Power seekers

A rash of players - old and new, big and small - is chalking out plans to add huge capacities, but not all projects will see the light of day.

From well head to wall socket - that's the vision the late Dhirubhai Ambani had for Reliance Industries Ltd, or RIL, which he founded as a textiles manufacturer in 1966. In the years and decades that followed, backward integration became the mantra for the patriarch and his two sons, Mukesh and Anil. From textiles, RIL moved to polyester, fibre intermediates, plastic, petrochemicals, petroleum refining and eventually, further upstream, into oil and gas exploration and production. In the process, RIL has become a fully integrated giant along the energy value chain. Well, almost...

{mosimage}Before the brothers Ambani split the group's assets in 2005 amongst themselves, RIL was relentlessly pursuing its vision of grabbing a larger share of the consumer's wallet - by, for instance, selling petrol and diesel as well as providing electricity. The "wall socket" piece of the integrated business came from the acquisition of power utility BSES in 2003, which was subsequently rechristened Reliance Energy.

However, when Anil went his own way, he took along with him the power piece, amongst other businesses, by virtue of a settlement that was hammered out between the two brothers. A non-compete clause ensured that neither brother could enter the other's territory.

So when in May this year, the brothers thrashed out a fresh agreement that allowed them to, among other things, compete against each other, the stage was set for Mukesh to piece together the missing bit of the integrated picture. At RIL's 36th annual general meeting in mid-June, the Chairman told shareholders: "We see an unbounded opportunity in this space (energy). We are drawing up specific plans for mega-investment in this sector with clean coalbased power generation projects, hydel projects and also in nuclear power, as and when it is opened up. Reliance is ready to seize the prospect of transforming the Indian electricity landscape.''

Rajiv Rattan
Vice Chairman & Co-founder
Company: Indiabulls Power
Current capacity: Nil
Projected capacity: 8,000 MW by 2016
Estimated investment: Rs 32,000 crore
"A power project provides stable returns for typically 25 years - a proposition seldom available in other businesses"
The Ambanis' penchant for thinking big is reflected in the huge capacities - refining and petrochemicals - they have put up. And it will not be too different in power. Talk within industry circles is that the last date for submission of bids for an ultra mega power project, or UMPP, in Chhattisgarh was postponed three times since May 3 only to facilitate RIL's entry.

Mukesh's trump card could well be D.V. Kapur, the founder chairman of NTPC, India's largest power generator, who has a two-decade-old relationship with the Ambani family; he sits on the RIL Board as an independent director. "Mukesh consults me on the power business and we do discuss these (ventures) in board meetings as well,'' Kapur says.

V. Raghuraman, an independent director with Suzlon, says: "He (Kapur) is the one who laid a strong foundation for NTPC's growth. He is like a mentor to RIL and provides visionary and strategic inputs for the group's growth.'' "When RIL does something, they do it big. You can expect big action from Mukesh Ambani in the coming days,'' adds Raghuraman, who is also a former principal adviser to the Confederation of Indian Industry(CII) on Energy.

Anil, for his part, has his hands full with three UMPPs that add up to 12,000 MW. After raising Rs 11,563 crore from the public via an initial public offering for Reliance Power Ltd, or RPL, the younger Ambani is out to prove that the IPO deserved the hefty premium of Rs 420 it demanded from retail investors.

The stock is currently quoting at a 40 per cent discount to its issue price. The venture, which had no operational history at the time of the IPO, aims to create a capacity of 35,000 MW - up from 28,200 MW that was stated at the issue time.

J.P. Chalasani
Chief Executive Officer
Company: Reliance Power
Current Capacity: 1,023 MW
Projected Capacity: 35,000 MW by 2020
Estimated Investment: Rs 1.36 trillion
"We have already completed fi nancial closure for 10,000 MW of projects, the largest by any private sector power company"
RPL has made substantial progress since then, say company officials. It has commissioned two 300 MW units of a 1,200 MW project in Rosa in Uttar Pradesh, earlier than the scheduled date. "The Sasan UMPP will also come up ahead of schedule,'' says a confident J.P. Chalasani, CEO, RPL. "We have already completed financial closure for 10,000 MW of projects, the largest by any private sector power company,'' he adds. RPL, he declares, will be the largest private sector power company in India by 2020 with at least 35,000 MW of installed capacity.

