India Utilities Sector

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1 Asia Pacific/India Equity Research Electric Utilities Research Analysts Amish Shah, CFA Abhishek Bansal India Utilities Sector SECTOR REVIEW The smart (grid) way forward? Figure 1: Smart grid could solve SEBs' finance issue with minimal tariff hikes Tariff hike needed to cash breakeven in FY15 (%) 80% 70% 60% 50% 40% 30% 20% 10% 0% All-India (avg.) UP Rajasthan MP Tamil Nadu AP At existing AT&C losses At 10% AT&C losses Source: Credit Suisse estimates Smart grid, if not tariff hikes, can address SEB issue. SEBs committing to sustainable tariff hikes was expected to resolve their issue of ailing finances. But recent power tariffs cuts by Haryana and Delhi led by a political agenda has dented these hopes. Smart grid could also address the SEB issue, in our view. Smart grid is a digital T&D network comprising: (1) smart meters for procuring data on the power flow, (2) telecom infra to transmit this data to a control centre and (3) software to regulate power flow, on an automated and real-time basis versus based on estimates and manual operations currently. We see gains for all the stakeholders from smart grid implementation. It can provide: (1) reliable and cheaper power supply for consumers, (2) reliable data for demand forecasts for generators, (3) stable loads preventing events such as the July 2012 grid collapse for PGCIL and (4) for SEBs, it can help reduce AT&C losses to <10% (27% currently) resulting in >US$10 bn savings p.a., besides better asset utilisation and reduced equipment failure. As per our analysis, SEBs can break even with just 2% tariff hike (21% currently). Funding and poor state support key near-term challenges. Funding for smart grid (c.us$40 bn) is a key concern. Our analysis suggests that SEBs could achieve a payback in just four years. But front-ended nature of capex deters SEBs to incur these investments. Besides, despite a push from the central government and its obvious benefits, support from the states is not very encouraging. IT and industrial companies would be the key beneficiaries of this capex, when it starts. Given lack of visibility for even such critical reforms, we remain negative on L&T, BHEL, Crompton, Voltas and most IPPs. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Focus tables Figure 2: Key features of a smart grid and its benefits to various stakeholders Existing grid Future smart grid Beneficiary Benefits 17 January 2014 Type Electromechanical Digital SEB Lower AT&C losses, better grid stability, peak load management, renewable integration, better asset utilisation Communication One-way Two-way Generation Centralised Distributed Consumers Increased access to electricity, improved power quality, Presence of sensors Few Throughout reduction in power bills by shifting load to off-peak periods Monitoring, fault detection Manual Automatic Government, Financially sound SEBs, satisfied customers, tariff neutral Fault correction Manual restoration Self-healing Regulators system upgrade and modernisation, reduced emissions Control Limited Pervasive Generators Ability to match supply to demand pattern, better investment Consumers Passive Active planning, completion of projects in planned timelines Source: PGCIL, Credit Suisse Figure 3: Smart grid implementation, if not tariff hikes, can address the SEB issue All-India SEB cash losses in AT&C losses (%) FY15 (Rs bn) 27% (current) 24% 21% 18% 15% 12% 10% Tariff hike (%) 0% (981) (823) (664) (506) (348) (189) (84) Source: PFC data, Credit Suisse estimates 2% (904) (742) (581) (420) (258) (97) 11 8% (673) (502) (331) (160) % (442) (261) (81) % (211) (21) % Figure 4: Companies have already started to prepare to benefit from smart grid opportunity Company Capability Alstom L&T Crompton Greaves ABB India HCL Technologies Started a smart grid facility in Chennai to manufacture a complete range of electro-mechanical relays and numerical relays Manufactures smart meters and remote meter reading for residential and commercial consumers Recently launched facility in Bangalore to provide integrated smart grid solutions Is witnessing orders of the size of Rs1-2 bn for smart grid implementation in India Has developed a lab which assists customers in developing smart grid solutions Source: Company data, Media reports, Credit Suisse Figure 5: Potential beneficiaries of smart grid capex in the long run, when this capex kick-starts Segment Beneficiaries IT/ Communication systems Smart charging/ Electric Vehicle Grid optimisation Smart metering/ Meter Data Management Power generation Demand Response systems GE, Cisco, Siemens, Ericsson, IBM, Capgemini, Accenture, Telvent^, KEMA^, TCS, Infosys, Wipro, Mahindra Satyam, Kalkitech^, HCL Infosystems, HCL Technologies, L&T GM, Tata Motors, Hero Electric, GE, Nissan, Honda ABB, Siemens, Schneider Electric, Alstom, Crompton Greaves, PGCIL Secure Meters^, Landis+Gyr*, Cyan Holdings, e-meter^, L&T, Itron, JnJ Powercom Systems All power generators Ecolibrium Energy^ ^Unlisted. *In 2011, Landis+Gyr was acquired by Toshiba Corporation. Source: Company data, Credit Suisse Figure 6: Capex cycle unlikely to revive near term on poor support from states, remain negative on Industrials/ IPPs Company CS Rating Mkt Cap US$ mn PER (x) P/BV (x) Div. yield (%) RoE (%) EPS growth (%) FY13 FY14E FY15E FY13 FY14E FY15E FY14E FY15E FY13 FY14E FY15E FY14E FY15E L&T U 15, (1) BHEL U 6, (52) (19) Crompton Greaves U 1, Voltas U Adani Power U 1,625 n.a. n.a. n.a n.a. n.a. n.a. n.a. n.a. Lanco Infratech U 290 n.a. n.a. n.a n.a. n.a. n.a. n.a. n.a. Reliance Power U 3, Tata Power U 3, (24) 27 Source: Company data, Credit Suisse estimates India Utilities Sector 2

