The recent Trafotech 2012 exhibition and workshop organized by IEEMA brought to light some weak spots in India's transformer industry. In the context of the country's power sector ambitions, transformers are bound to play a decisive role and addressing the industry's concerns becomes imperative. This special story by Venugopal Pillai and Mrinalini Prasad attempts to discuss the most important challenges ahead of the Indian transformer industry.

The transformer industry holds special significance given that India is in the midst of a massive upgrade of its power transmission & distribution sector. It is only through an efficient network of transformers can electricity travel from the power generation plant to the final consumption centre. Again, it is only an efficient and reliable transformer that finally helps a power generation asset realize its socio-economic objectives. Though India's transformer industry has matured over the years, there are several concerns. Worse, some are only getting graver with the passage of time. On the one hand, India's has proved its technical prowess by producing 1,200kV transformers—the highest voltage in the world, and on the other, is still grappling with an embarrassingly high rate of transformer failure.

This story special discusses three major challenges affecting the transformer industry—the key raw material CRGO; entry of China in the Indian market; and the country's transformer management and testing abilities.

A. CRGO: THE KEY INPUT
The transformer industry's biggest concern continues to be cold rolled grain-oriented (CRGO) steel. Whether it is absence of domestic manufacturing, or imports of inferior material, the CRGO muddle eludes a lasting solution. In his keynote address during Trafotech 2012, Ramesh D. Chandak, President, IEEMA, noted: "The Second Steel Quality Control Order, coming into effect from September 12, 2012, mandating compulsory BIS-certification for CRGO electrical steel will directly impact transformer manufacturers. This is a serious situation and it will bring the entire Indian transformer industry to a standstill in the very near future, if enough number of mills is not certified by that date."

This observation is indeed pertinent and can be better appreciated in light of some background. CRGO steel is a very crucial input for manufacture of transformers and is estimated to account for over half of the manufacturing cost of a transformer. India, despite repeated attempts, has failed to set up local manufacturing capacity for CRGO. As such, the country's entire demand for CRGO—estimated at some 2.5 lakh tonnes annually—is met through imports. India has the dubious distinction of producing the world's largest capacity transformer of 1,200kV but is yet bereft of technology to produce its most important feedstock.

CRGO is produced by only a few companies worldwide— around 14 of them—and the technology is very closely guarded. This is perhaps why technical collaborations with Indian companies have not been forthcoming. The basic contention with imported CRGO is about the quality of the material. Alongside the prime quality CRGO entering the country, there is also a significant volume of defective or substandard CRGO that makes its way into Indian transformers. It is this non-prime CRGO that has been the biggest impediment.

In several interactions that Electrical Monitor has had with transformer manufacturers, it was very evident that the scrap CRGO problem in turn has two aspects. On the one hand, there are marginal distribution transformer manufacturers that intentionally use cheap and substandard CRGO, helping them to quote lower during the procurement process of power utilities. On the other hand, there are manufacturers that end up using substandard CRGO out of ignorance. Reason: there is simply no way to know the quality of imported CRGO.

The ministry of steel attempted to correct this situation through an order that mandated the use of only BIS-certified electrical steel by India. The order comes into force on September 12, 2012. The order was done in right spirit and it also earned the acknowledgement of Indian transformer manufacturers. On their part, trade associations like Indian Transformer Manufacturers Association (ITMA) also offered assistance to foreign CRGO manufacturers to get their products BIS-certified. It now turns out that out of the 14 global CRGO manufacturers, only three have got their products BIScertified. If more manufacturers do not get their products duly certified, India stands to face multiplicity of problems; lack of CRGO stock would be just one of them, noted R.D. Chandak at the event.

It is interesting to note that the steel quality control order has no implication on imported finished goods. As a result, while Indian manufacturers would be struggling to get hold of BIS-certified CRGO for their transformers, imported transformers could unmindfully gain entry into the Indian market. In keeping with the country's power sector ambitions, transformer manufacturers over the years have significantly enhanced their production capacity. In the absence of certified CRGO, this capacity could turn unproductive and the domestic demand could end up being fulfilled by imports. This is a needless eventuality of the steel quality control order, some industry players feel.