This isn't just a story about the Ambani brothers coming head to head in the power sector, although that's a tussle worth watching, too - for instance, they are competing for a 1,320 MW thermal project in Gulbarga for which the Karnataka government has begun floating tenders.

Almost everyone in big business in India wants to generate power, and sell it to consumers yearning for it. After all, data from the Central Electricity Authority shows that, between April and July, the country had a peak shortage of 14 per cent or 16,434 MW, while in reality the shortage is said to be twice that figure.

Prasad R. Menon
Managing Director
Company: Tata Power
Current capacity: 3,000 MW
Projected capacity: 25,000 MW by 2017
Estimated investment: Rs 90,000 crore
"We are working to retain our leadership position and that is indeed a challenge...We take up only such projects that are both practical and possible"
A CII and A.T. Kearney study, released in November, says India needs around $250 billion (Rs 11.5 trillion) over eight years. A CLSA report, meanwhile, identifies India's power sector among the fastest-growing in the world, with $50 billion (Rs 2.3 trillion) worth of new capacity due for commissioning over the next three years.

Other than the Ambani brothers, those in line to put up huge generation capacities include established players such as the state-owned giant NTPC, the Tatas, the Ruias of Essar Group, as well as relatively new players such as Indiabulls Power, GVK Power, GMR Energy, Sajjan Jindal's JSW Energy and his younger brother Naveen Jindal's Jindal Steel & Power.

There are also quite a few first-timers, including Moser Baer, and Gautam Thapar's Avantha Group, as well as smaller names such as Action Shoes and the Hyderabad-based Pioneer Distilleries (see The Outsiders). In all, Business Today's estimates that some 25 promoters have plans to put up 500 gigawatt (GW) of generating capacity over the next seven to 10 years by investing all of Rs 20 trillion.

B.V.N. Rao
Business Chairman - Energy
Company: GMR Group
Current capacity: 808 MW
Projected capacity: 10,000 MW by 2016
Estimated investment: Rs 37,000 crore
"GMR would like to position itself amongst the top three utility companies of India with a signifi -cant presence in the generation sector"
Even as you read this feature, projects with a capacity of some 63,000 MW are being implemented in various parts of the country. You don't have to be a soothsayer to predict that all these projects won't see the light of day - some will drown in seas of debt, others will get steamrolled by delays and cost increases, and a few may be rendered uncompetitive because of their prohibitive tariffs. Yet, that's not deterring the ambitious - and the foolhardy - but doubtless it's the plans of established players that appear most realistic. Consider NTPC, the Maharatna public sector undertaking, or PSU, that has an installed capacity of 32,194 MW - or 20 per cent of the country's installed capacity.

By 2017, NTPC wants to scale up to 75,000 MW. That's not all. By 2032, it wants to be the world's largest utility with an estimated capacity of 128 GW (1,000 MW make one gigawatt).

NTPC is not just the largest power producer in the country, it's also among the cheapest, providing electricity at Rs 2.27 per unit. "By 2032, we will have 28 per cent of our power generated from non-fossil sources," says R.S. Sharma, till recently the Chairman & Managing Director (he retired on August 31).

G.V.K. Reddy
Company: GVK Power
Current capacity: 915 MW
Projected capacity: 10,000 MW by 2016
Estimated investment:  Rs 37,000 crore
"Power will contribute substantially to our infrastructure business"
Another company with an aggressive expansion programme is Tata Power, the largest player in the private sector with a capacity of 3,000 MW, and which ranks fourth among Tata Group companies in revenue contribution. The Tatas are targeting a capacity of 25,000 MW by 2017. With two projects under way in Mundra and Maithon (in Gujarat and Jharkhand, respectively), Tata Power hopes to hit 10,000 MW in three years. "Some 7,000 MW of projects are in the pipeline.

