Late last week, an agreement was reached between Reliance Industries and the power division of the Adani Group, two of the biggest conglomerates in India. It would include RIL acquiring a 26% share in Mahan Energen Limited (MEL), a Madhya Pradesh-based Adani Power subsidiary. At Rs 50 crore, the ticket size is modest, but the strategic ramifications are significant.
With the aim of using it for captive uses, it grants RIL access to 500 megawatts of power. The current capacity, according to Mahan's website, is 1,200 MW, divided between two facilities that are 600 MW each. An additional 1,600 MW, divided between two more units that are 800 MW each, is planned.
"It is in compliance with the provisions of Electricity Rules, 2005 in terms of which the company, as a captive user, is required to own 26% proportionate ownership in one unit of MEL of 600 MW capacity, with RIL being the captive user of 500 MW generation capacity," RIL said in a statement regarding the proposed investment.
This long-term purchase arrangement is for 20 years. To put it in context, a captive power plant is built with the intention of supplying electricity on a regular basis. It is typically located adjacent to a sizable manufacturing facility.
Since RIL is a customer and is obtaining its electricity from a captive plant (MEL), it is required to own a quarter of that plant. It is important to note that both firms are involved in industries like renewable energy.
Both RIL and Adani benefit greatly from these factors. Even with the extra time, the former would have needed to spend at least Rs 2,000 crore to build a 500 MW plant at, say, Rs 4 per MW.
According to Deven Choksey, MD of DRChoksey FinServ, Adani receives inflow of funds and RIL has access to cheaper power. Regarding cost, RIL would have had to pay more than Rs 10 for each unit. "Now, it might only cost Rs 3.5–4," he thinks.
Midway through 2021, this Madhya Pradesh facility was purchased from Essar Power following its insolvency. It was a component of several thermal and renewable power assets later acquired by The Adani Group.
The Adani group may readily use the facility to meet its power needs across enterprises in central and eastern India given its position. "The Adani group's equity has returned, and servicing the debt is simple. Reliance claims that the electricity can be transmitted to places up to Jamnagar.
