The significant transformation currently being witnessed in the power transmission sector is crucial to meet the increasing energy needs of the country, which is one of the fastest-growing economies in the world, note Rohin Agarwal and Aditya Jain.
India’s power transmission infrastructure is undergoing a significant transformation, driven by several factors, including ambitious renewable energy goals, rapid urbanization, and a growing demand for reliable electricity. This transformation is crucial to meet the increasing energy needs of the country, which is one of the fastest-growing economies in the world.
The Indian government has set forth clear objectives to upgrade its transmission capabilities as part of the National Electricity Plan, released in October 2024. Under this plan, the government is committing substantial investments to enhance transmission infrastructure, with Rs.4.25 trillion earmarked between FY23 and FY27 and an additional Rs.5 trillion between FY28 and FY32. These funds will be directed towards developing new greenfield projects and augmenting existing systems, thus paving the way for a more robust and sustainable energy network.
Key Elements of the Transformation
TBCB Mechanism: One of the key mechanisms driving this transformation is the tariff-based competitive bidding (TBCB) model. This approach has been adopted to attract greater private sector participation in the power transmission sector. The TBCB mechanism has brought about significant improvements in the sector, contributing to greater transparency, better price discovery, fiscal discipline, and the introduction of advanced technologies. The Central Transmission Utility (CTU) has also implemented a cash pooling mechanism, which helps reduce counterparty risks, improve financial stability, and enhance the profitability of transmission projects. This has made the sector more attractive for investment, as evidenced by increased monetization opportunities via Infrastructure Investment Trusts (InvITs), which provide a flexible and lucrative investment structure for both domestic and international investors.
Debt and Equity Structure: The financing structure of transmission projects in India typically follows a 75:25 debt-to-equity ratio during the construction phase. This means that a significant portion of the funding comes from debt, with the remainder being equity from the project developers. However, once the projects are operational and generating revenue, they are typically refinanced, often at an 85:15 debt-to-equity ratio. This refinancing model helps developers release their capital for future projects and ensures the financial sustainability of ongoing ones. Public sector lenders, such as Power Finance Corporation (PFC) and Rural Electrification Corporation (REC), play a dominant role in providing debt financing for transmission projects. However, the involvement of institutions like the State Bank of India (SBI), India Infrastructure Finance Company Ltd (IIFCL), Indian Renewable Energy Development Agency (IREDA), and the National Bank for Financing Infrastructure and Development (NaBFID) is growing, further diversifying the financing landscape.
On the equity side, international investors are becoming more interested in India’s transmission sector. In the past, these investors typically focused on low-risk, operational assets. However, there has been a shift, with increased interest in both operational and development-stage projects. This shift is a sign of growing confidence in India’s transmission sector and its long-term growth potential. Collaborative efforts between domestic developers and international investors, such as the partnerships between Sterlite Power and the Government of Singapore Investment Corporation (GIC) or Indigrid with British International Investment (BII) and Norwegian fund Norfund, highlight the growing international interest and the increasing role of global investors in shaping the future of India’s transmission network.
Role of InvITs: Infrastructure Investment Trusts (InvITs) have emerged as a key financial tool in India’s power transmission sector. InvITs provide stable, predictable cash flows, making them an attractive investment option for both institutional and retail investors. By allowing developers to recycle capital from operational assets, InvITs facilitate the continuous development of new projects, ensuring a steady stream of infrastructure growth. Indigrid, a leading InvIT in the transmission space, serves as a prime example of how InvITs can successfully attract investor interest. The model provides an annuity-style revenue stream, ensuring liquidity and boosting investor confidence, which, in turn, drives further investment in the sector.
Conclusion: In conclusion, India’s transmission sector is on the cusp of rapid growth and transformation, with substantial investments, innovative financing mechanisms, and increasing global investor participation all playing a pivotal role. The combination of government-led initiatives, private sector involvement, and international partnerships is set to build a resilient, future-ready transmission network that aligns with India’s ambitious renewable energy goals. This transformation is not only crucial for meeting domestic energy needs but also has the potential to set a global benchmark for sustainable energy infrastructure. As the country continues to invest in and develop its power transmission capabilities, it is positioning itself as a leader in the global transition towards renewable energy and a sustainable energy future.
About the authors: Rohin Agarwal is Vice President, Avener Capital; Aditya Jain is Associate, Avener Capital.
