New UMPPs on offer, but bid norms may put off private investors
Authorities are hoping to revive private-sector interest with two new so-called ultra mega power projects (UMPPs) in Orissa and Tamil Nadu that are part of the government's aim to provide cheaper power through economies of scale.
They were seen as the answer to India's mounting power woes. But in the nearly eight years since the government kicked off plans to set up 16 large power projects across the country, implementation has been hobbled by a host of problems, ranging from fuel supplies and land acquisition to tariff issues. Now, authorities are hoping to revive private-sector interest with two new so-called ultra mega power projects (UMPPs) in Orissa and Tamil Nadu that are part of the government's aim to provide cheaper power through economies of scale.
So far, the response has been encouraging. Some leading companies, including Tata Power and Larsen & Toubro, have participated in the qualification rounds of the tender process for the latest projects, kick-started by Power Finance Corporation Ltd. The power ministry is hoping the line-up of firms will boost private-sector investment in power, which fell sharply to about Rs 55,000 crore in 2012/13 from Rs 98,300 crore in the previous year. An ultra mega power project is about 4,000 MW in capacity and costs about Rs 25,000 crore.
So, is it time to uncork the champagne? Not yet, say energy experts. According to them, some of the problems that have dogged existing projects have not been ironed out. "Fuel uncertainties still remain," says Delhi-based energy analyst V. Raghuraman. "We cannot read too much into private-sector companies showing interest in the qualification round for a UMPP."
His concerns are not unfounded. The United Progressive Alliance introduced the concept of UMPPs in 2005/06 with the aim of bringing down the cost of generating power through scale and competition. In the past six years, the government has awarded four such projects: the first, in Mundra in coastal Gujarat, was bagged by Tata Power, while the Anil Ambani-promoted Reliance Power bagged the other three in Andhra Pradesh, Jharkhand and Madhya Pradesh.
So far, Mundra has commissioned all five 800-MW units, but the Tatas are selling Mundra power below the cost of generation because a change in coal pricing regulations in Indonesia has pushed up the cost of imported fuel. Reliance Power commissioned its first 660-MW unit at Sasan in March, but has stopped work on its Krishnapatnam project in coastal Andhra Pradesh because of the higher price of imported coal.
The revised bid norms, however, address this issue to a large extent. Developers can pass on the increase in the cost of coal due to extraordinary events such as a policy change. The architect of India's UMPP policy, former Union power secretary R.V. Shahi, says this is a positive step. However, the clause requiring developers to transfer the plants to the government after the expiry of the contract period may dampen investor sentiment. "The minus point is the new scheme is based on the build-operate-transfer model, which is being perceived by developers as well as bankers as negative. There is a big question mark," he says.
Given its experience with UMPPs, Power Finance Corp weighed the pros and cons, and tweaked the bid conditions before kicking off the latest tender process. One change, for example, is that the projects in Odisha and Tamil Nadu will have to source equipment from domestic manufacturers. All the earlier projects used imported equipment. The new rule is aimed at encouraging domestic manufacturers of power equipment and discouraging imports from Chinese rivals. A few large companies, such as Larsen & Toubro and JSW Group, have sewn up joint ventures with foreign firms for making equipment such as boilers, turbines and generators.
On the flip side, investors will lose out on the benefits of buying foreign equipment with cheaper overseas debt. Industry experts are not sure whether banks will be keen to fund the two UMPPs, because they are already sitting on a huge pile of bad loans. They are also likely to ask tough questions while evaluating the projects when developers approach them for a loan.
"We have to wait and see how effective the initial response will turn out to be in terms of price bids, and whether these bids will be within reasonable limits," says Shahi, who now heads Delhi-based consulting firm Energy Infratech.
A power sector analyst with a leading brokerage says private companies have participated in the qualifying round to meet a technical requirement. They may not show similar enthusiasm while making tariff bids, given the lack of incentives. NTPC, however, is optimistic about the latest projects.
"For the new UMPPs, I am glad that wide-ranging consultations have been done. We feel confident to successfully bid and win. Our balance sheet has enough cash available to enable us to invest in this endeavour," says its Chairman Arup Roy Choudhury.
So far, the response has been encouraging. Some leading companies, including Tata Power and Larsen & Toubro, have participated in the qualification rounds of the tender process for the latest projects, kick-started by Power Finance Corporation Ltd. The power ministry is hoping the line-up of firms will boost private-sector investment in power, which fell sharply to about Rs 55,000 crore in 2012/13 from Rs 98,300 crore in the previous year. An ultra mega power project is about 4,000 MW in capacity and costs about Rs 25,000 crore.
ENERGY EXPERTS SAY SOME OF THE PROBLEMS THAT HAVE DOGGED EXISTING PROJECTS HAVE NOT BEEN IRONED OUT
His concerns are not unfounded. The United Progressive Alliance introduced the concept of UMPPs in 2005/06 with the aim of bringing down the cost of generating power through scale and competition. In the past six years, the government has awarded four such projects: the first, in Mundra in coastal Gujarat, was bagged by Tata Power, while the Anil Ambani-promoted Reliance Power bagged the other three in Andhra Pradesh, Jharkhand and Madhya Pradesh.
The revised bid norms, however, address this issue to a large extent. Developers can pass on the increase in the cost of coal due to extraordinary events such as a policy change. The architect of India's UMPP policy, former Union power secretary R.V. Shahi, says this is a positive step. However, the clause requiring developers to transfer the plants to the government after the expiry of the contract period may dampen investor sentiment. "The minus point is the new scheme is based on the build-operate-transfer model, which is being perceived by developers as well as bankers as negative. There is a big question mark," he says.
Given its experience with UMPPs, Power Finance Corp weighed the pros and cons, and tweaked the bid conditions before kicking off the latest tender process. One change, for example, is that the projects in Odisha and Tamil Nadu will have to source equipment from domestic manufacturers. All the earlier projects used imported equipment. The new rule is aimed at encouraging domestic manufacturers of power equipment and discouraging imports from Chinese rivals. A few large companies, such as Larsen & Toubro and JSW Group, have sewn up joint ventures with foreign firms for making equipment such as boilers, turbines and generators.
On the flip side, investors will lose out on the benefits of buying foreign equipment with cheaper overseas debt. Industry experts are not sure whether banks will be keen to fund the two UMPPs, because they are already sitting on a huge pile of bad loans. They are also likely to ask tough questions while evaluating the projects when developers approach them for a loan.
"We have to wait and see how effective the initial response will turn out to be in terms of price bids, and whether these bids will be within reasonable limits," says Shahi, who now heads Delhi-based consulting firm Energy Infratech.
A power sector analyst with a leading brokerage says private companies have participated in the qualifying round to meet a technical requirement. They may not show similar enthusiasm while making tariff bids, given the lack of incentives. NTPC, however, is optimistic about the latest projects.
"For the new UMPPs, I am glad that wide-ranging consultations have been done. We feel confident to successfully bid and win. Our balance sheet has enough cash available to enable us to invest in this endeavour," says its Chairman Arup Roy Choudhury.
