In April 2013, Praful Patel, then Union Minister of Heavy Industries and Public Enterprises, came out with a 'Vision 2022 for the Indian Electrical Equipment (EE) industry', targeting production worth $100 billion by 2022. The 10-year plan also estimated that the domestic demand for power generation equipment (boiler, turbine and generator, or BTG) would increase steadily to touch $25-30 billion by that time. The assumption was based on plans to add around 88.5 Gigawatt (GW) and 93 GW during the 12th and the 13th Five-year Plans, respectively, mainly to coal-fired power plants.
By FY2011/12, the Indian EE industry had grown close to Rs 1.20 lakh crore ($25 billion), and the share of the BTG sector was about 25 per cent or $6.5 billion. To tap this opportunity further, as many as five BTG joint ventures (JVs) were also set up in the last decade where Indian corporate houses, including Larsen & Toubro, Bharat Forge, JSW Energy, BGR Energy Systems and Thermax, had invested heavily. But the priorities of the government changed soon.
The emphasis on wind and solar power generation and the decision to discourage new coal-fired thermal projects have landed the BTG sector in serious trouble. By 2016/17, the Indian electrical industry, including the BTG and the transmission and distribution (T&D) segments, dipped to Rs1,54,000 crore, according to data from Indian Electrical and Electronics Manufacturers Association.
Of this, the share of the BTG manufacturers was only 15 per cent or Rs23,100 crore ($3.5 billion). The JVs, too, are sitting on idle capacity due to lack of local orders. In order to survive, most of them now depend on orders from parent companies, JV partners and NTPC.
To put things into perspective, the outlook for coal-fired power plants in India was robust since the 2000s. The amendment to the Electricity Act in 2003 allowed private participation in the sector, and several large corporates set up thermal power plants. Companies such as Tata Power, Adani Power, Reliance Power, JSW, GMR and GVK started readying a chain of projects with a 5-10 year window. Besides, the government wanted to set up over a dozen or so 4,000 megawatt (MW) ultra mega power projects (UMPPs) through a publicprivate partnership. And most of those projects required supercritical technology, which was not available in the country.
Public sector firm Bharat Heavy Electricals (BHEL), India's major power equipment maker and a specialist in subcritical technology at the time, was under constant pressure for failing to meet delivery schedules despite a swelling order book running into billions of dollars.
That was the period when supercritical BTG manufacturing took off as Indian corporates and their joint-venture partners hoped to make good in a fast-surging market. L&T-MHPS Boilers (formerly L&TMHI Boilers) started as a 51:49 JV between Larsen & Toubro and Mitsubishi Hitachi Power Systems (MHPS) of Japan in April 2007 to develop supercritical boilers and pulverisers in India. The JV came up with an installed capacity of 4,000 MW per annum at Hazira in Gujarat. L&T set up another joint venture with MHPS and Mitsubishi Electric Corp. (MELCO) for a steam turbine generator (STG) unit with equipment capacity ranging from 500-1,000 MW.
The company, called L&T-MHPS Turbine Generators (formerly known as L&T-MHI Turbine Generators), has a manufacturing capacity of 5,000 MW per annum. However, orders had steadily declined for the L&T JVs over the past three fiscals.
The approximate order book for the power business amounted to Rs23,000 crore in 2014/15, Rs20,000 crore in 2015/16 and Rs13,000 crore in 2016/17. At the end of the third quarter (October-December) of 2017/18, the order book was worth around Rs10,500 crore. Although the boiler factory is fully utilised at present, the STG unit is running at about 70 per cent of its capacity, and its utilisation is falling.
"Our JV partner has helped us get export orders, and we will need continued support until the market revives in India," says Shailendra Roy, CEO and Managing Director of L&T Power and Whole-time Director of L&T.
According to him, over 25 per cent of boiler pressure parts capacity and roughly 50 per cent of pulveriser capacity are utilised to meet export requirements. For STG, capacity utilisation amounts to just 60 per cent and orders mostly come through JV partners.
The situation is no different for Pune-based Thermax that set up a joint venture in 2010 with Babcock & Wilcox Power Generation Group from the US, for manufacturing large boilers. Thermax Babcock & Wilcox Energy Solutions (TBWES) built a manufacturing unit in Pune for supercritical and subcritical boilers with an annual capacity of 3,000 MW and provisions for expansion up to 5,000 MW.
