Why have oil refiner and trader Adani, steel manufacturer Jindal, copper & aluminium manufacturer Sterlite and drug manufacturer Torrent jumped into power projects? The reason is: They can make super profits by selling power to the power grid, also called merchant power, thanks to the Electricity Bill 2003 and the new rules framed by the Central Electricity Regulatory Commission (CERC). These rules provide for trading in power without getting into power purchase agreements.
The volume of power trading over the past three years has jumped 22% CAGR—to 21 billion KWh, in 2008. Of this, 557 million units were traded between Rs8-Rs10 per unit (as against nil in 2007) and 5,292 million units were traded for Rs6-Rs8 per unit (as against 461 million units in 2007). This clearly shows that power is being sold at high prices by merchant power projects as they are free to trade power at any price during periods of peak shortage. The cost of electricity generation ranges between Rs1.75 per unit for coal-based power projects to Rs3.5 per unit for traded coal by thermal power plants. Selling at Rs5 and above ensures super profits. At times of peak demand, it can fetch as much as Rs10 per unit. This is not too far from the tariff fixed for solar power projects. The Orissa Electricity Regulatory Commission (OERC) has fixed the tariff for solar power at Rs15 per KWh for the first 12 years for new solar projects.
According to a research report by broking company Enam, new power projects of 62GW will come up between 2011 and 2014. Of this, 13.3GW will come from merchant power projects. Jindal Steel & Power is planning a 3,200MW merchant power project and 2,500MW as ‘regulated power projects’. Torrent and Sterlite are also planning 3,647MW and 4,400MW power projects, 40% of which will be sold as merchant power. Adani’s 6,600MW power project includes 1,848MW for merchant power.
Adani Power is completing a 6,600MW power project and has mobilised Rs3,000 crore from its recent IPO. It will commission its project by 2011-12. Indiabulls Power Limited (IBP) is executing five coal-based power projects generating 6,615MW and is planning an IPO for financing it. IBP’s management has indicated that the first power plant would be commissioned at Nashik in 2011-12. Merchant power is the new road to make super profits.