3 The smart (grid) way forward? Smart grid, if not tariff hikes, can address SEB issue Most SEBs took a tariff hike during CY12/13 for some after a gap of 7-8 years. Also, with SEBs opting for Financial Restructuring Plan (FRP), which mandates SEBs to take tariff hikes, the issue of ailing SEB finances was expected to be resolved. But, recent cut in power tariffs by Haryana and Delhi led by political agenda has dented these hopes. Smart grid could also address the SEB issue, in our view. Power T&D infrastructure in India lacks adequate metering across its value chain. This makes it difficult to assess where in the value chain was power lost on account of technical issues, or stolen. Currently, this is assessed only periodically, mostly manual and based on estimates. India thus aims to set up a smart grid a digitalised power T&D network comprising: (1) smart meters capable of collecting data on the power flow across the value chain (even up to the appliance), (2) telecom infrastructure to transmit this data to a control centre and (3) software to control the power flow and load on a real-time and automated basis. Provides benefits for all stakeholders We see immense potential for the growth of smart grid technologies in India given the benefits they accrue to the stakeholders in the power sector value chain. For consumers, a smart grid would: (1) improve access to electricity (c.78 mn households yet to be electrified), (2) improve quality and reliability of power (less power cuts, stable voltages) curtailing the need to use voltage stabilisers, UPS, invertors, etc., (c.us$1.5 bn spend p.a.) and (3) cut power bills by managing consumption during off-peak hours (when power tariffs are cheaper). PGCIL should achieve stable power loads, preventing events such as the July 2012 grid collapse. Generators would have reliable data for power demand forecasts, allowing them to plan their asset utilisation and future investments. Also, most importantly, it would help achieve the integration of renewable energy-based generation (wind, solar, etc). Most importantly, for SEBs, a smart grid would: (1) help reduce AT&C losses to <10% vs 27% currently, resulting in >US$10 bn savings p.a., and (2) provide savings through better asset utilisation and a reduction in equipment failure. This implies SEBs would be able to reach cash breakeven with just a 2% tariff hike versus the 21% required currently. Sound SEBs would bring in indirect benefits to the entire power sector value chain. Long-term opportunity for IT/ Industrial companies India requires to incur a capex of c.us$40 bn to set up a smart grid. Besides, smart grid implementation is at a nascent stage even globally. We recommend investors to watch out for developments in this space as it could provide huge opportunities for IT and Industrial companies when this capex kickstarts. We note that several companies have already started to prepare for this opportunity by building expertise/factories for smart grid systems. In our view, companies that can offer integrated smart grid solutions (meters, telecom, software, etc) would gain market share; niche Industrial companies could become acquisition targets. Funding and poor state support are key challenges Funding for such large capex is a key concern currently. However, our analysis suggests that considering the benefits only from AT&C loss reduction, SEBs could achieve a payback of this capex in just four years. But the front-ended nature of capex deters SEBs necessitating financial support from the central government. Fast-tracking franchisee distribution should help in faster smart grid implementation, in our view. Importantly, despite a push from the central government and its obvious benefits, the support from states on smart grid initiatives is not very encouraging. Given a lack of visibility for even such critical reforms, we remain negative on L&T, BHEL, Crompton, Voltas and most IPPs. Tariff hikes were expected to address SEB finances but such hopes are fading Smart grid could also address the SEB issue Smart grid can improve access to electricity, power quality and reliability and cut power bills for consumers Smart grid could reduce SEB losses by US$10 bn p.a. by reducing AT&C losses to <10%... allowing SEBs to achieve breakeven with just 2% tariff hike (21% needed currently) Integrated solutions providers to gain market share; niche players could become acquisition targets Smart grid's capex has just four years payback but front-ended capex poses funding challenges Remain negative on Industrials/ most IPPs India Utilities Sector 3

4 Valuation matrix Figure 7: Valuation summary for Indian listed players working in smart grid domain Company Mkt cap (US$ mn) P/E (x) EPS growth (%) P/BV (x) RoE (%) Dividend yield (%) FY13 FY14E FY15E FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E Crompton Greaves 1,228 (209) n.a (1) Alstom T&D India (36) n.a Larsen & Toubro 14, (5) Reliance Infra 1, (25) Siemens 3, (38) Power Grid 8, ABB India 2, Schneider Electric Infrastructure Ltd 297 (64) n.a. n.a. n.a n.a. 7.7 n.a. n.a. (11) n.a. n.a. n.a. n.a. n.a. Alstom India (10) TCS 74, Infosys 34, HCL Technologies 15, Wipro 22, Tech Mahindra 7, HCL Infosystems 105 (8) n.a. n.a. n.a. n.a (4) (1) 4 n.a. n.a. n.a. Source: Company data, the BLOOMBERG PROFESSIONAL service Figure 8: Valuation summary of Industrials and Utilities stocks under our coverage Company CS Rating Mkt Cap US$ mn PER (x) P/BV (x) Div. yield (%) RoE (%) EPS growth (%) FY13 FY14E FY15E FY13 FY14E FY15E FY14E FY15E FY13 FY14E FY15E FY14E FY15E L&T U 15, (1) BHEL U 6, (52) (19) Crompton Greaves U 1, Cummins India N 2, (12) 10 Voltas U Adani Power U 1,625 n.a. n.a. n.a n.a. n.a. n.a. n.a. n.a. JPVL O (39) 27 KSK Energy O (28) 292 Lanco Infratech U 290 n.a. n.a. n.a n.a. n.a. n.a. n.a. n.a. NHPC O 3, (1) 7 NTPC O 17, Reliance Power U 3, Tata Power U 3, (24) 27 Source: Company data, Credit Suisse estimates India Utilities Sector 4