The steel quality control order is a step in the right direction. However, its implementation and enforcement might not be a smooth affair, industry players feel. Asis Das, Managing Director, Stanelec Pvt Ltd, was of the opinion that it would be impracticable to enforce "September 12" as the deadline. In his view, only four global manufacturers have got their products certified and it just cannot be the case that these four satisfy the entire country's demand. Das felt that an extension of the deadline would be the most obvious next step. "An extension of six months could be a feasible option," he said. In all this, Das strongly recommended the government diktat on BIS certification and said that it needs to be implemented in the interest of all conscientious transformer manufacturers.

PGCIL, RINL to make electrical steel

Rasthriya Ispat Nigam, better known as Visakhapatnam Steel Plant, has signed an agreement with Power Grid Corporation of India for setting up a joint venture route to make electrical steel. The new project envisages setting up of a hot strip mill to produce CRGO and CRNO steel. The total investment in the venture would be around Rs.3,000 crore. The new facility will annually produce 1.5 lakh tonnes of CRGO and 1 lakh tonnes of CRNO. Incidentally, RINL and Power Grid are also involved in another joint venture for the manufacture of transmission line towers and tower components. The MoU to this effect was signed in December 2011. It may also be mentioned that Steel Authority of India was to partner with BHEL, MOIL and Power Grid Corporation for a joint venture to produce electrical steel. SAIL opted out of the venture in March 2012, paving the way for RINL to join. SAIL, in the early 1990s, had also made an abortive attempt to produce electrical steel at its Bokaro plant in Jharkhand.

Echoing this view was Amit Saraf, Director, Saraf Electricals Pvt Ltd. He was very supportive of the order and noted, "There is no moving back from here." He admitted that there will be practical difficulties in implementing the order but "teething problems always exist and can be addressed." Garg also noted that there were some issues in the order that need clarification. For instance, whether the BIS-certification applies only to transformers manufactured in India or does it even cover transformers imported. He also agreed with IEEMA's view that if CRGO availability was hurt, people could resort to importing transformers from China, mainly taking advantage of the competitive pricing. Garg was however hopeful that the government would work out an interim solution given that honouring the September-12 deadline would be easier said than done.

While the overall perception that Electrical Monitor derived from the interactions was in support of the quality control order, it is also worth looking at the inherent shortcomings in the government's noble intentions. By its nomenclature, the government's intention is to bring about some quality control on the electrical steel (CRGO) used. The only way that the government could achieve this was to impose some standard of quality, which has now taken the form of "BIS certification."

The moot point here is that not all imported CRGO is of inferior quality. It is possible to use scrap CRGO to make quality transformers. The practical difficulty is that there is no way to readily know the quality of CRGO, and this is what the government has attempted to address through the quality control order. Recalling the genesis of imported CRGO, R.V. Shah, CMD, High-Volt Electricals Pvt Ltd, noted that there was a time in the 1980s when prime quality CRGO was in short supply globally. This resulted in a sharp increase in prices, making it economically unviable to make transformers using prime grade CRGO. Indian manufacturers then started designing transformers with scrap (used) CRGO. This is how non-prime CRGO entered the Indian transformer milieu.

Shah also made an interesting observation that if a transformer is designed to use "non-prime" CRGO, using prime material may not be advisable. The nature of CRGO has to be factored into the transformer design, he explained. "We cannot condemn all forms of secondary CRGO as being substandard. It is possible to make a good transformer using secondary CRGO," Shah observed. He even mentioned that the transformer design is as important as the quality of material used. In a lighter vein, Shah noted, "One can always make a bad transformer using the best of materials!"

All transformer manufacturers that Electrical Monitor interacted with admitted that the quality control order has its limitations, but something urgently needs to be done about the intentional and willful use of secondary CRGO by a growing tribe of marginal distribution transformers.

