Guest Article by Mr. Nirav Dadhania
Indian power sector is going through precarious phase since some time. It is one of the few sectors where the companies don’t have product differentiation, operation is regulated and the end product happens to be full of vote bank politics.
The sector is facing multitude of problems like fuel sourcing, land acquisition, environment and government clearances, regulatory issues, timely payment from utilities, high interest rates, etc. Fortunately government has realized this and has initiated efforts like putting the clearances in fast track, Coal India signing fuel supply agreements for 71,500 MW, restructuring of state electricity boards, increase in tariff, etc.
Many Indian power producers have already started looking for opportunities in international market. TATA Power, which has already few projects under implementation abroad, is now concentrating on Africa, Southeast Asia, the Middle East and the SAARC (South Asian Association for Regional Co-operation).
The report card of existing four UMPPs (at Mundra to TATA Power and Sasan, Tilaiya and Krishnapatnam to Reliance Power) is not commendable. And now the government has started the bidding process of two new UMPPs: one each at Bedabahal in Odisha and Cheyyur in Tamil Nadu. The estimated cost Bedabahal UMPP is Rs 25,200 crore and of Cheyyur UMPP is Rs 24,200 crore. Assuming a debt / equity ratio of 3, the required debt comes around 35,000 crores. This would be a humungous task for developers to raise such a huge amount.
Bidding for UMPPs...
Bidding for power projects is no big trade secret as all the project parameters are out in open and most of the companies can reasonably estimate the cost of project. Considering that in the past, project developers have had aggressively bid to win the projects and have had burned their fingers in the process, it is expected that this time the developers will not discount the unexpected contingencies. Moreover, this time fuel cost is not the bidding parameter and the companies will bid the tariff for the 1st year only rather than levelised tariff structure.
Changing role of EPC players and financing…
Traditionally, EPC players have played the role of mere contractors providing the services/equipments. But considering the huge amount of investments required and fierce competition to bid the project, EPC companies will now play an important role as project stakeholder and would include joint ownership, providing strategic and business advisory to develop the project. One of the bidding strategies for power developer would be on how well they synchronize with their EPC partners.
EPC partners will not only bring technical competencies but can also bring in cheap funds. In past Reliance Power was able tie up $1.1 billion from three Chinese lenders. This was to support import of Boiler-Turbine Generator (BTG) from Shanghai Electric Group Company Ltd. Recently China
Development Bank Corp had agreed to lend $3 billion for 2,500 MW to Global Wind a venture between Ming Yang and Reliance Capital.
Import of Chinese power equipments and their performance has remained a controversial topic with domestic firms strongly opposing the imports. The Central Electrical Authority has submitted a report to the Union Power Ministry mentioning below par performance of Chinese equipments. Chinese units based on imported coal have, however, done better than BHEL on some parameters.
The developers will however, need to understand that success of project will depend on how much External Commercial Borrowing (ECB) they are able to get. Indian banking system has already reached its power sector lending limit. Also, their risk appetite of domestic lenders has waned considering the increase in risk profile of power projects. SBI chairperson Arundhati Bhattacharya in a letter to Power Secretary has pointed out that Dhabol power project is on verge of becoming NPA.
Considering the present situation, it would be difficult for developers to compete with someone having strong EPC partner with cheap ECB funding.
Increased responsibility of finance managers in EPC contracting…
Traditionally EPC contracting has largely remained purview of technical / commercial team with finance function playing limited role of budgeting. With EPC players playing a more integrated role, finance managers need to take a more collaborative approach with technical and EPC partners. They need to work out different payment/ownership structures so as to calculate different IRRs for both, the company and EPC partners. Manager need to create various scenarios in their financial models of various permutations combinations of payments vs stake sale mechanism.
Also, more innovation is required in terms of funding structures like repayment structuring, integrated financing solution across power value chain, hedging and risk mitigation.
About the Author: Mr. Nirav Dadhania is a finance professional with techno commercial expertise. He has worked with various reputed power companies in India. He can be contacted at
His LinkedIn profile is www.linkedin.com/in/dnirav.
The information and views expressed in this blog post are solely those of the author and not necessarily those of Power India. This blog was posted directly by the author and was not reviewed for accuracy, spelling or grammar.
