India’s Power Sector Surge: Motilal Oswal Tracks A Rs 40 Trillion Investment Opportunity

India’s power sector is on the cusp of a major transformation, offering colossal investment opportunities over the next decade. Economic growth, energy transition, and technological advancements will drive the sector’s rapid growth, according to a Motilal Oswal report titled “Power Utilities: EmPOWERING INDIA!”

The report outlines the massive growth and investment potential in the sector and highlights the key trends shaping its future. While the report provides a comprehensive analysis of the power sector’s growth prospects, here are five key takeaways:

#1 Investment Opportunity of INR 40 Trillion

The report reveals that India’s power sector presents a massive investment opportunity worth INR 40 trillion over the next decade, which is 33% higher than the INR 30 trillion estimate recently cited by the Union Minister for New and Renewable Energy. This growth is driven by a combination of robust economic prospects, increasing electrification, and technological advancements.

The INR 40 trillion is divided into INR 34 trillion for firm capital expenditure and an additional INR 6 trillion for optional projects. The bulk of the investment—96%—will focus on power generation and transmission, with the remaining 4% allocated to smart metering.

#2 Accelerating Power Demand

Power demand in India is expected to grow at a compound annual growth rate (CAGR) of 7%, up from the previous estimate of 5%. Key contributors to this growth include the rising adoption of electric vehicles (EVs), expansion of data centres, and increased electrification across sectors.

By 2035, EVs and data centres alone are projected to contribute one-third of the country’s power demand growth, a significant rise from their current negligible share. Data centres are expected to grow at a rate of about 30% annually, while EV penetration will increase across various vehicle categories, reaching 60% for two-wheelers, and 20% each for passenger and commercial vehicles.

One notable comparison in the report is that India’s current consumption trends closely mirror those of China during 2000-03, a period after which China’s power consumption grew at an impressive CAGR of around 8%. This signals a promising future for India’s power consumption.

#3 Transition to Renewable Energy

India’s renewable energy targets are set to be a major force in the power sector over the next decade. The country aims to achieve 500 GW of renewable energy (RE) capacity by 2030, with a total installed power capacity of 900 GW by FY32, up from 442 GW in FY24.

 

Solar and wind power are expected to dominate, accounting for around 53% of total installed capacity, while the share of thermal power is projected to decrease to 29%. This transition is further bolstered by government policies such as the introduction of the Late Payment Surcharge (LPS) in 2022, which has significantly improved the financial health of the sector.

#4 Strong Policy Support

The government has played an active role in supporting the power sector through various initiatives, including reducing Aggregate Technical and Commercial (AT&C) losses, implementing smart metres, and providing financial support for infrastructure development. In recent years, policies have focused on improving the operational and financial health of the sector.

For example, the LPS introduced in 2022 helped reduce states’ outstanding dues from INR 1,397 billion in June 2022 to INR 500 billion by January 2024. Additionally, AT&C losses have declined from 22% in FY21 to 15% in FY23, with a target to reduce these further to 12-15% by FY26. Funding has also been directed toward upgrading distribution infrastructure and battery storage, along with promoting investment in areas like offshore wind and nuclear energy.

#5 Technological Advancements as Power Demand Drivers

Advanced technologies such as 5G, Artificial Intelligence (AI), and the Internet of Things (IoT) are set to become significant drivers of electricity demand in India. For instance, data centres, cryptocurrency mining, and AI-related activities could account for 10-15% of global electricity demand growth in the coming years.

Electrification of transport will also remain a key demand driver, with the metro rail network expected to expand to around 2,000 km in the coming years, further boosting EV penetration.

Key Risks Associated

While the growth prospects for the power sector are promising, the report also outlines several risks that could impact performance. Expectations of strong earnings growth, coupled with high valuations, could lead to significant de-rating if even minor earnings slippages occur. The report projects a 13% CAGR in earnings for covered companies during FY24-27.

One of the main concerns is delays in the start-up of new projects, as transmission connectivity issues in states like Rajasthan have already affected progress. Renewable energy projects may also face lower-than-expected profitability, while rising competition in the transmission and standard solar or wind generation sectors could create challenges. Price volatility in key commodities and components, along with limited domestic solar module capacity, further adds to the risks. Moreover, potential regulatory risks from market coupling for dominant power exchanges like the publicly listed IEX present additional uncertainty.