According to a recent report by McKinsey & Company (see http://www.mckinsey.com/locations/india/mckinseyonindia/, if India were to grow at 8% p.a. for the next 10 years, it will require a 3 X increase in power generation capacity (to 300+ GW). Considering that India has added 5-6 GW p.a. in the recent past, this would require a 5-10 X increase in the pace of capacity expansion and an aggregate investment of $ 600 B (by 2017).
While this is clearly a multi-faceted challenge, there are 2 dimensions to it that are worth noting.
The shortage of peak power. The peak power deficit in India is currently 16 % and is expected to rise to 20% by 2017. On the flip side, there is already a base load surplus of 5% which is expected to rise to 14 % by 2017).
The need to reduce distribution losses. Average distribution losses in India are around 37-40 % rendering all distribution companies financially unviable.
While a key element of the solution is to accelerate the build out of generation capacity, there are other levers that India needs to pull, including:
Scaling up solar power generation. India’s solar potential is amongst the highest in the world (with an annual specific solar yield that is comparable with California and almost 2 X of Germany). Furthermore, solar is a great solution for India’s peak power requirements (unlike wind whose production is mostly concentrated in the months with least peak shortages). Yet, India has an insignificant amount of solar generation capacity today. India needs to launch a massive effort to scale up solar power generation capacity, possibly setting a target of 10- 20 GW of solar capacity by 2017 (even this will be only 10-20 % of the expected peak power shortage by 2017). Initially, these capacities will require subsidies to be viable, but over the next 5 years, with economies of scale and yield improvements, solar can achieve grid parity. In fact, given that significant amounts of peak power are generated via diesel generators at costs of $ 0.30 /kWh, one could argue that solar is already at grid parity in India. Fortunately, there seems to be some early signs of government support for such a scale up (http://www.pewclimate.org/international/country-policies/india-climate-plan-summary/06-2008) but we need to see more wood behind the arrow.
Demand Side Management. Building 300 GW of additional capacity is both impractical (requires 5-10 X increase in pace of capacity generation) and suicidal (it will double carbon emissions on a per capita basis). India needs to reduce absolute demand (via improved energy efficiency) and shift peak demand to off-peak hours. Time-of-use pricing, energy efficient appliances/lighting, and higher efficiency standards for new construction can reduce demand from 10-15%.
Leveraging technology to reduce distribution losses. Technologies ranging from real-time metering, to pre-paid cards will play a pivotal role in reducing distribution losses. can help India reduce distribution losses to ~ 15%.
Increasing the influence of market forces. the step changes required are only possible by dramatically increasing the role of market forces in the power sector. India needs to privatize distribution companies, create efficient whole sale markets, facilitate the creation of merchant generation capacity, accelerate private sector investments in equipment manufacturing and incentivize private companies to improve the plant efficiencies (PLFs) of poor performing public sector plants.
Over the next 10 years, India’s power demand growth will be second only to China. Furthermore, McKinsey estimates that there the potential for industry particpants to capture upto $ 160B in EBITDA by 2017.
From my vantage point, the Indian power sector offers an incredible opportunity for value creation for start-ups – ranging from providing technology to building demand management businesses and distribution franchises. If you are working on such an opportunity, do drop me a mail at agarg(at)foundationcapital.com