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 regarding renewable energy expansion, reducing red tape for power projects and improving fuel availability for thermal generation. That said, in vestment into India's power grid infrastructure will need to increase if Prime Minister Modi's ambitious power plans are to be realised. Indeed, the transmission and distribution net work remains highly inefficient, posing a significant risk to the expansion of the power and renewables sector in India.
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 remains positive, and we believe that several fundamental drivers of growth are beginning to align in India's favour. That said, building up vast amounts of generating capacity - including conventional power plants, renewables capacity, hydropower and nuclear - will be futile unless the grid infrastructure is in place to support it. We are yet to see a significant ramp up in investment into the T&D segment and the number of grid infrastructure projects in the pipeline is minimal when compared to the pipeline of power plant projects. Using our Power Key Projects Database and collating the number of power projects in the pipeline in India - including those planned, approved, under construction, in tender etc - it becomes clear that grid infrastructure only accounts for a small proportion of the total number, under 10%. This will not be enough to ensure grid infrastructure development aligns with the rapid growth in power capacity. As such, we expect the grid infrastructure segment to continue to underperform and present a sizeable risk to the expansion of the power and renewables sector in India.
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.
India has rapidly emerged as a key investment destination for renewable energy developers, resulting in a strengthening renewables project pipeline and surging installation rates across the country. Although China is the clear renewables outperformer in Asia, given the sheer size of the industry, India will firmly remain in second spot over the coming decade, with non-hydro renewables capacity totalling around 78GW by 2024.
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.