The JV is pulling down the profits of Thermax, a Rs4,700 crore-plus company. TBWES earned revenues of Rs306 crore in 2016/17 (as against Rs334 crore in the previous year) as it executed orders from Babcock & Wilcox, in the absence of orders from domestic players. During the fiscal, the company had to set aside Rs112 crore for impairment of its investments in TBWES and further paid Rs180 crore for loan repayment.
As a result, Thermax clocked a net loss of Rs17 crore in the fourth quarter of 2016/17. "As policies are not favourable, we are doing the necessary realignment to take the business forward," says M.S. Unnikrishnan, Managing Director and CEO of Thermax.
Bharat Forge's story is that of an exit. In 2009, the Pune-based company formed a JV with French multinational Alstom to manufacture supercritical equipment.
After energy major GE acquired Alstom's global power and grid businesses for 9.7 billion (around $10.6 billion) in 2014, Bharat Forge decided to exit the JV. In November 2016, it announced to divest its 49 per cent stake to Singapore-based GE Pacific for $35 million (around Rs230 crore). The forging major had invested about Rs170 crore in the joint venture. "Our factory in Sanand will have full capacity utilisation next year as 2016 was a good year for GE Power and we bagged a few good orders from NTPC and some state-run projects," says Andrew H. DeLeone, Managing Director of the listed entity GE Power India (formerly Alstom India Ltd). Another joint venture with an annual capacity of 3,000 MW was set up by Japan's Toshiba Group (75 per cent) and Sajjan Jindal's JSW Group (25 per cent) to manufacture supercritical generators and turbines.
It started commercial operations in 2011. According to sources who do not want to be named, the JV had its business up and running due to four-five bulk orders from NTPC, including five 880 MW and two 660 MW turbines and generators, among others. Although Toshiba has plans to make the Chennai manufacturing unit a hub for its global businesses in South-east Asia, West Asia and African countries, the JV's capacity expansion plans have been put on hold for now, sources say. On the other hand, the BGR-Hitachi JV had witnessed major differences between the partners that led to a stalemate. In 2010, BGR Energy Systems had signed two joint-venture agreements with Hitachi of Japan and Hitachi Power Europe GmbH, a Hitachi subsidiary, to set up a boiler and a turbine manufacturing facility in Tamil Nadu.
BGR Energy held 74 per cent stake in the venture. It also bagged a contract worth Rs12,000 crore in 2012 from NTPC to supply supercritical steam turbine generators for Lara Super Thermal Power Project (2x800 MW) and supercritical steam generators (boilers) for Solapur (2x660 MW) and Meja (2x660 MW) projects. But disputes arose when Hitachi merged its thermal power businesses with Mitsubishi Heavy Industries (MHI).
BGR Energy initiated legal proceedings, but in May 2016, it settled its disputes with Hitachi and MHI, paving the way for the execution of orders. BGR has also withdrawn all pending legal proceedings. BGR Boilers supplied supercritical steam generators, clocking an operating income of Rs678.46 crore while profit before tax stood at Rs46.68 crore.
Shailendra Roy, CEO and MD, L&T Power, Whole-time Director, L&T
"Our JV partner has helped us get export orders, and we will need continued support until the market revives in India" Shailendra Roy, CEO and MD, L&T Power, Whole-time Director, L&TBGR Turbines supplied supercritical STG components, made an operating income of Rs129.79 crore and the profit before tax for the year was Rs44 lakh, BGR Energy said on the progress of the joint venture in its annual report for 2016/17. What's Causing the Slide According to a recent report by credit rating agency ICRA, stressed assets in the thermal power space have a total capacity of about 60,000 MW. Out of this, 26,000 MW thermal assets are in trouble due to the absence of long-term power purchase agreements, or PPAs; about 12,000 MW power assets are stranded due to non-availability of domestic gas supply and 22,000 MW plants are struggling due to unviable tariffs in the PPAs and capital cost overrun.
