Renewed energy

POWER COMPANIES

A more conducive environment is encouraging power firms to bet on large projects.

The rules of the game are changing. And suddenly, investments are flooding the power sector. In the past couple of weeks itself there've been some big announcements.

Anil Dhirubhai Ambani's Reliance Energy Limited (REL) has said it proposes to invest a whopping Rs 60,000 crore over the next five years while elder brother Mukesh Ambani's Reliance Industries plans to stake Rs 10,000 crore in captive power.

What's more, Oil and Natural Gas Corporation (ONGC), has anounced that it will set up power generation capacity of around 2,700 mw over the next few years, putting in an amount just short of Rs 10,000 crore.

It's not hard to see why the sector's seeing a rash of new ventures. Policy and regulatory reforms, over the last couple of years, have removed much of the red tape and uncertainty associated with projects.

For instance, the government has allowed open access to power by which power generated can be sold to multiple buyers, unlike in the past where a power purchase agreement stipulated who the buyer would be.

Also today there's more security for sellers , thanks to in-built clauses in agreements which makes recovering dues more easy. And coal has become more accessible to the private sector producers with the government alloting coal blocks.

Says Santosh Kamath, associate director, KPMG, "Post the Electricity Act 2003, private players are confident of getting good returns on the power they produce and sell."

By December this year, the country should see its first power exchange. Much like a stock exchange, it will allow licensed power traders "" of whom there are about a dozen "" to trade on it. The government has also promised to come up with a merchant power plant policy although merchant power plants ""like the one belonging to the Bhilwara group in Manali""are already a reality.

Power generated at these plants need not be sold through purchase agreements; instead it can be sold at "commercial" rates. So some large users can access power today. However, more consumers need to be able to access it.

Also, as Kamath points out, reforms in distribution, though slow have begun to show results. Says he,"State-run utilities are seeing lower losses and are able to recover costs, which has improved their financial condition.That is giving private players the confidence to invest in generation."

The franchisee system used by distribution companies is another opportunity for the private sector. Except for the ownership of the assets, the entire management and operations are managed by the franchisee.

For instance, the Torrent Group now has the rights to distribute electricity in Bhiwandi, north of Mumbai for 10 years. This is a first of its kind agreement where a private sector power utility has been offered the role of a franchisee of a distribution circle. The venture could result in annual revenues of about Rs 500 crore.

There are also opportunities for the private sector in the transmission space, hitherto the preserve of the government. A case in point: the Western Region System Strengthening Scheme (WRSS), which is being set up at a cost of around Rs 2,500 crore.

Transmission major, Power Grid Corporation of India Limited (PGCIL) recently invited offers from private bidders for the project, who have responded enthusiastically. Meanwhile, Gujarat based Torrent Power has teamed up with PGCIL for a 250 km 400 kv double circuit line in Gujarat.

Of the capacity of 78,577 mw to be added during the eleventh plan, about 10,760 mw will be contributed by the private sector. This amounts to about a 150 per cent increase over that in the tenth plan. During that period the private sector's contribution was just 4,000 mw. A quantum jump perhaps, but not yet a powerful statement.

INCREASING PRIVATE SECTOR CAPACITY...

Private sector's contribution in the 10th Plan: 4,000 mw
Private sector's expected contribution in the 11th Plan: 10,760 mw
Total private sector installed capacity today : 18,419 mw
Projected capacity by 2012: 25,537 mw

LARGER INVESTMENTS*...

Reliance Energy Rs 60,000 crore
Reliance Industries Rs 10,000 crore
Tata Power Rs 21,000 crore
ONGC Rs 9,540 crore
Bhilwara Power up to Rs 7,000 crore
*announced over the l ast few weeks