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Government spending can boost Indian transformer industry

Amol Kotwal ,  Friday, January 25, 2013, 17:20 Hrs  [IST]

Amol Kotwal-Amol Kotwal is Associate Director, Energy & Power Systems Practice, Frost & Sullivan

Several transformer companies in the small and unorganized sector are slowly graduating to the medium-sized category, thus expanding the base of organized participants.

India is on the verge of becoming an emerging power nation among developing economies. The availability of electricity is directly linked to the Gross Domestic Product (GDP) growth of developing economies, India being no exception. Growth of the Indian electrical industry and its investment appeal primarily depends on government policies. Timely capacity additions to electricity generation, transmission and distribution are necessary to improve and sustain GDP growth and reduce the electricity demand-supply gap.

India’s power generation of installed capacity at the end of XI Five-Year Plan (March 31, 2012) stood at approximately 200 GW. Of the total, approximately 78 GW of power generation capacity addition was planned during the XI Five-Year Plan period, which was subsequently revised to 62 GW, of which only 55 GW of capacity was added. Acute fuel shortage (both coal and natural gas), high coal prices and delay in commissioning of new units, affected capacity addition plans.

Although India has the fifth largest power generation capacity, globally (trailing behind China, US, Japan and Russia), a power deficit scenario has been plaguing the sector for more than a decade. India’s per capita power consumption of around 700 kilowatt hour (kwh) per annum is significantly below the world average of 2,600 kwh and developed countries’ average of 8,000 kwh. India needs to rapidly increase its generation capacity to achieve 1,000 kwh per capita consumption annually, in order to achieve the goal set by the Ministry of Power – ‘Power for All’.

Power deficit at the end of XI Plan reached 8.5 per cent, whereas peak deficit was to the tune of 10.5 per cent. Key reasons (apart from missing out on power generation capacity addition targets) for the continued power deficit scenario in the country are:

Frost & SullivanDismal conditions and inappropriate maintenance of existing T&D equipment/ infrastructure

Rampant power theft, leading to high T&D losses (at the end of XI Plan, T&D losses were to the tune of 23.3 per cent) impacting financial condition of power T&D utilities (discoms and transcos)

A robust and efficient power T&D infrastructure is imperative for effective transfer of power from generation source to the consumption points / demand centres. Thus, expanding the T&D infrastructure to transmit the power generated to consumer points across the length and breadth of the country becomes imperative.

Transformers are critical components of the power T&D network that are used to change voltage in the power transmission and distribution process, and hence play a key role.

Transformers can be broadly classified, based on the output rating as:
  • Distribution transformers (31.5 KVA to 5,000 KVA)
  • Power transformers (5.1 MVA to 500 MVA)
  • Special transformers (depending on the type of application like welding, traction, furnace, etc.)
The Indian transformer industry is more than five decades old, hence mature. Domestic manufacturers have developed capabilities to manufacture all types of equipment to meet the country’s demand for transformers up to 800kV and going up to 1,200kV. The industry enjoys a good reputation in terms of quality, price, and delivery in the domestic as well as overseas markets.

India’s transformer market is predominantly unorganized with many small participants catering to the smaller distribution transformer markets. However, many are slowly graduating to the medium-sized category, thus expanding the organized participants’ base.

There are 300+ transformer companies in India, with an overall annual installed capacity of over 370,000 MVA. The market is fragmented with around 20 organized players such as Bharat Heavy Electricals Ltd (BHEL), ABB Ltd, Crompton Greaves Ltd (CGL), Areva T&D, EMCO Ltd, Bharat Bijlee Ltd (BBL), Vijai Electricals, Transformers & Rectifiers India Ltd (TRIL), Voltamp Transformers Ltd, and others.

In the power transformers category, companies in the high-end segment (400kV and above) mainly include international players such as ABB Ltd, Alstom T&D (erstwhile Areva T&D India), and Siemens; and Indian manufacturers such as BHEL, CGL, TRIL, and Vijai Electricals. Majority of other companies in this sector are present in the 220kV segment in power and distribution transformers. Leading players have significant presence in both power and distribution transformer market.

Large players such as BHEL, ABB Ltd, Alstom T&D (erstwhile Areva T&D India), and CGL have installed capacities exceeding 15,000 MVA per annum. However, these are diversified power equipment players and the transformer segment is not a major revenue contributor. Among players who primarily manufacture transformers, TRIL is the largest in capacity followed by EMCO, Vijai Electricals, Voltamp Transformers, and Bharat Bijlee. The unorganized sector primarily caters to smaller rating transformer requirements.

Apart from catering to domestic demand, India exports transformers to over 100 nations including the US, Europe, Malaysia, Singapore, Bangladesh, African countries, and Gulf countries. India is also an importer of transformers; the major source countries include China, Germany, USA, Korea, and Japan

The transformer market in India can be pegged at more than Rs.13,000 crore. Power transformers contribute 45 per cent of the total market and distribution transformers 55 per cent. Over the last two years the market has grown at a very moderate rate at less than 4 per cent, due to the slowdown of power generation capacity addition and T&D infrastructure expansion.