Scrap CRGO, L1 and Failure Rate: India has the dubious distinction of having the highest transformer failure rate, a metric that is shamefully higher than that of even lessdeveloped countries. Several studies on the subject reveal that India's transformer failure rate is in the region of 20-25 per cent, with the global level being less than 5 per cent. Substandard transformers are weakening the distribution infrastructure, which already is woefully inadequate. India's current power deficit is arising not only by insufficient power generation capacity; electricity cannot uninterruptedly reach downstream consumption centres due to regularly-failing transformers. One reason why such substandard transformers are employed in service is the government's archaic L1 procurement process—a system that ensures that contracts are awarded to those quoting the lowest price (L1). There is no scope to incorporate any qualitative aspect in this price-centric philosophy. Transformer manufacturers are known to quote ridiculously low rates while bidding for government-backed contracts. A manufacturer of quality transformers simply cannot match these rates, resulting in contracts going the way of L1 bidders. This results in substandard transformers getting pressed into service. A power utility official requesting anonymity admitted that the L1 methodology is defective but no power utility would like to willfully override it. Deviating from the L1 norm could attract the adverse attention of agencies like Central Vigilance Commission, etc, the source said.

The main reason why transformers can be sold at such low rates is the intentional use of inferior scrap CRGO. Once again, it is this intentional use that the steel quality control is trying to fight— or at least address.

LIMITATIONS OF THE STEEL QUALITY ORDER
While the intention of the government is trying to curb the use of inferior CRGO, it has limitations. Assuming that a CRGO supplier is interested in getting his products BIScertified, there is some effort involved at the ground level. "Government paper work in India is never easy!" noted R.V. Shah of High-Volt Electricals. Secondly, one cannot unilaterally assume that all producers of CRGO would be interested in supplying to India, and prior to that, be willing to undergo the routine of BIS certification. CRGO manufacturers located in Asia could show more inclination but one could not be sure of European suppliers for instance. "Despite a big market in India, you cannot expect every supplier to be interested," was what Shah observed.

If one assumes theoretically that only BIS-certified electrical steel can be used in India, and that only a fraction of the suppliers get around to certifying their products, we will come to a situation where supply is short of demand. This is more so because India today is fully dependent on imported CRGO. Efforts to produce the material domestically have proved elusive for decades on end. The demand-supply mismatch so caused will obviously lead to a price rise. Given that there are only a few manufacturers of CRGO worldwide, it is very likely that suppliers form a cartel and artificially wield prices.

Transformer manufacturers that Electrical Monitor interacted with unanimously admitted that there would some short of "extension" or "interim relief" on the steel quality control order. The order cannot be implemented and enforced in totality from September 12 onwards. At the very practical level, the government must also think about what happens of the imported CRGO that is already in the country. Asis Das of Stanelec estimated that the country has enough imported CRGO scrap to last for at least two years. Amit Saraf of Saraf Electricals felt that it would be practicable for the government to ban import of non BIS-certified electrical steel with effect from September 12, 2012, but allow the use of existing imported CRGO for a period of time. "The quality control order cannot be implemented overnight," noted Garg.

Fresh thinking: An interaction with Vishal Gakhar, Director General, IEEMA, provided keen insights into the CRGO muddle. He also corroborated views held by transformer manufacturers on the subject. Gakhar felt that the basic objective of the order, which is to improve the quality of Indian transformers, has to be acknowledged. However, there is still not enough clarity on whether CRGO alone can be held responsible for the overall quality of the transformer. "At the same time, we need to support the government's decision of preventing the import of substandard CRGO. That is why we, at IEEMA, have always been welcoming the step," he explained.

All the same, there are practical hindrances in complying with the order. As of now, the order implies that effective September 12, 2012, India will not be allowed to import non BIS-certified steel. With only three manufacturers getting BIS certification so far, there is bound to be a demand-supply mismatch that can lead to higher prices of CRGO. An industry source indicated that the three manufacturers in question can barely supply a fifth of India's CRGO requirement. "It was definitely felt that the first step should have been to get CRGO suppliers to get BIS registration and then pass the order," the top IEEMA official noted.

