The supply glut. Capacity utilization of generation assets continue to drop even as the Street remains hopeful of a potential closing of the gap on account of (1) improving demand prospects under UDAY, (2) de-commissioning of old and inefficient capacities, and (3) lack of new investment in generation assets by the private sector. We do not share the optimism, noting (1) 87 GW of capacity pipeline already under construction besides the optimistic targets for renewable assets and (2) modest demand growth over the past five years incrementally dragged down by increasing energy efficiency.
Peak demand stood at 159 GW against current installed capacity of 319 GW
India currently has an installed capacity of 319 GW, against peak demand of 159 GW and another 87 GW of capacity already under construction Energy deficit for FY2017 has come off to 0.7% and is no longer representative of a measure for demand-supply gap. Coal-based capacities (192 GW) contribute 79% of India's power demand, with existing coal-based capacities operating at 60% utilization—compared to 77% on average in FY2009. India already has another 71 GW of coal-based capacities under construction that will likely commission over the next 3-5 years, leaving limited scope for improvement in capacity utilization even after factoring 7% CAGR in power demand over the next five years.
Power demand has clocked 5% CAGR over past 10 years, 3% CAGR over past five years
Power demand has grown at a CAGR of 3% over the past five years, which means that supply will continue to outstrip demand and keep capacity utilization in check. State utilities are already sitting on surplus PPAs that are not fully utilized, where the state is already paying the entire fixed cost. States would rather improve utilization from extant PPAs before scouting for new one. We highlight that of the 87 GW of capacities under construction, 55 GW belong to state and central sector and would likely have PPAs already in place. In fact, the reduction in AT&C losses as well as implementation of energy-efficiency measures such as mass-scale distribution of LEDs curtail demand. MoP quoted energy-efficiency measures to reduce energy demand by 3.5% per annum for the next three years.
Subcritical plants aggregate 34 GW in all, renewables will further supplement capacity addition
MoP has identified 34 GW of power plants that are over 25 years old, and consequently have higher fuel consumption and emission parameters. We highlight that of the 34 GW, 22 GW have undergone repair programs that can extend their life, even as the fate of 5 GW remains uncertain. One must acknowledge that these plants are completely depreciated (low capital cost and debt-free), and replacing them with new plants will be an expensive affair—incremental fixed charge could exceed the benefits of lower specific fuel consumption. Renewable capacity addition clocked 11 GW in FY2017 alone, taking the overall installed capacity of renewable assets to 50 GW. While the pace of capacity addition in FY2018 will moderate as several capacities were eyeing the cut-off for accelerated depreciation, the increment renewable capacity addition adds to the supply glut.
Preference for regulated utilities over private sector plays stays
We maintain our preference for regulated utilities such as Power Grid and NTPC that are investing in growth and are at reasonable valuations (10-11X P/E). A revival of distribution utilities, although a much needed reform in the power sector, will benefit private generators only over the medium-to-long term.