The weak financials of state-owned electricity distribution companies, or discoms, along with subdued demand from the industrial segment, has affected overall demand. A CRISIL Research study released last year says around 21 GW of commissioned private-sector coal-based capacity was under stress due to lack of longterm PPAs or poor/zero offtake. Up to 35 GW power assets are also struggling due to lack of fuel supply agreement, coal linkage, unviable pricing and so on.
"We do not expect discoms of major states such as Maharashtra, Gujarat, Tamil Nadu and Madhya Pradesh to sign fresh long-term PPAs before 2020, based on demand projections in tariff filings," said Prasad Koparkar, Senior Director, CRISIL Research, in the report. In addition, several independent power producers, or IPPs, preferred lowcost Chinese suppliers over their Indian counterparts.
Even BHEL managed to bag bulk orders until 2012/13, but it is now looking to diversify into defence, solar, metro and aerospace for survival. Understandably, domestic equipment manufacturers had sought a level playing field, and by early 2016, the government barred the duty-free import of capital goods for power generation and transmission projects. In May that year, the Central Electricity Authority mandated domestic sourcing of equipment for all central- and state-governmentfunded power projects.
Andrew H. DeLeone MD, GE Power India
"Now capacity addition or modernisation are mainly driven by state utilities; the IPPs are yet to come back to boost demand" Andrew H. DeLeone MD, GE Power IndiaBut by that time, the government had shelved its plans of big capacity additions in the thermal power, space and liberal policies were in place to encourage renewables, especially solar power, which achieved grid parity in many of the recent auctions. Further, the National Electricity Policy does not envisage any new coal-based power plant during 2017-2022.
According to L&T's Shailendra Roy, a sluggish economy has led to subdued power demand in manufacturing and capital goods sectors.
On the other hand, owing to financial stress and poor operational efficiencies, discoms continue to be in trouble and have resorted to power cuts to suppress any incremental demand. Add to that a few more crucial factors such as stranded power projects, limited availability of funds and a change in energy priorities and the slide faced by BTG manufacturers could be easily explained.
"It is quite unfortunate. India has been going through an economic downturn since 2012, and once the momentum is back, there will be demand for power. It takes six-seven years to set up a thermal power plant, and we should anticipate it right now," says Unnikrishnan of Thermax, noting that solar and wind power cannot be viable on a massive scale. But the rise and rise of renewables, especially that of solar power, is a reality as costs are hitting abysmal lows - be it the price of photovoltaic systems, overall project cost or cost per kilowatt hour - and it is another painful kick in the guts.
"Also, India is a signatory of the Paris climate agreement. So, the government has set a target of 175 GW of installed renewable energy capacity by 2022. To achieve this, both central and state utilities are focussing more on renewable capacity installation," says Roy. Andrew DeLeone of GE Power India refuses to give up hope. He thinks the demand is sure to pick up in the medium-to-long term.
"Now capacity addition or modernisation of projects are mainly driven by state utilities; the IPPs are yet to come back to boost the demand." Survival Strategy With domestic orders dwindling, the joint ventures in question are compelled to fall back on export orders from their JV partners and explore opportunities in overseas markets, especially the developing countries. According to Roy of L&T, the best-case scenario at home seems to be the revival of 7-8 GW of coal-based power projects that could translate into business opportunities worth Rs32,000 crore over the next two years.
The JVs are also pursuing air pollution control measures, namely, flue gas desulphurisation systems and selective catalytic reduction units, which can lead to businesses worth Rs5,000 crore. Another focus area is the renewed interest in nuclear power plants (and hence, in the turbine islands, their key components) after the government approved 10 pressurised heavy-water reactors of 700 MW each.
The opportunities here include developing STG islands and supplying components for related civil constructions. There is another silver lining. Utilities in India are expected to replace old and inefficient coal power plants with new and advanced supercritical or ultrasupercritical units, and it will create some long-awaited demand. In fact, the Central Electricity Authority, NTPC and other state utilities may soon retire 19 GW of out-of-date thermal assets and replace them with next-gen facilities.
"However, a lot more needs to be done in the conventional power sector such as revamping or modernising old plants as new technologies are available to make them conform to COP21 protocol," says Sunil Mathur, Managing Director and CEO of Siemens India.