A McKinsey study on India's power sector foresees the power deficit surging from 15,000 mw today to 70,000 mw by 2017. "To fulfil its power requirements by 2017, India need to increase its pace of capacity addition five-tenfold," says Vipul Tuli, partner, McKinsey & Company, who is also co-leader of the management consulting firm's Electric Power and Natural Gas Practice, which prepared the report: Powering India: the road to 2017, that provides a detailed perspective on the demand outlook in 2017. The report states that, if India's gdp continues to grow at an average rate of 8 per cent for the next 10 years, the country's power demand will soar from around 120 gw (120,000 mw) today to 335 gw (335,000 mw) by 2017. It indicates that the four factors driving this demand will be a rapid growth in the manufacturing sector, a high 14 per cent growth in residential consumption that outstrips the 8 per cent gdp growth, the connection of 125,000 villages to the grid through several flagship programmes like Bharat Nirman, and the realisation of demand that is suppressed due to load shedding. McKinsey's associate partner Jaidit Brar believes that a $600 billion opportunity will most likely emerge across the value chain by 2017, if key reforms are implemented. "Of this, around $300 billion will be needed for generation, $110 billion for transmission, and the balance $190 for distribution," he calculates. "The sector also has the potential to present an annual profit pool (ebitda) of $135 billion to $160 billion by then, with the largest value creation opportunity residing in generation." As in any sector, players with the right strategy, business model and execution capabilities will capture a disproportionate share of this profit pool, mentions Brar, adding that they will undoubtedly need to understand the various risks at hand. He nevertheless notes that the payoff for embracing development risks, and regulatory and market uncertainties will be large. "Players who will enter early will create significantly more value than players who enter after reforms have stabilised and the sector has matured," maintains Brar. "The valuations of a few players in India's telecommunications industry testify to this." The result of a six-month long effort in collaboration with industry leaders and policymakers, the report acknowledges that over the past five years, strategic measures have been taken to unleash the potential of the power sector. These include introduction of the Electricity Act 2003 and ultra mega power projects (umpps), apart from a number of administrative steps like tripartite agreements between the Central government, central generators and the states and recapitalization of state electricity boards (sebs). "But though progressive and necessary, these measures have been insufficient," it observes. The report recommends a modification in the profile of the fresh capacity so as to ensure that the country has the right mix of base-load and peaking plants. It does not foresee the magnitude of capacity additions required materializing through a traditional approach, counseling instead a radically new approach to address viability risks, ensure faster capacity creation, secure fuel, and improve asset efficiency. "Given the number of agencies involved in the sector, more effective monitoring and review mechanisms are also critical," it says. To mitigate the viability and market risks, a function of a high amount of theft and losses in distribution, the report suggests reducing the aggregate technical and commercial (at&c) losses to 15 per cent by 2017 and creating market mechanisms to stimulate investments in peaking plants. There should be a deep and well-functioning wholesale electricity market coupled with multi-year differential tariffs, it adds. According to the report, tardy capacity additions are induced by coordination between multiple stakeholders across the Central and states governments which leads to delays in acquiring sites and obtaining approvals. There are also shortages of engineering procurement and construction (epc) services, skilled manpower and equipment capacity. To tide over these drawbacks, the report feels the authorities should tender over 140 project sites by 2012, with end-to-end approvals in place, create 30 gw per year capacity for equipment and manufacturing related supply chain, and train and develop 300,000 skilled and semi-skilled workers in the field. To overcome inadequate fuel supplies, ah outcome of a regulated coal sector and limited indigenous gas supply, the report recommends accelerated captive mine development and creation of the requisite infrastructure capacity for 100 million tonnes per annum of coal imports. It also advises that natural gas supplies for peaking plants be secured by reviving lng projects and making regional pipelines a strategic priority. Also deemed important is a renewable energy programme for generating 30 gw by 2020, with a focus on solar power, given that India has the highest solar yields in the world. To surmount operational inefficiencies, caused by low plant load factors and transmission failures, the McKinsey study calls for an action plan for over 10 per cent gain from demand-side management (dsm). Several countries like Brazil and the US have implemented dsm initiatives to curb demand by as much as 20 per cent, it points out.