Beijing's promise to keep to the Yuan "flexible" has brought much cheer to the world, but its impact on the domestic power equipment market in India would not be very significant. India's power capacity addition targets are getting increasingly reliant on imported power equipment and at least in the foreseeable future, the country cannot disregard Chinese equipment, whatever are the pecuniary consequences of a revalued Yuan.

Statistics clearly show that Chinese main plant equipment-boilers, turbines and generators-is a wellentrenched phenomenon in the Indian power market. As of today, an estimated 16,793 mw of thermal power capacity using Chinese equipment is under construction and expected to commission in the XI Plan period. This represents nearly 40 per cent of the total (see table). If one considers thermal power projects scheduled to commission in the XII Plan period, China's role would be much bigger.

For several years now, domestic equipment manufacturers were grumbling about Chinese equipment being cheaper due to a fixed Yuan-unchanged since 2005. On an average, Chinese power equipment cost 20-30 per cent lesser than the domestic counterpart. Several representations were made to the Centre to impose duty on Chinese equipment with a view to protecting domestic equipment makers. However, experts widely believe that import Chinese equipment will still be advantageous, even if an appreciated Yuan makes landed costs higher. The biggest advantage that Chinese equipment offers, more than its competitive price, is timely delivery. Lower gestation period means that returns on investment are faster. The positive fiscal implications of equipment arriving on time are huge, and could more than compensate for higher costs.

Every leading independent power producer appears to be relying on Chinese equipment. Reliance ADAG Group, both as an EPC contractor and IPP, has been sourcing BTG packages from Shanghai Electric Corporation with whom it also entered into a co-operation agreement. Lanco, Adani Power and JSW Energy have a large number of projects to be built with Chinese equipment engaging suppliers like Harbin, Dong Fang Electric, Sepco, Sepco-III, Sichuan Machinery, Shangdong Tiejun, etc. Out of the 16,793 mw of thermal power capacity that is being constructed for the XI Plan with Chinese equipment, nearly 85 per cent is through private sector projects. It is also noteworthy that Chinese machinery is also being used for supercritical projects where indigenous capabilities are still nascent.

The government has accepted the fact that power capacity addition in the XI Plan would not be possible without the involvement of foreign suppliers, including Chinese. Union power minister Sushilkumar Shinde recently said in Parliament that import duty on power equipment for mega and ultra-mega power projects would not be made effective up to April 2012 (the beginning of the XII Plan period), as Indian manufacturers might not be in a position to meet the full requirement of capacity addition in the next two years. A committee set up by the Planning Commission under the chairmanship of Member (Industry)

ADVANTAGE CHINA
While the possible Yuan appreciation may give Indian power equipment suppliers some price advantage, it should be mentioned here that China is aggressively encouraging power equipment exports. This encouragement, which is so enmeshed in its national policies, will far outweigh the rather small disadvantage that the flexible Yuan might result in. Government support in China comes from various forms like lower lending rates, subsidies to export-oriented manufacturing, favourable joint venture laws, lower costs of materials like steel, aluminium, copper and steel, favourable direct and indirect tax regime, etc.

On the other hand, Indian manufacturers, unmindful of their cheaper Chinese equipment grouse, have to pay indirect taxes (sales tax and octroi) that push up prices by over 10 per cent. Experts therefore feel that even if China loses, albeit partly, the "fixed" currency advantage, Chinese equipment could still be cheaper.

THE TIME FACTOR
Some experts believe that even if Chinese equipment were costlier than Indian equipment, domestic power producers would not mind going for it for the sheer delivery schedule. Currently, India's largest power equipment maker BHEL has its order book full for at least five years. Though the company is expanding its manufacturing capacity, the situation is never going to change overnight.

Consider the supercritical technology that India is beginning to adopt very actively. India has ordered around 50 supercritical power units out of which 28 have been bagged by Chinese companies with the remaining by either Indian or other foreign (non-Chinese) companies. Even the orders won by Indian companies, mainly by BHEL, are currently mere commitments and would need to be executed at a much later date. BHEL is yet in the process of establishing its capabilities in the supercritical technology area. On the other hand, when we speak of Chinese supercritical equipment, in most cases, the equipment has physically arrived in India and construction work has begun. In short, Chinese equipment currently has a big advantage in terms of availability of technology, shorter lead time and lower cost. These advantages may peter out with time with the emergence of new market forces, but in the foreseeable future, they are too significant to be ignored.

When the power generation segment was fully in the hands of the public sector (Central and state government), setting up power generation plants was a national and social objective, but never a time-bound one. A gestation period of 6-7 years for setting up an average-sized commercial power plant was considered normal. Much of the gestation period was indeed the waiting period for receiving main plant equipment from BHEL. It may be recalled that in the X Plan Period (2002-07), the country could barely add 20,000 mw of power generation capacity, which was less than half of the original target. Delayed receipt of equipment from BHEL was allegedly the main cause of the debacle.

The scenario today is radically different. When it comes to the private sector, setting up of a power generation plant is largely, if not purely, a commercial objective. Completing a project on time and optimizing the project cost are topmost priorities for the developer. In such a situation, relying on domestic power equipment could vitiate the project's commercial viability and at least at the moment, Chinese power equipment appears to be first choice. New generation power developers like Reliance Power, Lanco, Sterlite Energy, JSW Energy and Adani Power have endorsed this view. Together these five developers currently have over 14,000 mw of thermal power capacity under construction that is scheduled to commission in the remaining part of the XI Plan period. This does not include capacity already commissioned or that scheduled to do so in the XII Plan period. Take for instance the Sasan ultra mega power project that is being developed by Reliance Power Ltd (Anil Ambani Group) with main plant equipment sourced from Shanghai Electric Corporation of China. Even though the project is envisaged to commission in the XII Plan period, the private developer has assured that at least one of six units will be commissioned within the ongoing XI Plan itself. This means that the gestation period would be compressed by at least a year and the first unit could commission within three years from zero date. Similar is the case with the Mundra UMPP that is being developed by Tata Power Company.

