Friday, March 14, 2008

Lanco looks to raise profitability through merchant power biz

Hyderabad, March 14: Power generation company Lanco Infratech Ltd is looking to increase the profitability of its business by selling a little less than 20% of the 8,000MW of power it will be generating by 2011 as merchant power.

“Lanco currently has 500MW under operation, while 7,500MW of capacity is under various stages of implementation. Of the total 8,000MW, we are looking at earmarking 1,400MW for merchant power business,” said Lagadapati Madhusudhan Rao, chairman and managing director, Lanco.

Merchant power is the term used by power companies to describe electricity sold in the open market. Power plants usually sign long-term power purchase agreements (PPAs) with state governments under which they agree to sell power to state-owned distribution utilities at a fixed rate for a specified period. The price at which power generating companies sell to the state will be lower than the price they can get in the open market.

Lanco previously announced its desire to focus on merchant power, but this is the first time Rao has spoken about the exact quantity of power the company hopes to sell through this route. The tariff of merchant power currently works out to Rs5 per unit, as against around Rs2.50 per unit under long-term PPAs. In view of the shortage of power production in the country, the price of Rs5 per unit is sustainable for the next three years, Rao said.

Of the proposed 1,400MW of merchant power allocation, 400MW would come from the second phase of the Kondapalli project in Andhra Pradesh, 500MW from the Baban project in Orissa and 500MW would come from the Amarkantak project in Chhattisgarh.

Power generation capacity being added by both public and private sector players in the country will kick in by 2011 and reduce the current situation of power shortage. This will lead to price of merchant power coming down to around Rs3.50 a unit, Rao added. “Even during the medium term of 2012-17, we expect to earn Rs3.50 a unit for merchant power, which is 40% higher than what we earn under PPA route,” he said.

“The world over MPPs (merchant power projects) generate high rates of return, where demand exceeds supply,” say Shankar K. and Shashikiran Rao, analysts with the Mumbai-based equity research firm Edelweiss Securities Ltd in a report dated 7 February 2008.

While in the current demand-supply scenario, merchant power generation seems attractive, any adverse developments in the long run will hurt unit price realization and reduce returns for these projects, the analysts add.
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