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How Tata Power's close links with government gives it an edge
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In this fortnightly blog edition, we share our research on how ‘Tata Power’ has maintained close ties with various governments and political parties in India, giving it a distinct advantage over other players in the power sector.
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No Government Approvals Needed!
In May 2008, during the visit of the then Prime Minister Dr. Manmohan Singh to Bhutan, the two countries signed a protocol in the field of Hydroelectric Power and agreed to increase the scale of power projects from 5,000 MW to 10,000 MW by the year 2020. The initiative was to be pursued through a joint venture, with the Druk Green Power Corporation (DGPC) of Bhutan holding a 49% stake in the projects, while the remaining stake would be held by Indian public sector (government owned) companies. It is important to note that private sector entities had ‘NOT’ been allowed in these bilateral projects. By November 2011, this cooperation was formally agreed upon by the Government of India, as outlined in a circular issued by the PIB, Government of India.
Later in June 2012, Tata Power was reportedly ‘urging’ the Central Government, according to an article in ‘The Hindu’ to formulate a policy that would allow private companies like theirs to undertake large-capacity hydroelectric projects in foreign countries and sell the generated power to India. What’s even more interesting is that Tata Power was already in discussions with Bhutanese government officials for the development of a large hydro project there. Bhutan’s officials were quite positive about the idea and had ‘advised’ the company to take up the matter with the Indian Government so that Tata Power could be permitted to co-develop the project in Bhutan.
Then in July 2012, Tata Power confirmed the commissioning a joint venture with the Royal Government of Bhutan (which would hold 74% of the equity, with Tata Power holding the remaining 26%) to implement the 126 MW Dagachhu Hydro Project in partnership with Druk Green Power Corporation, expected to be completed by the end of 2013.
The reason we started today’s blog with this story is that in August 2024, Tata Power again announced its partnership with Druk Green Power Corporation (Bhutan’s largest and government-owned power company) to develop the 600 MW Khorlochhu Hydropower Project in Bhutan. The estimated project cost is ₹6,900 crore, and Tata Power’s shall hold a 40% equity stake in it.
“No Indian governmental or regulatory approvals are required for the transaction”
- Dr. Praveer Sinha, MD & CEO, Tata Power (2024) [Source]
The electricity produced is sold to India during the summer months, helping meet peak demand, while in winter, it is used within Bhutan itself.
Moreover, according to Tata Power CEO Mr. Praveer Sinha, "The hydro project with Bhutan is a game changer. This may be the beginning of many more such projects in Bhutan. We may look at three to four projects over the next five to seven years."
Now, for more context, let’s understand two additional points:
Unfortunately, most of India’s neighboring countries face either economic or political instability, or India does not have strong relationships with them. To name - Pakistan, Afghanistan, Bangladesh, Myanmar, and Sri Lanka all grapple with significant political and economic challenges that can take years to resolve. On the other hand, India's strained relations with China, Maldives, and occasionally even Nepal are well known globally. In this scenario, Bhutan stands out as the only neighboring country where there is stability, and India’s ties remain strong (which is crucial for us due to its geographical location). Given this, the Indian government’s Foreign Ministry always acts vigilantly to ensure that relations with Bhutan remain positive. It is telling that a private entity like Tata Power, setting up a long-term project in collaboration with Bhutan's government-owned Druk Green Power Corporation without needing formal permissions, speaks volumes about the immense influence that the Tata brand holds within political circles.
In 2012, India was under the Congress-led UPA alliance government, while the BJP was in opposition. Fast forward to 2024, and we now have the BJP-led NDA alliance in power. This transition makes it even more evident how Tata Group companies, particularly Tata Power, enjoy a quiet yet influential reputation across the political spectrum. The continuity of their projects, irrespective of the ruling party, underscores the deep-rooted trust and respect the Tata brand commands in political circles. In sectors like utilities, especially power, where governments worldwide typically hold substantial influence, Tata Power emerges as the biggest beneficiary within the Tata Group. Its ability to navigate political transitions while advancing strategic projects highlights the unique standing it holds as a private entity in an otherwise government-dominated space.
