Reliance Power Gets Into More Trouble

ADAG group company Reliance Power is further in troubled waters as four states which were to buy power from its Krishnapatnam UMPP have imposed financial penalty on the company. The work at the site of UMPP has been stopped from 2011, as reported on the website of the Central Regulatory Authority. These four states (Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra) have slapped a fine of Rs 400 crore on R-Power. To add to the woes, the states have also threatened to encash the bank guarantees, terminate the power purchase agreements, and recover the land allotted to this 4,000 MW ultra mega power project. The Delhi High Court has ruled in favour of Reliance Power in this case after it filed a petition; however we believe that the problems are not over.

The company has a 25-year power purchase agreement (PPA) with 11 utilities in these four states at the price of Rs 2.33 per unit. It, however, sees this tariff insufficient to cover all the costs. The new Indonesian mining law has changed all the financial equations. According to the newspaper reports, R-Power has signed a 25-year coal supply agreement with Indonesian companies at the price of USD 25-30 per tonne.

The new law has asked the miners to sell the coal at the benchmark prices which is to the tune of about USD 60 per tonne. We believe that due to the change in the regulation R-Power would see coal prices rising by about Rs 1,200-1,300 crore per year when the project is fully commissioned. To meet these higher costs the company would need a tariff hike of at least of Rs 2.90 per unit which is 25 per cent higher to the contracted price as per the earlier PPAs.

Tata Power and Adani Power are also facing a similar type of difficulty in their projects. Tata Power’s move to increase the tariffs has met with resistance from the state governments which have agreed to procure the power.

In the budget the government has provided for some tax sops and depreciation benefit to the power companies. We believe that Reliance Power may not get the benefits from this as the project work is yet to be completed. The current development is limited to the basic ground work such as levelling of the site, boundary work, road construction, etc. There is no update on the BTG package, transmission network, etc. We believe that the UMPP may further get delayed due to the kind of problems it is now facing.

The same is the case with its other projects where gas availability is very limited and their commercial operations are further seen in trouble. In the near term we see no profitability in its projects. We therefore maintain our call to avoid the scrip.

Table 1: Progress Card Of Krishnapatnam UMPP (Source: CEA Reports)

• No Visibility On Commercial Operation Date (COD)

• Land Acquisition – 97% completed.
• Transmission Network – Contracts signed but no further progress.
• Current Status – Basic work like boundary work, leveling of the main plant site, ground work for cooling tower area, chimney and foundation for turbine and generator completed.