Opportunities in the Indian Power Sector for Foreign Players

Source: India Briefing

The Indian power sector presents opportunities for foreign investors due to increased industrial consumption and a renewable push for electricity generation. India allows 100% FDI into the sector and has plans to monetize assets in the power transmission and power generation sectors. The Electricity Amendment Bill, 2020 if passed, will allow for new market entrants, favoring private sector players, and increasing the scope of green energy. The government is keen to reform the Indian power sector by increasing privatization, inviting technology transfers through greater foreign investment, and reducing the extent of distribution and transmission losses.

The evolution of the Indian power sector, a core pillar of infrastructure, has been the key driver of India’s socio-economic growth. India’s diverse power sector depends on conventional sources like coal, natural gas, and oil to hydro, nuclear energy, wind, solar, and bio-waste etc. The country is both a leader in global energy production and consumption, next only to China and the US.

In recent times, there has been a visible increase in the deployment of clean renewables and grid-connected distributed generation. Given the expanding demand due to rapid industrialization and urbanization, the Indian power sector presents huge opportunities to global investors. It is forecast that the country’s electricity demand will surge at a compound annual growth rate (CAGR) of seven percent to reach 1894.70 Terawatt-hour (TWh) by FY 2022. At the same time, current annual demand outstrips supply by 7.5 percent, implying the need for more capacity installation.

The power sector was temporarily hit due to market disruptions caused by the Covid-19 pandemic, but is on its way to a swift recovery, led by a slew of robust measures – such as the of privatization of electricity distribution companies (discoms) in the Union Territories, the special liquidity infusion of INR 900 billion (US$12.16 billion) into distribution utilities, and the increased focus on consumer rights.

Outlook for the Indian power sector for 2022 looks promising propelled by improved investor sentiment shaped by developments like the implementation of the Production Linked Incentive (PLI) Scheme for solar photovoltaic modules and gradual replacement of coal by other renewable energy sources. The Electricity Amendment Bill 2020, which will delicense power distribution and open the sector to new players, is currently under consideration by industry experts and bureaucratic bodies. A key push of the bill is obligating discoms to buy a certain percentage of electricity from renewable energy sources. Opposition to the bill raises concerns of national regulators overruling state regulators and fears of a concentration of ‘cherry-picked’ private players.

Opportunities for foreign investment in India’s power sector

India’s electricity consumption patterns are indicative of surging demand, presenting opportunities for foreign investors. The industrial sector accounted for 42 percent of total energy consumption in FY 2019. The sector is projected to attract investment worth INR 9.5 trillion (US$135.37 billion) between FY 2019 to FY 2023. In the last two decades, the power sector in India has attracted foreign direct investment (FDI) worth US$15.36 billion, accelerated by the liberalized FDI policy allowing 100 percent on the automatic route.