Concerns on new policy norms being proposed for UMPPs…

The newly proposed guidelines for development of Ultra Mega Power Projects (UMPPs) have received stiff oppositions from the developers as well as Financial Institutions according to whom the new norms will make the development of UMPPs unviable.

 

 

 

According to the new norms:

• The projects will be owned by power distribution utilities
• Bidders will be mere contractors to build the project
• Bidder shall collect fees through tariffs for 30 years.
• The utilities would own the land, denying power firms the option to mortgage land to raise funds.
• The plants are proposed to be transferred to distribution utilities at the end of the concession period for a price, similar to the case of other infrastructure projects in road and port sectors.
  

However the above norms have been strongly criticised by  bankers/financial institutions and industry officials with the arguments that in financial matters, cash-starved utilities are fundamentally different from strong organisations such as the National Highways Authority of India (NHAI).

Though the according to the Power Ministry the change has been proposed as existing UMPP developers are facing problems in land acquisition.

 

The views/concerns raised by the stack holders are:

• Power plants are feasible only for the previous built, operate and own model than the design, build, finance, operate and transfer basis as there is a significant difference between roads and power projects since the NHAI is an AAA-rated utility unlike the power distribution utilities.
• Funding of the  newly developed UMPPs under these rules would be more risky since the companies setting up the projects will not own the land unlike the previous cases.
• The new guidelines do not provide sufficient security for lenders.
• Certain risks in the proposed framework are not feasible to being priced and consequently are non-financeable. Similarly, even if certain risks are reflected in tariffs, this would result in very high bids, defeating the objective of competitive bidding.
• Capability of state distribution utilities to purchase land, pay electricity bills and buy back the UMPPs after the concession period have also been questioned by the parties involved.
• The accumulated losses of state power distribution companies are estimated at 1.9 Lakh Crore and the Centre has recently approved a bailout package for them.
• According to the draft documents  even in case of non-payment of electricity bills by distribution companies, the concessionaire would terminate the contract and project assets will be transferred to the distribution utilities that will pay the power company.

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Third unit of Mundra UMPP synchronized by Tata Power…

Tata Power, the largest domestic private power company, has today synchronised third 800 MW unit of Mundra Ultra Mega Power Project (UMPP) in Gujarat.

 

Mundra UMPP, the 4,000 MW  thermal project, is the first of the UMPPs that has initiated the entry of 800 MW supercritical boiler technology in the country and  is being set up through a special purpose vehicle Coastal Gujarat Project Ltd (CGPL).

This technology and the choice of unit sizes at Mundra UMPP will help save fuel for the project and cut down greenhouse gas emissions up to 15 per cent as compared to sub-critical coal-fired power stations.

 

Further, as it’s an imported coal plant, the high quality fuel will result in significant reduction of sulphur emissions to virtually insignificant levels. As compared to other subcritical plants in India, this project will use 1.7 million tonnes of less coal per year while generating the same quantum of power. This not only makes available more coal in the long run for power generation but also reduces carbon emissions.

 

Units 1 and 2 of the Mundra UMPP has been commissioned in March and July 2012 respectively.

 

With this Tata Power has reached installed power generation capacity of around 6,899 MW

• Thermal Capacity : 6,047 MW
• Clean Energy (Hydro, Wind, Solar etc): 852 MW

 

 

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Additional Reading…

• http://business-standard.com/india/news/tata-power-synchronises-third-800-mw-unit-at-mundra-umpp/190094/on
• http://www.thehindubusinessline.com/companies/article3977289.ece?homepage=true&ref=wl_home
• http://economictimes.indiatimes.com/news/news-by-industry/energy/power/tata-power-synchronises-third-800-mw-unit-at-mundra-project/articleshow/16721996.cms

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Tata Power bided for three Nigeria discoms which requires investment of USD 900 Mn…

Tata Power’s Delhi Distribution arm (TPDDL) has recently bided for three (3) power distribution companies in Nigeria by forming two (2) consortiums with two leading companies of the African nation which will require investment of around USD 900 Mn (Rs. 1,560 Crore).

