Reliance Power Theory: I Win, You Lose

Gas dispute between Ambani brothers has caught the attention of millions of eyes in the country. Desperation for getting a large pie from KG D-6 output has gone to the extent that Anil Ambani had to come openly in the media to criticize his elder brother accusing RIL for delay in implementation of Dadri project.

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In fact, Dadri has run into controversies from the day the Anil Ambani led company signed State Support Agreement with the UP Government. Mulayam Singh Yadav led UP Government amended the Power Policy of the state to facilitate various tax exemptions and add favorable provisions in the agreement. Finance Department of UP Government raised strong objections over this. An official from the Finance Department was quoted saying “It is a total sellout and surrender as many provisions of the state’s new power policy and revenue components of the state were completely ignored while executing the agreement”.

Furthermore, farmers have strongly protested numerous times including the recent one on August 12, 2009 against the power project where around 2,200 acres of their rich and fertile land was acquired for the project despite the availability of ample of barren land in the state. Dissatisfaction of Dadri’s farmers could also be attributed to little compensation paid for their valuable land. NTPC had also acquired the land in Dadri for its power project with no resistance, thanks to appropriate compensation paid by the public sector power major.

Let’s have a look at the price of land paid by both the companies for acquisition of land in the area. RPower is paying about Rs 180 per square metre for land acquisition in Dadri while comparatively, NTPC paid Rs 850-1100 per square metre for land acquisition almost four years back.

For table, please refer to link here.

Price paid by NTPC for land acquisition in Dadri is Rs 670 per sq. metre higher than that of paid by RPower. As NTPC has paid the fair market price for farmer’s land, its plant is already operational with work on expanding the present power generation capacity already in progress. On the other side, RPower, which is willing to acquire the valuable land at the price of small pizzas, is facing strong protest of the farmers.

As far as tariff is concerned, the UP Government has assured per unit fixed cost of Rs 1.25 per unit for power from RPower’s Dadri project without discussing the variable cost in the agreement. Comparatively, fixed cost of Dadri power plant of NTPC works out around Rs 0.90 per unit, Rs 0.35 lesser than that of RPower’s. Difference of Rs 0.35 per unit in power generation at the same location is quite substantial. RPower’s Dadri plant is of much larger scale and hence the fixed cost of power generation for RPower should haven been lower on account of economies of scale.

Even if the fixed cost of Rs 1.25 per unit for RPower’s Dadri project is compared with any other plant in the country, it stands much higher. Existing power plant of NTPC at Kawas has fixed cost of Rs 0.90 per unit whereas the existing unit of the company at Gandhar incurs fixed cost of Rs 0.94 per unit. Kayamkulam power plant of NTPC has fixed cost of Rs 1.06 per unit.

Similarly, fixed cost of power generation for Dabhol power plant operated by Ratnagiri Gas & Power Pvt Ltd (RGPPL) works out to Rs 0.88 per unit. Fixed cost for RPower’s Dadri project is much higher compared to any of these plants. As a matter of fact, fixed cost assured by the then UP Government for RPower’s Dadri project is one of the highest among all the gas-based plants in the country.

For table, please refer to http://oilandgasindia.blogspot.com/.

The real icing on the cake is that the UP Government, in the State Support Agreement, has assured RPower to revise its fixed cost, if the project cost goes up. It secures the RPower from any upward movement in the project cost.

On the other hand, the variable cost of most of the gas-based power projects works out around Rs 5 per unit. Variable cost of Kayamkulam is more than Rs 7 per unit, whereas for Kawas power plant it is Rs 5.44 per unit. Variable cost of NTPC’s Gandhar power plant is around Rs 4 per unit. It indicates that variable cost of around Rs 5 per unit is fairly acceptable in the country.

According to a CLSA research report, at gas price of $4.3 per mmbtu and power tariff of Rs 3per unit, a power producer can make profit of Rs 0.65 per unit. With power tariff going up to Rs 3.5 per unit, the profit margin goes higher to Rs 1.10 per unit. Thus, it could be inferred that gas price of $4.2 is quite competitive for power generation. At this price of gas, the variable cost of power will remain below Rs 4 per unit, which seems better than the industry standard in the country.

Anil Ambani is pitching for gas from KG D-6 field at $2.34 per mmbtu, against the Government approved price of $4.2 per mmbtu. If the gas price of $4.2 per mmbtu is profitable, why is Jr Ambani fighting for gas at subsidized rates. When the entire power sector will be consuming gas at $4.2 per mmbtu, why the ADAG is pressing for cheaper gas prices? Is the Anil Ambani led company plan to make windfall profit and make the other gas-based plants in the country uncompetitive? Does he intend to get gas at the cost of the industry?

Apparently, it is solely for optimizing the profitability of the ADAG group. But is the windfall profitability of one group at the cost of thousands of households and the entire power sector in the country is justified.

Gas supply by GAIL to Power Sector Consumers

For table, please refer to link http://oilandgasindia.blogspot.com/