India Power Report Q1 2013

BMI View: In light of India's economic and demographic growth, we expect power consumption toincrease from an estimated 697.65 terawatt hours (TWh) in 2011 to 1286.19TWh in 2021. The country's12th Five-Year Plan anticipates energy demand will grow by 6% per annum and electricity capacity willexpand by 100 gigawatts (GW). Critical to the plan is the focus on measures to combat the continued risein India's dependence on imported energy, and a move to favour diversification towards renewablesources as well as nuclear. The FY2012/13 budget announcement is indicative of this focus, with theIndian government initiating a series of incentives and measures that will benefit the power sector.

The key trends and developments in the Indian electricity market are:

Several developments in H212 within India's renewables industry highlight the continuedinterest the sector is receiving from private investors and the political will that underpins it. Weexpect further significant growth in the industry, and maintain our belief that renewables presentsignificant investment opportunities. However, we highlight that renewable-generated electricityis unlikely to contribute significantly to the country's overall power generation capacity. This isfounded on our concerns about the sheer size of India's electricity market, coupled with ourlong-held view that the renewable industry will not reach its full potential.

India's coal shortage looks set to intensify as the weather turns wetter and colder. At the heart ofthe problem lies the inability to launch a new mining bill that will address the sector's poorbusiness environment, as well as state-owned coal miner Coal India's inability to maximise thecountry's coal potential. We believe coal shortages are likely to remain a downside risk to Indianpower producers and infrastructure activity over the short to medium term.

In the worst electricity disruption in a decade, two separate grid failures cut power supply tomore than 600mn people in 22 states at the end of July 2012. We believe the disruption is likelyto have come about as a result of the lack of investment in India's transmission and distributionnetwork, as well as in the broader electricity market. Consequently, we believe the Julydisruption could be the spark that ignites a wave of long-needed reform in India's electricitysector.

The Indian power sector's track record is testament to the difficulties the country faces in implementingits ambitious targets. State government indebtedness is a major obstacle to marshalling the massiveinfrastructure investment required, and a lack of depth in the Indian financial sector also limits fundingoptions. Furthermore, there is still a lack of regulatory transparency, longevity and certainty regarding thedomestic power sector.