5 Delhi Tamil Nadu West Bengal Jammu & Kashmir Kerala Maharashtra Rajasthan Orissa All India (avg.) Andhra Pradesh Jharkhand Chattisgarh Uttar Pradesh Haryana Tripura Himachal Pradesh Bihar Punjab Goa Karnataka Madhya Pradesh Uttarakhand Assam Gujarat 17 January 2014 Smart grid, if not tariff hikes, can address SEB issue Most SEBs took a tariff hike during CY12/13, with some taking after a gap of 7-8 years. Also, with SEBs opting for Financial Restructuring Plan (FRP), which mandates SEBs to take tariff hikes, the issue of ailing SEB finances was expected to be resolved. But recent power tariffs cuts by Haryana and Delhi led by a political agenda has dented these hopes. Smart grid could also address the SEB issue, in our view. Power T&D infrastructure in India lacks adequate metering across its value chain. This makes it difficult to assess where in the value chain was power lost, on account of technical issues, or stolen. Currently, this is assessed only periodically, mostly manually and based on estimates. India thus aims to set up a smart grid a digitalised power T&D network comprising: (1) smart meters capable of collecting data on the power flow across the value chain (even up to the appliance), (2) telecom infrastructure to transmit this data to a control centre and (3) software to control the power flow and load on a real-time and automated basis. Hope of tariff hike resolving SEB issue fading Tariff hikes were expected to address SEB finances but such hopes fading Smart grid could also address the SEB issue Most SEBs took a tariff hike during CY12/13, with some taking a hike after a gap of 7-8 years. Also, with SEBs opting for Financial Restructuring Plan (FRP), which mandates SEBs to take tariff hikes, the issue of ailing SEB finances was expected to be resolved. However, recent power tariffs cuts by Haryana and Delhi led by a political agenda has dented these hopes. In Delhi, while the state government has decided to cut power tariffs by 50% for residential consumers consuming up to 400 units a month (tariff cut to be funded by state government through subsidy). In Haryana, the state government has withdrawn the tariff increase of ~13% which was to be effective April 2013 onwards for domestic consumers consuming up to 500 units per month. Power tariffs for agricultural consumers have been reduced by 60% for this fiscal year. Figure 9: Most SEBs effected tariff hikes over last months but recent roll-backs concerning 60% Avg. tariff hike over last months 50% 40% 30% 20% 10% 0% Source: Media reports, Credit Suisse India Utilities Sector 5

6 Smart grid has the potential to resolve SEB issue Smart grid could also address the SEB issue, in our view. Power T&D infrastructure in India lacks adequate metering across its value chain. This makes it difficult to assess where in the value chain was power lost on account of technical issues, or stolen. Currently, this is assessed only periodically, mostly manual and based on estimates. India thus aims to set up a smart grid a digitalised power T&D network comprising of smart meters, telecom infrastructure and software systems as depicted in the figure below. Figure 10: Schematic of a smart grid system Source: US GAO Smart grid: A digital automated transmission network Smart grid is a digital modernised power transmission network that uses information technology to gather information about the behaviour of power suppliers and consumers. Using this information, this digital network (on an automated basis) helps improve the efficiency, reliability, economics and sustainability of power production and distribution. For instance, a smart grid is able to monitor the flow of power from the point of generation to consumption (even up to the appliances using this power). Based on power generation and consumption patterns, it can control or curtail the power load on a real-time basis. Increased visibility, predictability and control of power generation vis-à-vis demand provide flexibility to both the power generators and the power consumers. Among other objectives, a smart grid would help in (1) integrating renewable energy-based power generation and (2) reducing aggregated technical and commercial (AT&C) power distribution losses (AT&C losses remained high at 27% as at March 2012). To convert the existing (traditional) power transmission grid into a smart grid, additional layers of automation, communication and IT systems would have to be incorporated. India Utilities Sector 6

7 Smart grid: Layers Figure 11: Existing power transmission grid versus smart grid key features Existing grid Future smart grid Type Electromechanical Digital Communication One-way Two-way Generation Centralised Distributed Presence of sensors Few Throughout Monitoring and fault detection Manual Automatic Fault correction Manual restoration Self-healing Control Limited Pervasive Consumers Passive Active Source: PGCIL, Credit Suisse A smart grid system would be a combination of six different layers. We have summarised the importance of each layer below: Power layer comprises power generation plants across all fuels (including renewable sources). Smart grid plays a limited role at this level since it does not directly contribute to power generation and is limited to integrating different sources of power generation. Communications/IT layer comprises technology and software. Most importantly, it requires an Advanced Metering Infrastructure (AMI), which supports communication between power consuming applications and the transmission grid infrastructure. AMI systems include hardware, software, communications, consumer energy displays and controllers, customer associated systems, Meter Data Management (MDM) software, and supplier business systems. AMI collects, measures and analyses data of energy usage for each appliance consuming power and communicates with other metering devices such as electricity meters, gas meters, heat meters and water meters, either on request or on an automated basis. Smart power meter manufacturers and IT companies are the primary players in this segment. Demand response layer system allows power generators and power consumers to interact on a real-time basis (mostly on an automated basis), i.e. implementation of smart meters and other AMI would help in establishing a two-way communication between the power generators and power consumers. This layer aims at reducing the power consumption during the peak hours of a day and incentivising power consumption during off-peak hours by implementing tariffs based on the time of the day (peak vs. non-peak). Better power demand management helps power consumers by (1) eliminating/reducing the need for back-up power generators (required currently for power cuts during peak time), and (2) cutting electricity bills by diverting a part of the power consumption (of low priority appliances) to off-peak hours when power tariffs are lower. It helps the power generators by (1) relatively consistent power loads which bring in operating efficiencies (2) extending the life of their equipment and (3) better capex planning for capacity adds. Grid optimisation. The smart grid would provide the power transmission grid operators digital control of the grid. This will help improve the transmission grid's reliability (in terms of lower tripping), efficiency (by operating at less volatile power loads) and security (by lowering the risk of grid collapse from overloads). Grid optimisation shall help in reducing AT&C losses of SEBs. India Utilities Sector 7

8 Figure 12: Key components of a smart grid Source: McKinsey & Company report 'The smart grid opportunity for solution providers' Distributed generation and storage. Currently, bulk of power generation in India is centralised and generated from large coal, gas and hydro power projects. While these plants offer greater economies of scale, power has to be transmitted to customers over long distances. Distributed generation focusses on collecting power generated locally from various renewable energy sources such as wind, solar, etc., and integrating it with the national power transmission grid. Besides, the existing power transmission grid has negligible capabilities of storing energy as it is very expensive. However, smart grid technology aims to focus on energy storage as a necessary and viable option. Smart charging and vehicle-to-grid. Smart grid/smart meter implementation would allow the consumer to determine power tariffs during peak and off-peak hours. The smart grid aims to encourage use of plug-in hybrid electric vehicles (PHEVs) which can charge their batteries during the off-peak hour when there is a lot of spare power generation capacity available. However, this would require introduction of PHEVs at an affordable price point to attract volumes and is thus at a nascent stage. India Utilities Sector 8