We are also interested in UMPPs that are slated for Chhattisgarh and Orissa," says CEO Prasad R. Menon. "We are working to retain our leadership position and that is indeed a challenge. We take up only such projects that are practical and possible,'' he adds.

Along the way, he is pushing a green agenda - he wants renewables to form a quarter of Tata Power's installed capacity by 2017; currently it is less than a fifth. "In 10 years, solar power will come close to grid parity in tariffs,'' predicts Menon. Energy is also a key focus area for groups building infrastructure like highways and airports. Two such conglomerates based in the south are the Bangalore's GMR Group and Hyderabad's GVK Group. "GMR would like to position itself amongst the top three utility companies of India, with a significant presence in the generation sector," declares B.V.N. Rao, who heads the group's energy vertical.

A.K. Chhatwani
Head of Power Development Division
Company: L&T
Current capacity: Nil
Projected capacity: 5,000 MW by 2015
Estimated investment: Rs 20,000 crore
"The power business will make up a quarter to one-third of our revenues in less than 10 years"
The target: 10,000 MW by 2016, from just 808 MW at present. Last year, GMR acquired two projects - 600 MW in Maharashtra and 1,970 MW in Madhya Pradesh - which are expected to come on stream in two to four years. Power already fetches 45 per cent of the group's revenues, ahead of the airports and highways businesses. "Based on our current programme for capital expenditure, power revenues will continue to be higher than airport revenues for us,'' says Group CFO A. Subbarao. GMR has four airport projects in its kitty, including those at Hyderabad and Delhi.

GMR's arch rival, the GVK Group, is targeting 10,000 MW in five years. "Most of our growth will happen during the 12th Plan period (which ends in March, 2017)." Power will continue to contribute substantially to overall revenues of the infrastructure business,'' says Chairman G.V.K. Reddy. GVK Power and Infrastructure, reports say, is close to raising about Rs 1,300 crore in private equity (PE) to fund its power projects. Reddy confirmed he is raising equity, but did not disclose how much.

Along with infrastructure creators who see power as a logical extension, there are also promoters who believe their competence in real estate can come handy in power projects. "As a group already present in real estate, we have the skills needed to speedily acquire land, which is usually a lengthy process in power projects. The other major attraction is the stable returns power projects provide over a long period that is typically 25 years; that's a proposition seldom available in other businesses,'' says Rajiv Rattan, Vice Chairman and Co-founder, Indiabulls. He thinks the group's power business may well become bigger than its real estate and financial services ventures within 10 years. Indiabulls Power, which is working on 8,000 MW of capacity, is busy sewing up power purchase agreements (PPAs) with utilities and aims to keep just a quarter of its generation for sale in the open market.

All turbines go
Makers of power equipment, meantime, also feel the time is right to integrate forward and begin generating electricity. Engineering major Larsen & Toubro (L&T) has moved into building thermal projects of its own - as opposed to erecting such units for other companies - after setting up a plant to manufacture boilers, turbines & generators (BTG) in Gujarat in a partnership with Mitsubishi Heavy Industries (MHI), Japan. L&T is working on projects totalling 5,000 MW in Chhattisgarh, Punjab and Orissa and hopes to achieve financial closure for another 5,000 MW by 2015. "The power business (including BTG manufacturing, projects and generation) will form a major part of L&T's total business, making up a quarter to one-third of our revenues in less than six years , '' says A.K. Chhatwani, Senior Executive Vice President, L&T. Within the power portfolio, generation is expected to account for half of revenues.

Chhatwani, who has been with L&T for 42 years now, is the man who clinched the L&T-Mitsubishi joint venture, in which the Indian company has a 51 per cent stake and Mitsubishi 49 per cent.

