Is Reliance Power paying too much for Jaypee's power plants? Not really

Anil Ambani-controlled Reliance Power (R Power) has done the biggest acquisition in the power market, snapping up all the hydroelectric assets of Jaiprakash Group for around Rs 12,000 crore. For that money, R Power will get three functioning hydel projects, with a combined capacity of around 1,800 MW, two located in Himachal Pradesh’s Kinnaur district, the third in Uttarakhand. This is R Power’s first acquisition; all its other projects, including the Sasan ultra mega power plant, Rosa and a clutch of hydroelectric plants in the northeast, are being developed in-house. At around Rs 6 crore per MW, is R Power paying too much? Not really. All three projects are run of the river, which means there are no large, costly reservoirs to maintain. The variable cost of running these plants is close to zero, as the only fuel to generate electricity is the kinetic energy of flowing water. And complete projects mean almost-zero capital cost.

The deal could be funded by a mix of debt and equity, whose details are not clear. But most of R Power’s earlier projects are almost complete, which makes this deal bankable. Each of the acquired plants has an estimated lifespan of 50 years, which means that after a few years of paying off borrowing costs, they will generate unencumbered cash for decades to come. What is the risk underlying this purchase? It is the culture of state governments to give power free or nearly-free to constituents like farm lobbies. This has driven many state electricity boards (SEBs), which buy power from generators, into the red. As their financial position worsens, SEBs often default on payments. This must stop. Every Indian today wants access to quality power and would be willing to pay, if they get electricity at home. States must seize this moment to convert a culture of non-payment into one of compliance.