Before we jump into today’s topic, I just want to wish everyone a very Happy Diwali! I hope you had a great time celebrating, enjoying the festivities with your loved ones, and that the coming year brings you all the success and happiness you’re aiming for.
Electricity is now such an essential part of our lives. With India’s rising middle class, the growing influence of AI, cooling needs, data centres, and electric vehicles, the world’s demand for electricity is skyrocketing—and India is right in the mix. It’s hard to imagine Diwali without those vibrant lights everywhere, right?
But as our demand grows, one big question stands out: can our supply keep up?
Especially now, as both the global and India’s power sectors reach a major turning point, the shift from coal-powered electricity to cleaner, greener energy sources is accelerating.
Today, let’s take a closer look at India’s evolving power sector. Are we truly on the brink of a power supercycle? Let’s find out!
India’s Power Opportunity
India is aiming to significantly increase its renewable capacity, mainly solar and wind power over the next 7-8 years to meet the increasing demand. From 94 GW combined capacity (Solar + Wind), the aim is to reach 550 GW capacity by 2032.
Note: While the increase in solar and wind generation capacity appears substantial, it’s essential to remember that these plants have lower efficiency compared to traditional sources. For instance, coal power plants, when running efficiently, can achieve a plant load factor (PLF), which is a measure of efficiency, of 85-90%, while solar plants typically deliver only about 25% PLF. This means that significantly more solar capacity is required to match the output of a coal plant.
To support this growing generation capacity, India will need substantial investment in Transmission and Distribution (T&D) infrastructure as well. According to a report by Motilal Oswal, total capital expenditure in the power sector is projected to reach a substantial ₹34-42 lakh crore between 2024 and 2032.
Breaking down the Power Sector in India
The power sector covers a huge value chain, with several different sub-sectors, each playing a unique role.
Here’s a quick breakdown of what each part does and a few companies involved in each area. This is just a snapshot and not an exhaustive list.
But wait – everything is not so hunky dory
Before COVID, the power sector wasn’t exactly in the spotlight. Since 2020, however, there’s been a surge of interest in energy security and the shift to cleaner sources.
The BSE Power Index, which tracks top companies in the sector, has skyrocketed about fourfold in the last five years—an impressive bull run. However, not all these gains stem from actual revenue and profit growth. Much of it has come from a steep rise in price-to-earnings (PE) ratios, which jumped from 8x in 2020 to an eye-popping 32x, according to Aequitas, an investment firm.
The current situation also brings back memories of 2007-08, when a boom in the power sector left some over-leveraged companies in difficult situations. After that, the sector went through a lull from 2014 to 2020, with limited investor interest during those years.
But, is this time different? Maybe. Maybe not. One needs to be cautious. The coming years will be pivotal in defining India’s energy resilience and sustainability. For investors, the power sector may present a compelling opportunity, but one may need to enter and exit at the right time.
What’s your views on this sector? I’d love to hear your thoughts.
Till the next time,
Vijay
CEO – InCred Money
P.S. I share my thoughts on Investing and the Economy regularly. You can follow me here.
