India's power sector has always been a story of shortages, and successive governments have attempted to solve the problem through rapid capacity addition without adequate regard to the backend problems. It was with such missionary zeal to wipe out the power shortage that in 2005 the government had launched ultra-mega power plants, or UMPPs, with 4,000 Mw capacity each to be located at coal pitheads and at the coast which would make coal imports easy.
The report card of the four UMPPs that were given out to private companies amid much fanfare - Mundra (Gujarat) to Tata Power and Sasan (Madhya Pradesh), Tilaiya (Jharkhand) and Krishnapatnam (Andhra Pradesh) to Reliance Power - is hardly encouraging: while Mundra and one unit of Sasan are generating power, the other two are yet to start. And now the government has launched two new UMPPs: one each at Bedabahal in Odisha and Cheyyur in Tamil Nadu.
In eight years since UMPPs were first launched, the investment climate has dramatically changed. All large private-sector power players are currently facing tough times and the government may find it hard to attract investments. Considering that the estimated cost of the Bedabahal UMPP is Rs 25,200 crore and of Cheyyur UMPP is Rs 24,200 crore, the investment requirement is huge - assuming debt/equity of 3, this would require the developers to raise over Rs 35,000-crore in loans.
Arranging that kind of money won't be easy. Indian financial institutions are over-exposed to the powers sector. Some power companies like Lanco have gone in for corporate debt restructuring. Interest rates for power companies have escalated to 13-14 per cent per annum. So, project developers are increasingly dependent on external commercial borrowings (ECBs). "Most domestic developers are financially stretched, and so we should work to attract more overseas developers and local companies that are financially stronger, especially those in the public sector," says Kameshwar Rao, leader (energy, utilities and mining), PriceWaterhouseCoopers. "Conditions like fuel availability, PPA (power purchase agreements) and equity infusion for attracting funding are not being met. Promoters were dependent on private equity which has lost interest due to the sector outlook weakening; this is also responsible for domestic banks not making the sanctioned disbursements," says Tata Power Managing Director Anil Sardana.
Brake on imports
To be sure, there has been record addition to India's power capacity in the last few years. Much of that was fuelled by the easy import of equipment for power projects - almost 50 per cent of the new coal-based capacities use imported equipment. However, the recent duties on imported equipment threaten to increase project costs. Sardana says there is a strong need to remove the barriers to entry at all stages and for an optimal pricing and tax strategy to be in place, so that resource allocation takes place based on market forces operating in a credible regulatory regime.
The Union power ministry too appears conscious of the challenges it is facing with regard to the two new UMPPs. So, qualifying norms have been simplified this time, allowing companies which are not in the power sector to bid. "The qualifying requirement, however, for non-power bidders, is higher," says Power Secretary PK Sinha. A bidder needs to have technical capability of Rs 12,600 crore worth of projects in case of power companies in the last five years. The bidder is allowed to include an infrastructure project executed by it worth Rs 1,260 crore in its experience. This threshold was earlier Rs 2,520 crore but was reduced due to the economic slowdown.
Sinha says some 52 developers turned up at the pre-application conference on October 15 which included multinationals like Mitsui, Larsen & Toubro and General Electric, besides domestic power producers like GMR Energy, Adani Power, Sterlite Industries and Tata Power. Reliance Power, which already has three UMPPs, did not take part in the conference. That's because the bidding norms do not allow companies with three UMPPs under construction to bid for more such projects. Rao says a different set of developers such as multinationals, engineering companies and public sector corporations will participate this time. This explains the presence of a large number of non-power generating companies in the pre-application conference.
Easier qualifying criteria is among various other changes being tried out in the bidding for UMPPs this time. For Bedabahal, which comes along with a coal mine, it is only the fixed charge which will constitute the tariff for the purpose of bidding. Since the bidder is expected to source fuel from captive coal mines allocated for the project, the fuel charge payable would be Rs 0.356 a kWh (unit). Though this was not the case in Sasan and Tilaiya, the two pithead UMPPs that were bid out earlier, companies want any variation in the mining cost which is beyond the control of bidders should be adequately compensated.
Cheaper power
From the buyer's point of view, the changes in the bidding norms could make tariffs more realistic. "The rates of UMPPs are typically less. The rates are far lower than power generated out of smaller plants," says Manu Srivastava, managing director, MP Power Management Company, the holding company for three power distribution companies in Madhya Pradesh. The state will source 1,485 Mw from Sasan and 200 Mw from Tilaiya at less than Rs 2 a unit. In addition, it has signed up for buying another 400 mw power from the Bedabahal UMPP. In the case of both Sasan and Tilaiya, Reliance Power is seeking a tariff revision from the Central Electricity Regulatory Commission. Srivastava says the current PPAs do not permit any revision. "It is difficult to seek solution out of the written draft even if some of the reasons for seeking revision are genuine. It makes more sense to allow flexibility in the beginning. The price of power is more a function of factors prevailing then," he says.
Tata Power, which has fully operationalised imported coal-based Mundra UMPP but on account of changes in Indonesian law is seeking an increase in Rs 2.44 tariff it quoted to bag the project, does not see the changes in bidding norms bringing any relief. The company has lobbied the power ministry to retain the previous documentation except setting right a few issues related to fuel risk et cetera. "The present documentation is a completely new concept and provides challenges which add much more risk on the developers end. We would take such decision (on bidding for the two UMPPs) only after deliberations at the board level. At this stage, the terms and conditions indicated in the documentation are a matter of serious concern," says Sardana.
For the power sector, fuel continues to be a serious concern. Sinha, on his part, points out that resolution of 16,000 Mw of stranded gas-based capacity is on the cards with the gas pooling proposal, while fuel supply agreements for 72,000 Mw of coal-based capacity have been signed. With eight tapering linkages, given in lieu of long-term linkages that have not materialised, another 4,000 Mw would get coal. "If these decisions get implemented, new projects will become attractive to bankers and developers," he says. In power, where there are long-gestation projects, capacity planning has to be done over at least a five-year horizon. The challenge would be to make the two new projects on the block live the dream.
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