Is investing in Indian power plants the next big thing?

Gautam Thapar, whose companies includes India's biggest paper maker, plans to invest at least 50 billion rupees ($1.3 billion) building two power plants to help meet a shortage of electricity.

Avantha Power & Infrastructure will construct two facilities with a capacity to produce 600 megawatts each, Thapar, chairman of Avantha Group, said in an interview in Gurgaon, near New Delhi. Avantha is seeking investment from private equity funds, he said, declining to name them.

Thapar will combine his electricity distribution and generation businesses as part of a plan to more than double revenue to $10 billion in five years. Avantha intends to purchase a processed food maker in Hungary and overseas power equipment and software companies to meet that goal.

“The challenge for us is ‘where is the next big opportunity’,” Thapar said. “I like long-term asset heavy, cash-flow heavy businesses. They may not be sexy, but are good solid businesses.”

The South Asian nation's economy has expanded an average 8.7 percent since 2003, and supply during peak hours falls 14.8 percent short of demand. That's prompted private producers such as Avantha Power to consider building utilities that sell electricity on contracts of as short as a week at double the rate of generators with 25-year agreements.

India in 2003 changed the rules on access by utilities to the transmission network, paving the way for companies to set up plants without entering into long-term purchase agreements.

Utilities typically sell power based on long-term contracts and merchant power plants sell at prices based on demand.

“Today you have power trading and people with scale, size and the balance sheet who will buy merchant power,” said Thapar.

Are the conditions right for more private investments in power?