Mumbai // For BVR Mohan Reddy, the head of a major information technology company based in Hyderabad, electricity is vital to his business, but he finds securing power in India a major challenge.
“When we have power shortfalls, especially in the summer months, the software industry relies on in-house, captive power generation using diesel,” says Mr Reddy, the founder and executive chairman of Cyient. “Not only that diesel power generation is expensive, but also there are pollution challenges. We manage, but certainly this is not an efficient way of running the business.”
India’s new government, led by the prime minister Narendra Modi, is planning to launch a national energy policy and will focus on developing infrastructure in the sector as it strives to revive economic growth. By 2022, every family in India will have access to electricity, according to a speech this month by Pranab Mukherjee, India’s president.
Blackouts are common in many parts of India and more than 300 million people do not have access to electricity, according to the World Bank.
Indians have become accustomed to generous energy subsidies from the government, while theft of electricity is widespread in the country. Officials from the Reliance-owned distribution company BSES Rajdhani last month were beaten after they tried to search for meters that had been tampered with in a village near New Delhi. Private distributors find it challenging to generate profits in such an environment, with annual losses in India’s power sector expected to reach US$27 billion by 2017 in the absence of sweeping reforms, according to the World Bank.
“The aim of the government will be to substantially augment electricity generation capacity through … conventional and non-conventional sources,” Mr Mukherjee said. “It will expand the national solar mission and connect households and industries with gas grids. Reforms in the coal sector will be pursued with urgency for attracting private investment in a transparent manner.” Nuclear power projects would also be a focus for development, he added.
The ruling Bhartiya Janata Party has highlighted that renewable energy sources, including solar, will be important to meeting India’s energy demands.
Mr Reddy is hopeful, saying that the new government “has taken this challenge of power shortage very seriously”.
“The infrastructure requires considerable modernisation. On account of outdated infrastructure, power loss which includes power theft and percentage of transmission loss is very high,” he adds. “The power generated is far lower than the demand. India has to embark on a very aggressive strategy for power generation. Power generation is critical for economic development and requires immediate attention.”
As it boosts its electricity infrastructure, India will need to avoid a repeat of what happened in the 1990s, when foreign companies including EDF and Enron were brought in to build power plants. A number of these companies withdrew from the projects, with the Enron case becoming a high-profile example. A dispute ensued between the state government of Maharashtra and Enron, as the $3bn project became economically unviable amid power theft and high costs. Enron shut down the plant in 2001.
Private investment in India’s energy sector is much needed to improve its efficiency, analysts say.
Coal is the main source of electricity in India, accounting for more than two-thirds of its generation. Despite having the fifth-largest coal reserves in the world, India last year imported $15bn of coal, according to HSBC.
“India needs more power – a lot more, and fast,” says Frederic Neumann, the co-head of Asian economic research at HSBC. “Otherwise its recovery, and all the hopes for a Modi boom, will be scuttled.”
Between 2007 and 2012, India installed 50 gigawatts of new production capacity, below the 78GW originally planned, he says.
“The shortfall can partly be explained by inadequate fuel supply, especially coal. The current plan, running through 2017, envisages 100GW of new capacity. An industrial revival, let alone the goal of establishing India as a manufacturing export power-house, will remain a distant dream without substantially more power supplies.”
Energy related imports fuel the country’s trade deficit.
“Around 37 per cent of India’s energy needs are currently imported,” Mr Neumann says. “With few oil reserves, yet burgeoning demand, this is bound to rise over time. But, to maintain external payments stability, all efforts must be made to contain the rise in energy imports. Here, coal is India’s best bet. Leaving it unused in the ground is not a viable strategy.”
Coal production in India can be boosted through additional infrastructure, such as additional rail tracks to existing mines to allow it to be transported more easily.
Coal India, a public company, produces the vast majority of India’s coal.
“Like other state firms, it needs to raise its game to meet India’s challenge,” Mr Neumann says. “A partial privatisation could be on the agenda as a way to raise urgently needed investment funds but also to strengthen managerial discipline. In addition, coal production rights could be given to private firms in competition with Coal India.”
Others agree that a dependence on government funding is hampering the sector.
“The major infrastructure issue lies in distribution, what with weak distributions network and large parts of India not yet covered by the distribution system,” says Gurudeo Sinha, a senior fellow at The Energy and Resources Institute, based in New Delhi. “Also, the distribution system is owned mostly by government owned companies. Hence, investment in this sector is mostly by the government. The poor financial health of most of the distribution companies is another factor which impacts generation, as distribution companies do not draw power at higher rates even when it is available.”
Urgent changes need to be made to address the problems, analysts say. “If the government creates an environment where fuel is available, land is available and you have environmental clearance procedures in place, private investment will come in generation,” says Ashok Banerjee, the professor of finance at the Indian Institute of Management in Kolkata. “The problem is getting any investment in transmission. The government of India will have to invest a lot of money in building transmission infrastructure because that is lagging.”
Foreign investment has been flowing into hydroelectric power projects in India, with Abu Dhabi National Energy (Taqa) in March agreeing to buy two hydroelectric power plants in the northern state of Himachal Pradesh, adding to a stake it already has in a similar project on the Sorang Khad river, flowing from the Himalayas. Taqa would become the largest private operator of hydroelectric plants in India, once the acquisition is completed, with a 51 per cent stake in a consortium which is investing $616 million in the two plants.
Investment in renewable sources in India is likely to pay off, as the country strives to solve its power problems.
“India has huge renewables capacity in the form of wind, solar, biomass, tidal,” says Mr Sinha. “Although, there has been substantial increase in renewables generation, it is extremely important to fast track the growth of renewables generation in the country as this is essential for energy security.”
In the past, this has been held back.
“The relatively high generation cost from renewables, other than large hydro, difficulty in obtaining government subsidies, and the speed of technological progress have kept uncertainty around renewables high,” the World Energy Council says. “However, on the rural side, in many cases renewables provide the easiest means to deliver energy to the poor.”
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
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How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.