POWER TRANSMISSION. CAN SMEs POWER UP THE SECTOR?

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1 POWER TRANSMISSION CAN SMEs POWER UP THE SECTOR? Power transmission industry is expected to grow manifolds in coming years with the help of ambitious power for all program by 2022 and with few other initiatives taken by the government. This report gives a brief analysis of the role of SMEs in transmission industry and assessment of the industry trends along with key success factors, opportunities, challenges, future outlook and much more 0

2 Table of Contents ABOUT THE AUTHOR...2 EXECUTIVE SUMMARY...3 INDUSTRY OVERVIEW...4 TRANSMISSION TOWERS MARKET...5 CONDUCTORS MARKET...5 PROJECT CYCLE...6 COMPETITION...6 PROFITABILITY...7 EXPORTS...7 EXTERNAL ENVIRONMENT & ITS IMPACT...9 GOVERNMENT INITIATIVES...9 OPPORTUNITIES FOR SMEs CHALLENGES FOR SMEs WAY FORWARD

3 ABOUT THE AUTHOR Rohan Agarwal has 2 years of experience in project management in Realty sector. He has keen interest in Operations and Finance area and is currently pursuing MBA from International Management Institute (IMI) New Delhi. He is a graduate in Civil Engineering from Delhi Technological University. Kumar Rishi is a Post Graduate in Marketing from IMT Ghaziabad and a Mechanical Engineer from Thapar University, Patiala. He has experience in auto component industry and market research. Ashwani Kumar holds wide experience helping SMEs growth in Steel & Automotive Component industries using Operational excellence, LEAN & Six Sigma concepts. He is a graduate from IIM Rohtak with a Mechanical Engineering background from IIT Delhi and currently running Sookshm Management Consulting Firm catering to SMEs. 2

4 EXECUTIVE SUMMARY India s energy requirement displayed a growth at CAGR of 5.5% during FY07-FY16. According to ministry of power till Feb 17, India has generation capacity installed of GW and the Peak Demand of about 159 GW. Despite huge investments being planned for the two 5-Year Plans (12th and 13th), investments in power transmission sector are still not satisfactory. For investments made in generation of power, at least 50% should be invested in transmission of power in addition to it. But in India, this ratio stands at 30%. When we are looking at the industry from SME point of view, then understanding the cost structure becomes crucial. In transmission industry, few activities such as tower design, supply of conductors and material amount for 80-85% of the total costs and efforts of the project. And project life cycle spans over 3-4 years for completion including finalizing of plan and conducting surveys. PGCIL and state Transco award projects to various private players. In the past, healthy profitability levels (RoCE of 25-30%) attracted new players. This heightened competition has deteriorated the financials of players. The sharp drop in RoCE (from earlier level to around 18%) was due to rising working capital requirement and aggressive bidding by smaller competitors. The transmission tower EPC industry is expected to generate revenues of INR 275 Billion in at CAGR of 7-9% over which is mainly due to domestic demand. A sharp drop in global commodity prices over the last year has squeezed budgets of several resource-dependent economies. Thus, impacting their investments and international demand. But domestic projects helped in arresting the decline. Transmission towers has major export market in Middle East, South East Asia, Latin America and Europe. As Middle East countries look to expand as well as stabilize transmission network along with interconnection of grid. Germany is also looking for grid connectivity with neighboring countries to sell unused green power. If we look at the external environment of the industry, tariff based competitive bidding, land acquisition, biological health effects, 100% FDI in the sector and technological advances like FACTS devices and HTLS Conductors all are impacting the industry growth for good or bad. Government initiatives like Make in India and Union budget 2017 are aimed at promoting skill development, 100% rural electrification by 2018, Implementation of Indian Customs Single Window, reduction in corporate tax on SMEs, removed tariff protection, lowered custom duties and mandated domestic sourcing of equipment for all central and state funded projects. SMEs are facing various challenges, be it Chinese firms bidding for power transmission projects in India or insufficient capabilities for R&D and innovation or large Indian players who provide complete solutions. But the future outlook for the industry looks promising, as it offers many exciting opportunities for SMEs like estimated investments in power transmission for 13 th five-year plan is around INR 2.6 lakh crore, using technology in implementation of project, market-oriented reforms like Power for All by 2022, target capacity of 175GW in renewable energy and up gradation of existing infrastructure are some of the opportunities where SMEs needs to stay competitive in future. 3

