Adani has made some very ‘power’ful moves

Looking at five critical steps that made the industrialist what he is today

One criticism levelled against the Government of India in respect of its private power purchase policy is its excessive concern about the returns investors get and not the price that Indian citizens would have to pay.

True, ever since the Enron episode, the government has tried to closely examine the capital costs involved.

But the flaw persists as the power purchase policy guarantees a return on capital costs involved.

Thus, today, Indian thermal power project costs per mw compared with thermal power projects set up elsewhere under the ICB route are among the highest in the world.
Gautam Adani could change all that.

His entry into the power sector began when he set up a 2,640 mw power plant at Mundra for his special economic zone project.

But, typically, instead of just limiting his purchase to equipment for this project alone, he decided to order equipment for a plant five times this size. Evidently he wanted to set up bigger power projects.

Thus, when he lost to the Tatas the bid for the Mundra ultra mega-power-project (UMPP) of 4,000 mw, many of his officers thought that Adani would be livid.
Instead, they were surprised to find a cheerful Gautam-bhai happily remarking that he had “got a good neighbour” at Mundra.

Aware that the Tatas too would require to import coal, in addition to the coal required for Adani’s own 2,640 mw plant at Mundra, and also in addition to Adani’s own future expansion plans in the power sector, Adani decided to build at a cost of Rs 2,000 crore a dedicated coal terminal for handling 40 million tonnes of imported coal — the largest coal handling terminal in the world.

The Tatas have been roped in as long-term users of this facility.

But the loss of the Mundra UMPP made Adani look at the power sector again.
He decided that he would persuade the government to adopt what is known as the “Case 2 bidding process”, which would make government licensing in the power sector virtually irrelevant.

Adani suggested that the government allow anyone to set up a power plant based primarily on the basis of the price at which a promoter was willing to sell power to the government.

This would put the risk of land, capital and management on the entrepreneur and not compel the government to ensure the promoter’s survival.

It would force promoters to produce power more efficiently, and also allow power tariffs to go down, failing which penalties and forfeiture of bank guarantees would take place.

Not surprisingly, when the first bids for the supply of 1,000 mw were invited, Adani won hands down with the offer of power for 25 years at Rs.2.35 per kwh (unit).
Then came another successful bids — from Gujarat, from Haryana, and then even from Maharashtra.

The bids from Rajasthan and Dahej are yet to be finalised. In the case of Haryana, Adani is also setting up a separate transmission line from Mundra to Haryana, along with substations, to ensure lower T&D losses.

All these prices are significantly lower than the prices at which the states get power from many other power suppliers.

Adani has been able to keep his costs low because of several factors. 
First, his capital costs for the boiler-turbine-generator (BTG) equipment are significantly lower than those of his competitors because they were made almost 2.5 years ago, in anticipation of bigger orders to come.

Second, he gets much of his coal imports from his own mines in Indonesia and captive coal handling facilities at Mundra where his efficiency and management allows him to keep costs low.

Third, Adani also went in for purchase of two cape-sized vessels for coal imports as early as in 2006 when price tags were lower.

The orders for ships being placed by other power producers today will involve costs at least 25% higher with significantly longer delivery schedules.

Adani’s ships are expected to be delivered by Korea by 2010, which should further contribute to margins.

Fourth, except where power plants are to be built outside Mundra, Adani has the benefit of ample land and logistics that he can use to his advantage.

Lastly, he has also become one of the the largest players on the Power Trading Corporation so that he can sell surplus power from his power plants, or purchase the same when urgently required, thus allowing him to hedge bets.

Simultaneously, in order to consolidate his position in the energy sector further, he has also acquired exploration rights in three oil and gas fields in India and Thailand.
All these bids are through Adani Welspun Exploration Ltd (a 65:35 joint venture between Adani and the Welspun group).

It has recently acquired a fourth gas block in Thailand and is bidding for more in India through the NELP VII programme.

Clearly, Adani as a power player has come of age.

rnb@yes2etl.com