India's Reliance Power to Shift Uttar Pradesh Gas-Fired Power Project to Andhra Pradesh

---

Researched by Industrial Info Resources (Sugar Land, Texas)--Reliance Power Limited (BSE:532939) (RPower) (Navi Mumbai, Maharashtra), which is India's leading power generation company and part of the Reliance Anil Dhirubhai Ambani Group (ADAG) (Mumbai), is reviewing the possibility of shifting the plant site for the company's proposed 7,480-megawatt (MW), gas-based power plant from Dadri in the northern state of Uttar Pradesh to a suitable location in the southern state of Andhra Pradesh. This is mainly due to prevailing land acquisition issues and the high cost for transportation of the gas obtained from Andhra Pradesh to Uttar Pradesh.

Unnamed company officials told local media that the land required for the power plant in Uttar Pradesh is under litigation; along with estimated "lower profit margins owing to higher transportation costs," this has forced the company to reconsider its options for the plant site. Also, the tariff for power generated by the Dari projected would be higher at 7 U.S. cents per unit of electricity generated, than the 6 U.S. cents per unit of electricity payable by a customer in Andhra Pradesh, thus negatively impacting profit margins when transporting the fuel over long distances.

RPower has an agreement with the Uttar Pradesh government, whereby the upper limit of the price of electricity generated at Dadri is 2.7 U.S. cents per unit. However, it has to face competition from other major players in the state, such as India's largest thermal power generation company, NTPC Limited (BSE:532555) (New Delhi), which has a total installed power generation capacity of 21,704 MW, set to breach 75,000 MW in the next seven years. State-owned NTPC, with its subsidized power plants, which have very low capital costs and a prevailing mechanism that averages out the prices of its fuel inputs, poses a serious threat to upcoming companies such as Reliance Power.

The move to shift to Andhra Pradesh is very significant, because the planned Dadri plant is pegged to become the world's largest gas-fired plant on a single site and has until recently been the focal point of a legal battle between Anil Ambani and brother Mukesh Ambani, who is the owner of petrochemical and oil and gas company Reliance Industries Limited (BSE:500325) (RIL) (Mumbai), for gas supplies from the Krishna-Godavari (KG) basin in Andhra Pradesh.

However, earlier this month, Reliance Power suffered a setback, with the Indian Supreme Court's ruling in favor of RIL, which announced that RIL is not obliged to supply gas to Reliance Power at the formerly agreed price, which was the point of contention of the legal battle. Instead, in a move strengthening the government's hold over gas pricing, the court ruling approved a fixed benchmark price of $4.20 per unit of gas sourced from the KG basin and not the previously decided $2.34 per unit in the family memorandum of understanding signed in 2005. This memorandum of understanding was central to the rift between the two fraternal companies.

The state government of Andhra Pradesh had approached Reliance Power earlier to set up a greenfield power project in the state, based on the gas sourced from the KG basin. According to sources, Reliance Power is now looking into this proposal and considering the invitation.

Meanwhile, undeterred by the Supreme Court ruling, Reliance Power Chief Executive Officer J Chalsani told reporters that the company's Dadri project was easily reproducible in some other area of the country, and that the company already has three or four alternative sites for establishing a project on similar lines. He also mentioned that as additional gas resources are explored and discovered in the country, even within the prized KG basin, gas would be sourced from there, thereby not affecting Reliance Power's plans to develop a 10,000-MW capacity facility in due course.

In separate options, Reliance Power may consider dividing the 7,840-MW project into smaller ones situated closer to the KG basin, to reduce transportation costs. "One could debate both scenarios," said an official of advisory company PricewaterhouseCoopers LLP (New York). "A large plant in the north would make the pipeline costs viable and gas transmitted through a north-south pipeline could be distributed to other users as well. Smaller plants closer to load centers will have lower transportation costs, and much less time will be needed to set these up rather than a mega project."

The Dadri plant was first planned as a 3,500-MW plant when the company signed a memorandum of understanding with the Uttar Pradesh government in June 2004, according to which the government was supposed to acquire 1,011 hectares of land from local farmers for the company. Although the company reportedly possesses 809 hectares of the requisite land, protests from the farming community have delayed the project.

The capacity of the plant was scaled up to 5,500 MW and then to nearly 7,500 MW. It will be set up at an investment of about $5.5 billion, with the first phase costing nearly $2.6 billion.

View Project Report - 89000744 89000761 89000764

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. IIR's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.