Sector Update | 10 January 2018
Capital Goods
Emission control equipment orders to finally kick start!
INR1.3t opportunity over next five years
The Ministry of Environment and Forests (MOEF) had notified new emission norms for air
and water consumption in December 2015, with a deadline of two years for
implementation. While the deadline has expired, very little progress has been made in this
regard till date. However, the Central Electricity Authority (CEA) under the Ministry of
Power has worked out a revised five-year timeline to December 2022 with power plants –
this has been agreed to by the MOEF and power plants will have to install the requisite
emission control equipment by December 2022. In this note, we delve into the potential
opportunity from these norms over the next few years by analyzing the implementation
plan for ~192GW of India’s existing coal-fired capacity, identifying the players benefitting
from this move, and gauging the impetus to replacement demand with old plants getting
phased out faster.
Ordering for emission control equipment to finally start from CY18; December
2022 the revised deadline:
The MOEF had notified new emission norms for air
and water in December 2015
(see Exhibit 1),
with a two-year timeline for
implementation. While very little progress in the past two years, the CEA has
worked out an implementation plan by December 2022 based on discussions
with individual power plants. The emission control implementation plan
submitted by the CEA to the Minister of Environment and Forest has been
accepted and Central Pollution Control Board (CPCB) has already issued notices
to ~131GW power plants in December 2017 (India’s coal-fired capacity at
~192GW) to comply with these emission norms as per the implementation plan
(December 2018 to December 2022) submitted to the CEA. In our view, utilities
were delaying orders, as they awaited (a) revised timelines to be frozen before
going ahead with placing orders, (b) compensation for shutdown of boilers while
retrofitting, especially in case of SCR implementation, and (c) change in PPAs to
reflect higher costs from retrofitting. With these uncertainties behind, we
expect orders to pick up significantly over the next 2 -3 years, as 2-2.5 years
would be required for these projects to be executed to meet the
implementation deadline of December 2022. ~40GW of plants have already
been tendered for FGD installation, with ~32GW of tenders by NTPC alone.
INR1.3t opportunity for emission control equipment providers:
We delved into
the potential opportunity from the emission norms over the next few years by
analyzing the implementation plan for ~192GW of India’s existing coal-fired
capacity. We estimate an opportunity of INR1.3t
(see Exhibit 5)
totaling 196GW
from the retrofit of existing power plants (165GW) alongside the new plants
(30GW) to be commissioned over the 13
th
plan (FY22). In case of existing plants,
we have used the list of plants (~166GW) that have agreed to the
implementation timeline with the CEA by December 2022. The capex is
estimated at INR8.8m-12.8m/MW by the Central Electricity Authority for
meeting the new air (SPM, SOX, and NOX) and water consumption norms. In our
Ankur Sharma
(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449
Amit Shah
(Amit.Shah@MotilalOswal.com); +91 22 3029 5126
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
8 August 2016
1

Capital Goods
view, the spending on water consumption may not be material and have only
considered the spend on SOX, SPM and NOX control equipment. ~INR4m is the
estimate for the desulphurization unit (SOX control), and depending on
technology, INR1m-4m/MW for selective catalytic reduction (SCR) for nitrogen
emissions. The CEA estimates the tariff impact of ESP, SOX, NOX and closed
water circulation at INR0.62-0.93/unit, which will be passed on via modifications
to the existing PPAs of utilities. Of this, the cost for implementation of the FGD
is INR0.20 and INR0.09-0.30 for SCR.
Replacement demand to get a boost, with ~17GW of plants set to retire due to
inability to meet emission norms:
The other outcome of adherence to the strict
emission norms would be faster phase out of older power plants that may not
find it feasible to invest in retrofitting – in any case, a power plant reaches its
end of life by 40 years and has to be phased out thereafter. According to media
reports, the Ministry of Power is of the view that plants older than 25 years
should be replaced with new super critical units, which (a) are less polluting, (b)
are more efficient in terms of station heat rate and coal consumption, (c) have
lower auxiliary consumption, and (d) have lower fixed costs. Our base case
assumption is retirement of ~17GW based on the implementation time lines
provided to the CEA by power utilities till December 2022 – this does not include
31GW of plants older than 25 years, but have agreed to meet the new emission
norms. On the flip side, the longer term impact of these norms is to discourage
construction of new coal-fired plants by making it more expensive – INR9m-
13m/MW additional costs to meet the new air and water consumption norms.
Boiler manufacturers and EPC players to participate in emission control
equipment opportunity:
With an opportunity of INR1.3t on the anvil, we expect
participation from both boiler manufacturers and EPC players that would want
to partner with technology suppliers to obtain a prequalification. We expect 10-
12 players to participate in the upcoming opportunity. A bulk of the orders for
the above equipment would need to be placed by FY21 (December 2020) so that
construction is completed on time by December 2022, since it would take 20-24
months for execution and commissioning. Effectively, this implies that orders
worth INR1.3t have to be placed in the next three years to FY21, implying an
annual ordering opportunity of ~INR400b, which would be catered to by 10-12
players. We expect the opportunity for each player at ~INR40b, which may not
be material for a BHEL or an L&T, but could be quite material for smaller players
like Thermax, GE Power, Ducon Technologies, and IGSEC Heavy Engineering.
