- Depends on Govt initiatives for growth and hence long term growth opportunities are suspect.

 

- Power Purchase agreement with state boards specify a fixed RoE of 14%. It could be lowered in the future depending on whims of the babus.

 

- Power is mostly sold to state boards which are themselves cash strapped.

 

Inspite of all these factors, why is every business house falling over each other to get into power generation?

 

- ADAG group is never known to get into boring businesses.

- Tatas have big plans with Tata Power

- Sterlite is joining the bandwagon with their Sterlite Energy IPO

- The big gang of infra companies from Andhra Pradesh - GMR, GVK, Lanco etc - all have big power plans.

 

The Jindals, JP Associates, the Adanis - think of a business house or a professionally managed large company - everybody wants to build mega power plants. Are we missing something here?

 

A few theories -

 

- I haven't read the Electricity Act 2003, but perhaps power plants can sell power to trading companies/industries after selling a particular quantum to State Electricity Boards?

 

- The power plant that Adanis are building in Mundra SEZ - they can sell 600MW on 'merchant basis'. I assume this means that power is sold to the highest bidder. SSKI report estimates that 600 MW can be sold at Rs. 4 per unit (Remember Reliance Power's bid for Sasan UMPP was for Rs. 1.12 per unit).

 

- In telecom sector, the companies made profit inspite of falling ARPUs because of rise in demand. Perhaps the same logic could be extended to power sector too?

 

- In USA, power utility companies like Consolidated Edison have huge market caps.