REL to invest $1 bn in coal blocks abroad

REL to invest $1 bn in coal blocks abroad

In a move to secure coal supplies for its 4,000MW imported coal-based ultra mega power project (UMPP) at Krishnapattnam in Andhra Pradesh, Reliance Power Ltd (RPL) is set to make a $1 billion (Rs3,960 crore) investment in overseas coal blocks.

The company is evaluating opportunities in Australia and South Africa, but a top company executive said Indonesia has emerged as the favourite destination.

“For the Krishnapattnam power project we have a coal requirement of 15 million tonnes per annum (mtpa). Assuming a project life cycle of 25 years, the total coal requirement will work out to be around 400mt. This will require an investment to the value of around $1 billion. We plan to finalize the deal shortly," said Lalit Jalan, executive director, Reliance Energy Ltd (REL). He declined to provide further details.

RPL is promoted by the Reliance Anil Dhirubhai Ambani Group’s REL and has filed an application with stock market regulator Sebi to make an initial public offering of shares. Some analysts estimate the size of this issue at around Rs12,000 crore.

If RPL’s acquisition of coal blocks comes through, it will be the second such deal after Tata Power recently paid $1.1 billion for a 30% stake in two coal mining units and a trading company, belonging to Indonesia’s PT Bumi Resources. Tata Power will use coal from these mines at its imported coal based UMPP at Mundra in Gujarat.

According to Dipesh Dipu, a manager with audit and consulting firm PricewaterhouseCoopers, the acquisition of coal properties “makes business sense in light of the high coal prices in both contract and spot markets. Coal mining costs are expected to rise too, due to demand pressures on equipment and human resources in particular, but it will still have value for the investors who choose to mine rather than purchase at prevailing market rates".

RPL has been the most successful company in terms of UMPPs. It has already been awarded the project at Sasan, Madhya Pradesh, and has emerged the winning bidder for the Krishnapattnam project in Andhra Pradesh although the project has not been formally awarded to it. The company emerged as the winning bidder for the project ahead of Larsen & Toubro Ltd and Sterlite Industries Ltd by quoting a tariff of Rs2.33 per unit.

India’s largest power generation company NTPC Ltd also planned to bid for the imported coal-based 4,000MW UMPP at Krishnapattnam in Andhra Pradesh, but did not do so because it was unable to line up supplies of imported coal in time.

Indonesia has substantial coal reserves and has emerged a popular destination for Indian firms looking for coal. Other companies shopping for coal in the island nation include NTPC and Lanco Infratech.

Prices of imported coal, including?freight,?average around $90 per tonne. Given this, it is critical for a company to secure coal supplies as any fluctuation in international coal prices could impact input costs. The Krishnapattnam project is expected to require an investment of around Rs16,000 crore.

The government has planned to facilitate setting up 10 UMPPs across the country.

Of the 10, those in Mundra (Gujarat), Girye (Maharashtra), Tadri (Karnataka), Krishnapattnam (Andhra Pradesh), Cheyyur and Marakkanam (Tamil Nadu) are coastal projects that will rely on imported coal. They will be totally dependent on imported coal and will require up to 90 million tonnes of coal each year starting 2012. The other four, in Sasan (Madhya Pradesh), Akaltara (Chhattisgarh), Tilaiya (Jharkhand) and Jharsuguda (Orissa) are coal pit-head projects, located near mines.

“The demand for power generation in the magnitude envisaged by the Integrated Energy Policy will necessitate dependence on imported coal, particularly so in light of the status of coal mining project implementation from both CIL (Coal India Ltd) and captive consumers. However, increasing price trends could potentially be a dampner, when the tariffs need to be within the affordable range," Dipu added.