5 INDUSTRY OVERVIEW India s energy requirement displayed a growth at CAGR of 5.5 per cent during FY07-FY16. As per ministry of power as of Feb 17, India has generation capacity installed of GW and the Peak Demand of about 159 GW with generation mix of Thermal energy (68.2%), Hydro energy (14.1%), Renewable energy (15.9%) and Nuclear energy (1.8%). In the last 5 years, power generation capacity has grown by around 50%, whereas transmission capacity has increased by around 30%. Despite INR 4800 Billion worth of investments being planned for two Five Year Plans (12th and 13th), investments in transmission sector are still not adequate. For 1 dollar invested in generation of power, minimum 50 cents should be invested in power transmission. In India, this ratio stands at 30%. The rising demand for energy has led to increasing capacity addition for power generation. Increasing investments in capacity has resulted in rising demand for power generation and transmission equipment. Major components of transmission includes transmission towers and lines and conductors. Various stakeholders in electricity system are shown in diagram-1: Diagram 1: Stakeholders in electricity system 4

6 Rs Billion TRANSMISSION TOWERS MARKET The transmission tower EPC industry generated INR 220 Billion in revenues in as given in Fig-1. Of which domestic demand accounted for INR 132 bn (60%) and international demand for INR 88 bn (40%). Scope of the project differs depending on whether it s under PGCIL (conductors supplied by PGCIL) or under state transmission authority (conductor may or may not be supplied). Domestic market for towers declined in because of decline in PGCIL projects in As projects generally spans over 2 years hence the decline. But projects from states such as UP, Gujarat, TN and Maharashtra helped in arresting the decline. Market is expected to grow to INR 275 billion in , translating into a CAGR of 7-9% over This is mainly due to the domestic demand FY Domestic International Figure-1: Transmission tower market size CONDUCTORS MARKET Overall conductors market grew at CAGR of 4.7% (in MT) and CAGR of 9.6% (in INR CR.) between FY to and has a market size of around INR 100 Bn in Production of Indian conductors industry was around 4.2 Lac MT of conductors in FY Production figures were at maximum in to around 5.5 Lac MT. The industry witnessed production at around 4 Lac MT in the last two years (i.e and ). This trend is largely a reflection of PGCIL conductor contracts until FY and swell in its inventory levels in the following years. Three type of conductors considered are: Aluminium Conductor (AAC), All Aluminium Alloy Conductor (AAAC) and Aluminium Conductor Steel Reinforced (ACSR). Amongst them ASCR conductor market is on the rise as we can see in the figure-2. Generation capacity: 315 GW MARKET SIZE: Transmission tower EPC: INR 275 Bn Conductors: INR 100 Bn 5

7 PROJECT CYCLE The transmission project cycle consists of 5 main phases, as mentioned: Attracting Players, Planning & Project Award, Project Execution and commissioning, Operations & Maintenance and Exit. There are different challenges associated with each phase. Key steps in the development of a transmission line are survey, tower design, type testing, laying of the foundation, supply of the material, erection of the towers, and stringing of the lines. Of these, tower design, supply of conductors and material amount for 80-85% of the total costs and efforts. The entire process generally takes 3-4 years for completion including finalizing of plan and conducting surveys. Figure-2: Conductors market trend COMPETITION Established players like KEC, etc. captures about 60% PGCIL orders. For contracts bid out till August in , the share of relatively newer players such as EMC, Skipper Ltd and Karmatara Engineering Pvt Ltd was steady at around 40%. The presence of foreign players is limited in the transmission tower segment. In order to bid, foreign players typically enter into joint ventures with local players. For instance, Spanish firm Isolux Corsan has entered into a joint venture with C&C Constructions Ltd. Players in domestic market are listed in table

