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Business News/ Opinion / Views/  Can Bhel adapt to India's clean energy transition?

Can Bhel adapt to India's clean energy transition?

This is no less than an existential crisis for Bhel, which is heavily dependent on orders for conventional power projects.

Over the years, Bhel has made forays into defence, aerospace, transportation, energy storage, e-mobility, solar and water, as part of its diversification drive.Premium
Over the years, Bhel has made forays into defence, aerospace, transportation, energy storage, e-mobility, solar and water, as part of its diversification drive.

NEW DELHI : In 1964, when it was established, Bharat Heavy Electricals Ltd (Bhel) was seen as crucial to the future of a country that needed to industrialize quickly. It lived up to the promise.

As a popular adage in power sector circles goes, three out of five light bulbs in India are powered by electricity generated from its machines. It has the credit of commissioning power plants in extremely difficult terrain, such as Syria, Libya and Iraq. In 2022, however, as India undergoes an energy transition from fossil fuels to renewables, the fear is that the public sector undertaking (PSU) might be left behind.

According to several experts and the company’s past and present employees, this is no less than an existential crisis for Bhel, which is heavily dependent on orders for conventional power projects.

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Those have been drying up. Sample this: In the last three years, the Union ministry of environment, forest and climate change have given environmental clearance at the central level to only 10 coal-fuelled power projects. A former chairman and managing director of Bhel, who did not want to be named, admits that the changing energy landscape is a problem for the company. “Due to lack of environmental clearances, no new coal-based power generation capacity is coming up," he said.

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But the company believes that the perception that its performance is faltering is misplaced. “While the shift towards solar power is undeniable, for a country the size of India, renewable power cannot constitute more than 50% of the total generation. This is critical in view of grid stability and thermal power will continue to be the mainstay of India’s national grid for decades to come, supplemented and supported by nuclear and hydel power," a spokesperson for Bhel said in a detailed emailed response.

Bhel accounts for 53% of India’s installed power generation capacity in the conventional space. “It is one of the very few companies in the world that manufactures and supplies equipment for the entire range of power plants, with proven capabilities for executing thermal, gas, hydro and nuclear power projects," the spokesperson added.

The switch

Nevertheless, Bhel recorded a net loss of 191.85 crore for the quarter ended June, even as revenue was up 61.03% to 4,672 crore. The loss is despite Bhel’s order book remaining quite robust—it was 99,967 crore at the end of first quarter of the current financial year, according to Crisil. The order book was 102,542 crore, 102,090 crore and 108,443 crore in FY22, FY 21 and FY 20, respectively. “The power segment has traditionally contributed to 70-80% of its revenue. Profitability remains exposed to volatility in the power sector and structural issues such as excess capacity, delays in land acquisition and environmental clearances, availability of fuel and funding, and weak financial position of many state power utilities, which are key clients," said Crisil Ratings Ltd in a 22 July report.

The Bhel spokesperson blamed the hit on profits on global supply chain disruptions caused by the pandemic and geopolitical conflict. “Additionally, for the projects under execution, the project payment schedules are back loaded, causing delay in realization of revenues and profits. Another major factor is the absence of thermal power project orders. The price pressure is expected to ease in the coming months, and new projects are coming up," the spokesperson said.

“Bhel created the power equipment manufacturing capacity when it was virtually non-existent in the country," said former Union power secretary Anil Razdan. “But it should have looked at new energy sources. There is no space for complacency in business," he added.

As companies focus on improving their environmental, social and governance (ESG) quotient, coal-fuelled power is getting a short shrift. The Securities and Exchange Board of India has made business responsibility and sustainability reporting mandatory from the current financial year. With Prime Minister Narendra Modi pledging net-zero carbon emissions by 2070 at the COP26 summit, the drive to embrace green energy will only pick up pace. The Lok Sabha has cleared amendments to the Energy Conservation Act, which will make the use of clean energy mandatory. Global investors too are lining up for India’s green energy space, as electricity demand picks up after the dip of the second covid wave.

Different strokes

It’s not that the company is not aware of the tectonic shift. Over the years, Bhel has made forays into defence, aerospace, transportation, energy storage, e-mobility, solar and water, as part of its diversification drive. But substantial progress has eluded it.

This is surprising given that Bhel has been supplying traction motors to Indian Railways since 1962, played a major role in the commissioning of Kolkata Metro in 1982, manufactured central rings for the Chandrayaan-3 project, and even supplied the integrated platform management system to the recently commissioned aircraft carrier INS Vikrant.

Experts say the company suffers from a winners’ curse.

“The core of its purpose was design, engineering and manufacturing. Success in a specific technology and sector blindsided it. Lack of leadership, diversification of products, inability to seize market opportunities in growth areas impacted their growth and destroyed shareholders’ value," said Sambitosh Mohapatra, leader for ESG, energy utilities and resources practice, PricewaterhouseCoopers India.

In other words, it failed to see that it needed a reset. “Companies primarily catering to the fossil-fuel industry must reengineer their business models to align with emerging energy transition themes and customer’s climate action needs," says Debasish Mishra, a partner at Deloitte Touche Tohmatsu India.