Regarding the process of BIS certification, Gakhar noted that IEEMA was in dialogue with BIS to streamline the registration process. There is need for a single window agency that can help global suppliers to obtain BIS certification in a time bound manner. He also observed that the quality control order was coming at a time when the transformer industry was going through a very harrowing phase. "The industry has suffered a decline of over 7 per cent in the first quarter of FY13. CRGO supplies have been disrupted over the past few months and also with only three suppliers getting BIS certification so far, the situation could turn even more challenging."

B. ROLE OF CHINA
While speaking of imports of electrical equipment, the very term "China" evokes great interest. All through the XI Plan, imports of power generation equipment from China was a topic of much academic and policy debate. An estimated 40 per cent of the power generation capacity commissioned in the XI Plan was based on equipment imported from China. While the government did its bit to preempt Chinese participation by imposing "local manufacturing facility" as a prerequisite for tenders by government-owned power utilities, China got its market share from private power projects. India's focus is now on power T&D infrastructure, and China is also moving in tandem.

The Indian transformer market has been identified as a great business opportunity by Chinese manufacturers. India has targeted to add 65,000 mw of new power generation capacity in the XII Plan period. This translates to a demand of 1.95 lakh MVA, considering only power transformers-and not distribution transformers. China appears to be interested in supplying large high-end power transformers where the business margins are highest.

Considering all forms of transformers used in the power sector, the total demand in the XII Plan period is estimated at 500,500 MVA. Besides, transformers worth 238,150 MVA would need to be replaced, according to an IEEMA estimate. Thus the total transformer market in the XII Plan period is estimated at 1.48 lakh MVA per year.

According to estimates made by Electrical Monitor, domestic production of transformers is likely to have reached 2.3 lakh MVA in FY12, up from an estimated 1.91 lakh MVA in FY11 and 1.53 lakh MVA in FY10. Capacity utilization of the Indian transformer industry, as reliable statistics suggest, is between 65 and 75 per cent. The average annual production of transformers has been rising steadily from 47,000 MVA in the IX Plan (1997-02) to 83,000 MVA in the X Plan (2002-07). The bygone XI Plan has seen the highest ever average annual production of around 1.7 lakh MVA.

The Dark Side of CRGO

If one looks at the economic activity of making distribution transformers using inferior scrap CRGO, it is a very lucrative one. Non-prime CRGO could cost up to 50 per cent lower than the prime variety. Further, the cost of CRGO in the total cost of a distribution transformer could be anything between 35 per cent and 50 per cent. Power utilities are "ready buyers" for such transformers as they are hopelessly bound by the L1 procurement mechanism. Every power utility knows beforehand the life expectancy of a distribution transformer procured under the L1 route. Very unwittingly, the use of inferior CRGO has gained formalness. After all, inferior CRGO is willfully used only because there is a market for it. Over the years, the activity of importing scrap CRGO steel and its deployment in distribution transformers has turned into a huge business with high and widespread stakes. The use of inferior CRGO refuses to wane for decades on end. This coincides with the fact that India has been unable to produce electrical steel for the past fifty years. Industry players, through their tacit admissions, do not see these two developments as independent.

Power Grid Corporation of India, the Central transmission utility, is expected to be a big buyer of power transformers in the XII Plan period. PGCIL has outlined a capital expenditure of Rs.1 lakh crore for the XII Plan period. An estimated 70 per cent of this will be in procuring equipment while 30 per cent will be towards contracts. An industry expert opined that transformers account for one-fifth of PGCIL's total equipment purchase. Hence, PGCIL alone is expected to spend around Rs.15,000 crore on purchasing power transformers in the ongoing Plan period.

