R-Power may build gas-fired plant in AP

Reliance Power is considering setting up a new gas-based power plant in Andhra Pradesh instead of Dadri after the Supreme Court ruled that the government approved gas price of $4.2 per unit is the benchmark price for gas from the Krishna Godavari basin. Litigation over land for the power plant in Uttar Pradesh and lower profit margins because of transportation costs have compelled the company to look at alternative locations.

The idea is to get on with the power project the moment a gas deal is signed with RIL. “It take 24-36weeks for the plant to be up and ready once the gas sales agreement is in place,” JP Chalasani, the CEO of Reliance Power, had said last week. The power tariff for the Dadri project would work out to an estimated Rs 3.29 per unit of electricity. Buying the fuel in the gas-producing state of AP would mean lower transportation costs and thus higher margins for the power producer.

Profit margins for power projects are impacted when the fuel has to be transported over longer distances. While the consumer pays Rs 2.95 per unit at AP, the cost of power would be an estimated Rs 3.29 per unit in UP.

This is not to say that power at over Rs 3 per unit is not sustainable or affordable. Several power- starved states like Maharashtra, Rajasthan or even Delhi are buying power at such costs. But for Reliance Power, the key to the proposed project would be early implementation and higher margins. “Since land is still an issue at Dadri, and there is some litigation, we have to look at alternative sites and keep costs in mind,” the official said, adding that the company may even decide to build two facilities simultaneously.

Any delay in building the project could cost Reliance Power both in terms of cost and quantity of gas. Since the gas price is linked to average crude price, there is a likelihood that gas prices will be revised upwards in the next revision in 2012. However, the company will have to keep demand in mind as well while selecting any alternative site.

For a power plant, a higher variable cost (fuel, transportation and local levies add up to the variable cost) means increased power tariff. Reliance Power, has an agreement with the Uttar Pradesh government whereby the fixed cost of the proposed Dadri power plant is capped at Rs 1.25 per unit. The variable cost is a pass through to the consumer. However, Reliance Power will have to compete with other competitors in the region, like government-owned National Thermal Power Corporation (NTPC), to sell its power. NTPC has the advantage of both depreciated power plants (where the capital cost or fixed cost is far low) and a mechanism by which it averages out its fuel costs. So, while NTPC is buying gas for some of its plants from Reliance Industries’ (RIL) KG gas at a cost of $6.2 per mmBtu (thanks to the higher transportation cost) it manages to sell power at competitive rates.

The AP government, led by the then chief minister YSR Reddy, had asked Reliance Power to develop a green field power project in the state based on the gas from the KG basin. According to an official in Reliance Power, who did not wish to be named, this proposal is now being looked into and cannot be ruled out as an option.

“Gas at $6.2 per mmBtu is on the higher side,” former power secretary RV Shahi, who also worked with NTPC and BSES earlier, said. The idea should be to pool gas prices where gas produced by government controlled companies and other private oil companies could be clubbed together to arrive at a more sustainable fuel price, he said. According to a spokesman of RIL, the transportation cost for gas varies between 0.30 cents per mmBtu to $ 1.5 per mmBtu along its pipeline.