Power business may get a boost

Thanks to GMR Energy coal mine buy

BL Research Bureau

GMR Energy's move to acquire a 5 per cent stake in the South Africa-based mining subsidiary of Homeland Energy Group would not only secure fuel supply for the company's coal-based power projects, but also provide an opening to the lucrative coal mining business.

The company's move to focus on coal-based projects comes after prolonged glitches with liquid and gas-based fuels used for its currently operational assets.

GMR Energy, a subsidiary of GMR Infrastructure, which manages the power assets of the group, has announced its intention to pick up a 5 per cent stake in Homeland Mining and Energy for $15 million (about Rs 60 crore).

The company has the option of acquiring another 5 per cent by May and 40 per cent by September.

If this comes through, GMR Energy would have a 50 per cent stake for $155 million (Rs 620 crore) in the South African mining company. That the agreement is primarily for coal mining projects and excludes areas such as uranium resources suggests that GMR is looking mainly to the coal-based initiatives.

Constraints

While GMR has had a successful stint with its airport projects, the company's existing projects in power have seen indifferent performance, due to constraints on the fuel front.

Two of the power generation plants that run on liquid fuel have registered low plant load factors (a measure of operational efficiency of thermal power plants) due to high cost of liquid fuels - naphtha and LSHS (low sulphur heavy stock).

However, fixed capacity charges paid by the utilities have ensured that these projects do not run into losses.

Whether the company would enjoy similar benefits once the contracts come up for renewal remains in doubt.

Further, a third project is yet commence power generation due to shortfall in natural gas sourced from GAIL.

On the back of these constraints in its existing power projects, GMR made a conscious effort to move to hydro and coal-based power projects. The company has already secured a coal block for the 1000 MW coal-fired projects in Orissa.

It is in this backdrop that the company has now chosen to enter coal mining business with a view to securing fuel supplies for its upcoming projects.

Securing stake in coal mining companies has now become a preferred strategy for a number of power generation companies.

Companies such as Adani Power and Tata Power have used this strategy to secure supply for their projects, given the delays experienced in securing allotments to coal blocks locally.

If GMR manages to acquire control over the coal mining company, not only would its power assets benefit through higher backward integration; but it could also position the company well to possibly enter the power generation business in South Africa.