 

 

 

 

Details of the transaction are as follows…

• The Nigerian government had decided to privatise 11 state-owned distribution companies as part of reforming the power sector.
• Nigeria's Bureau of Public Enterprise (BPE), which has been tasked to carry out the reform process, has adopted the 'Delhi model' to privatise its power distribution sector.
• Around 54 companies had bid for these companies.
• 21 firms including TPDDL have cleared the technical evaluation process.
• TPDDL has bided for
1. Eko and Ikeja discoms as a consortium member of Oando
2. Benin Discom a consortium member of Viego Holding Ltd
• TPDDL has the option of acquiring up to 51 per cent stake in the consortiums over a period of time.
• Other companies which cleared the technical qualification round are Honeywell, Integrated Energy, West Power and Gas, Rensmart Power and Rockson Engineering etc.

 

If won, Tata Power will be the first Indian Discom to get into power distribution company in a foreign country.

 

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Additional Reading…

• http://www.business-standard.com/generalnews/news/tata-power-subsidiary-bids-for-discoms-in-nigeria/65337/
• http://economictimes.indiatimes.com/news/news-by-industry/energy/power/tata-power-subsidiary-tpddl-bids-for-discoms-in-nigeria/articleshow/16708066.cms
• http://www.ptinews.com/news/3029479_Tata-Power-subsidiary-bids-for-discoms-in-Nigeria

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Tata Power rating lowered to B1 by Moody’s…

Credit quality of Tata Power Company (“TPC”), on of the largest private sector power companies of India, has been downgraded by Moody’s (global credit rating agency) Investors Service from Ba3 to B1 on account of on-going issues related coal availability and pricing, bank waivers and tariff renegotiations for its Mundra Ultra Mega Power Project (UMPP). Further, TPC’s unsecured bond rating has been downgraded from B1 to B2 and foreign currency rating of its senior unsecured MTN program has been downgraded from (P)B1 to (P)B2. The outlook for the ratings is stable.

 

TPC is the largest private-sector power utility in India with an installed generation capacity of 6,099 MW as of September 2012. The company's business operations include generation (thermal, hydro, solar and wind), transmission and distribution.

Headquartered in Mumbai, TPC has a strong presence in the area, meeting about 80% of its power requirements. Thermal capacity accounts for 86% of its capacity, with coal being the primary fuel source. Hydro power and wind form the bulk of the remaining generation capacity with a small amount of solar power capacity.

Primary reasons of downgrade seems to be…

• Possible adverse impact of weak coal prices on its Indonesian coal mines, as well as the continuing uncertainty related to unresolved bank waivers and the tariff renegotiations for its Mundra Ultra Mega Power Project.
• Current weakness prevailing in coal prices will eliminate the benefit the TPC was having earlier with respect to investment in coal mines which have given likely hedge against fuel costs.
• Due to this the margins on coal mines will also be reduced.
• As the Mundra UMPP’s coal requirement is higher than the output of TPC’s mines, the lower coal prices for UMPP will not be adequate to  offset the lower cashflow of mines. This will pose an added credit challenge to TPC.
• CGPL's (SPV of TPC executing Mundra UMPP) unresolved bank waivers may be viewed as a weakness. However, given the nature of the banking consortium and TPC's financial support for the project, a default is very unlikely.
• Tariffs for CGPL's Power Purchase Agreements (PPAs) combine both fixed and variable elements, including fuel costs. The company currently is able to pass through only 45% of the fuel costs to its customers.
• In addition, the CGPL unit relies entirely on coal imported from Indonesia. Its profitability has been affected by the Indonesian government's directive that coal be sold at market rates, thereby exposing it to considerably higher costs than expected at the inception of the Mundra project. TPC's bid for the Mundra unit was based on the expectation that coal prices would be well below the current market rates.
• Although TPC has brought its case to the regulator to start renegotiating its PPAs to address fuel-cost risks, progress will take time. The lack of precedents makes it difficult to assess the likely outcome and timeline.