While coal remains the mainstay of India’s energy mix, accounting for around 51% or 204.07 GW of its installed capacity of 404.13 GW; clean energy is the way forward. India has an installed renewable energy capacity of 160.92 gigawatt (GW) and 74.76 GW is under implementation.

“Over-dependence on coal-fuelled power generation plants landed Bhel in this position. Also, while a state-run firm has its own benefits, the challenges are many —for instance, slow-decision making process results in lost opportunities," said a former Bhel director requesting anonymity.

In the 1980s, Bhel was the first in the country to set up a solar photo-voltaic (SPV) manufacturing unit but frittered that advantage away. “We were an early entrant in solar photo-voltaic manufacturing, but in the course of time the market got commoditised due to cheap Chinese solar cells and modules. Not just Bhel, none of the Indian solar cell/module making entities could survive the onslaught as Chinese manufacturers enjoy subsidies in electricity cost, finance cost and economies of scale," the Bhel spokesperson said.

India currently has a manufacturing capacity of only 3GW for solar cells and 15GW for modules. Globally, the manufacturing of solar cells is dominated by China. But there is a growing demand for domestic solar modules and cells, especially after the government imposed a basic customs duty of 25% on solar cells and 40% on modules from 1 April this year.

India plans to create an additional domestic solar equipment manufacturing capacity of 25GW each of solar cells and modules, and 10GW of wafers by April 2023. Along with leveraging its growing green energy market to boost manufacture of solar power generation equipment, it is also looking to play a bigger role in global supply chains. The Union budget presented earlier this year made an additional allocation of 19,500 crore for the production-linked incentive scheme for high-efficiency solar modules.

For Bhel to tap into such an opportunity, the company’s veterans believe it needs a complete overhaul. “But the impetus is not there," said the second former director of Bhel cited above.

In the green energy space, Bhel provides engineering, procurement and construction (EPC) of solar PV applications. It also has a floating solar portfolio of more than 150MW, out of which more than 100MW has been commissioned, and a rooftop portfolio of around 33MW. “Bhel has become the largest EPC player in the floating solar segment in the country, with design and engineering capabilities to address a range of complex site requirements including lakes, ponds, canals, reservoirs, among others. It successfully commissioned 80MW of the 100MW NTPC Ramagundam, India’s largest floating solar SPV plant in March," the Bhel spokesperson said.

However, experts say it has not scaled to the level desired in the space. “The business profile of Bhel has to change—there are no two ways about it. The solution is to put the right people on the job who understand technology and manufacturing and focus on sectors such as defence, transportation and non-conventional energy," said former Bhel chairman and managing director B. Prasada Rao.

Bhel has forayed into hydrogen economy and battery energy systems, among others. It also provides solutions for electric vehicle (EV) charging stations, including solar-based EV charging stations and battery energy storage systems. However, in the solar space, the company is now expected to face serious competition from private players like Reliance New Energy and Adani Solar.

The former CMD cited above who did not want to be named suggests that Bhel should move to the L&T model. “Bhel should be a project-oriented company and should be diversified like Larsen & Toubro. It should do EPC jobs and concentrate on government contracts," he said.

The opportunity

Experts also concur that Bhel has an important role to play in India’s new energy play. “Though it was built for heavy engineering, it could have been more agile and moved towards more appropriate and future technologies; leveraging its strengths such as financial base, infrastructure and a huge pool of talent. It could have diversified earlier. If it does so today, it is never too late," said Razdan.

“It needs to reflect on its purpose and reorient its focus. Its board has the responsibility to reform, recast and restructure the organisation, starting with providing it with right leadership accountable to the value they create," said PwC India’s Mohapatra.

According to the Central Electricity Authority, by 2030, the domestic power requirement would touch 817GW, more than half of which would be clean energy. Of this, 280GW would be solar energy alone. “With focus shifting to renewables, Bhel will also need to foray in that space in a much bigger way. It can focus on newer areas emerging in energy transition such as battery storage, green hydrogen, etc. Timing, speed and competitiveness will be of essence," added Somesh Kumar, power and utilities leader, EY India.

Among the steps Bhel has taken includes creating a separate business vertical for green hydrogen. It is also focussing on providing emission control solutions and eyeing a major role in rail projects like Vande Bharat, metro rail projects, monorail, Maglev, battery and alternate fuel-powered locomotives, and high-speed rail and signalling.

“As India wants to gain ground in energy manufacturing, companies that have traditional manufacturing expertise must take the lead," said Debasish Mishra.

The opportunities will present themselves to Bhel with the government lining up an ambitious plan for the power sector as part of its Vision 2047, while ensuring access to cost-competitive, reliable and clean electricity. “Remember, Bhel is a technological giant with skill sets developed over decades," added the former Bhel director cited above.

With 16 manufacturing units, around 33,500 staff, and an installed global power generation equipment base of 193GW, many believe it can navigate the waters before the tide goes out.

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Published: 07 Sep 2022, 11:07 PM IST
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