The Indian government recognizes that the long-term sunk cost, long project planning and construction timeframe, and high-risk portfolio make it difficult for private investors to raise funds whose maturity matches project completion dates. Since 1991 it has allowed 100% foreign direct investment (FDI) in the power sector (with the exception of nuclear power) under the automatic route (that is, without hindrance from the financial regulatory agency, the Reserve Bank of India) and without limitations on project cost and amount of FDI.

Despite these and other incentives and lucrative policy measures, FDI in the sector for 2006 totaled $157 million—accounting for less than 1% of the nation’s total FDI. Experts cite several reasons for this, apart from the numerous challenges that afflict the sector, including short and erratic supply of fuel and equipment, high tariff rates, poor plant load factor, power theft, and other transmission and distribution losses. But the primary problem is the poor commercial performance and near-bankruptcy of state electricity boards (SEBs)—a result of pervasive power politics. The prevalence of corruption, lack of corporate governance practices, and red tape (owing to the multi-regulatory system that involves both state and federal levels of government) are also major concerns.

A famous example is Enron’s 2001 withdrawal from the Dabhol Power Project because the Maharashtra SEB defaulted on a payment—a situation worsened by the government’s noncommittal attitude toward the long-term power purchase agreement. Circumstances have since improved, but foreign companies doing business in India’s power sector still have cause for concern, according to Canasia Power Corp., a Canadian company that is developing two 2,000-MW supercritical plants in Gujarat and Uttar Pradesh by 2013–2014.

“Where the company experienced the greatest difficulties were with India’s systemic problems in the power sector, such as the financial weakness of the State Electricity Boards (SEBs), who are the only real buyers of bulk power on a national scale, plus the problems associated with Coal India and its inability to supply adequate coal (quantity and quality) to existing and proposed plants on an assured basis,” Canasia Chair and CEO Ashok Dhillon told POWER. “SEB financial weakness undermines the financibility of [power purchase agreements] entered into with them, and Coal India’s problems disallow projects dependent on local coal from achieving financial closure and construction.”

Canasia opted for supercritical technology, having considered the government’s power expansion plans, its environmental concerns, and requirement for high efficiencies. Dhillon said that it was also important to develop “mega” plants (above 1,000 MW) to “achieve economies of scale to be able to produce power at competitive tariff rates.” But, like private developers of other supercritical plants in India, Canasia also faced large-equipment supply concerns—a factor typically cited as a hurdle to the nation’s plans to accelerate capacity expansion.

Equipment manufacturing lead times can be as long as four years. Order books for BHEL, the state-owned engineering and manufacturing company and the nation’s only large-scale equipment manufacturing company, are completely overwhelmed through 2012, while other local players, like Larsen & Tourbo, are only starting to ramp up operations. Considering this, Canasia instead opted to source critical equipment from China, because it was “the most competitively priced and [had] the most capacity.”

China—already India’s largest trading partner and fiercest FDI competitor—is poised to take a lion’s share of the power equipment business, according to Lloyd’s Register, a third-party assurance certification service provider to the power sector. Even though the three major Chinese suppliers—Shanghai Electric Corp, Dongfang Electric Co., and Harbin Electric Co.—contend with heavyweights like GE, Alstom, Fuji Electric, Doosan, and Mitsubishi Electric, “about 20,000 MW worth of major infrastructure is presently on order by Indian buyers from China,” said Swaminathan Krishnaswamy, Lloyd’s Register vice-president for India and Sri Lankan chemicals and power. As well as having greater capacity—Dongfang Electric, for instance, has twice the manufacturing capacity of BHEL at 20,000 MW—Chinese companies can deliver equipment for a 4,000-MW plant 30% faster, in as little as 18 months. “The main infrastructure to produce each MW costs $300,000 to $350,000, bringing the total value [of Chinese equipment sales to India] to $7 billion by 2011,” Krishnaswamy said.

Opportunities for FDI in all spheres of the nation’s power sector are as tremendous, Abdul Shaikh, a senior international economist with the U.S. Commercial Service’s India Business Information Center, noted. True, the country must improve its public finances, sector viability, and fuel supply, while strengthening its political climate and legal framework. But because India currently offers 30% corporate tax and has thrown open import opportunities, the possibilities are apparent. “By 2012, it is estimated that India will need to invest about $170 billion to add 100,000 MW of additional power capacity to fulfill its growing infrastructure needs,” he said.

—Sonal Patel is POWER’s senior staff writer.