Thursday, August 9, 2012

>Grid failures – catalyst for power sector reforms?

As per the Ministry of Power, the grid failure in the Northern, Eastern and Northeast regions on Tuesday afternoon (July 31) resulted in power supply disruption in 22 states (out of 28) of India. These grids are inter connected and the grid failure today is the consequence of failure of the Northern grid on Monday. Consequently, 40% of capacity of NTPC (14,000MW) located in these regions ceased to generate power. The Ministry of Power and the Power Grid Corporation (PGCIL - which manages the grid) expect that power supply could be restored by evening and that the situation may normalize by Wednesday.

While we are still waiting for the government’s official clarification, our discussion with power companies and various news flows suggest that the grid failure was due to 1) overdrawing power from states such as Uttar Pradesh and Punjab due to the sudden spike in demand, and 2) imbalance in grid frequency due to excess supply of power from the Western region. We believe these power outages (the worst in the last decade) underscores the urgency of reforms in the power sector mainly through: 1) addressing fuel supply issues which would drive higher utilization levels for generation capacities; and 2) cleaning the balance sheets of state-owned distribution companies which should help fund high cost power supplies and enable increased capex to strengthen the intra state transmission & distribution (T&D) infrastructure. As per Power Grid, total T&D spend for 12th plan (FY13-17) is budgeted at US$88bn - US$22bn for inter state transmission, US$10bn for intra state transmission and US$55bn for distribution. While we witnessed significant investments in the power generation segment due to private sector participation, and inter state transmission segment by PGCIL, we believe capex in intra state T&D segment is not keeping pace and could continue to be a drag on the entire value chain.

While we expect these grid failures to act as a catalyst for power sector reforms, we believe reforms in the distribution segment could take time as it involves 28 states and some are going to the polls over next 6-8 moths. Among stocks under coverage, we expect Adani Power, Tata Power and NTPC to benefit on the resolution of fuel supply issues and Crompton Greaves and Havells India to benefit on the increase of intra state T&D spend.