Mar 20, 2006 -- financialwire.net

AES (NYSE: AES), Korea Electric Power (NYSE: KEP), Mitsui (NASDAQ: MITSY), Sumitomo (TSE: 8053) and CLP International are scouting for power projects in India. The power biggies are looking at exploiting the potential growth in electricity demand spurred by the 8% growth of the Indian economy.

AES has already signed an agreement to build a $1.2 billion, 1,000 megawatt (MW) power plant in eastern India and, along with Korea Electric Power, shown expression of interest for the Mundra coastal project, one of the five ultra-mega power projects proposed by the Indian government. Mitsui has shown interest in another mega project, the Sasan Pithead project. The ultra-mega power projects, each having a minimum capacity of 4,000 MW, are being planned to fulfill to meet the power requirements of a number of states.

The Indian government aims to add a power generation capacity of about 62,000 MW during the 11th Five Year Plan (2007-2012), composed of coal and lignite 38,000 MW; gas (LNG) 6,000 MW; hydro 15,000 MW and nuclear 3,000 MW, involving a total cost of $ 90 billion for generation, transmission, sub-transmission, distribution and rural electrification.

The government plans to achieve these targets through private investment, 100% foreign direct investment has been allowed in the power sector except for dispatch. In order to reduce the cost of the project and ensure cheap power to consumers, guidelines have been issued under Electricity Act, 2003 to ensure that all future generation projects would be developed under the competitive bidding route. With this, investment in the Indian power sector should become more competitive, transparent, open and free of bureaucratic hassles.

For global power companies, India offers a huge market and exemption from taxes on profit earned for 10 years. However, this tax holiday will last only till 2012. Financial institutions lending to power projects are also exempt from tax for income arising out of interest, dividends and long-term capital gains arising out of such power projects. Since the cost of lending reduces for the financial institutions they pass on the advantage to power projects to attract more companies. All this reduces the overall cost of power projects in India.

If the Indian economy continues to grow at its present rate, the demand for electricity would also be expected to grow further. According to the 16th electric power survey, by 2012 India's peak demand would be 157,107 MW; as of now India's total installed capacity stands at 123,667 MW. This offers a mouth-watering opportunity for foreign players. Moreover, since the tax holiday will last only till 2012, the power majors could be in a hurry to enter India. Given the huge demand, Punam Choudhary, analyst at ValueNotes, believes that the government will announce more ambitious projects in the future to fulfill the ever increasing electricity demand, and foreign players will have an important role to play in contributing towards India's power generation capabilities.

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