India's SAIL and L&T Enter Public-Private Partnership for Captive Power Generation

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Researched by Industrial Info Resources (Sugar Land, Texas)--Steel Authority of India Limited (BSE:500113) (SAIL) (New Delhi) recently entered into a memorandum of understanding with engineering and construction major Larsen & Toubro Limited (BSE:500510) (L&T) (Mumbai) to jointly develop captive and independent power plants to address the power requirements of the steel major. According to the agreement, SAIL and L&T will also jointly explore opportunities to own and develop captive coal blocks to ensure a supply of fuel for the proposed power projects.

The memorandum of understanding is a precursor to a joint venture that will be set up by the two firms within a period of three months from the date of entering into the agreement. The joint venture will initially engage in the identification of suitable coal blocks that will then enable the firms to determine an ideal location for setting up the power plant. SAIL and L&T propose to set up a greenfield coal-based independent or captive power plant with an initial capacity of 1,600 megawatts (MW) based on supercritical technology. The two firms will then undertake capacity expansion of 800 MW or 1,600 MW at either the same or another location.

The memorandum between SAIL and L&T highlights the increasing focus on public-private partnerships for development of captive power in the country. Such partnerships are being promoted to lure increased capital investment from the private sector players to address the growing power requirements of state-owned organizations. The Indian Ministry of Power has estimated a total investment opportunity of $200 billion over the next seven years in the power sector. The central and state governments are encouraging private sector participation by providing incentives in the form of tax waivers including an income tax holiday for a period of 10 years during the first 15 years of operation, subsidies, and relief from payment of electricity duty fees. In June this year, Tata Power Company Limited (BSE:500400) (Mumbai) announced plans to enter into a public-private partnership to set up a 1,000-MW coal-fed thermal power station at Naraj Marthapur in Orissa. In December last year, the state government of Maharashtra adopted the public-private route to develop captive power projects of 200 MW to cater to the needs of the upcoming Multi-modal International Hub Airport at Nagpur.

SAIL currently addresses the power requirements of its steel plants primarily through in-house power generation facilities or through captive power plants and by entering into joint ventures with power generation firms. Power distribution companies pertaining to the respective regional grids supply the balance of power requirement. SAIL currently has a requirement of 950 MW of power. This is expected to increase to 1,826 MW by 2010 and to 4,066 MW by 2020.

In September this year, SAIL awarded a $157 million contract to Bharat Heavy Electricals Limited (BSE:500103) (BHEL) (New Delhi) for setting up a captive power plant to address the power requirements of its upcoming expansion project at its steel plant in Burnpur, West Bengal. The project is slated to be commissioned within a period of 26 months. In April this year, a joint venture between SAIL and NTPC Limited (BOM:532555) (New Delhi) commissioned a 250-MW thermal power plant at SAIL's steel plant at Bhilai, Madhya Pradesh. The second unit of 250 MW was slated for commissioning by September this year. NTPC and SAIL floated a 50:50 joint venture to develop and operate captive power plants for SAIL's steel plants at Bhilai and Rourkela in Orissa, and Durgapur in West Bengal.

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