Even though Adani has also signed an MoU with Bhutan's Druk Green Power Corporation (DGPC) to set up a 570 MW green hydro plant, similar to Tata Power’s project, they face a distinct risk tied to India's shifting political landscape as they are often known for close ties with the ruling party BJP led NDA alliance in India. Should the opposition Congress return to power, Adani’s rise could face significant setbacks, while the Tatas would have a higher likelihood of continuing their upward trajectory. This positions Tata Group as a potential beneficiary, capitalizing on reduced competition in such a scenario.
India’s DISCOM mess!
A DISCOM, or Distribution Company, serves as an intermediary that purchases electricity from power producers and sells it to consumers. DISCOMs are a crucial link between consumers and the electricity transmission system, with over 90% of them in India managed by state governments.
And as of March 31, 2023, the cumulative losses incurred by DISCOMs in India exceed INR 6.47 lakh crores, according to government data!
This is where the interaction with the ultimate consumer occurs, and several reasons explain why power distribution companies (DISCOMs) in India have been operating at a loss:
Inefficient operations: Ineffective power procurement, billing, and collection practices contribute to financial losses
High debt: The total debt of DISCOMs increased due to higher interest rates, rising power demand, and the costs associated with imported coal
Poor cash flow: Delayed consumer payments results in insufficient cash flow, preventing DISCOMs from making timely payments to energy generators
Insufficient tariffs: Politically influenced low tariffs that do not reflect the cost of supply, can lead to financial shortfalls
Theft: High levels of electricity theft significantly impact financial viability
Read more about DISCOM problem here.
“(Tata Power will look for) new distribution expansion (privatization) opportunities in other states, as & when these opportunities arise in line with government policy”
But what happens when you privatize a DISCOM?
Privatization is a politically sensitive issue, which is why 90% of states continue to have government-controlled power distribution and have not moved toward privatization. However, in 2020, Odisha became one of the few states to privatize its four state-owned distribution companies (DISCOMs) by partnering with Tata Power, aiming to improve power supply reliability and reduce losses. Tata Power acquired a 51% stake in the DISCOMs, while the remaining 49% is owned by the state government. The Odisha government initiated this process in 2017, and it concluded on June 1, 2020, under the leadership of Naveen Patnaik, who served as Chief Minister from 2000 to 2024. (It is worth noting that Naveen Patnaik leads the Biju Janata Dal (BJD) and faced off against the BJP-led NDA in the 2024 state elections, ultimately losing by a significant margin after two decades)
And BOOM! Odisha is now back in profits as per NITI Aayog’s data:
Tata Power focused on improving efficiency, reducing losses, and investing in upgrades, leading to a swift turnaround. One of the key reasons for this success was the expertise and experience of its CEO and Managing Director, Dr Praveer Sinha. Let’s take a closer look at his background.
Delhi’s DISCOM Privatization Story
Delhi touched 52.3°C temperature in Summer 2024, and the company that benefitted the most from the rising demand for power in the region - TATA Power. They supply electricity to over 20 Lakhs houses of Delhi, roughly implying about 70 Lakhs customers. It alone handles about 30% of the peak power load of Delhi, without any major outage. In fact for FY25, the distribution is expected to profit INR 500 Crores! However, the road to glory and profits was not easy at all:
1.) In year 2002, the government owned 'Delhi Vidyut Board' was privatized, and TATA Power had formed a 51% : 49% joint venture (JV) with the Government of Delhi. At that time of takeover, the entity had only two dusty computers in a non-functional state, with all documentation being done solely on paper (offline).
2.) This was the first privatization of its kind, with 5,400 erstwhile government employees being taken over by the TATA Power-led joint venture. (Imagine the outcry that would have occurred during that era, when privatization was not even discussed by most politicians)
3.) The cultural differences were so significant that when the Tatas attempted to install a biometric system at the office, the old employees interpreted it as an insult and would pour water/sand over the machine to display their resistance.
