Updated: Sep 30, 2020
As the world shifts toward renewable energy sources, south Asia’s dominant economy expects to reduce its dependency on coal-based power plants. But it will still need to rely on coal consumption to meet its growing electricity needs. Therein lies opportunity — but not without certain risks.
India’s strong GDP growth over the past decade placed it firmly among the world’s top 10 largest economies. Even with the disruption caused by the COVID-19 lockdown, various sectors in the country remain highly attractive for investment.
One such sector is energy. India’s economic boom quite naturally spurred a greater demand for electricity. Between 2011 and February 2020, the country went on a building spree, increasing its total installed capacity for generating electricity at an annual rate of 9 percent.
Today, India is the third-largest producer and consumer of electricity on the planet, with most of the demand (about 55 percent) met by coal-based power plants. That figure is expected to fall to just over 30 percent by 2030, however, as more renewable energy sources come online.
In the meantime, the nation plans to retire many of its older plants. That leaves India’s energy sector in an unusual spot: To keep up with rising demand in the next 10 years, it will need more coal-based capacity (100 gigawatts) as the transition to renewables continues. That means that coal-based generation will remain an integral part of the Indian energy landscape.
It also means new opportunities for investment in the power sector as the construction of new, more energy-efficient plants, proceeds. However, investors must also be aware of risks involved in the power generation business when evaluating such investments.
A Complex Process with Potential Rewards
Investing in power generation in India can be rewarding but strategic planning and depth of expertise is vital to success. Significant investment risk exists for two main reasons: (1) the challenge of valuing power generation assets, and (2) the effects of heavy government regulations and actions.
Power generation projects are complex undertakings that require substantial time and effort to bring them into production. The process invariably begins with a substantial capital investment in equipment and infrastructure before commercial operations can begin.
The construction process can be impacted by delays stemming from land acquisition and obtaining environmental clearances, among other issues. Additionally, projects may be prone to volatile commodity price cycles and changes in supply and demand dynamics.
As in many other countries, the power sector in India is heavily regulated. Local, on-the-ground knowledge of state and federal laws as well as pending reforms and the players and regulatory agencies, is a must.
There are other factors to consider as well, and issues to overcome, but with an understanding of the overall dynamics of the power sector and the right expertise, investing in a country building its future now is well worth considering.
The ability to value such assets is critical to both investors and states, whether for the purposes of analyzing damage (that may arise from claims being pursued by domestic or foreign investors or for estimating operational losses); ascertaining the value of a power project or company in a transaction; demonstrating feasibility; or preparing capital budgets.
In any case, a valuation approach requires a detailed review of available market data. Performing comparable transaction analyses and constructing an income-based model (whenever sufficiently reliable information exists to prepare one) are essential next steps.
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For in-depth insights on valuing coal-based power plants in India and the associated investment risks, read the article "How and Why to Value Coal-Based Power plants in 2020" on FTIConsulting.com.
For further information, please contact:
Montek Mayal, Senior Managing Director, FTI Consulting