8 Table-1: PLAYERS IN DOMESTIC MARKET MAJOR INDIAN EPC PLAYERS FOREIGN PLAYERS STR. & EQUIPMENT Kalpataru transmission ltd, KEC international, Jyoti structures, L&T, Gammon India & TATA projects Isolux, Cobra, Instalaciones Inabensa SUPPLIERS Man structurals, Karamtara group, Sujana towers, Ramsarup industries, Skipper ltd. PROFITABILITY As we can see in the figure-3, in the past, healthy profitability levels, i.e., Return on Capital employed (RoCE) of 25-30% attracted new players from related businesses such as electric equipment and construction. This heightened competition deteriorated the financials of players. The sharp drop in RoCE was due to rising working capital requirement and aggressive bidding by smaller competitors. As a result only few companies are surviving in the industry with sustainable profit margins. Figure-3: RoCE trend for industry EXPORTS The international market is expected to grow 8-10% CAGR over the period to , a much slower pace compared to the earlier 18-20% CAGR between and A sharp drop in global commodity prices over the last year has squeezed budgets of several resourcedependent economies. Thus, impacting their investments. Indian Electrical Equipment Industry had an estimated Production for : INR 1280 billion and Exports worth INR 340 billion. In FY14, for Conductor export market, African countries accounted for more than 42% of Indian Conductors exports. Over the last 5 years, Kenya 7

9 has been amongst the top 10 importers of Indian conductor. Transmission line towers has major export market in Middle East (Saudi Arabia, UAE, Oman, and GCC), South East Asia (Indonesia, Malaysia); Latin America (Brazil) and Europe (Germany and UK). As Middle East countries look to expand as well as stabilize transmission network along with interconnection of grid. Germany is also looking for grid connectivity with neighboring countries to sell unused green power. Several African countries such as Zambia, Algeria, South Africa, Angola, Mozambique, etc., which are dependent on exports of key commodities, have already witnessed sharp increases in their trade deficits and slower growth. Thus, affecting the exports as they are investing less in infrastructure. Major international market for turnkey projects are Africa, Central Asia and Middle East, whereas North America was mainly supply only market, due to strict norms. India s exports and imports market of electrical equipment industry from to are shown in Figure-4. Export market has seen a decline in trend post mainly due to economic slowdown whose effects were visible after 3-4 years due to the project life cycle in industry. Figure-4: India's Exports & Imports of Electrical Equipment in INR Crores 8

10 EXTERNAL ENVIRONMENT & ITS IMPACT Adverse environmental and health impact: Reduces the commercial value of the land, often leading to protests from the land owners. It also affects the nearby ecosystem, while passing through the forest cover or populated areas. Entrance of Chinese firms for bidding in Central and State sector projects: It is likely to increase competition for Indian manufacturers including SMEs. Differential treatment of private players from PGCIL for award of forest clearances and Section 164 authorization. Private developers are required to acquire the compensatory land for afforestation and hand it over to the Forest Department whereas PGCIL has to pay double the afforestation compensation for getting the clearance. Tariff based competitive bidding has been put in place for awarding projects over costplus regime. This will increase the transparency and competitiveness in the system. But cost escalations in case of project delays cannot be passed through in this system. GOVERNMENT INITIATIVES Government has taken crucial steps for skill development by promising 1500 multi-skill training institutes, industry-academia partnerships and certain service tax exemptions for skill development and vocational training services. Excise duties and Custom duties have been changed for T&D to promote Make in India. Under MAKE IN INDIA, domestic sourcing of equipment has been made mandatory for all central and state funded projects. Setting up of the Electrical Equipment Skill Development Council (EESDC) which would focus on identifying critical manufacturing skills required for the electrical machinery industry. VISION 2022 for electrical equipment industry: Clusters will be established for electrical equipment industry. And plans to make India the country of choice for the production of electrical equipment and reach an output of US$100 billion by balancing exports and imports. Implementation of Indian Customs Single Window project has made progress to promote import/export of capital goods by reducing dwell time and cost of doing business. In Union budget 17, 100% rural electrification by 1 st May 2018 has been set as target. This provides great opportunity for Transmission & Distribution firms. 9