Faster availability of Chinese equipment is poised to set new benchmarks for commissioning schedules of power plants. Whatever be the future of Chinese power equipment in India-be it due to a stronger Yuan or any other economic factor-India is certainly entering a new paradigm as far as gestation periods for thermal power plants are concerned. The gestation periods of 6-7 years seen in the government-dominated days will only remain as an embarrassing chapter of India's power sector history.

Several state government utilities are tying up longterm power supplies using the tariff-based competitive bidding guidelines. In fact, India is progressively moving to a regime where any power purchased by state government-owned distribution companies will necessarily be based on tariff-based competitive bidding.

When it comes to Case I and Case II bidding by state government utilities, the power purchase agreement usually takes effect with a gap of four years (the time given to the power producer to start supplies) and is effective for a 25-year period. With more and more private sector entrepreneurs turning to commercial merchant power producers, there will be a growing need of commissioning power plants faster. In such a scenario, Chinese power equipment could play a very important role-at least till comparable alternatives emerge.

India is today in the midst of a power equipment revolution. With over 15,000 mw of new power generation capacity expected to be added every year in the medium to long term, the power equipment represents a huge business opportunity that cannot be overlooked. While the traditional mainstay BHEL is in the midst of a capacity expansion programme, there is a host of new entrants all vying for a slice of the pie. BHEL currently has a manufacturing capacity of 15,000 mw per year that is being increased to 20,000 mw in the coming years. At 20,000 mw, BHEL would appear to be technically competent of meeting the country's requirements. However, this is only an academic possibility. Experts feel that BHEL, in the medium to long term, will have a market share of around 25 per cent, implying the development of a huge power equipment manufacturing base in India by private and foreign companies.

Larsen & Toubro, India's leading engineering conglomerate and an existing supplier of power equipment, has tied up with Mitsubishi Heavy of Japan to set up manufacturing capabilities for supercritical power equipment. JSW Group has tied up with Toshiba of Japan to set up a manufacturing base for turbines and generators at Chennai, Tamil Nadu. The joint venture is aiming at an initial capacity of 3,000 mw by 2014. Bharat Forge and Alstom have come together to form an equipment manufacturing facility at Mundra in Gujarat. The plant is expected to go on stream in 2013 with a capacity of 5,000 mw. Ansaldo of Italy in which Gammon now has a controlling stake is planning to set up a boiler manufacturing facility in India. Besides, smaller existing players like Cethar Vessels are upgrading their capabilities through international collaborations. Reliance Infrastructure (Anil Ambani Group) is also learnt to be in talks with Shanghai Electric Corporation to set up a large power equipment manufacturing facility in India. Besides, Central utility NTPC has already formed a joint venture with BHEL to produce power equipment. Thermax has tied up with Babcock Wilson for turbines and so has Triveni Engineering with GE.

By 2015, India will see a tremendous growth in power equipment capacity, mainly coming from the private sector. This will not only reduce the reliance on BHEL but could also, depending on the price competitiveness, be a force that Chinese suppliers would have to contend with.

Despite its growing importance, it is now being felt that power producers, particularly those setting up small and medium industrial power plants, are growing wary of Chinese power equipment. While there is no official information available on this phenomenon, one can make some deduction on the basis of the growing order book of BHEL from the private sector. As discussed in Electrical Monitor, June 2010, the PSU engineering major's performance was redeemed to a large extent by orders for power plants from private producers. In 2009-10, private sector orders in the power sector amounted to 14,689 mw that was more than thrice of that in 2008-09. In fact, private power sector orders accounted for over 50 per cent of BHEL's overall order inflow including that from other sectors like industry and exports.

What will go against Chinese equipment, more than a stronger Yuan, is lack of after-sales service. While China is very prompt in getting plants running, there are issues of operation and maintenance. There are unconfirmed reports of Chinese power equipment failing, or running at sub-optimal conditions. If China has to gain a foothold in the Indian power sector, it would have to create a strong local service base, if not manufacturing facilities, an analyst said. Sooner or later, China's lack of local presence will become its undoing.

The next five-seven years will be a critical phase for India's power equipment sector with nearly 25,000 mw of capacity likely to come on stream, largely in the private and foreign sector. If this capacity is created successfully and on time, it will definitely have a bearing on the fate of Chinese power equipment. With time, more and more power generation plants will be set up in private sector, which technically opens a big business opportunity window. While Central and state government agencies might desist placing orders on Chinese equipment, the same is not true for private sector. At least at the moment, the tilt is clearly in favour of China. It is also interesting to note that Chinese equipment is making a backdoor entry into government projects through EPC contracts placed on private sector companies, which in turn, are selecting Chinese equipment. How much the Yuan appreciates is only one determinant. There are other advantages like timely delivery that today only China can offer. When more domestic equipment manufacturing capacity gets created, Indian power producers will have a wider choice and access to competitive prices. Equipment produced locally will definitely have an advantage as after-sales service would be ensured. Power producers have no fascination in particular for Chinese equipment-it is a matter of nochoice more than choice.

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