Stocks to benefit on upcoming opportunity:
Players in the listed space that
would benefit from the emission control equipment opportunity are BHEL (Sell),
L&T (Buy), Thermax (Neutral), GE Power (N/R), Ducon Technologies (N/R), and
IGSEC Heavy Engineering (N/R) alongside EPC players like Reliance Infra (N/R)
and Techno Electric (N/R).
10 January 2017
2

Capital Goods
Emission control equipment orders to finally kick off
Revised timeline of December 2022 for implementation
The MOEF had notified new emission norms for air and water in December 2015
(see Exhibit 1), with a two-year timeline for implementation (by December 2017).
Different norms have been set for (a) plants commissioned prior to 2003, (b) plants
commissioned between 2004 and 2016, and (c) plants commissioned after 2016.
Exhibit 1: Air emission norms specified by MOEF effective December 2015
Description
Plant prior to December,2003
SOX emission
600mg/Nm3
(Units <500MW)
200mg/Nm3 for Units equal to or
>500MW
600mg/Nm3
(Units <500MW)
200mg/Nm3 (Units equal to or
>500MW)
100mg/Nm3
NOX Emission
600mg/Nm3
Particulate
Matter
100mg/Nm3
Plant from Jan’04 –Dec’16
300mg/Nm3
50mg/Nm3
Plants post Jan’17
100mg/Nm3
30mg/Nm3
Source: MOEF, MOSL
While very little progress was made in the past two years, the CEA has worked out
an implementation plan by December 2022 based on discussions with individual
power plants. The emission control equipment implementation plan submitted by
the CEA to the Ministry of Environment and Forest has been accepted and Central
Pollution Control Board (CPCB) has issued notices to ~131GW plants in December
2017 (~190GW is India’s coal-fired capacity) to comply with these emission norms as
per the phasing plan (December 2018 to December 2022) submitted to the CEA.
Exhibit 2: Power plant capacities split by year of commissioning
Date of commissioning
Prior to Dec'2003
Jan'04- Dec'16
Plant post Jan'17
Total
GW
58
129
5.2
193
Source: MOP, MOSL
In our view, utilities were delaying placing orders, as they awaited:
Revised timelines before going ahead with placing of orders,
Compensation for shutdown of boilers while retrofitting, especially in case of
SCR implementation, and
Change in PPAs to reflect higher costs from retrofitting.
With these uncertainties behind, we expect orders to pick up significantly over the
next 2-3 years, as 2-2.5 years would be required for these projects to be executed to
meet the implementation deadline of December 2022. ~40GW of plants have
already been tendered for FGD installation, with ~32GW of tenders by NTPC alone.
10 January 2017
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Capital Goods
Exhibit 3: FGD tenders issued and waiting for award
Name of company
NTPC bulk tender
NTPC bulk tender
NTPC North Karanpura
NTPC Khargone
NTPC Telengana
GSECL Wanakbori (Unit 8)
GSECL Ukai
GSECL Sikka TPS
NTPC Ramagundem
NLC - Neyveli NTPP
NLC Ghatampur(1.98GW)
NLC TPS I expansion
NLC TPS II
NLC TPS II Expansion
NLC Barsingar TPP
Total
Capacity(GW)
17.0
7.2
1.3
1.3
1.6
0.8
0.5
0.5
1.6
1.0
2.0
0.4
1.5
0.5
0.3
37.5
Source: MOSL, Industry
10 January 2017
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Capital Goods
Potential opportunity of ~INR1.3t over next five years
Ordering to begin from CY18
With the implementation plan getting finalized by the CEA with the power utilities
and agreed to by the MOEF, the CPCB has sent out notices in December 2017 to
ensure adherence to the timelines. Our analysis of the implementation timelines
drawn up by the CEA for existing plants, along with new plants likely to be
commissioned by FY22 shows that a total capex of ~INR1.3t would be needed over
the next five years to December 2022.
Exhibit 4: Power plants to retrofit emission control equipment as per phased timeline
Description
Compliant with FGD norms
To implement as per timelines (a)
Being phased out/Not needed
Total
New plants to be commissioned by FY22 (b)
Total retrofit opportunity (a+b)
GW
10
166
17
194
30
195
Source: MOSL, CEA
Exhibit 5: Capex to be incurred to retrofit power plants by December 2022
Description
Cost / MW (INRm)
Power plants for potential retrofit(GW)
Capex till December'2022 (INRb)
FGD
4
195
779
SCR
2
195
389
ESP
1
95
95
Total
1,273
Source: MOSL. CEA, ** CEA has identified 65GW of plants for ESP upgrade and 30GW to be
commissioned plants
Bulk of the orders for the above equipment would need to be placed by FY21
(December 2020) so that the construction is completed on time by December 2022,
since it would take 20-24 months for execution and commissioning. Effectively, this
implies that orders worth INR1.3t have to be placed in the next three years to FY21,
implying an annual ordering opportunity of ~INR400b, which would be catered to by
10-12 players.