 

TPC's credit metrics have materially weakened in FY03/2012 and Moody's believes that the company will breach its downgrade triggers -- FFO interest coverage below 1.8x, adjusted debt/book capitalization above 65%, and RCF/debt below 7% -- on a sustained basis.

These key measures are no longer consistent with TPC's Ba-rated peers.

For TPC, the indicated rating from the Regulated Electric and Gas Utilities rating methodology is now Ba3. The final rating is one notch below the indicated rating, to reflect the company's greater reliance on the coal mines to generate cash flow and the current volatility in coal prices, which are unique factors not captured by the rating methodology.

The outlook is stable based on Moody's expectation that the waiver will be obtained in the next few months on terms that will not be severely detrimental to the Mundra project or TPC overall.

• Upward rating pressure is limited, as the PPA renegotiation will take time. However, the rating could be upgraded if margins at the coal mines improve or the PPA is renegotiated, such that FFO interest coverage is above 2x, adjusted debt/book capitalization below 65%, and RCF/Debt above 8% on a sustained basis.
• On the other hand, downward rating pressure would emerge if: 1) CGPL is not able to obtain a waiver within a reasonable timeframe and without significant additional costs or onerous new terms; 2) the company is not able to expand capacity for the Mundra UMPP and other projects within the stated timeframe and budgeted costs; or 3) FFO interest coverage is below 1.6x, adjusted debt/book capitalization above 70%, and RCF/Debt below 6.5% on a sustained basis.

 

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More Literature on this…

• http://www.business-standard.com/india/news/tata-power-downgraded-by-moodys/488689/
• http://www.moodys.com/research/Moodys-downgrades-Tata-Power-to-B1-outlook-stable--PR_256967

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DERC announced RPO Regulations for Solar and other RE Sources…

The Delhi Electricity Regulatory Commission (DERC) has recently announced its much awaited RPO Regulations on 1st October 2012. DERC has made to RPO applicable to Distribution Licensees, Captive Users and Open Access Consumers on similar lines as per the other states.

The RPO regulation is applicable to:

• Distribution Licensee(s) operating in the National Capital Territory of Delhi
• Any Captive user, using other than renewable energy sources exceeding 1 MW
• Any Open Access Consumer with a contract Demand exceeding 1 MW from sources other than renewable sources of energy.

The obligation till FY 2016-17 is shown in the table below:

Financial Year	Solar RPO	Total RPO
2012-13	0.15%	3.40%
2013-14	0.20%	4.80%
2014-15	0.250%	6.20%
2015-16	0.300%	7.60%
2016-17	0.350%	9.00%

Open access consumer are exempted from the cross-subsidy surcharge determined by the Commission from time to time to the extent of RPO.
However, no banking facility shall be provided for supply of electricity from renewable energy sources through open access.

Rpo Rec Framework Implementation Regulations

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More literature on this topic…
http://powerbase.in/derc-issues-regulations-rpo/
http://www.indianpowersphere.com/2012/05/derc-to-specify-minimum-quantum-of.html

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Andhra Pradesh Government’s new solar power policy…

The government of Andhra Pradesh has recently announced its State Solar Policy on 26th Sep 12. Unlike other states’ solar policies, AP Government has sot specified any policy with respect to feed-in-tariffs or competitive bidding schemes etc rather they have put emphasise on developing solar power through REC Mechanism.

Following are some of the major policy incentives…

• Banking:
  • 100% banking is permitted from January to December of the year.
  • Banked units can not be adjusted during February to June and during evening peak hours 6.30 PM to 10.30 PM.
  • The banked energy will attract banking charge of 2%.
• Exemption of Wheeling and Transmission Charges: For all the intra-state open access transactions (through 33kV system), wheeling and transmission charges are exempted.
• Exemption of Cross Subsidy Surcharge (CSS): Consumers purchasing power from solar projects are exempted from CSS. This will be a great relief for consumers as CSS remains the major cause of worry for consumers as well as develop-ers opting for third-party sale / open access.
• Exemption of Electricity Duty: E-Duty is also exempted for all the solar power projects opting for third party sale and/or captive usage.
• Refund of VAT, Stamp Duty and Registration Charges: Solar developers will be able to get the refund of the said charges.

