UMPPs are not the answers

The Central government's ultra mega power project (UMPP) scheme is back on track after initial setbacks due to bidding controversies related to the Sasan project. This has encouraged the government to envisage five more UMPPs in addition to the nine already approved. However, it is mostly Indian companies that have shown interest in these projects while response from overseas investors has been lukewarm. This is because the financial health of state electricity boards (SEBs) has not improved much, with almost all of them running on huge transmission and distribution losses.

Exclusive powers given to electricity regulatory commissions to decide on the question of power off-take from these projects have been another turn-off for foreign investors. While Tata Power and Reliance Power have their power distribution networks and can easily divert surplus power from their UMPPs in case an allocatee refuses to take committed supply, there is no such safety valve for foreign investors. In these circumstances, it is difficult to say how far UMPPs will answer the country's energy needs.

That aside, India's power requirement is rising at a much faster pace than the generation capacity addition envisaged by the government through UMPPs. International consultancy firm McKinsey has said that if India continues to grow at an average rate of eight per cent for the next 10 years, the country's demand for power will soar to 315-335 gigawatt (GW) by 2017 from the present 120 GW, a projection that is 100 GW higher than the government estimates. To meet the country's projected electricity demand, McKinsey has suggested that India focus on setting up peaking power sources like hydro and gas-based power plants.

The UMPP scheme is a good, though modest, initiative, said Harry Dhaul, director-general, Independent Power Producers Association of India (IPPAI). This is the first time the government has appointed a nodal agency to tie up key physical inputs like land acquisition, fuel linkage and cooling water supply besides statutory clearances for facilitating implementation of power projects through tariff-based bidding, he points out. However, there is not much improvement in the financial health of SEBs as most of them are still running huge losses. And this is a big disincentive to attracting foreign investment in the Indian power generation business, he said.

Besides, the commercial terms stipulated by the government for drawal of power from UMPPs also do not provide comfort to foreign investors. The commercial terms give electricity regulatory commissions exclusive powers to decide on power off-take from UMPPs. Though developers are allowed to sell power to another customer in case an SEB refuses to draw committed power supply, this is not a practicable option for developers even though it is premised on the assumption that electricity generated from UMPPs would be cheaper and developers should not find it difficult to get customers. Finding another customer with a matching demand might not be possible in every case, and even if there is one, issues of transmission network capacity might still be there for actually delivery.

So, while domestic players like Tata Power and Reliance Power can divert surplus power from these projects in case an allocatee declines to take power supply, foreign companies might be left high and dry. That is the reason why the UMPPs have failed to elicit an enthusiastic response from foreign investors, Dhaul said.

UMPP projects are not the answer to the country's fast-rising power demand. Even if all the UMPPs envisaged by the government are implemented, India's power problems will not get solved, Dhaul said, because the country's power requirement is projected to be much higher compared to generation capacity addition envisaged through the UMPP scheme.

While pithead-located UMPPs are largely insulated from fuel price variation risks, those coming up in coastal regions based on imported coal could see their cost economics go haywire in the event of international coal prices rising sharply. The fuel risks to these coastal UMPPs became clear in recent years when imported coal prices started rising on cues from the crude oil market.

Some power sector experts attribute poor response to the bidding of the imported coal-based Krishnapatnam UMPP in Andhra Pradesh earlier to the surge in international coal prices. This project received only three bids as against six offers submitted for the similar Mundra UMPP in Gujarat, which was tendered about a year before.

Although about a dozen developers had expressed interest in bidding for the Krishnapatnam UMPP, only three - Reliance Energy, Sterlite, and Larsen and Toubro (L&T) - submitted bids. Those who walked away after expressing interest included Essar Power, NTPC, Japan's Sumitomo, China Light and Power and Tata Power. Tata Power's withdrawal was significant given that the company had already won the bid for the Mundra UMPP.

Kuljit Singh of global consultancy firm Ernst and Young (E&Y) suggests these UMPPs should have coal linkage with captive mines as well instead of entirely depending on market supply. This should help them cover fuel risks and cushion electricity tariff from any possible spikes in international coal prices.

Apart from overseas investors, even public sector utility, and India's biggest coal power generator, NTPC has not shown much enthusiasm for UMPPs. Although it participated in the auction for the Sasan and Mundra UMPPs, its bids were quite uncompetitive. For example, it came out at the seventh position in the race for the Sasan UMPP, which saw extraordinarily aggressive bidding from private players like Lanco and REL, while its bid was highest for the Mundra project.

Meanwhile, bidding for selection of a developer for the fourth UMPP at Tilaiya, Jharkhand, is underway. Power Finance Corp (PFC), the nodal agency for supervising the bidding process for the project, expects to complete the bidding process in time for allocation of the project by the end of December.

In a bid to scale up capacity addition through the UMPP scheme, Union Power Minister Sushil Kumar Shinde held a meeting with state energy ministers in New Delhi in August. Finance Minister P Chidambaram, Minister of Law and Justice HR Bhardwaj, Minister of Science and Technology and Earth Sciences Kapil Sibal and Planning Commission Deputy Chairman Montek Singh Ahluwalia were also present as members of the Empowered Group of Ministers on UMPPs.

In the meeting, three more sites - Munge in the Sindhdurg district of Maharashtra, Cheyyur in Tamil Nadu and Bedabahal in Orissa's Sundergarh district - were finalised for UMPPs.

While the Bedabahal UMPP is envisaged to meet its coal requirement from a nearby mine, the other two projects will be based on imported coal. To ensure that these projects do not face any infrastructural bottlenecks in unloading imported coal consignments, captive ports are also planned for them.

Of the three UMPPs bid out so far, Tata Power's Mundra project has already achieved financial closure while REL expects to tie up finances for the Sasan and Krishnapatnam UMPPs by October this year.

 

Tata Power has arranged a $1.8 billion loan from a consortium including multilateral lenders like International Finance Corp (IFC) and Asian Development Bank (ADB) as well as Export-Import Bank from South Korea, while a syndicate of domestic lenders led by SBI Capitals will extend a Rs 5,550 crore debt for the Rs 17,000 crore Mundra UMPP. The developer has brought up Rs 4,250 crore as its own share of equity for financing the Rs 17,000 crore project.