Is the National Electricity Plan really a fresh announcement coming in or is this something that was budgeted for and talked about already and you guys were factoring it in the capex lined up for the coming years?
Sabyasachi Majumdar: The power demand has been fairly buoyant after the recovery from COVID and it has been growing at a high single digit. Basically, it can be considered a continuation of the current trend. Right now, peak demand is somewhere around 250 gigawatt and the government expects it to go up to about 458 gigawatt up to 2032, which basically represents CAGR of about 7% to 8% per annum, which is more or less in line with what we have been seeing in the past. So, it is pretty much based on that.
But obviously, the electricity plan, including the transmission capacities, which have to go into it, have to be updated from time to time. Broadly, it is consistent with the demand growth that we are seeing and that will require as per the government estimate that the total GVA transformation capacity will go up from about 1250 to 2340 and the total inter-regional transfer will go up from 119 gigawatt to 168 gigawatt and that would require a capex of around Rs 9 lakh crore which is fairly consistent with the kind of demand growth which is likely to take place.
Which sectors do you think would stand to benefit the most because there is that whole demand-supply eco chain and a very large one at that.
Sabyasachi Majumdar: One of the beneficiaries would be the transmission companies themselves. It means that there are a lot of projects for them to take up. But apart from that, the beneficiaries will be the suppliers to the transmission network, which will basically be the equipment manufacturers, the people who make the lines, conductors, cables, transformation equipment, switchyards, switchgears, all of those, plus the EPC contractors who are going to string up all these lines and set up all these capacities. So, it will have a broad-based impact across the large segment of the electrical engineering industry.
Do you see the bulk go by transmission only or do you believe even hydrogen, storage, etc will get a push?
Sabyasachi Majumdar: The transmission demand that is being projected really depends upon what is going to be the underlying power generation itself. There is an organic demand coming from this high single-digit growth that we are seeing from the power sector, which of course in turn will depend upon what is the overall GDP growth. So, overall GDP growth will be growing the basic demand from the power sector. But apart from that, the two discontinuous impacts on the power consumption will be coming from the green hydrogen segment as well as the electric vehicle segment.
So, to the extent that green hydrogen picks up, the government has a certain target in mind for green hydrogen as a part of the total hydrogen. There is a lot of green hydrogen demand which is likely to come from developed countries like the US, Europe, Japan, Korea, etc. Of course, right now, while large volumes have been talked about green hydrogen, but at the same time as of now there are not that many large contracts which have been signed. So, from the green hydrogen perspective, it will really depend upon how much actual long-term demand contracts are signed with the various RE players who are looking to put up large green hydrogen volumes, that of course because the amount of electricity which will go into green hydrogen is immense. For every 1 kg of green hydrogen, it requires 50 units of power. So, if we are looking at millions of tonnes of green hydrogen, assuming that demand materializes, we have to consider how much additional renewable energy capacities will have to be set up and considering the fact that renewable energy capacities are of reasonably modest PLF, so green hydrogen and electric vehicles will produce the additional incremental demand, while the regular demand growth will come from the conventional power segment.What you are saying is that it is feasible, because this is a big opportunity. Do you think we will be able to incur that capacity addition? It is not going to be a challenge?
Sabyasachi Majumdar: I am not saying that capacity addition is not going to be a challenge, but it is something that we can meet. If we are looking at Rs 9 lakh crore of investment, that will require about Rs 7 lakh crore of debt and about Rs 2 lakh crore of equity and given the kind of funds which are available, our own domestic rate, it is not that the funding is going to be a challenge because apart from that 9 lakh crore of funding which will go into the transmission, the money will also have to be made available for the generation itself.
For instance, we are looking at about Rs 19 lakh crore. CARE is looking at about Rs 19 lakh crore investment over the next seven-eight years for renewable energy and storage alone, plus if you add about 80,000 megawatts which is planned for thermal, that is another about Rs 8 lakh crore. So, all put together we are looking at anywhere between Rs 35 and 45 lakh crore. Having said that, given the kind of equity available domestically, as well as if the power sector is run fundamentally in an economic manner, the national funds would also be available. So, it will be challenging but doable.
What is your take about this government’s view of divesting stake in some of these renewables, whether it is the Solar Energy Corporation of India (SECI), whether it is ONGC, SJVN, NLC, and the like? Is this the right way forward? Do you see that becoming a reality over the next 12-18 months, a lot of these companies getting carved out and listed separately?
Sabyasachi Majumdar: I would not like to speak about the valuations or whether listing is the right strategy or not because that is not our mandate. I will look at it from two perspectives. One is, of course, what is the government’s motivation for listing? One of the motivations for listing and divestment, would be to meet its own funding requirements for their own budgetary purpose because they have a certain target every year for perspective.
So that way the government has to take a call on whether they want to divest or they just want to have additional funds for the various renewable energy companies which are in the public sector. So, we cannot really comment on that. The other aspect, of course, is that as I said earlier, that based on what CARE expects about the total amount of renewable energy capacity addition and storage which has to go along with it as per our own internal analysis over the next eight years will be requiring about Rs 19 lakh crore of funds, of which let us say about 25% at least or about four-and-a-half to five lakh will have to come from the equity.
Obviously, many of the renewable companies generate free cash flow of debt servicing and all and obviously that is available for equity. But obviously, given the fact that the amount of capex is so huge obviously we will need additional equity funding. Now, as to whether equity funding will come from the IPOs or whether it will come from fresh equity from outside the country, more private equity money coming in – that is a call that individually the promoters of the various groups will have to take. So that is not something I can comment on.
But I think the sector requires a lot of equity and from the perspective of the rating agency. We would like the renewable energy companies to maintain comfortable leverage metrics as they go forward on the capex plan, so the equity market may look at it from a different perspective. But as a credit rating agency, from the rating metrics, we would want from the leverage perspective, fresh equity coming in, whether it comes from IPOs or from equity infusion from the existing promoters domestically or from PE investment from outside, is a different matter.