Coal to power RIL’s future ambitions

NEW-FOUND FREEDOM POWER IS LUCRATIVE

 

 RELIANCE Industries, freed from its non-compete agreement with the Anil Dhirubhai Ambani Group (ADAG) that barred it from investing in high-growth sectors, is likely to make its first big-ticket investment in coal-fired power plants.
   RIL, which is looking to invest surplus cash, is likely to settle on coal-based power plants thanks to the surging demand for electricity and the attractive rates of return, a person familiar with the group's thinking said.
   An RIL spokesperson declined to comment on the issue.
   As part of the peace formula announced by RIL and ADAG two weeks ago, the non-compete agreement signed between the two companies in 2005 was scrapped, allowing Mukesh Ambani's group to enter power, telecom, and financial services. The deal also gave ADAG the freedom to enter the petroleum, refining, and petrochemicals sector.
   RIL's possible entry into the power sector could throw up the intriguing possibility of the two brothers going head-to-head for the first time. But there is unlikely to be a clash as ADAG is already implementing two large power projects and may not be in a position to bid aggressively for more, the person said.
   RIL is unlikely to enter the telecom sector, which has seen a steady fall in margins and rising competitive pressures, unless it can find a new-generation technology that will be capital efficient, the person said. He did not, however, rule out the possibility of RIL acquiring an existing telecom company. As far as financial services are concerned, RIL is unlikely to get into the space immediately as the market is still evolving, he added.
   The company is clear that among the three new sectors open to it, power is the most lucrative and the challenge will lie in developing plants in record time and with the best technology. "The challenge is to come in before demand starts petering out, which is in the next six to seven years. We will have to build the plant within three years if the normal practice is five years and most importantly, we have to adopt cost-effective technology like clean coal to maximise the returns," the person added.
   The rationale is simple. The sector has a demand-supply gap of 14%, requiring capacity addition of 90,000-100,000 mw every five years, and power-generating companies rake in a healthy rate of return of around 20% on an average. The company would have to become a player within the next three years or else would miss the bus, the person said.
   As the second-largest growing economy, India is still far below global standards in electricity capacity. China, for instance, adds 100,000 mw of capacity every year to fuel its economy.
   RIL may have preferred to get into the gas-based clean power sector since it is the largest gas producer. But having reserved that sector for ADAG for the next 12 years, the company is looking at cashing in on mega coal-based power projects.
   It is estimated that the average return on an efficient coal-based power project is upwards of 20%. Add to this the new policy that allows power companies to sell a percentage of the electricity generated in the spot market (industry jargon as merchant power).

POWER PLAY


THE ATTRACTION

Peak demand shortage of 14%

Needs capacity addition of 90,000-100,000 mw every five years

Healthy returns of about 20% on an average

Sustained growth of sectorabout 9%

Technology advantage-to use clean coal technology

Business synergy in energy vertical

Private participation in power sector set to grow to 45%


OTHER PLAN

Unlikely to get into telecom immediately because of low margins

Entry into financial services not in the short term

Financial services plan may roll with retail plans



States looking to set up power plants


FOR such players, the rate of return is easily as much as 25%. Jindal Power, which developed a 1,000 mw plant, has sold most of its power at merchant rates that could be as high as Rs 11-12 per unit at peak times.
   According to Power Trading Corporation chairman TN Thakur, as much as 4%, or 30 billion units of electricity generated in the country, is traded in the short term where tariffs average Rs 5-7 per unit.
   There is a huge demand-supply gap in the power sector and the next five to six years would see new capacities being built to meet the economy's growing needs. According to the integrated energy policy, the country needs to add 8 lakh mw by 2032 to sustain GDP growth at 9%-plus.
   RIL sees a huge potential in this. Several states, including Mahatrashtra, Gujarat, Madhya Pradesh, Tamil Nadu Andhra Pradesh, have been advertising and inviting expressions of interest from potential power plant developers. In many of these, the state governments have already secured land, environmental clearances and even coal linkage so that the plant can be put up fast.
   "Private power producers that comprised just 10% in the 10th Plan period are expected to go up to 45% by the end of the 12th Plan," says RV Shahi, former power secretary.
   So while RIL will concentrate on offshore investments as far as oil and gas and petrochemical are concerned, where it will be open to inorganic growth, its big play in the domestic market will be coalbased power.
   The company plans to get as much as 30% of revenues from offshore operations. It has made a beginning with shale gas. A foray or a buyout of petrochemical assets abroad also cannot be ruled out.