Big moves for a bright future

The government decides on the ambitious route of letting in private players to

create the mega capacities needed to power economic growth

Akash Bisht

Like Health for All and Literacy for All, Power To All by 2012 is part of the ambitious project of turning India into a developed country by 2020. According to the blueprint for the power sector, a major step towards achieving this target is through mega power projects. It is believed that the cost-effectiveness entailed by the economies of scale made possible in big projects will pave the way for low tariff for consumers.

The Ultra Mega Power Projects has been drawn up by the Union Ministry of Power, by the Central Electricity Authority (CEA) and the Power Finance Corporation (PFC). The plan envisages seven big projects, each one with a capacity generation of 4000 MW. The bidders for these projects will be from the private sector. The bidder offering the lowest cost of production per unit will be awarded the project. These big projects are planned to feed the regional and national power grids, serving the power needs of several states.

The seven proposed mega projects are to be located in Madhya Pradesh, Gujarat, Andhra Pradesh, Orissa, Maharashtra, Karnataka and Chhattisgarh. Two more, to be located in Jharkhand and Tamil Nadu, are also on the anvil. The CEA is in the process of selecting the sites for the last two projects.

The guidelines for competitive bidding for determination of tariff have been issued in January 2005. These indicate that all future power needs are to be procured through distributive licences. This does not, however, apply in the case of existing projects that are expanding their capacity. In their case, the regulators will determine tariff based on norms.

Unlike the older Build-Operate-Transfer (BOT) model, the Ultra Mega Power Projects is to be based on Build-Operate-Own (BOO) model. That is, the new big power projects will remain in the private sector, and that utilities—power and water suppliers—will now be entrusted to private players. Their operations will come under the purview of independent regulators with statutory authority.

In order to enhance investors’ confidence, reduce risk perception and get good response to competitive bidding, five shell companies have been set up as wholly-owned subsidiaries of PFC to facilitate tie-up of inputs, linkages and clearances for these projects. These companies will undertake preliminary studies and obtain necessary clearances and tie-ups, including water, land and power-selling arrangements,  environmental clearance etc, prior to award of these projects to successful bidders through tariff-based International Competitive Bidding (ICB).

Of the seven projects planned in the first phase, three are to be located at pitheads with captive coal mines, and four at coastal locations, which will depend on imported coal supplies.

Seven wholly-owned subsidiaries have been established by Power Finance Corporation Ltd. (A Govt. of India Undertaking) for taking up developmental work of these Ultra Mega Power Projects. The subsidiaries are:

Three pithead locations based on domestic coal:

●          Sasan Power Limited  (Sasan, Madhya Pradesh)

●          Orissa Integrated Power Limited (lb Valley, Orissa)

●          Akaltara Power Limited (Akaltara, Chhattisgarh)

Four coastal locations based on imported coal:

            ●          Coastal Gujarat Power Limited (Mundra, Gujarat)

            ●          Coastal Andhra Power Limited (Krishnapatnam,

                        Andhra Pradesh)

            ●          Coastal Maharashtra Mega Power Limited (Girye, Maharashtra)

            ●          Coastal Karnataka Power Limited (Tadri, Karnataka)

The Sasan Project, in Madhya Pradesh, and Mundra Project, in Gujarat, taken up in the first phase, are expected to be awarded to successful bidders by December 2006. Bid documents for these projects were issued in June 2006, and they are scheduled to be received by the middle of November 2006. Thirteen bidders for the three pithead projects, and 11 for the four coast-based ones have been declared qualified.

Of the bids invited for Krishnapatnam project, in Andhra Pradesh, 17 have submitted their Request for Qualification. There are six overseas bidders among them.

The bid documents were discussed in detail with the qualified bidders in July 2005. The changes emerging from the consultation with the bidders were also discussed in a meeting with Power Secretaries of various power-purchasing states prior to issuance of final amendments in September, 2006.

The Ultra Mega Projects, based on super-critical technology, would entail investment to the tune of Rs 15,000 crore or US

$3000m for each project. With the prevailing debt-equity ratio of

70 : 30, it requires equity to the order of Rs 4500 crore or US $ 900m. It is expected that the investment will be raised either from the domestic market or through foreign direct investment (FDI).

Financial institutions have indicated that for reliable and credible developers and for power projects offering cheaper tariff, debt funding may not be a constraint at all. A long-term bond market and take-out financing would be useful, and it will also be based on competitive tariff. Sectoral capping and group exposure capping, for the purpose of debt financing, as notified by the RBI, are expected to be revisited and properly enhanced exclusively for these Ultra Mega Projects. Development of these large projects will see the participation of big business groups, which, either on their own or through consortia, would take up the implementation of these projects.