Exhibit 6: Ownership wise break up of power plants (166GW)
Ownership
Central
State
Private
Total
GW
50
50
66
166
Source: CEA, MOSL
Exhibit 7: Breakup of power plants by size
Breakup by size of unit
<500MW
500MW and above
Total
GW
61
105
166
Source: CEA, MOSL
10 January 2017
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Capital Goods
Competitive intensity to be intense
Expect 10-12 credible players competing
Unlike in the case of BTG manufacturing, we expect the competitive intensity in case
of emission control equipment to be much higher – participation would be seen by
boiler manufacturers alongside EPC contractors that would look to either bid on
their own or jointly with foreign partners.
Players likely to participate in emission control equipment opportunity
BHEL – Mitsubishi
L&T – Chiyoda
Doosan Heavy
Thermax
GE Power
Ducon Technologies
IGSEC Heavy Engineering
Toshiba
Reliance Infra
Techno Electric
Our discussions with utilities players and equipment manufacturers indicate 10-12
credible participants in the upcoming opportunity for emission control equipment.
While pricing in the initial bids may be aggressive, given the large size of the
opportunity, we would expect an improvement in pricing.
Bulk of the orders for the above equipment would need to be placed by FY21
(December 2020) so that construction is completed on time by December 2022,
since it would take 20-24 months for execution and commissioning. Effectively, this
implies that orders worth INR1.3t have to be placed in the next three years to FY21,
translating to an annual ordering opportunity of ~INR400b, which would be catered
to by 10-12 players
With these orders spread over 10-12 players, we estimate the opportunity for each
player at ~INR40b, which may not be very material for a BHEL or an L&T. However,
this could be quite material for smaller players like Thermax, GE Power, Ducon
Technologies, and IGSEC Heavy Engineering.
10 January 2017
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Capital Goods
Replacement demand for BTG to get a boost
20 year-old+ plants unlikely to invest to meet new norms by December 2022
In our view, the other outcome of implementation of the emission norms by
December 2022 would be that old plants could be phased out – in any case, a power
plant reaches its end of life by 40 years and has to be phased out thereafter.
According to media reports, the Ministry of Power is of the view that plants older
than 25 years should be replaced with new super critical units that (a) are less
polluting, (b) are more efficient in terms of station heat rate and coal consumption,
(c) have lower auxiliary consumption, and (d) have lower fixed costs. Our base case
assumption is retirement of ~17GW based on the implementation timelines
provided to the CEA by power utilities till December 2022.
We estimate that plants of ~12GW would be >40 years of age by December 2022
and would have to be phased out; these are unlikely to install emission control
equipment. If we assume a scenario where all plants >25 years as of December 2022
are to be phased out, it would mean that ~48GW of power plants would have to be
put out of service (~25% of India’s total installed capacity currently and ~22% of the
country’s coal-fired capacity in December 2022). This is a possibility, since plants
that have agreed to install emission control equipment may not find this feasible
near to the implementation date and might choose to upgrade to new super critical
units.
Exhibit 8: Break-up of power plants by year of commissioning
Date of commissioning
Prior to Dec'2003
Jan'04- Dec'16
Plant post Jan'17
Total
GW
58
129
6
194
Source: CEA, MOSL
Exhibit 9: Retirement opportunity of 17GW to December 2022, as plants unable to retrofit
emission control equipment
Description
Compliant with FGD norms
To implement as per timelines (a)
Being phased out/Not needed
Total
GW
10
166
17
194
Source: CEA, MOSL
10 January 2017
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Capital Goods
Exhibit 10: Capacity addition plans over 11-12th plan – we build in 17GW retirement in
13th plan
Description
Hydel
Coal
Gas
Nuclear
RES
Total
XIth plan
4,336
40,901
4,439
880
16,742
67,298
XIIth plan
5,488
78,685
7,144
2,000
29,846
123,163
XIIIth plan
4,000
30,000
-
2,500
50,000
86,500
Source: MOSL, CEA
Exhibit 11: Base deficit to sustain in 13th plan, despite 17GW of retirement as projected
under the emission implementation program till December 2022
Base Deficit(BU)
100
50
0
-50
Base Deficit (%)
11.0%
8.0%
5.0%
2.0%
-1.0%
-4.0%
Source: CEA, MOSL
Exhibit 12: Share of renewables to rise, as we expect only ~30GW of coal fired capacity to
be added in 13th plan
Hydel
12%
2%
13%
2%
12%
2%
14%
2%
Thermal
17%
2%
19%
2%
Nuclear
21%
2%
Renewables
23%
2%
63%
25%
2%
62%
26%
2%
61%
68%
68%
71%
70%
67%
66%
65%
18%
17%
15%
14%
14%
13%
13%
13%
12%
12%
Source: MOSL, CEA
10 January 2017
8

Capital Goods
NOTES
10 January 2017
9

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employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this
information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring
Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-30801085.
Registration details of group entities.: MOSL: SEBI Registration: INZ000158836; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100.
Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd.
offers Commodities Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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