According to the International Energy Agency, India’s energy demand is expected to more than double in the next decade due to population growth (by about 160 million). The story on the supply side is starkly different — lack of fuel availability and the weak finances of distribution utilities continue to cripple the power sector.

Various risks are at play in this sector, ranging from fuel, technology and construction, to market, environment, labour and regulation.

Regulatory uncertainty

Power projects are capital-intensive, with a long gestation period. Any adverse policy change can significantly affect participation by private and foreign investors. Will policies such as the proposed model power purchase agreements and the ‘design, finance, build, operate and transfer’ (DFBOT) framework discourage investments? Will political instability increase regulatory uncertainty?

Fuel shortage, rising costs

Chronic fuel shortage is forcing many thermal power plants to run below capacity. There are also questions over the quality of the available coal. Rising costs and the lack of secure, long-term fuel supply are making power expensive for distribution companies. Will the dependence on foreign coal push innovation and efficiency in domestic mining? Will the Government encourage private sector participation in coal mining in a transparent manner?

Project management

In addition to fuel shortage and high coal prices, constraints on the availability of power equipment and quality EPC (engineering, procurement and construction) players have hurt plans for additional capacity. Will dependence on foreign equipment suppliers increase? Will domestic players up their game? Will foreign equipment meet local power plant conditions and expectations on quality, service, and repair and maintenance?

distribution Inefficiency

While AT&C (aggregate, technical and commercial) losses have always been an area of concern, there hasn’t been much improvement in this segment. While distribution reforms remain key to the power sector, will investments continue to flow to generation and transmission?

renewable sources

Due to growing regulations on thermal power generation, coupled with rising fuel costs, will the market shift towards renewable energy sources? Will domestic companies commit to large-scale investment in renewable energy? Will the Government continue to support renewable power generation through incentives and purchase obligations?

nuclear energy: the future

The earthquake and the resulting tsunami in Japan in March 2011 have cast doubts on nuclear energy as a viable option. How will Government regulations evolve? Will they become more restrictive after mass protests against nuclear power plants?

Considering the various challenges, a main concern is how best to mitigate the risks of infrastructure capital projects.

To ensure sustained growth, the power sector has to develop risk-intelligent strategies and risk management practices. This begins with constructively challenging one’s assumptions, and is refined through signal detection and interpretation. It concludes with a portfolio of strategic options that the organisation holds in readiness for the day when a potential future scenario becomes reality.

To develop a risk intelligent strategy, companies must

Identify and challenge the fundamental assumptions on which their current strategy is based. They must create a list of unexpected events and consider the significance of each to the enterprise;

Identify and look for indications of unexpected events;

Ask if each unexpected event is an opportunity, threat, or both;

Develop a strategy that contains a requisite variety of options and alternatives that keeps the business resilient in adversity, and agile in seizing opportunities.

A risk-intelligent approach is the foundation of a successful enterprise. The power sector should revisit its risk assessments and vet investment decisions. For the Government and policymakers, it is a time to reconsider the connection between energy policy and project-level risk allocation — or run the risk of watching the capital flow elsewhere.

Abhay Gupte is Senior Director, Deloitte Touche Tohmatsu India Pvt Ltd

Related Topics
comment COMMENT NOW