BMI View: Our view that power sector reforms would be a top priority for Modi's government is playing out. We are witnessing notable progress in the Indian power market with regards renewable energy expansion, reducing red tape for power projects and improving fuel availability for thermal generation. We believe the government will increasingly turn its attention to reforming the power distribution segment and boosting India's energy independence. Our long-term outlook for the sector is similarly positive as we believe that several fundamental drivers of growth for the sector are beginning to align in India's favour.
We forecast that electricity generation in India will grow by 6.5% in 2015, faster than 5.5% growth that we estimate the sector will have experienced in 2014. Our 2015 forecast can be attributed to the strengthening economic outlook and the reforms that Modi has started to initiate in the sector.
We have maintained our long-term forecasts for the Indian power sector, and forecast electricity generation to grow at an average of 6.2% per annum between 2016 and 2024. The outlook for the sector is extremely positive, and we believe that several fundamental drivers of growth are beginning to align in India's favour.
Key Trends And Developments
Coal stock shortages have been a persistent bottleneck for coal-fired power generation in the country over the last five years (causing widespread power shortages), as state-controlled Coal India has failed to meet its coal output and supply targets. However, the situation has improved over the last few months, as Modi's efforts to increase the availability of coal domestically - primarily by accelerating the bidding process for coal mines and implementing more stringent production oversight - are bearing fruit.
Since coming to power, the government has relaxed several environmental rules to make it easier for companies to develop new projects. Small and medium-sized coal miners can now expand production by 50% without public consent, while polluting industries can operate closer to national parks. This relaxation of environmental laws has translated into a major reduction in red tape for the power sector and significant progress has been made with clearing the backlog of projects awaiting environmental approval.
Automated demand-response (ADR) technology will increasingly gain traction in India as the country looks to optimise its electricity usage and ease the strain on its electricity grid. This view is supported by a deal between US technology provider Honeywell and Tata Power Delhi Distribution Limited, which will see the pair launch India's first large-scale ADR programme in Delhi. We believe there is scope for broader roll out of such programmes across India; ADR will draw interest from utilities and distribution companies as they move to boost grid efficiency and ensure stable electricity supply during periods of peak demand.
We expect sizable growth in the India off-grid and micro-grid solar market over the next decade. Inefficiencies within the power grid infrastructure, power supply shortages, the cost competitiveness of the resource and barriers to utility scale projects drive the uptake of such solar systems. Those companies with heavy exposure to the rural energy sector, with expertise in small-scale renewable power stand to benefit from this growth.
The nuclear deal with the US in January 2015 and with Russia in December 2014 reinforces India's commitment to nuclear as a source of power, and highlights potential for more nuclear power projects over the coming years. We forecast nuclear power generation to grow by an annual average of 6.9% between 2015 and 2024, but will monitor progress in the industry closely, with the potential for an upward revision to our generation and capacity forecasts over the coming quarters. That said, we highlight that pricing, funding and limited public support for nuclear power will remain key challenges to sector growth.