Making power while the sun shines

SMARTSHARE

Frontline power company stocks have been laggards this year. While the Sensex has risen 46 per cent this calendar year, old war horses like Tata Power (29 per cent) and NTPC (25 per cent) have lagged the benchmark by a wide margin.

And Reliance Energy has in fact given a negative 8 per cent return. Jaiprakash Hydro too is in august company with a negative return of 3 per cent.

As the markets get into another round of sectoral rotation, the power sector seems to be in line for its place under the sun.

While the first reforms happened in the power sector, in the form of breaking up the loss making SEBs into separate business units for power generation, transmission and distribution, the frontline companies in the sector have not built on those 2004-05 gains.

There are two drivers of the argument for the power sector. The first is that we have the second-largest population in the world and this population is growing.

The second is our sustainable economic growth, which even our staunch rivals would put at more than 7 per cent. Energy demand is closely linked to the economic development. As societies develop, their energy needs expand as well.

We would need 1,50,000 MW of additional power in the next 10 years if we are to maintain the current Indian per capita consumption of 606 units. That gives us a run rate of setting up a 288 MW unit per week for the next 10 years.

The relationship between GDP growth and power requirement is not linear. A 7 per cent rise in GDP would warrant a 10 per cent rise in power capacity to maintain the status-quo in terms of the current shortage. If we intend to bridge the shortage as well, the growth rate would have to be much higher for the next 10 years.

While currently thermal power accounts for 66 per cent of the total production and hydro power for 26 per cent, the balance 8 per cent is accounted for by nuclear, wind and solar energy.

In the next three years, nuclear power will really take off. Areva of France, the world's largest supplier of nuclear plants, has the best credentials in the business. Whether it lands orders will be a function of what kind of elbow room Uncle Sam would give India in choosing its technology partners.

With installations of about 5,200 MW, India is among the world's five largest players in wind power. Though the potential is around 45,000 MW for the country as a whole, high-velocity sites like Gujarat and Tamil Nadu are already getting congested.

Breakthroughs in technology to harness thorium has the potential to make nuclear energy the most preferred route of alternate energy. But till that happens, solar energy could be the solution to India's power requirements.

The potential of solar energy in India is huge for a number of reasons:

Solar radiation falling over India is about 5,000 trillion kWh/year.

There are about 300 clear sunny days in a year in most parts of India.

The average insolation incident over India is about 5.5 kWh/sq meter

According to the Ministry of Non-conventional Energy, as on December 31, 2005, the contribution of solar power at 1,748 MW was 1.4 per cent of the total power generated. But as technology upgrades and the efficiency of photo voltaic cells improves, the cost per MW, which is the highest among all sources, could fall.

As usage doubles, the efficiency of scale could reduce cost by 18 per cent. It is best suited for rural India, where 46 per cent of the homes have not heard of Thomas Alva Edison as yet.

Disclaimer: As we are in the business of giving stock advice, all stocks mentioned here may be taken as our disclosure.