9 Figure 13: Smart grid ecosystem Source: Moxa Indian government's initiatives towards smart grid Realising the importance of a smart grid, the Ministry of Power constituted the India Smart Grid Forum (ISGF) and India Smart Grid Task Force (ISGTF) in The mandate of both these agencies is to advise the Ministry on appropriate policies and programmes for accelerated development of a smart grid in India. India Smart Grid Forum (ISGF) is a public-private partnership initiative aimed at providing research and inputs to ISGTF; while ISGTF is an inter-ministerial task force, aimed at reviewing the recommendations of ISGF, ensuring awareness about the smart grid among the various stakeholders and coordinating with the various government departments and evolving a roadmap for smart grid implementation. Notably, ISGTF and ISGF's roadmaps shall be drafted in alignment with ongoing programmes such as R-APDRP (Restructured Accelerated Power Development and Reforms Programme), RGGVY (Rajiv Gandhi Grameen Vidyutikaran Yojna) and JNNSM (Jawaharlal Nehru National Solar Mission). This is to ensure that the smart grid complements the existing ongoing initiatives in the power sector. India Utilities Sector 9

10 Figure 14: Information flow and hierarchy diagram of ISGTF and ISGF Ministry of Power India Smart Grid Task Force (ISGTF) India Smart Grid Forum (ISGF) Bureau of India Standards International agencies Industry/ corporates Government entities Academic institutions Research bodies Source: Credit Suisse India Smart Grid Forum (ISGF) The India Smart Grid Forum was launched in May 2010 as a non-profit voluntary consortium of public and private stakeholders, research institutes and utilities/sebs. This forum is open for voluntary memberships from all interested stakeholders. The forum aims at providing research inputs/suggestions to ISGTF on issues relating to (1) products and technology, (2) power demand/supply management/forecasts, (3) policies and regulations relating to tariffs and financing structures, and (d) standards and security for smart grids. The Forum coordinates with global and Indian industrial, academic and research bodies to leverage global experience/standards. The Forum aims at assisting the Ministry of Power and ISGTF in deploying smart grid technologies in an efficient, costeffective, innovative and scalable manner. Under the ISGF, ten working groups have been formed, each focusing on research/inputs relating to specific aspects of a smart grid. A summary of key tasks performed by each group is summarised below. Figure 15: List of ten working groups formed under the ISGF Working group Scope of work WG-1 WG-2 WG-3 WG-4 WG-5 WG-6 WG-7 WG-8 WG-9 WG-10 Advanced transmission systems Advanced distribution systems Communication systems Metering including interoperability standards Consumption and load control (demand response, home automation, appliances, storage, vehicles, etc.) Policy and regulations (incl. tariffs, financing) Architecture and design (standards, interoperability, security) Pilots and business models Renewables and micro-grids Cyber security Source: India Smart Grid portal India Utilities Sector 10

11 Indian Smart Grid Task Force (ISGTF) The ISGTF is an inter-ministerial group, set up in September 2010 by the Ministry of Power to serve as government s focal point for activities related to smart grid and evolve a roadmap for smart grid implementation in India. Main functions of the ISGTF include: Ensuring awareness, co-ordination and integration of the diverse activities related to smart grid technologies, Evolving standards, practices and services for smart grid, R&D, etc. Relationship of smart grid technologies and practices to (a) electric utility regulation, (b) infrastructure development, reliability and security, and (c) other faces of electricity supply, demand, transmission, distribution and policy; Coordinating and integrating other relevant inter-governmental activities; Collaborating on interoperability frame work; Reviewing and validating the recommendations of the Smart Grid Forum. Five working groups have been constituted to focus on various aspects of smart grid as summarised below: Figure 16: Five working groups formed under the ISGTF for smart grid implementation Working group Scope of work WG-1 WG-2 WG-3 WG-4 WG-5 Source: India Smart Grid portal Trials/pilot on new technologies Loss reduction and theft control including data gathering and analytics Access of power to rural areas and reliability and quality of power to urban areas Distributed generation and renewable Physical cyber security, standards and spectrum R-APDRP: Building blocks for smart grid Considering the enormous financial burden faced by the state and central governments due to high AT&C losses, the government launched the Accelerated Power Development Programme (APDP) in Under APDP, central government's assistance was made available to states undertaking distribution reforms in a time-bound manner. In March 2002, APDP was transformed into APDRP (Accelerated Power Development and Reforms Program) by adding urban focus and introducing incentives for SEBs achieving cash loss reductions. AT&C losses under this programme decreased from 38.9% in FY02 to 29.2% in FY08. However, considering that the absolute level of AT&C losses was still high, the government realised that further AT&C loss reductions could be achieved only if reliable and verifiable baseline data was available, which in turn required implementation of IT systems in the transmission and distribution network. In September 2008, APDRP was restructured as R-APDRP (Restructured Accelerated Power Development & Reforms Programme) and an outlay of Rs516 bn was envisaged under three parts Part A, B and C. SEBs participating in R-APDRP are required to achieve the following targets of AT&C loss reductions until they achieve the 15% AT&C loss reduction level: Utilities having AT&C loss >30%: Reduction by 3% per year Utilities having AT&C loss <30%: Reduction by 1.5% per year India Utilities Sector 11

