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.