But there was one man — 'Dr Praveer Sinha', the former CEO & ED of the Joint Venture, who not only understood the challenges but also tackled them head-on, transforming the loss-making entity into a cash machine for Tatas. Later, in 2018, he was promoted to become the CEO of the parent company, TATA Power. Thanks to leaders like him, Delhi today enjoys uninterrupted power supply, while neighboring cities like Gurugram and Noida suffered from long outages during summer. Now when Odisha’s Discom privatization opportunity came in front of Tatas, they knew that they got the right man to handle it.
“We are in discussions with 3-4 states to privatize their DISCOMs”
- Dr. Praveer Sinha, MD & CEO, Tata Power (2024)
In the future, if more state governments seek to eliminate their loss-making operations, Tata Power is well-positioned to seize that opportunity, thanks to its past experience, expertise, and relatively politically neutral reputation.
After discussing Bhutan and DISCOMs, let’s now turn our attention to nuclear energy and how Tata Power is playing a key role in helping the government achieve its ambitions.
India’s Nuclear Energy Goals
India has adopted an aggressive stance on nuclear energy for the medium to long term. The Department of Atomic Energy has been tasked with achieving a 20 gigawatts (GW) capacity of nuclear power generation by 2030, which would position India as the third-largest producer of atomic energy in the world, after the US and France. As of July 2024, India has an operational capacity of 8 GW across 24 nuclear power reactors, with a long-term goal of reaching 100 GW of nuclear power by 2047.
“Energy is an important pillar of cooperation between India and Russia and we are eager to further cement ties in this sector”
But how is Tata Power closely working with the government?
In the latest central budget announced in July 2024, India’s Finance Minister highlighted key aspects of the nuclear power strategy, emphasizing a shift toward encouraging private sector participation in small nuclear reactors. This marks a significant policy change, as current laws prohibit private companies from building nuclear plants independently, although they can supply equipment and necessary components for construction, excluding reactors. Additionally, atomic energy remains on the list of ‘prohibited’ sectors for foreign direct investment.
Tata Power has taken this development seriously, and their involvement with the government is evident in the management's commentary on the matter:
Dr Praveer Sinha, CEO & MD (Aug ‘24) - “We are discussing with the concerned authority in the government and the company involved in such activity, and we hope to play very very important role once there is clarity on fuel & tech”
N Chandrasekaran, Chairman (July ‘24) - “The company will explore participation in small modular nuclear reactors, once government gives necessary permissions”
Hence they have got themselves closely involved in this new initiative too, as per the statements.
To Summarize
The key focus of this blog was to highlight instances where Tata Power has demonstrated close proximity to the government across various timelines and levels, with minimal impact from changing political landscapes. Notably, Tata Power has also played a significant role in various government schemes like installing solar pumps under PM KUSUM scheme and has been actively involved in the ‘PM Surya Ghar: Muft Bijli Yojana,’ which aims to install solar rooftops in over 1 crore homes. Tata Power holds approximately 20% market share in this initiative and is actively promoting the scheme at the grassroots level, as previously discussed in our blog post, “Modi's 3rd tussle with Solar”. With all these points we tend to believe it is a privately-owned Public Sector Undertaking (PSU).
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We are not a SEBI registered advisor; personal investment/interest in the shares exists for the company mentioned above; this isn’t investment advice but our personal thought process; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the decision maker is responsible for any outcome.
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Very impressed. You could not have brought the difference between the Tatas and Adani. I liked you simple and elegant description and the understated recommendations. It is a popular adage, buy a Tata company any time at any price, and if you hold it for a reasonably fair period you will be rewarded. When the share holders are rewarded the company prospers and when both prosper and the customer us happy you cannot have better sattava.
Very detailed article. Kindly guide me on how to find such details like partnership with bhutan, privatisation of delhi, odisha etc.. are they mentioned in annual report? Do we have another source?