12 Figure 17: Split of the planned outlay under R-APDRP Scheme Objective Planned outlay (Rs bn) R-APDRP (A) Establishment of IT-enabled systems for achieving reliable and verifiable baseline data 100 system in all towns with population >30,000 (2001 census) 1,402 towns identified R-APDRP (B) Strengthening and upgrade of transmission and distribution network 400 R-APDRP (C) Capacity building of utility personnel, development of franchises, pilot projects; funding for 16 smart grid pilot projects falls under this scheme Total 516 Source: R-APDRP notification, Credit Suisse Figure 18: Status on R-APDRP Part A and Part B schemes State R-APDRP (Part A) - IT R-APDRP (Part A) SCADA R-APDRP (Part B) Towns Sanctioned covered cost (Rs bn) Amount disbursed (Rs bn) % disbursed Towns Sanctioned covered cost (Rs bn) Amount disbursed (Rs bn) % disbursed Towns Sanctioned covered cost (Rs bn) Amount disbursed (Rs bn) % disbursed Andhra Pradesh % % % Arunachal Pradesh % Assam % % % Bihar % % % Chandigarh % Chhattisgarh % % % Goa % Gujarat % % % Haryana % % % Himachal Pradesh % % Jammu & Kashmir % % % Jharkhand % % % Karnataka % % Kerala % % % Madhya Pradesh % % % Maharashtra % % % Manipur % % Meghalaya % % Mizoram % % Nagaland % Puducherry % % % Punjab % % % Rajasthan % % % Sikkim % % Tamil Nadu % % % Tripura % % Uttar Pradesh % % % Uttarakhand % % % West Bengal % % % Total 1, % % % Source: R-APDRP data, Credit Suisse Funding mechanism for R-APDRP For Part A projects: The government shall provide 100% of the funds through a loan from the government of India (GoI). The entire loan shall be converted into a grant once the project is implemented and is verified by an independent agency appointed by the Ministry of Power (MoP). No conversion to grant shall be made in case Part A is not completed within three years from the date of sanctioning. For Part B projects: The government shall initially provide up to 25% (90% for special category states) of the funds through a loan from the GoI. Up to 50% (90% for special category states) of the loan shall be converted into a grant in five equal tranches if the India Utilities Sector 12

13 SEB manages to achieve a 15% AT&C loss target in the project area on a sustainable basis for five years and the project is completed within the stipulated timeline. Verification shall be done by an independent agency appointed by the MoP. If the SEB fails to achieve or sustain the 15% AT&C loss target in a particular year, the respective year s tranche of conversion of loan to grant shall be reduced in proportion to the shortfall in achieving the 15% AT&C loss target from the starting AT&C loss figure. Alignment of R-APDRP with smart grid implementation Part A of R-APDRP primarily involves implementation of IT systems to enable capturing of baseline data is under way in 1,402 towns (almost all urban areas covered). As per Shunglu Committee's December 2011 report on financial position of SEBs, these towns alone contribute to ~40% of total energy consumed in India. While R-APDRP (A) implementation is already complete in towns, ~1,000 towns are expected to be completed by CY14-end. The smart grid roadmap has been designed to build on the assets being created under R-APDRP to ensure that R-APDRP's investments do not become prematurely obsolete. Implementation timelines India's plans (Figure 19) towards implementing smart grid and initiatives taken so far to achieve them (Figure 20) are summarised below. Figure 19: Ministry of Power's smart grid roadmap Access and availability of quality power AT&C loss reduction for all SEBs Smart grid rollouts including automation, micro-grids and other improvements Policies and tariffs Green Power and Energy Efficiency Electric Vehicles and Energy Storage During XII Plan (FY13-17) During XIII Plan (FY18-22) During XIV Plan (FY23-27) Electrification of all households by hrs availability of power at principal cities, 22 hrs for all towns and life line supply (8 hrs, including evening peak) to all by hour supply in all urban areas; minimum Stable and quality 24x7 power supply to all 12 hour supply to all consumers (including categories of consumers across the evening peak) by 2022 country Reduction of AT&C losses to <15% Reduction of AT&C losses to <12% Reduction of AT&C losses to <10% Reduction of transmission losses to <4% Reduction of transmission losses to <3.5% Reduction of transmission losses to <3% SG roll out in pilot project cities SG roll out in all urban areas SG rollout nationwide AMI roll out for consumers with load >20kW or as per prioritised target areas of SEBs Nationwide AMI roll out for customers with 3-phase connections Nationwide AMI roll out for all customers Deployment of Wide Area Monitoring Systems (WAMS) Deployment of WAMS at all substations and grid connected generation units Deployment of WAMS at all substations and grid connected generation units Development of micro grids in 1,000 villages/industrial parks/commercial hubs In 10,000 villages/industrial parks/commercial hubs In 20,000 villages/industrial parks/commercial hubs Enablement of 'Prosumers' (producing consumers) in select areas In metros and major urban areas Active participation of 'producing consumers' Gas insulated EHV/HV and automated distribution substations in all metros by 2017 In all state capitals and principal cities by 2022 Development of 5 smart cities 25 smart cities 100 smart cities Implementation of dynamic tariffs Open access in metros, select urban areas Open access to all consumers Mandatory Demand Response programs for select categories of consumers Tariff mechanism for roof top solar PVs, Net metering Mandatory Demand Response programs for larger sections of consumers Renewable integration of 30 GW 80 GW 130 GW Energy Efficiency Programs for lighting in metros and state capitals; initiation of Dynamic Energy Efficiency Programs Energy Efficiency Programs in all urban areas; Dynamic Energy Efficiency Programs in all urban areas Nationwide Setting up of Renewable Energy Monitoring Centres at 5 RLDCs for better forecasting, scheduling and dispatch of renewable energy Development of EV (Electric Vehicle) and smart EV charging stations in all urban areas and grid synergy plan EV charging stations in urban areas and along selected highways Introduction of battery parks and other Energy Storage Systems on trial basis Source: Smart Grid Roadmap, Credit Suisse Large roll outs of Energy Storage Systems along all state and national highways EV charging stations in all urban areas and strategic locations on highways India Utilities Sector 13