Anticipating the huge domestic (due to a power deficit scenario, requirement of power sector expansion) and overseas demand, the transformer industry in India has more than doubled its manufacturing capacity over the last five years. Transformer manufacturing capacity in India stands at ~370 GVA with capacity utilization rates hovering around 60-70 per cent on an average over the last five years. Transformer over-capacity in the Indian market has led to immense pricing pressure scenario severely impacting the profitability of the market players

New entrants India’s huge power shortage, need to ramp up power T&D infrastructure, economic slowdown of developed markets like Europe and North America and excess Transformer manufacturing capacity in China has resulted in India being an attractive destination for transformer companies globally to tap the Indian market opportunity. Anticipating this, many foreign players are already in the process of setting up base in India. Over the last 12-15 months, new players have entered the market either through acquisitions or through setting up of facilities within India. A few notable examples are:  Canadian company, Hammond Power Solutions Inc. had acquired 70 per cent equity stake in the Hyderabad based transformer supplier Pan- Electro Technic Enterprises Pvt. Ltd in February 2012.
  • Chinese manufacturer, TBEA has set up transformer manufacturing unit in Gujarat in order to qualify for the bids from PGCIL.
  • Another Chinese player, Baoding Tianwei Baodian Electric Co. (TWBB) has set up a joint venture (JV) with Anand-based Atlanta Electricals Private Limited for setting up a transformer factory in India.
  • South Korea's Hyundai Heavy Industries is also planning a facility for manufacturing transformers in Sanand, Gujarat
  • Power generation capacity augmentation and Power T&D infrastructure expansion to be in-line with power generation capacity addition. According to the XII Plan, Rs.12,00,000-13,00,000 crore is likely to be invested in the power sector. This spending on the power sector is expected to be equally distributed between generation and T&D. Spending on power T&D infrastructure is expected to boost demand for transformers.
  • Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) scheme to improve rural electricity infrastructure and rural household electrification. The electrification drive is expected to provide impetus to demand for distribution transformers
  • Increasing focus on Rural Electrification Accelerated Power Development and Reform Program (APDRP 1-2) in order to minimize aggregate technical and commercial (AT&C) losses at the distribution level and improve the financial health of the state electricity boards
  • Industrial sector Growth
  • Replacement of ageing equipment
  • These reforms are expected to significantly affect demand for transformers over the next four to five years.
  • CRGO: Inadequate supply of prime quality Cold Rolled Grain Oriented (CRGO) steel is the biggest challenge faced by transformer manufacturers in the country. CRGO requirement is completely met through imports; it is in fact challenging to assess the true quality of the material that is used by the transformer manufacturers in India. India needs 2.5 lakh tonnes of CRGO every year and an appalling 70 per cent of this is scrap grade material.
  • Failure rate of Transformers: High failure rate of distribution transformers is a big concern for the transformer industry in India. The average operational life of a transformer is between 25 to 30 years; however, transformers in India are known to be recalled for repair in as early as three years. The failure rate of distribution transformers in India is estimated at 10-15 per cent (in stark contrast to the less than 2 per cent in developing countries). This is due to the low entry barriers in the distribution transformer market leading to unorganized players entering the market, and competing on the price factor. SEBs historically follow a L1 vendor selection criteria, which has led to proliferation of many small players, that compromise on the quality of transformers manufactured.
  • Financial condition of state utilities: State power utilities have been facing losses due to the supply of subsidized power to agricultural farmers, theft of power, and inefficient T&D infrastructure. This has restricted private investment in the power T&D sector, thereby reducing the quality of service from SEBs. This, in turn, is affecting the capacity building program and transmission of power.
  • Lack of testing facilities: The growth in testing infrastructure has not kept pace with that of production, both, quantitatively and qualitatively. Testing infrastructure available at India's premier agency, the Central Power Research Institute (CPRI) is proving short of demand. Manufacturers of large power transformers at times need to send their equipment for testing to overseas facilities like Korea Electrotechnology Research Institute (KERI) and KEMA which is expensive. Apart from this, huge logistical costs and lead time are also involved.
The Indian power and distribution transformer markets are highly dependent on investments planned by the Government of India for the T&D segment and reform programs like the Revised Accelerated Power Development and Reform Program and Rajiv Gandhi Grameen Vidyutikaran Yojana. These programs, when fully implemented as scheduled, are expected to drive the demand for both power and distribution transformers. The Government of India currently plans to strengthen transmission lines and create a National Grid interconnecting the five regions (northern, southern, eastern, western and northeastern) through the creation of “Transmission Super Highways”; this is expected to drive the demand for higher-rated power transformers. With T&D companies actively striving to reduce aggregate technical and commercial (AT&C) losses, the demand for energyefficient transformers would get a boost.

The financial bailout package for SEBs announced by the Cabinet Committee on Economic Affairs (CCEA) in September 2012 is expected to improve the commercial viability of distribution utilities. This restructuring scheme expected to improve the liquidity position of the discoms, since 50 per cent of short term liabilities would be taken over by state governments. The restructuring of the balance 50 per cent of liabilities is to be accompanied by concrete and measurable action (performance linked) by the discoms/states to improve operational performance of discoms. Power tariff increase is one of the metrics, which the utilities have to undertake as part of the restructuring package.

The improvement in SEBs financial condition would enable them to undertake power T&D infrastructure expansion in line with the requirement resulting in driving transformers demand.

With huge investments proposed across sectors such as power, infrastructure, etc., the transformers market in India is slated for strong growth. The excess capacity in the Transformer industry in India, and entry of new players is further expected to increase market competitiveness. Market consolidation over the next few years is inevitable.
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