11 OPPORTUNITIES FOR SMEs Market-oriented reforms, such as the target of Power for All and plans to add 100 GW by 2022, provide high incentives for capacity addition in power generation, which would increase the demand for electrical machinery and transmission infrastructure. Of the target capacity of 175GW in renewable energy, 100 GW from solar power, 60 GW from wind energy, 10 GW from biomass and 5 GW from small hydro power, according to the ministry of new and renewable energy. This push for green energy provides opportunities for T&D sector. Majority of Power transmission in India is being currently carried out in the 220 KV and 400 KV range, is expected to move up to a higher range of 765 KV and high-voltage direct current. This presents a significant opportunity to manufacturers (both established and SMEs) with capabilities in high-voltage (HV) to develop technology that can handle the need of such high voltages in the country. In 13 th 5-year plan, PGCIL's focus is on undertaking system strengthening projects, particularly in the South and North-East and increased ordering by PGCIL and state transmission companies will drive domestic demand. As a result domestic transmission tower industry is projected to expand at a CAGR of 6-8% between and % FDI in electrical machinery industry has facilitated the entry of global majors into the electrical machinery industry in India. There is an opportunity for SMEs to partner with these firms and use their resources and capabilities for various technological trends like HTLS conductors, FACTS devices and others. Transmission of 1200 KV was started through National Test station at Bina (Madhya Pradesh) in May This National Testing station will be monitored for 2 years and if successful will be replicated. Thus, an opportunity for SMEs in UHVAC technology. There is likely to be an estimated investments of INR 2.6 lakh crore in power transmission in 13 th plan according to CEA (Central Electricity Authority). Of this INR 1 lakh crore will come from POWERGRID and rest INR 1.6 lakh crore from states. Thus, large number of projects are likely to come up in next 5 years. 10

12 CHALLENGES FOR SMEs Large players provide complete solutions or turnkey projects thus SMEs face a big challenge in winning projects as generally they have capability in one part of EPC. Buyers are limited and majorly government agencies. Thus, buyer power is high and can frame eligibility criteria for awarding projects which might be difficult for SMEs to fulfill. Deficiency in current transmission infrastructure leading to T&D losses of more than 20% over past 5 years. And focus is insufficient on up gradation of existing transmission lines. There are major issues related to the slow pace of project commissioning and critical resources being under-utilized like land and Right of Way that have slackened the growth in transmission capacity. Insufficient focus on innovation be it in terms of new conductors or transmission tower designs by SMEs is hindering their growth in fast changing times. Poor Operations & Maintenance of existing systems by the existing players. Thus, affecting future prospects for winning the project bids as operations and maintenance is also an important criteria for awarding a contract. 11

13 THE WAY FORWARD Even after facing various challenges, SMEs are able to sustain in the market and could grow manifolds by partnering with firms having R&D capabilities of their own, this can be achieved through various routes. This will help SMEs to compete against larger domestic players for power transmission projects and helping SMEs grow by implementing various strategies and tools has been the objective of Sookshm since inception. Some of the crucial aspects which the transmission industry and SMEs will need to adopt for sustainable growth are as follows: Reducing the concentration of projects with PSUs as PGCIL and other state entities. As of March 16, private sector accounts for only 5.87% of transmission lines. Currently, there is no substitute to transmission lines. And having 315 GW of installed capacity is not compensated by adequate transmission infrastructure. Because of choked transmission infra, power surplus region are not able to supply to power deficit regions. There is huge need for participation of private sector investments or PPP mode for building up adequate infra. Incentivize early commissioning and speedier execution. These norms should be made part of the standard bidding documents. Key areas where technology can be used while implementing projects are: 1. Survey: Carry out transmission line optimization through LiDAR survey (light detection and ranging tech.) 2. Tower design: Use of green tower (least amount of steel), delta configuration for 765kv line, etc. 3. Selection of conductor: Use of high performance conductors (HTLS: high temperature low sag) needs to be taken up to increase power transfer intensity. Up gradation and reconductoring of existing lines can save valuable time, cost, row, and forest cover. This would also mean lesser delays, and faster commissioning at a much lower cost to the nation. 4. Mechanized construction methods: Transmission line erection and line stringing using helicopters. As power sector in India is expanding and need for independent transmission system operators is increasing, stability and power flow will be important. Thus, FACTS (Flexible AC Transmission Systems) will become the focus point such as SVC (Static Var Compensation) and STATCOM (Static Synchronous Compensator) devices for better power quality. FSCs (fixed series compensators) for improving existing lines. STATCOM can be used for weak power generation sources like wind and solar. 12

14 About Sookshm Aiming to Achieve Growth through CREATIVITY & INNOVATION We believe that there is always a better way to manage a business. At SOOKSHM, we are reinventing the way Businesses think, operate and grow. Our vision is to be India s leading advisory in Business Consulting for Indian Business Houses We seek to develop systems to help Businesses work more efficiently, thereby raise themselves to World Class Business Institutions. About Sookshm OUR SERVICES Marketing and growth strategy Operations optimization Organizational Redesigning Technology in Business Aiming to Achieve Growth through CREATIVITY & INNOVATION In the next 5 years, we wish to impact 1000 businesses, hand holding them in their journey towards Business Excellence. 13

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