Is Outsourcing of O&M

the next big idea in Power sector?

Indian power sector is witnessing significant capacity addition by the private sector. Facing an acute
shortage of trained technical manpower, new private players may find it difficult to efficiently run
the power plants on their own. Such players are increasingly thinking about outsourcing and this
trend is increasingly becoming visible. Can outsourcing of power O&M activities become a
significant opportunity going forward?

Views shared by Shardul Kulkarni (Principal

Energy) and Pratik Kadakia (Practice head Chemical & Energy) from the Tata Strategic
Management Group
Indian power sector is witnessing significant capacity addition by the private sector. Facing an acute
Introduction
are contributing to growth of power O&M services
shortage of trained technical manpower, new private players may find it difficult to efficiently run
Globally, the electrical power industry has changed
market globally.
the power plants on their own. Such players are increasingly thinking about outsourcing and this
radically over the last two-three decades as a
trend is increasingly becoming visible. Can outsourcing of power O&M activities become a
result of regulatory and technological changes.
We could expect to observe a similar trend in
significant opportunity going forward? Views shared by Shardul Kulkarni (Principal
This has allowed many new investors (mostly in
India. Apart from the global drivers such as cost
Energy) and Pratik Kadakia (Practice head Chemical & Energy) from the Tata Strategic
the private sector) to enter the market. In the
and risk mitigation, there are certain India specific
Management Group
modern competitive industry, asset owners face
drivers which make the case for outsourcing
risks and uncertainties related to plant Operation

stronger in the Indian context and are deliberated

and Maintenance (O&M).

in the next few paragraphs.

For many asset owners, the main driver for

India specific drivers of outsourcing

outsourcing includes a reduction in lifecycle cost

Capacity Addition by Private Sector

and risks. A service provider is able to reduce cost

In the next five years, India plans to add about 80

through economies of scale and mitigate the risks

GW of power generation capacity (Refer Fig. 1).

leveraging technical know-how of operating similar

Private sector is likely to drive this capacity

power plants.

addition with a dominant share of about 55%.

Fig 1: Planned sector-wise capacity additions (GW)

The

first

phase

of

growth

in

outsourced power O&M industry in

Total
capacity 1

173

191

209

231

255

the developed markets was driven

by sheer capacity additions of IPPs
and distributed generators (mainly
private players). The second phase
of growth is now expected to
happen

through

enhanced

penetration of outsourced services

in overall O&M spend by the
private sector. These two aspects

Tata Strategic Management Group

Notes :1) Total is excluding captive additions

Source: CEA, Analysis by Tata Strategic

Page 1

Apart

from

the

few

established

IPPs

like

This acute shortage of trained power, along with

NTPC/Tata Power/Reliance Infra, the new private

impending capacity additions, would further affect

sector players and PE investor backed IPPs are yet

the private sectors ability to attract (& retain) the

to establish a track record of successfully running

right technical talent to operate their new plants.

power plants. These new players could face

This will lead to an increasing tendency to

challenges in attracting scarce talent in the

outsource

absence of a long history of operations and are

Established utilities like NTPC, Tata Power, Torrent

likely to run the risk of an inefficiently operating

are best suited to leverage their past experience

power plant. Therefore, an experienced O&M

and address this market need.

O&M

activities

going

forward.

service provider is in a better position to mitigate

this risk, a view shared by many industry leaders.

Increasing share of imported equipments

Taking a cue from the global situation, some of

A few years ago, critical power equipments (such

the new generation IPPs could concentrate on

as boiler, turbine, generator) were sourced from

profit maximization activities such as power sale

the domestic market only. With power needs

and fuel sourcing while outsourcing the O&M. This

outpacing the domestic manufacturing capacity,

saves the effort to create a full-fledged O&M team

imports of critical equipments have increased

which is another driver of growth for third party

(Refer Fig 3).

O&M services

Fig 3: Expected distribution of orders placed

for equipments (XIth & XIIth plan)

Lack of trained manpower in power sector

Other
imports
12%

As per the Central Electricity Authority (CEA)

report, manpower availability in the power sector

China
38%

has drastically reduced by about 33% from IXth

plan period to XIth plan period (Refer Fig 2).

