Remaking India's Lagging Power Sector

Recent moves by two of India's biggest private interests – Lakshmi Mittal's ArcelorMittal and Reliance Power, controlled by Anil Ambani -- highlight the opportunities in the country's lagging power sector. Neither India's government nor industry has been unable to build fast enough to provide power for the fast-growing economy.

In an effort to solve acute power deficits, which now range between 10 and 13 percent annually, New Delhi has set a target to generate 78,000 megawatts of new capacity in the 11th five year plan which ends in 2012, and another 100,000 MW in the 12th five year plan, which ends in 2017. About 70 percent of India's electricity is generated from over 80 coal-fired thermal plants.

There is little help coming from overseas. Although laws were changed in 2003 to allow 100 percent foreign direct investment in the power sector, the response from overseas investors has been discouraging given myriad regulatory, land acquisition, leasing and other problems.

To meet the shortfall, ArcelorMittal, the world's biggest steel producer, has been looking for ways to convert the captive power for its multiple steel plant projects into commercial sales, giving the group the potential to become one of the country's most important independent power producers. ArcelorMittal could then challenge top private companies such as Tatas, Essar and Reliance, given the steel producer's financial clout.

Similarly, with more than 35,000 MW of new capacity under various stages of implementation, Reliance Power, controlled by Anil Ambani, could well challenge the state-owned NTPC to become India's largest independent power producer.

In an interview with Asia Sentinel, Anil Ambani, who recently declared at least a temporary truce with his elder brother Mukeshi following a protracted legal battle over gas pricing, said that "Huge untapped demand for power exists in our country with big potential for gas-based units due to new discoveries. Despite some uncertainties in policy, R-Power is bullish about India's power sector over the longer run.''

R-Power's plans include 25,000 MW of coal-fired and hydro projects and 12,000 MW gas-fired plants, Ambani said.

"The key ingredients of our emerging power portfolio are in place: land has been acquired, we have access to captive coal mines for raw material, government clearances are in place, construction work has begun for all major projects."

R-Power has been successful in obtaining three of four Ultra Mega Power Projects, as they known, of 4000 MW each, in the states of Madhya Pradesh, Jharkhand and Andhra Pradesh. Tata Power has won the remaining one, in Gujarat.

The 7,500 MW Dadri project in Uttar Pradesh is projected to be one of the world's largest gas-fired power plants at a single location. R-Power is also doing a gas-fired 4,000 MW project in Maharashtra as well. Financing for the Madhya Pradesh project is completed while the others are expected soon, Ambani said. R-Power raised nearly US$3 billion in early 2008 via a direct public offering.

R-Power Gas Plans

With the Supreme Court now having cleaned up the epic gas supply dispute between competing interests owned by Mukesh and Anil Ambani, Mukesh's

Reliance Industries Ltd expects to now quickly ramp up gas production from its Krishna-Godavari plant to 120 mscmd of gas, raising overall gas output to 300-400 mscmd in the country, Ambani said.

"The large natural gas finds will contribute towards economic growth and development of India,"he added. Reports suggest that RIL could buy equity stakes in gas-fired plants run by the umbrella group Anil Dhirubhai Ambani Group (ADAG), to build business synergies.

Ambanis Patch Up

There have been positive reactions to the Ambani brothers agreeing to bury their differences and establish an "overall environment of harmony, co-operation and collaboration between the two groups." Some observers say that Anil has bought peace with Mukesh as R-Power will need RIL's financial and political clout to see through the massive investments in the power sector that will yield returns only after a gestation period.

The two brothers will also need to complement each other's strengths to ensure that resources at their command find the right buyers, price and investors and not farmed out to competitors such as NTPC.

Mittal Power Moves

A spokesperson for ArcelorMittal said the company is looking to build captive power plants and mines to serve its proposed steel producing facilities.

"Such power plants are expected to be built in Jharkhand, Orissa and Karnataka, based on thermal coal linkages and gas-based plants at a later stage," the spokesman told local media. ArcelorMittal has committed to massive steel projects in Orissa, Jharkhand, both in east India and Karnataka in the south.

So far the Mittal Group has a minor presence in the power sector through LNM India Internet Ventures, which holds nearly 9 percent (value Rs5 billion) of Indiabulls Power, which is developing TPPs with 6,600 MW capacity.

Electricity generation will be Mittal's second big move in India in the energy sector --- ArcelorMittal holds 49 percent of the equity in HPCL-Mittal Energy Ltd (HMEL) that is setting up the US$4-billion refinery in Bhatinda, Punjab, which commenced operation in 1998.

In June 2007, Mittal matched the state-run fuel marketing firm Hindustan Petroleum (HPCL) equity. The 9 million ton joint venture refinery is scheduled to be completed in 2011. HMEL has announced that it intends to export the refined fuel to Pakistan.

Mittal Enhances India Presence

Last week, ArcelorMittal signed a MoU with the Karnataka government to spend nearly US$6.5 billion to build a 6 million-ton-a-year steel plant in the state, including a 750 MW power plant. The company is in talks with the State Power Corporation to supply power to the region.

ArcelorMittal's Orissa and Jharkhand steel projects, with combined investment of US$20 billion, face local problems including land acquisition issues and allocation of mining leases. With Karnataka plans taking a formal shape, the company is hoping for better.

"Once we have seen progress in Karnataka ahead of other (states), we will start here first and then wait and see what is happening in other states," Mittal told local media.

Foreign Investment In Power

The Hong Kong-based CLP Holdings Ltd and US-based AES Corp are the two main foreign stakeholders in India's power generation sector. However, the moves by ArcelorMittal follow recent interest by foreign players in India's power sector despite the drawbacks.

Last month, Singapore's Sembcorp signed onto a 1,320MW power project in Andhra Pradesh along side Gayatri Projects, a Hyderabad-based infrastructure firm. Sembcorp will initially invest Rs 10.5 billion.

"This is an indication of growing interest of FDI coming to the power generation sector," said power minister Sushil Kumar Shinde, who added that he personally saw to it that Sembcorp investment went through.

The Hinduja Group also has plans to invest US$12 billion on power projects in India to develop 10,000 MW Capacity. The Hindujas are looking at options in Uttar Pradesh, Gujarat and Maharashtra. A 1,040MW power plant is already in place in the southern state of Andhra Pradesh that took 13 years to complete.

Lamenting India's need to streamline approvals to attract investors, co-chairman Gopichand Hinduja recently said in Mumbai, "To make infrastructure more appealing to foreign and domestic investors, there should be accountability at every level of the project, and a responsibility to stick to timelines."

Siddharth Srivastava is a New Delhi-based journalist. He can be reached at