Power equipment: Fluctuating voltage

Raghuvir Srinivasan

IT IS an industry that is running on low voltage.

The Rs 8,000-crore power equipment industry is today operating at below par levels thanks to the mess in the country's power sector from which it derives its sustenance. It is indeed ironic that things should be so in a country hungry for power and where there is a dire need for more power plants to be set up. The power generation and transmission equipment industry finds itself in a piquant situation where its business environment holds out immense promise but simply fails to deliver.

The power equipment industry can be broadly classified into three segments. First, power generation equipment such as turbines, generators and boilers. Second, transmission and distribution equipment such as transformers, distributors and instrumentation and control systems. Third, services for renovation and modernisation. Though part of the same industry, these segments are different when it comes to business characteristics.

Power generation equipment

The power generation equipment business is typically driven by orders from new power projects and is thus heavily dependent on their commissioning. Replacement demand is limited and restricted to renovation and modernisation. Being heavy capital equipment they have a long manufacturing time cycle. Typically, the manufacture of a turbine/generator for a 500 MW plant would take about 36-42 months from the order's date. The approximate value of such equipment would be about Rs 2,000 crore.

Technology in this segment is mature and there have been few earth-shattering developments in turbine or generator technology in the last two decades. The last major development in turbine technology was the development of gas turbines by General Electric in the 1980s. Since then there have been rapid improvements in gas turbine technology but there has been nothing radical or path-breaking. There are just a handful of companies in the whole world in this business such as GE, Siemens, Alstom and Mitsubishi. They are either present on their own in different countries across the world or they license their technology to others.

For example, in India, GE and Siemens have licensed their technology for steam and gas turbines to Bharat Heavy Electricals Ltd (BHEL). Alstom has a presence through about 16 different entities. Of course, Alstom runs a comparatively smaller business concentrating on the minor projects of upto 200 MW capacity. Siemens operates in India independently in instrumentation and control systems, design of power plants and in transmission and distribution equipment. But when it comes to large power generation equipment it is BHEL all the way as of now. Due to the long manufacturing time cycle, the power generation equipment business operates by the order-book -- the bigger the book the better. The thumb-rule is that a two-year order book in hand is healthy from the manufacturer's point of view.

Competition in the domestic market is limited to BHEL, which strides like a colossus across the industry and others such as Alstom, Siemens and Mitsubishi. Having licensed their technology to BHEL, neither GE nor Siemens have independently forayed into the business of supplying generation equipment in the Indian market.

Transmission and distribution equipment

This segment is highly competitive, especially as one goes down the value chain. For small products such as distribution transformers and energy meters there is tremendous competition that thins out in the high value/high technology products. Competition is more even here between BHEL and MNCs such as ABB, Siemens and Alstom. After the worldwide divorce between ABB and Siemens in 2000, ABB now concentrates on the transmission and distribution business leaving the generation equipment area to Alstom.

Unlike the generation equipment segment the T&D equipment business relies equally on new orders and replacement demand. It has been able to survive even in the complicated business environment of the last decade thanks to business from the replacement market. Of course, the replacement market is not as large as it should be for the installed capacity of 1 lakh MW in the country because of the absence of a good renovation and maintenance programme in most power plants. According to Mr K. G. Ramachandran, Chairman and Managing Director, BHEL, about 30 per cent of the installed capacity is in need of modernisation and refurbishment. But financial problems of electricity boards and the inability to shut down plants for maintenance, given the tenuous demand-supply position, have ensured that R&M is not possible.

Services is a lucrative activity given the large installed base and it is not surprising that MNCs such as Alstom and ABB are rather active in this business. Here again, the market has not really taken off as it should have and the reasons are familiar. State electricity boards that own the majority of the stations in need of renovation and modernisation are in no position to use the limited funds they generate in R&M activity. That this market is lucrative is evident from the two joint ventures floated by BHEL with GE (BHEL-GE Gas Turbine Services Ltd) and Siemens (Powerplant Performance Improvement Ltd). These two companies service the existing installations based on their respective technologies. A measure of their success is that both these companies are doing very well financially, with one of them declaring a 95 per cent dividend for 2000-01. Others such as Alstom are equally active in this business. In fact, it is these areas that provide them with business in this difficult environment.

Challenging times ahead

When the power sector was liberalised in the early 1990s, it was predicted that power equipment suppliers would reap a rich harvest. Unfortunately for them, the anticipated growth never happened as the power sector got entangled in policy problems. Most of the independent power projects being bandied about then never took off, and those that did ran headlong into other problems. The bulk of the capacity expansion in the last decade came from Central utilities such as NTPC and NHPC, apart from such States as Maharashtra, Gujarat and Tamil Nadu.

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The pace of growth has proved to be too slow for equipment suppliers. With demand slowing down, India joined the long list of countries with an excess capacity for power plant equipment. BHEL's capacity to produce 6,000 MW of generation equipment in a year is now higher than the total demand from within India. In such a situation, the other players such as Alstom, who are attempting to compete with BHEL in generation equipment, find themselves marginalised. With BHEL cornering all the mega projects of 500 MW and above, the other players have changed their strategy to concentrate on the smaller projects promoted by private producers.

According to Mr K. G. Ramachandran, BHEL's Chairman and Managing Director, the company's capacity utilisation is at 60-65 per cent, which means that it supplies equipment worth just about 3,600-4,000 MW per annum. This means that there is new generation capacity addition of about 4,000 MW every year.

Worse than this is the payment problems that suppliers face with State Electricity Boards. Things seem to have worsened in the last year or so going by the outstanding receipts of the major companies. Alstom Power India has seen outstanding receipts increase to Rs 124.31 crore as on December 31, 2000, from Rs 76.12 crore the previous year. Compare that with the total turnover of Rs 273.85 crore in 2000 and the depth of the problem will be clear.

Similarly, BHEL's outstanding receipts as on March 31 was Rs 4,174.30 crore, almost 73 per cent of its total turnover of Rs 5,7414.12 crore, net of excise. Of course, BHEL's outstandings would have been worse but for the fact that it gets the Central government to pay part of its dues from State utilities through deductions from the Central assistance to States. The direct impact of the long outstandings is that interest costs have spiralled upwards -- from Rs 21.65 crore in 1999-2000 to Rs 43.76 crore in 2000-01.

To be sure, this is not a problem that will vanish tomorrow. Reform and restructuring of state electricity boards, the only solution, is a painful and long-term proposition. The realisation that things cannot continue the same way has already set in and the Montek Singh Ahluwalia Committee has laid out a framework to handle the situation. But again, a lot depends on how the governments at the Centre and the States follow the script.