According to very reliable information, PGCIL has already begun purchasing from Chinese suppliers. However, it is not clear as yet whether the CTU is insisting on transformer suppliers to have a local manufacturing base. In the early months of FY13, PGCIL is known to have procured power transformers from Chinese suppliers like TBEA Shenyang Transformer Group Co Ltd, Hyosung Corporation and Baoding Tianwei Baobian Electric Co Ltd. Contracts have been awarded on the international competitive bidding route where Chinese suppliers have clinched deals in direct competition with Indian, multinational companies and even other Chinese contenders.

The new approach: Whilst catering to India's power market, China is now seen to be adopting a new approach, which is more sympathetic to India's ideologies. China appears to be very serious in setting up a manufacturing base, unlike in the past when it was a mere supplier without a local manufacturing presence. The dissent over China was largely due to the lack of "level playing field" between Indian and Chinese equipment. This was mainly in the context of main plant equipment for thermal power plants where Chinese involvement was at its peak.

Two big names in the Chinese transformer industry— TBEA and Baoding Tianwei Baobian (known as TWBB)—are on their way to set up their manufacturing base in India. Incidentally, both of them have homed down their site selection to Gujarat. TBEA has formed a 100 per cent subsidiary TBEA India Pvt Ltd and is investing Rs.2,500 crore to set up a greenfield facility for power transformers at Karjan near Vadodara.

TWBB has selected Gujarat-based Atlanta Electricals Pvt Ltd to form a 51:49 JV called BTW Atlanta Transformers India Pvt Ltd. The manufacturing plant, also near Vadodara, is likely to go into production in May next year. Power transformers in the range from 220kV to 765kV will roll out from the plant with the possibility of making 1,200kV transformers in future.

With China very serious in setting up a manufacturing base, there should be no reason for Indian manufacturers to object. China's involvement is now a legitimate expression of foreign direct investment. Some transformer manufacturers that Electrical Monitor got in touch with appeared rather unfazed about Chinese competition. "Once they put a plant, they become like Indian players. They will face the same headwind that we (local players) face," noted Jaideep Jain, Director, Tesla Transformers Ltd, in an earlier interaction with Electrical Monitor.

C. TRANSFORMER MANAGEMENT & TESTING
Given that India's transformer base is set to expand substantially in the coming years, transformer management and testing will be crucial areas. Trafotech 2012 touched upon this vital aspect. In his presentation at the event, Pierre Lorin, Global Technology Manager - Transformers Service, ABB Secheron Ltd explained that India's ageing assets, rising energy demands and the need to deliver without unplanned outages are few challenges faced by utilities and industries alike. Lorin said, "The apparently contradictory demands of more transformers but less investment can be met through optimized asset management. But it requires accurate and reliable models considering both technical and economic criteria. Some of the key components of asset management can be addressed through condition-based assessment, online monitoring and economical analysis. Ultimately India will have to spend money on the right asset at the right time."

On the subject of transformer testing, Electrical Monitor interacted with a few event participants who generally agreed that India needs to do much more in terms of testing of highvoltage equipment like power transformers. "We need to invest more in our testing facilities and we also need to demonstrate our facilities at an international level," said Ramesh Chandak, MD & CEO, KEC International who is also President, IEEMA. Chandak also noted that the waiting period at the testing institutions has to reduce. India's testing system needs to be brought at a level where it would be accepted by the world. Giving an example, Chandak noted that China already has two testing institutions that are accepted internationally.

R K Tiwari, General Manager - Transformer, Capacitor & Bushing, BHEL Bhopal, noted "Our testing facilities with most manufacturers and Central testing facilities are at par with international standards." Tiwari cited some testing laboratories of CPRI, Alstom, BHEL-Bhopal and ABB as being of the international mark.

Suggesting that there is much scope for improvement was Adityaa Dhoot, Joint Managing Director, IMP Powers Ltd. "Testing labs on our country need immediate upgrade in terms of voltage as well as capacity. The government has recently allocated funds to CPRI and they are working towards it. Testing has to go hand-in-hand with the capacity addition," was what he had to note.

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