In the telecom sector, despite initial hiccups, the Reliance Group not only captured new markets but also weaned away consumers from incumbent players through its low tariff offer. While in telecom, Reliance placed its bet on the CDMA technology, in the energy sector it is betting on sourcing cheap gas from the Krishna-Godavari (KG) basin in Andhra Pradesh and is driven by the slogan of well head to wall socket.
The group has not revealed much about its end-to-end integration plans but the facts on hand are: The capacity of the power plant would be 3,500 mw; gas would be sourced from the KG basin through the HBJ pipeline (after extension); power from the plant would be sold at Rs 2 per unit; the total investment envisaged for the plant is around Rs 10,000 crore; and power from the plant (location not firmed up) would be sold to UP and adjoining states, including Delhi, where Reliance, through BSES, is operating some of the most densely populated power distribution companies.
While sources tell us that Reliances proposal is still at a conceptual stage, one can understand its gameplan based on the information and data that has been put out. And here the figure of Rs 2/unit is critical.
From the project point of view, a 3,500 mw power plant, assuming an auxiliary consumption of 10 per cent, can sell up to 24,594 million units. At Rs 2 a unit, this would mean that the company can generate around Rs 5,518.8 crore in one year alone.
As tariff varies inversely to the level of generation (i.e., the higher the generation, the lower the tariff), the assumption is that the plan is to sell 90 per cent of the plants capacity in any given year.
Alternatively, while tariffs should be higher for lower amounts of generation, if we still take Rs 2/unit as the tariff from the power company, at 75 per cent plant load factor, the project company can generate a whopping Rs 4,139.1 crore every year.
This tariff of Rs 2/unit also includes the price at which Reliance would source gas from the KG basin through a pipeline from Andhra Pradesh. While there are indications that the pipeline project would be executed through a separate project company, the indicative route for the pipeline is through Maharashtra, joining the HBJ pipeline in Gujarat.
The estimated reserve from the KG basin can meet a demand of 15,000 mw, which means that the pipeline can meet requirements for both fertiliser and other power projects along its route.
While demand from such ventures is not firmed up it is the UP project which would set the pipeline project rolling. From the total of Rs 5,518 crore, even if Reliance sets aside Rs 3,000 crore per year towards developing the pipeline and the KG field, the power company would be left with over Rs 2,500 crore, which could be used to meet operating expenses (excluding fuel) and recover the investment of Rs 10,000 crore in around five years.
The pipeline costs for Reliance would decrease as and when new customers are added to the project.
Coming back to the power plant, the question is whether Reliance has enough customers for its power. It definitely does. And it is here that the variable cost (or fuel cost) would play a critical role.
Even if the project has a high variable cost its fixed costs are expected to be lower than Re 1/unit. In total, both of these would add up to Rs 2 making it is a much cheaper option than any other gas-based power plant.
At present, the gas price is subsidised and comparative figures show that fuel costs from gas are in the region of Re 1/unit. These would only go up once the subsidy is removed. It is this advantage that Reliance has vis-a-vis not only other gas projects but even LNG.
As in telecom, a power regulator cannot keep consumers away from low-cost power. Thus, Reliance has a ready set of consumers for its power. For instance, the company has a ready set of customers in Delhi who can buy power from the project. If one were to add 10 million customers from UP and other states, on the lower side the expected consumer base would be at least 30 million. Now, this would include both industrial and domestic consumers consuming an average of 2.52 units a day. That may seem a lot considering that the national average is only 400 units (and UPs is 188). However, the project would be selling power to a mix of consumers, and Delhi has one of the most lucrative consumer bases. Added to this, power consumption would go up once cheaper alternatives are offered.