generators to set up power plants, it is Union Power Minister Piyush Goyal. The survival of equipment manufacturers will depend on how efficiently and effectively Goyal can execute power reforms. Indeed, the central government has come up with a plan to clear the books of power distribution companies. It could boost power demand and should come as a shot in the arm for equipment companies.

In recent interactions with scribes, Goyal has maintained that his prime focus is to add more renewable capacity and unlock 46,000 MW capacity that is stranded due to lack of long-term buyers, inadequate fuel supply, aggressive bidding for projects and coal blocks, bad contracts, and inability to achieve financial closure.

There is definitely need for much more power. As of March 2015, India's per capita electricity consumption was only 1,010 units, compared to the global average of 3,000 units. The country still needs to provide electricity to seven crore households, and faces power cuts of more than six hours daily on average. "There is a myth that India does not need more generation capacity," says Banmali Agrawala, President and CEO, GE South Asia. (GE has a JV with BHEL for gas turbines, but India is not adding any more gas-based generation capacity, putting a question mark on the JV's future.) "There is huge scope for power generation."

But for that to happen, the distribution end needs to be fixed. Distribution companies of states like Rajasthan, Tamil Nadu, Haryana, Uttar Pradesh and several others are reeling under enormous debt due to non-realisation of correct electricity tariffs and huge pilferage in supplies, and are not in a position to buy enough electricity (read BT's cover story on the power distribution problem, The Power Mess, October 25). "This is the biggest mess around," says Rattan. "If the balance sheets of the distribution companies are healthy, they can buy more electricity. If they buy more electricity, the PLF of the generation companies will improve. The improved PLF means addition of generation capacity."

Since 2013, 10,188 MW worth power purchase agreements or PPAs have been announced, which is equal to the 10,100 MW signed in 2011 alone. This shows the reduced interest of private players in the power segment. The equipment manufacturers are looking at this trend very carefully. "If reforms can push more signatures on PPAs, this would mean more PLF. If average PLF of all capacities reaches 80 per cent, this will kick-start the excitement among the manufacturers," says a CEO.

The equipment players themselves see action coming back into the market when the government comes out with bids for five UMPPs (ultra-mega power projects) - announced by Finance Minister Arun Jaitley - and Goyal executes his plan to revamp 10,000 MW thermal capacities that are on the verge of retirement. "In this time of 'Make in India', the government needs to ensure that existing investments in the power equipment space are better utilised," says Girish Shirodkar, Partner and Managing Director of the India chapter of US-based Strategic Decisions Group.

All eyes are now on the power minister.

THE IMPORTANCE OF BEING NTPC

State-owned National Thermal Power Corporation, or NTPC, is India's biggest electricity producer, generating about one-sixth of India's power. Expansion by NTPC plays a key role in fortunes of the country's power equipment manufacturers. Till the first week of October, NTPC had added 8,450 MW power generating capacity in the twelfth five-year plan (2012/17), and company officials are hopeful that in the pending two years it will exceed the target of 11,290 MW. NTPC spent Rs 23,239 crore on expansion in 2014/15, as against the planned capital expenditure of Rs 22,400 crore. During the current fiscal, the power giant is also expecting to surpass its capital expenditure target of Rs 23,000 crore by roughly 10 per cent.

In the past one year, NTPC has changed its stance and decided to expand organically rather than acquiring more plants. "We will acquire plants only from state-owned generation companies, not from the private players," says a top official from the PSU. The company, which has more than 23,000 MW capacity under construction and nearly 9,500 MW capacity under bidding, is on path to have a 128-GW capacity by 2032. That would be music to the ears of equipment manufacturers.