14 Figure 20: Initiatives planned for successful implementation of smart grid During XII Plan (FY13-17) First set of technical standards after completion of pilots Finalization of frameworks for cyber security assessment, audit and certification of SEBs by 2013 Standards for Electric Vehicles and their charging infrastructure Cost-Benefit analysis of smart grid projects with inputs from the pilots Development of performance standards for smart grid development in India by 2014 Development of indigenous low cost smart meter by 2014 Augmentation of control centres and data centres for deployment of smart grids Strengthening of optical fibre communication systems along and for transmission lines and substations 1200 kv UHV AC testing and simulation studies Training & capacity building 10% of utilities' technical personnel to be trained in smart grid solutions Planning for smart grid synergies with other activities such as multi-utility meter, automation, security, and monitoring services, traffic management. Establishment of Smart Grid Test bed by 2014 and Smart Grid Knowledge Centre by 2015 During XIII Plan (FY18-22) Development of standards for smart infrastructure (SEZ, buildings, roads/bridges, parking lots, malls) Strengthening of R&D and training/ capacity building. 25% of utilities' technical personnel to be trained in smart grid During XIV Plan (FY23-27) Continuous R&D, training and capacity building Source: Smart Grid Roadmap, Credit Suisse 14 smart grid pilot projects under way The Ministry of Power, in consultation with the ISGTF, has approved 14 smart grid pilot projects to be implemented in India. These projects shall receive 50% of the capex funding from the central government under the R-APDRP (Part-C), and the balance 50% would be spent by the respective SEBs in which the pilot projects are being implemented. Puducherry smart grid pilot project a case study Among the 14 pilot projects, Puducherry, which covers over 87,000 consumers, is the largest and being implemented by the PGCIL in coordination with the Puducherry Electricity Department. Total consumption of these customers is about 370 mn kwh. About 79% of these 87,000 customers belong to the residential category. The project cost is expected to be about Rs461 mn half of it would be funded by the Ministry of Power under the RAPDRP (Part-C). While the pilot test is yet to commence, the first phase is aimed at testing the capabilities of smart meters. About 1,400 smart meters were installed for residential consumers. Data from these meters could be fed on a real-time basis into a central control room. In October 2013, after about a year of trial, the Puducherry Electricity Department and Power Grid Corporation of India deemed the first phase a success. Successful bidder to be selected on the basis of a tendering process would now be responsible to roll-out the pilot test for all the 87,000 customers. Tendering in Gujarat under way, other states to follow Our interactions with industry experts suggest that UGVCL, Gujarat's smart grid pilot project, is at the most advanced stage of tendering. Six consortiums have already submitted their bids and the project is likely to be awarded shortly. Karnataka and Maharashtra, too, are likely to witness tenders being floated soon likely over the next three months. Figure 21: List of consortiums that have submitted bids for Gujarat (UGVCL) pilot project 1 Infosys and Crompton 2 Wipro, Alstom and JnJ Power 3 L&T and L&T Infotech 4 Reliance Infra and Accenture 5 Corinex Communications, Genus Power Infrastructures, Neo Silicon 6 RC Meters Source: Credit Suisse India Utilities Sector 14

15 Figure 22: Smart meter installed in Puducherry (on a prepilot test basis) Figure 23: Smart grid instrument installed alongside a transformer (on a pre-pilot test basis) Source: PGCIL Source: PGCIL India Utilities Sector 15

16 India Utilities Sector 16 Figure 24: Summary of 14 smart grid pilot projects Utility Area proposed Initial consumer base Puducherry Division 1, Puducherry TSECL, Tripura Electrical division-1, Agartala Project cost (Rs mn) Project timeline Proposed technology 87, months Common Meter Data Management System analyses data from different smart meters Developing model for 'time of use' (TOU) tariff and net metering 46, days Implementing Automated Metering Infrastructure (AMI) to achieve Peak Load Management (PLM) UGVCL, Gujarat Naroda/ Deesa 39, months Introduction of TOU tariff with approvals from GERC Renewable energy integration through proper and accurate load forecast by real time monitoring of substations, feeders and RES generation UHBVN, Haryana MSEDCL, Maharashtra Panipat city subdivision 30, months Implementing Automated Metering Infrastructure (AMI) to achieve Peak Load Management (PLM) Baramati, Pune 25, months Introduction of communication technologies like GPRS/CDMA/RF in metering environment Motorization of all feeder breakers and Ring Main Units KSEB, Kerala - 25, Not stated Implementing Automated Metering Infrastructure (AMI) Introducing incremental tariff for peak hours through ToD tariff CESC, Mysore, Karnataka APDCL, Assam APCPDCL, Andhra Pradesh PSPCL, Punjab WBSEDCL, West Bengal Mysore additional city area division Guwahati project area Jeedimetla industrial area Mall Mandi city subdivision, Amritsar 21, months from date of award to technology partner Introduction of real-time pricing signal Implementation of Fault Location Isolation and System Restoration (FLISR) at feeders Integration of distributed energy sources 15, months Integration of solar farm into the distribution network R&D on load forecasting based on weather, social events Development of filters for reducing power distortion and integrating it into the smart meters Development of messaging systems (for display in house and on mobile) for power consumption 11, months Implementing Automated Metering Infrastructure (AMI) to achieve Peak Load Management (PLM) and Power Quality and Outage Management 9, months Implementing Automated Metering Infrastructure (AMI) to achieve Peak Load Management (PLM) Siliguri, Darjeeling 4, year Implementing Automated Metering Infrastructure (AMI) to achieve Peak Load Management (PLM) JVVNL, Rajasthan Area in Jaipur 2, months Implementing Automated Metering Infrastructure (AMI) Integration of renewable energy sources Implementation of Data acquisition, Data management systems, net metering R&D for evolving a model of TOU tariff incentives HPSEB, Himachal Pradesh CSPDCL, Chhattisgarh Area under Electrical division, Nahan Not stated Installing high end power quality meters for HT consumers for capturing power quality data remotely Siltara, Chhattisgarh years from date of award of contract Source: India Smart Grid portal, Credit Suisse Implementing Automated Metering Infrastructure (AMI) to achieve Peak Load Management (PLM) Benefits envisaged Reduction in distribution losses Reduction in cost of billing Increase in revenue collection efficiency Reduction in distribution losses Reduction in peak load consumption and cost of billing Reduction in AT&C losses Saving in peak power purchase cost by reducing peak load Reduction in transformer failures and number of outages Reduction in cost of meter reading and payment collection Reduction in AT&C Losses Reduction in peak Load consumption and cost of billing Reduction in AT&C losses Reduction in field staff and meter reading cost Improvement in reliability parameters Reduction in AT&C losses Savings on employee and travel cost for meter reading Reduction in AT&C losses Load distribution during peak hours Reduction in transformer failure and unforeseen outages Reduction in meter reading cost Increased available energy during peak time Reduction in AT&C losses Reduction in interest payments due to deferred capital investment in sub-transmission networks Improved management of power procurement options UI using short term load forecasts Reduced AT&C loss Reduced purchase of high cost power at peak hours Reduced AT&C losses Reduced peak load consumption and cost of billing Reduced AT&C losses Reduced AT&C losses Reduced peak load consumption Reduced line outages and distribution transformer failures Increased energy sales due to reduced failures/increased availability Shifting peak load Reduction in outages Reducing distribution T&D losses Reducing peak load consumption through shifting of peak load demand to a non-peak time Reducing cost of billing