The above incentives are applicable only if the project is commissioned by June 2014. The incentives are extended for the period of 7 years.

The major concern is for the CPPs in the state as they cannot claim RECs on availing the above benefits. It will raise conflict regarding the state and central regulation on REC mechanism.

Read the full policy document here…

Andhra Pradesh Solar Policy 2012 Abstract

 

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More Literature on this topic…

• http://www.thehindubusinessline.com/news/states/article3951691.ece
• http://news.efytimes.com/e1/91625/Andhra-Pradesh-Gets-Solar-Policy

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Rs. 6,000 Crs investment in Solar Power planned by Aditya Birla group…

The USD 40 Bn Aditya Birla group is planning INR 6,000 Crores investment in solar power projects over the next five years.

 

 

 

Some of the companies recent developments towards solar power business are:

• Acquired a minority stake in a Solar PV plant controlled by Electrotherm in Gujarat
• Signed a long-term leasing agreement with Refex Energy to operate a solar plant at Bithuja in Rajsthan
• Essel Mining & Industries Ltd, a subsidiary of Aditya Birla is already into the business of wind power generation.
• Under the same company, around 100 MW solar projects are being planned over next 1 to 1.5 years.
• The current investment of the Group is around Rs. 200 Crs to develop 20 MW of solar projects.

 

Further plan of the Group includes, a target of $1 billion over the next 5-6 years.

 

According to sources, a three-pronged strategy has been devised by Mr. Ravi Khanna, CEO of Solar Power business (joined recently from Scandanavian Advanced Technology).

 

 

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More literature on this topic…

http://www.bloomberg.com/news/2012-10-05/india-s-aditya-birla-plans-solar-investments-times-says.html

http://www.adityabirla.com/our_companies/indian_companies/essel_mining.htm

http://economictimes.indiatimes.com/news/news-by-industry/energy/power/aditya-birla-group-to-invest-rs-6k-crore-in-solar-power-business/articleshow/16677992.cms

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Independent Directors of CIL opposes the CEA’s proposal for import of coal…

The independent directors of Coal India Ltd (CIL) have suggested the Coal Ministry and CIL that the recent proposal of Central Electricity Authority (CEA) regarding the import of coal would benefit only the Independent Power Producers (IPPs) at the expenses of public money.

 

The independent directors have sent a note to CIL as well as Coal Ministry wherein the have asked the official directors to re-consider their stand in view of the grave legal, commercial, economic and ethical problems arising out of their supporting the CEA views.

 

The proposal of CEA was as below:

• CIL shall import around 20 million tonnes of coal in 2012-13 and supply the same at a subsidised price (nearly half of the cost price) to IPPs.
• This will result in a loss of Rs. 3,000 Crore annually to the company and over 20 years the same will be around Rs. 60,000 Crore.
• The above losses shall be made good by increasing the prices of indigenous coal to about Rs.100 a tonne for all power producers.
• The decisions of CIL in finalising the terms of the fuel supply agreements (FSAs), including the trigger point at 80 per cent of annual contracted quantity (ACQ) and the rate of penalty at 0.01 per cent taken on April 16, were a result of wide and deep deliberations carried out at several meetings of the CIL board this year in pursuance of the April 4 Presidential directive.
• These decisions have already been implemented in the case of 29 private power producers.
• It states that no arrangement has been made by the CIL management to protect the company or its directors against allegations and proceedings likely to come up by deviating from the Presidential directive. The note states that the new dispensations entail lowering the trigger points from 80 per cent of ACQ to 65 per cent but also seek to levy penalty ranging from 5 to 40 per cent of the quantity not delivered. This mechanism is sought to be justified on the ground of ensuring better performance of CIL.
• The management seems to agree with the premise that the qualitative changes for securing productivity can be obtained only by a threat of penalty of 40 per cent. To us, it looks like an arrangement to transfer thousands of crores of public money to the private power producers in the name of penalty over CIL.

