A recent trip to Delhi was a useful opportunity to check in with key portfolio holdings in the power sector, including government-owned generator NTPC and private power producer JSW Energy, as well as on the wider economic implications of the health of India's energy sector.
Powering India's growth
With India on track for world-leading economic growth over the next decade – the IMF forecasts 6-6.5% in the medium-term per year, the fastest of any major economy – one of the essential factors required to enable this growth is a healthy energy sector, to quite literally produce the power needed to support an economy of India's scale and with its elevated levels of growth.
A major policy push of the first two terms of the Modi/BJP administration has been to increase the provision of electricity, country wide – with a goal of providing power to all now nearly met. With over 95% of villages now connected to the grid, as well as the rapid growth in power-hungry factories and offices this has driven a consistent increase in India's demand for energy.
Yet in terms of supply there has been a decade-long lull in investment in new capacity. To understand why requires a return to India's last major investment boom, at the turn of the millennium. During the years 2003-2008, India saw a significant increase in infrastructure investment to address physical capacity shortages constraining the economy – in some ways a similar backdrop to India's current economic cycle. However, several key issues developed during this investment cycle that ultimately led to critical problems for the wider economy, issues that much of Modi's first term spent attempting to address. A huge glut of power projects were constructed during that time, including many gas-fired plants in expectation of large volumes of gas from the recently discovered KG-D6 field in the Bay of Bengal that subsequently disappointed in terms of production. In addition, projects were often financed with cheap loans from banks and put up with no power off-take agreements. When the Global Financial Crisis happened in 2008, many of these projects went bust, leaving banks saddled with huge debts and stranded or unfinished power assets. The State Electricity Boards were also hamstrung with crippling debts that gummed up the entire power supply chain.
Fast forward to the current cycle and, despite the rapid headline economic growth from India in the past decade, the level of investment in the power sector has been flat to decreasing over this time period, only really starting to inflect upwards again the past year or two. While plant load factors (the level of capacity at which power plants operate, and where 80% is typically considered a practical upper limit) hit 79% in 2008, they were on a steady declining path until as recently as 2022, when the post-Covid economic recovery in India kicked into gear and drove demand and therefore power plant utilisation higher again. It is anticipated that load factors will again rise to nearly 80% in the next couple of years despite planned supply additions, thus making expedited investment in new capacity a government priority. An estimated 20% annual increase in expenditure on the power sector is required to meet expected demand. Importantly a number of key reforms undertaken in the past 10 years address the issues arising from the previous investment phase – namely that plants now cannot be built without a guaranteed fuel supply and committed off-take agreement, meaning asset cashflows are highly predictable and precludes the possibility of stranded capacity built without access to fuel or accessible customers.
NTPC
Given the scale of investment required, much of the heavy lifting will come from NTPC, India's largest power generation company, which plans to invest $25 billion over the next decade, moving from 72 gigawatts (GW) last year to 130GW by 2032. Moreover, the majority of this incremental capacity addition will come from renewable energy, aiming for 60GW of green capacity by 2032 as part of India's wider commitment to expand non-fossil fuel power capacity under international climate agreements.
NTPC management made clear that rates of return are already similar between coal-fired and renewable projects, increasing the incentives to shift to renewables. Indeed, in recent months NTPC has moved forward with plans to separately list its green energy subsidiary. Since the new government took office following June's general election, it has hit the ground running with significant announcements for new power capacity and transmission lines, including support for hydro-power, subsidies for India's first offshore wind and promotions of roof-top solar. NTPC has led the way with tenders for these projects, cementing its growth path, and so too for profitability, given that this is a direct function of a fixed return on the company's regulated asset base.
JSW EnergyA meeting with JSW Energy reiterated many of these themes, with management highlighting that 7% growth in India power demand requires at least 35-40 GW annual capacity additions. This means that India must effectively build out the UK's entire power generation capacity every 2-3 years. Operating at a smaller scale than NTPC, and in the private sector, JSW is nonetheless playing an important role in the resolution of India's power shortages – affirming plans to move from 7.3 GW capacity today to more than 2.5 times that by 2030. Further new initiatives include a new green hydrogen plant in Karnataka, online by 2025/26 and battery energy storage plans. In a sector blighted with poor capital allocation in the previous cycle, JSW maintained balance sheet discipline throughout, leaving it well positioned now to benefit from available projects while erstwhile competitors have been forced into bankruptcy.
The ongoing opportunities
India's electrification journey and significant power investment also affords numerous opportunities for other companies in the portfolio, from boilers (Thermax) and turbines (Siemens), to wires and cables (KEI Industries). It is possible that, moving forward, we may see incrementally slower infrastructure spend from the central government, which looks to realign spending plans in favour of rural India, confident that the private sector can now begin to drive infrastructure investment. However, numerous interactions with company management and government officials gave us confidence that the specific sub-sector of power will be ring-fenced and will remain as a crucial spending priority for the government, given its centrality to India delivering its growth potential – which in turn is critical for generating the millions of jobs its young population requires.
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