17 Provides benefits for all stakeholders We see immense potential for the growth of smart grid technologies in India given the benefits they accrue to the stakeholders in the power sector value chain. For consumers, a smart grid would (1) improve access to electricity (c.78 mn households yet to be electrified), (2) improve quality and reliability of power (less power cuts, stable voltages) curtailing the need to use voltage stabilisers, UPS, invertors, etc., (c.us$1.5 bn spend p.a.) and (3) cut power bills by managing consumption during off-peak hours (when power tariffs are cheaper). PGCIL should achieve stable power loads, preventing events such as the July 2012 grid collapse. Generators would have reliable data for power demand forecasts, allowing them to plan their asset utilisation and future investments. Also, most importantly, it would help achieve the integration of renewable energy-based generation (wind, solar, etc). Most importantly, for SEBs, a smart grid would (1) help reduce AT&C losses to <10% vs. 27% currently, resulting in >US$10 bn savings p.a., and (b) provide savings through better asset utilisation and a reduction in equipment failure. This implies SEBs would be able to reach cash breakeven with just a 2% tariff hike versus the 21% required currently. Sound SEBs would bring in indirect benefits to the entire power sector value chain. Smart grid can improve access to electricity, power quality & reliability and cut power bills for consumers Smart grid could reduce SEB losses by US$10 bn p.a. by reducing AT&C losses to <10%... allowing SEBs to achieve breakeven with just 2% tariff hike (21% needed currently) Figure 25: Benefits of smart grid for various stakeholders Distribution companies Consumers Government, Regulators Generation companies Reduction in AT&C losses Increased grid stability Peak load management Renewable integration Self-healing grid Reduced capital costs Reduction in power purchase cost Increased access to electricity Improved quality and reliability of power Prosumer (producer and consumer) enablement Increased choices - access to green power User friendly and transparent interface with utilities Financially sound distribution companies Satisfied customers Tariff neutral system upgrade and modernisation Reduction in emissions Better control over supply based on demand patterns Better investment planning Completion of projects in planned timelines Ability to better schedule plant shutdowns Better asset utilisation Cut in power bills by shifting load from peak to off-peak period Source: PGCIL, Credit Suisse AT&C losses continue to remain high in most states As per PFC's latest available data, AT&C losses, at an all-india level, stood at a high of 27% during FY12. Only two states, Himachal Pradesh and Kerala, had AT&C losses of less than 15% and key states such as Uttar Pradesh, Madhya Pradesh, Bihar, Rajasthan, Haryana and West Bengal had AT&C losses in excess of 25%. India Utilities Sector 17

18 Figure 26: Only two states currently have AT&C losses of less than 15% AT&C losses (%) FY10 FY11 FY12 Jammu & Kashmir Arunachal Pradesh Bihar Sikkim Uttar Pradesh Meghalaya Manipur Orissa Jharkhand Madhya Pradesh Tripura West Bengal Uttarakhand Mizoram Chhattisgarh Assam Haryana Rajasthan Karnataka Nagaland Maharashtra Punjab Tamil Nadu Gujarat Andhra Pradesh Goa Himachal Pradesh Kerala All-India (avg.) Source: PFC data Smart grid can cut tariff hike need from 21% to 8% Our sensitivity analysis suggests that at the current (27%) level of AT&C losses, SEBs shall be required to hike power tariffs by an average 21% to wipe off cash losses in FY15. On the other hand, if AT&C losses were to go down to the 15% level post smart grid implementation, SEBs shall require only an 8% average power tariff hike to cash breakeven and just 2% tariff hike in case AT&C losses are reduced to 2%. Figure 27: Sensitivity of all-india SEB losses to reductions in AT&C losses (upon smart grid implementation) is high All-India cash losses in FY15 AT&C losses (%) (Rs bn) 27% (current) 24% 21% 18% 15% 12% 10% Tariff hike (%) 0% (981) (823) (664) (506) (348) (189) (84) Source: PFC data, Credit Suisse estimates 2% (904) (742) (581) (420) (258) (97) 11 5% (788) (622) (456) (290) (124) % (673) (502) (331) (160) % (557) (382) (206) (30) % (442) (261) (81) % (326) (141) % (211) (21) % (95) % India Utilities Sector 18

19 Further, our analysis for key loss-making states suggests that tariff hike needs can be substantially curtailed if AT&C losses are brought down. While these states shall require an average 43% power tariff hike to offset their existing cash losses, the same can be achieved by only 16% average tariff hike if they manage to bring down AT&C losses to 10% through smart grid implementation. Thus, implementation of smart grid in the Indian context where AT&C losses are substantially high could result in significant savings (all- India cash losses stood at US$14.7 bn in FY12). Figure 28: Tariff hike needs would reduce substantially if AT&C losses are curtailed 80% Tariff hike needed to cash breakeven in FY15 (%) 70% 60% 50% 40% 30% 20% 10% 0% All-India (avg.) UP Rajasthan MP Tamil Nadu AP At existing AT&C losses At 10% AT&C losses Source: PFC data, Credit Suisse estimates Renewable integration with smart grid Potential of renewable-based generation is high India has 28 GW of renewable sources of installed power generation capacity, mostly comprising wind (over 19 GW) and solar (about 1.7 GW). Biomass, small hydro (less than 25 MW), urban and industrial waste-based power projects contribute the rest of renewable capacity. Renewable energy sources contribute to about 12% of total installed power capacity in India (though relatively small since these projects operate at low utilisation). Given the government's thrust towards increasing renewable capacities and thresholds issued to power distributors for procuring a minimum amount of their power supply from renewable sources, the share of renewables is likely to increase going forward. As per the Ministry of New and Renewable Energy (MNRE), India is expected to add 30 GW of renewable capacity during the XII Plan, and another 30.5 GW during the XIII Plan. Capacity additions are likely to be driven predominantly by solar and wind. Figure 29: Split of planned renewable capacity additions (MW) Installed capacity Planned addition Mar-12 Mar-13 XII Plan (FY12-17) XIII Plan (FY17-22) Wind 17,352 19,051 15,000 11,000 Solar 941 1,686 10,000 16,000 Small Hydro 3,395 3,632 2,100 1,500 Bio-power 3,225 3,697 2,900 2,000 Total renewable 24,913 28,066 30,000 30,500 Source: MNRE, CEA data India Utilities Sector 19