 

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More news on this topic:

http://www.thehindu.com/business/coal-india-board-split-on-cea-proposals/article3958525.ece

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Tussle between Power and Coal Ministry on coal shortfall…

Power Secretary P Uma Shankar has recently issued a letter to Coal India Ltd (CIL) to compensate for the losses of power companies due to failure of CIL to provide coal to the power firms.

 

This is sparked a confrontation between to prominent Ministries of India; Coal Ministry and Power Ministry.

 

Power Secretary blamed CIL for hurting power sector investments as financial institutions had been shaken by the coal shortages.

 

We believe that the move of CIL’s independent directors to block the import of coal and their sale at a discount to power producers as suggested by the Central Electricity Authority has triggered the Power Ministry to issue the said letter.

 

The views depicted in the letter by Mr. Shanakr were:

• Power producers had made investments after coal supplies were approved by the Coal Ministry and assurance letters issued by CIL, Shankar wrote in his letter.
• However, CIL has failed to honour its binding obligation, thus leaving such assets stranded, threatening not only their viability, but likely to make them non-performing assets.
• CIL board has also rejected the suggestion to import coal.

 

According to Mr. Shankar:

“CIL board and its director will do a great service to the nation if they do some soul searching on their responsibility and their commitment to increase production of domestic coal and ensure adequate supply of coal to help the growth of the country and not expose power and banking sectors to the risk of jeopardising all their investments, which is largely public money. In fact, as a responsible corporate entity, CIL should compensate the power producers for the loss suffered by them due to its failure in providing them the promised fuel to run their plants at a viable level. The PSU has obtained bank guarantees worth hundreds of crores from the power producers to bind them in an offtake agreement... CIL has failed to honour its commitments.

 

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More news on this topic:

http://www.indianexpress.com/news/power-secy-to-coal-india-no-coal-pay-companies/1011143/

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Power Plants should be given at par priority for gas allocation with fertilizer plants…

Power India found that the MoP (Ministry of Power) has requested that the gas based power plants should be given the at par preferences for allocations of natural gas with that of fertilizer plants. According to MoP, this should be due to the fact that import of power is not possible as is the case with urea.

 

As with the current priorities are concerned with respect to allocation of natural gas to various industries, fertilizer plants get top most priority followed b LPG extraction units; gas based power plants comes third in the priority list.

 

Due to this reason, when RIL’s (Reliance Industries Limited) KG-D6 field production fall then the expected level, all the available gas was first utilized for the meeting the fertilizer plant’s requirements and thereafter the requirements of LPG plants was met. Only leftover gas was distributed among the power plants on a pro-rata basis, resulting in sharp dip in electricity generation.

 

Following statistics may enlighten the above:

• KG-D6 output dipping to 27.5 million standard cubic meters per day (mmscmd) instead of rising to projected 80 mmscmd,
• Entire 15.668 mmscmd allocations to 16 fertiliser plants were met first (from the anove 27.5 mmscmd.)
• LPG manufacturing plants got 2.6 mmscmd as required
• Balance 9.3 mmscmd distributed among 25 power plants (the actual allocations/requirement was 28.9 mmscmd)
• Hence, only 30% requirement of gas plants were met while 100% requirement of fertilizer and LPG manufacturing plants were met.

 

Due to the above cited reasons, the Hon’ble Power MInister M Veerappa Moil has told in an interview that "There is a need of re-prioritisation of gas. Fertiliser can be imported but power cannot be imported. An equal status for power plants can be considered as we give to fertilizer,"

 

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More on this topic…

• http://www.moneycontrol.com/news/economy/give-power-stations-priority-for-gas-allocation-ministry_764246.html

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