Domestic
50%

Fig 2: Manpower availability in power

sector-India (Man/ MW)
9.4

Total: ~92 GW
Source: Secondary research, Analysis by Tata Strategic

7.0
5.8

During XIth and XIIth plan periods, it is expected

that about half the new power plants are likely to
source critical equipments oversees, mainly from
China. At the moment, most of the foreign
suppliers do not have a significant India presence.

IXth Plan

Xth Plan

XIth Plan

Source: CEA, Analysis by Tata Strategic

In case of unplanned shut-downs or faults, it will

Also, as per the planning commission report, there

be difficult for such foreign entities to respond

would be a shortage of ~27,000 persons in

quickly

technical cadre in the thermal power sector during

presence.

the XIIth plan period (2012-2017).

(maintenance/repair/annual overhaul) from such

Tata Strategic Management Group

Page 2

in

the
Also,

absence
the

cost

of
of

significant
such

local

services

foreign players would be high if they have to

This situation is similar to what happened in

support from their respective home base. Setting

developed markets a couple of decades ago.

up local arms may not be feasible given lower

There was a mindset barrier. But it got changed

volumes.

over the years once industry started realizing the

benefits of outsourcing such risk sharing and

Therefore, a credible domestic O&M service

overall cost reduction over the life cycle.

provider with strong technical know how for such

foreign equipments could result into a more

Managing expectations of IPP Owners

reliable option for IPPs with imported equipments,

Managing expectations of IPP owners could

a view shared by an established IPP.

sometimes be a tricky situation. These owners

tend to think that once O&M is outsourced, the

Magnitude of Opportunity

service provider should bring the entire technical

Indias current O&M spend is estimated at about

expertise and knowledgeable manpower to run the

Rs 21,000 Cr. This is likely to increase at CAGR of

power plant, which may not always be the case.

8% to about Rs 28,500 Cr by FY15.

Know-how of new technologies

Even a mere 5%-10% outsourcing of overall O&M

Off late, many new (and more efficient) power

activities would translate into a domestic O&M

generation technologies have been introduced

services opportunity of about Rs 1,400-Rs 2,800

globally. Technological advancements are more

Cr by FY15 which is quite significant.

visible in gas based power plants. An O&M service

provider may not necessarily have prior experience

This could further grow with an increased level of

in such new technologies. The challenge lies in

outsourcing. If outsourcing penetration were ~20-

successfully acquiring the know-how of running

25% as in developed markets, one could expect a

such advanced power generation systems.

dramatic growth in the domestic O&M services

market.

Conclusion
A wave of O&M outsourcing is quite visible in

Apart from the domestic market, there exists an

developed markets. Outsourcing of O&M activities

opportunity for domestic service providers to

has started showing its presence in India with

export these skilled services in developed markets

contract award announcement by a few service

and nearby emerging markets.

providers.

There

are

obvious

challenges

of

managing the mindsets and expectations of IPPs.

Challenges for O&M outsourcing industry

In the days to come, this could become a

Mindset to outsource

significant domestic industry and, along with

Complete

outsourcing

of

O&M

activities

is

relatively a new development in Indias power

sector. It would require a mindset change.

export of skilled services, it could become an

attractive global opportunity.
____________________________________________________
Tata Strategic Management Group, 2011. No part of it may be
circulated or reproduced for distribution without prior written
approval from Tata Strategic Management Group.

Tata Strategic Management Group

Page 3

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About the Author:

Shardul Kulkarni is Principal of Energy practice at Tata Strategic Management Group. He has more than 10
years experience in consulting and investment banking, primarily in financial/regulatory/commercial
aspects of power and renewable energy sectors. His areas of specialization include Strategy Formulation,
New Product Development, Project Finance and M&A. Shardul has led multiple engagements across
segments in power, oil & gas, renewable energy, energy efficiency in South Asian countries such as India,
Singapore, Thialand and Malaysia.
Pratik Kadakia is Practice Head of Chemical & Energy practice at Tata Strategic Management Group. He
has 18 years experience in chemical industry and consulting, primarily in specialty & bulk chemicals,
pharmaceuticals, alternate energy & power. His areas of specialization include growth/ entry/ turnaround
strategy, organization effectiveness, performance improvement, innovation management. Pratik has
worked with leading domestic & global chemical, petrochemicals and energy companies across various
market entry/ growth assignments.

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