20 Overall, this is likely to result in the share of renewable capacity increasing from 12% currently to 19% by the end of XIII Plan based on government's capacity addition estimates. Figure 30: Planned renewable capacity addition Figure 31: Share of renewable capacity to jump to 19% th Plan 10th Plan 11th Plan 12th Plan (E) 13th Plan (E) (from 12% currently) over the next decade th Plan 10th Plan 11th Plan 12th Plan (E) 13th Plan (E) 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Installed renewable capacity (GW) Total installed capacity (GW) Share of renewable (%) - RHS Source: MNRE, Planning Commission, CEA data Source: MNRE, Planning Commission, CEA data Renewable investments likely to witness a 29% CAGR in the XII Plan led by the private sector The Planning Commission's Five Year Plan estimates suggest that investment in the creation of renewable capacity is likely to witness a 29% CAGR during the XII Plan. The share of private sector is expected to remain high at 88% as witnessed in the XI Plan. Figure 32: Planned investment in renewable capacity addition (Rs bn) XI Plan (actual) FY13 FY14 FY15 FY16 FY17 XII Plan (expected) XII Plan CAGR Renewable ,076 3,186 29% Centre % States % Private ,802 29% Share of private (%) 88% 86% 87% 88% 88% 89% 88% Source: Planning Commission data, Credit Suisse Generation from renewable sources is concentrated; smart grid has the potential of integrating renewable-based generation One of the key objectives of the smart grid is to reduce volatility in power load to provide stability and reliability to the transmission grid. However, power generated from the renewable energy sources such as wind, solar, small hydro projects and bio-mass is unpredictable as it depends on climatic conditions such as wind patterns and sunshine which results in high fluctuations in power generated from these sources during the day as well as based on seasons. Besides, as explained above, the smart grid focusses on increasing distributed power generation and its storage. However, most of the wind power potential in India is concentrated in five states in the western and southern parts (please refer to the table below). Just three states Gujarat, Tamil Nadu and Rajasthan constitute about 70% of the wind and about 90% of solar-based generating capacity. India Utilities Sector 20

21 Figure 33: Renewable capacity is concentrated in five states (Current installed capacity, MW) Conventional Renewable Total Renewable as % of total installed Tamil Nadu 11,974 8,062 20,036 40% Karnataka 10,247 4,110 14,357 29% Rajasthan 9,588 3,366 12,954 26% Gujarat 18,479 4,058 22,537 18% Maharashtra 27,137 4,669 31,806 15% Total 77,425 24, ,690 24% Source: Ministry of Power, Credit Suisse Thus, integrating potential generation from renewable sources with the transmission grid requires careful planning and coordination. Given that the smart grid technology provides better communication between the power generators and the power consumers, it is possible to manage fluctuating power loads from renewable energy sources. Hence, integrating renewable power generation with the power transmission and distribution system is one of the key objectives of the smart grid. Regulatory changes implemented for easier integration of renewables into the grid As discussed above, one of the key concerns for renewable sources of generation is the variation in generation from these projects since they depend on climatic conditions. This has resulted in most renewable power generators providing no budget of planned generation from their projects during a day (mandatory for conventional sources of power generation). The lack of forecasts on power supplies from renewable sources makes the task of grid management difficult. In order to address this anomaly, the CERC has implemented the following regulations effective from January 2012: Wind The wind power generators shall be responsible for forecasting their generation up to an accuracy of 70%. Therefore, if the actual generation versus forecast is beyond the +/-30% range, the wind generator would have to bear the Unscheduled Interchange (UI) charges. If the actual generation is within the permissible range of +/-30%, the UI charges would be borne by the host state (state in which the wind project is implemented). The UI charges being borne by the host state would then be shared by all the states in the ratio of their peak demands during the previous month (of UI charges being implemented) in the form of a Renewable Regulatory Charge (RRC). Further, w.e.f. July 2013, CERC has directed that all wind projects with a capacity of at least 10 MW be required to forecast their generation for the next day in 15-minute blocks. Solar In the case of solar generation, the operator gives the schedule based on the availability of the generator, weather forecast, solar insolation, season and normal solar generation curve and shall be vetted by the RLDC in which the operator is located. If the RLDC is of the opinion that the schedule is unrealistic, it may ask for modifications. However, in the case of solar, no UI charge shall be payable by the solar generator. The host state shall bear the UI charges for any deviation in the generation schedule. However, similar to wind projects, such a UI charge borne by the host state shall be shared by all the states in the ratio of their peak demands during the previous month, in the form of a RRC. India Utilities Sector 21

22 Status on standards/regulations for integration of renewables into the grid Technical standards for connectivity of renewable sources to the high voltage grid and distributed generation sources (including roof-top solar power) to the low voltage grid are expected to be issued soon by the CEA. Regulations for technical standards for connectivity of renewable sources are in the final stage of being formulated. A taskforce has been formed by the Ministry of Power (headed by the Chairman of CEA) for dealing with issues with respect to the integration of renewable sources to the grid. A report by this taskforce is being finalised. Regulations relating to the operational standards for renewable sources have to be formulated by the CEA. This is expected to be completed by end-cy14. Figure 34: Integration of renewable energy sources with grid one of the key aspects of a smart grid ecosystem Source: IEEE National Electric Mobility Mission Plan: 6 mn electric vehicles by 2020E India recently launched a National Electric Mobility Mission Plan, which has a target of rolling out six million electric vehicles (four million two-wheelers and two million fourwheelers) by 2020 (hence is still at the nascent stage). For the efficient rollout of the EV programme, power distribution infrastructure upgrades and smarter systems are required which will control/limit simultaneous charging of hundreds of EVs from the same feeder. India Utilities Sector 22