Similarly, the Yash Birla Group, whose businesses include power solutions and electrical appliances, is setting up a 660 MW coal-fired plant in Maharashtra as part of its plan to have 2,500 MW thermal capacity in five years. "We have identified the power sector after considering the huge energy deficit and the scanty presence of planned business ventures in this segment,'' says Birla.

There are also firms that want to set up commercial generation units after having owned captive plants and selling surplus power to the grid. When Sajjan Jindal set up a 260 MW gas-based plant at Bellary a decade ago, it was meant to provide power to his steel mill there. But today it stands tall as a 860 MW giant, bolstering the confidence of the JSW Group in the power business. JSW Energy, which raised Rs 2,700 crore from an IPO last July, wants to generate 14,100 MW by 2015.

Investor appetite for power generating companies is huge. Gautam Thapar's Avantha Group, which owns India's biggest paper maker Ballarpur Industries, is the latest conglomerate that has lined up to tap the primary market. The $4 billion (Rs 18,400 crore) group, with 191 MW of captive capacity, is targeting 4,000 MW capacity by 2014. The Avantha IPO will be the second this year after the Sutlej Jal Vidyut Nigam's. Last year saw offers of four companies - Adani, NHPC, Indiabulls and JSW Energy - fully subscribed. Private equity is also finding takers.

In 2010 till August, close to $1.4 billon (Rs 6,440 crore) had found its way into 15 transactions. Moser Baer recently raised Rs 1,350 crore from Blackstone Advisors. The company, known for its storage media and solar power technology, is aiming for 4,000 MW of thermal capacity in its 5,000 MW energy portfolio by 2016.

"Thermal power will dominate the next 20-30 years and that's why we want to be there," says Sushil Bhagat, Group CFO, Moser Baer Projects. Adds Akhil Gupta, Chairman, Blackstone Advisors India: "We typically invest with a view to generating 25 per cent return. Our investment horizon spans 5-7 years, but Indian entrepreneurs primarily need growth capital to scale up their businesses, therefore we may remain invested for an extended period if the situation demands.'' Power is where the action is. And if even two-thirds of all the projects on the drawing board pan out, India could be actually looking at a situation of comfort in 5-7 years - after decades of shortages.

The good news is that unlike booms and busts in the past - dotcom, real estate, to name just two - the action in the power sector is backed by genuine demand. And once new capacities do come on stream, those focused sharply on producing electricity at the lowest cost possible will be the ones who turn up trumps.

 The outsiders

The Action Group's flagship company makes footwear. Over the years, the company has diversified into areas ranging from chemicals and steel to real estate and retail. Now, the power sector beckons. The promoters of Action Shoes have signed on to set up a 1,200 MW capacity in Orissa and Chhattisgarh.

Then, there's an alcohol producer who wants to dish out power. The Hyderabad-based Pioneer Distilleries - which Vijay Mallya bought into last fortnight - is beginning with a 100 MW gas-fired plant in Raigadh district of Maharashtra, which it hopes to commission by January 2013.

"We are entering the business because we can see the demand. Initially, we plan to sell power in the merchant market and later we will go for power-purchase agreements with buyers,'' says K. Suhan Rao, Managing Director, Pioneer Gas Power Ltd. Elsewhere, an owner of tea estates, the Bagaria Group, has applied for gas allocation for a 200 MW project.

"All kinds of people are entering the sector, with and without experience," says Rupen Patel, Managing Director, Patel Engineering, a Mumbai-based engineering, procurement & construction (EPC) firm. Patel's short point: EPC firms like his might be newcomers in the field of power generation, but they're no strangers to the sector itself. "We have 30 years of experience in building power projects, besides exposure to the technology. Only selling power will be new to us," adds Patel. The company is setting up a 2,650 MW thermal plant at Nagapattinam, Tamil Nadu, and a 143 MW hydel project in Arunachal Pradesh.

L&T is of course the big daddy in the EPC space keen to produce power (see main story), but even lesser-known EPC firms such as the Hyderabad-based SEW Infrastructure and Shriram EPC have trained their sights on the sector. The years ahead will separate the men from the boys - and there are going to be quite a few of both.