Almost after two years, the government has called for bidding out the second slot of UMPPs with additional payload to boost investments in the country. With nine bidders for Bhedabahal and eight for Cheyur, the bureaucracy is relieved. Pradeep Pandey explains whether the new bidding truly puts at rest the uncertainty behind UMPPs.
Putting an end to a two year hiatus on bid calls for second round of ultra mega power projects (UMPPs), Power Finance Corporation, which is the nodal agency for implementation of these projects, has hastened the process to rope in potential investors.
With this, the government is trying to prove that it has initiated the programme for damage control and polish its image in the global market. This was sought as the global rating agencies were quoting negative on policy reforms and other issues related to land and fuel. And, it was also creating a negative impact on investor sentiments in the domestic and overseas market. In a bet to improve the sentiments, the government has put the process of project clearance on fast-track for infrastructure projects, in which power projects has a major chunk.
While the government initiatives are appreciable, the power players and the government still have major differences on new standard bidding documents (SBDs) for UMPPs, even though a good number of developers have submitted their initial bids (request for qualification) for the first of five UMPPs lined up for the second round of bid. For the 4,000 MW UMPP at Bhedabahal in Odisha, potential developers such as NTPC, Tata Power, Adani Power, Jindal Steel and Power Ltd (JSPL), JSW Energy, Sterlite Inventure, CLP India, Larsen & Toubro and NHPC have evinced interest. Interestingly, other major players like Essar Energy, Lanco and GMR did not shown any interest in the project.
It is learnt that the second one, Cheyyur UMPP in Tamil Nadu, has also evoked a good response and around eight players have already shown interest by responding to the RFQ. So far, four UMPPs have been awarded, of which Sasan (Madhya Pradesh), Krishnapatnam (Andhra Pradesh) and Tilaiya (Jharkhand) have been bagged by Reliance Power. Tata Power is operating the Mundra UMPP in Gujarat. And further, the government plans to add 13 such projects to strengthen the power capacity in the country.
Earlier, the government had scrapped the initial bids for the Bhedabahal UMPP in September this year, since the bids were invited as per the previous SBDs. Albeit that time, the number of bidders, who had evinced interest in developing the UMPP, were close to double. If we compare the number of bidders in the first slot of UMPPs, it is well established that the the interest among the investors have fallen drastically as all the four UMPPs in the first round Sasan, Mundra, Krishnapatnam and Tilaiyaùdrew 13 to 16 bidders each.
ôFrom our perspective, it is great to see as many as nine bidders for the Odisha UMPP,ö PFCÆs CMD MK Goel told Power Today. He said the number of initial bids shows confidence in the face of so much talk about projects being stuck, and added that the government has been quietly sorting out issues in the sector. Asked whether he would expect tariff revision in the case of the second UMPP to be bid out, he expressed optimism in view of the newly found reforms orientation in the sector.
Power Today approached the companies who have submitted their initial bids, but most of them declined to comment or did not receive the call. Top officials from L&T, JSW Energy, Jindal Steel & Power, NTPC declined to comment, while others didn't respond the calls.
However, Rajiv Mishra, Managing Director, CLP India, and also the Chairman of Association of Power Producers (APP), seemed to be vocally admitting that under the current set of SBDs, it would be difficult for the companies to ensure returns to their stakeholders. CLP India is the only multinational company that has shown interest in the project.ôWith issues around interest rates, macro-economic instability, ECBs and new SBD norms, we may see fewer bidders and significantly higher tariffs,ö said Mishra. However, it only takes only one bidder to bring the tariff down. If that happens, one can only hope that the projects work and that there are no defaults, Mishra added.
Old SBDs v/s new SBDs
In its best efforts to make the next phase of UMPPs more viable, the government made some fundamental changes in the new SBD and produced it to the companies mentioning that it has taken care of most worrisome issues like land and fuel. The one major thing which is bothering the private players is the ownership of the project, which would go to the state electricity distribution utilities or discoms after a certain period, and also they would not have ownership of land under the new norms.
Taking this into account, the argument being put by the developers that if they are merely a contractor and not the owner of the assets, how the government can expect from them to invest such a huge investment. ´Under the new norms and current debt market scenario, it would be very difficult for developers to arrange funds for the projects,´ said one of the senior official with a private bidder, who wished not to be named.
According to APP Chairman, the previous norms were better than the new ones. To this, the government officials have some thing different to say. ´If earlier norms were good then why those projects did not came up as per schedule,´ asked Gajendra Haldea, advisor to the Deputy Chairman of the Planning Commission. Haldea explains that one must appreciate that nine companies have shown interest in the Odisha UMPPs. If each company has to pay an hefty amount to buy RFQ document, amounting around Rs 12.5 lakh, they would not have came up.
Observers have given a mixed review to the new norms. ´The new bidding norm for UMPPs is a mixed bag in which there are some positive aspects while some are negative. For example, I believe that design, build, finance, operate and transfer (DBFOT) model could be more suitable for road projects, but it would not be more conducive for power projects, which have longer life and the viability depends on return on investment (RoI) through tariff. And, tariff realisation depends on various factors such as policy factors and fuel supply issue. However, one good part is that fuel costs as pass-through have been taken under consideration´ said Seshan Balakrishnan, Director Transaction Advisory Services, Infrastructure at Ernst & Young.
According to the new SBDs, the bidder offers the most efficient capacity charge and heat value would be judged the winner. It has treated fuel cost as pass-through. ôIn case of captive blocks, the developers would not have problem of shortfall, while in case of linkages, the model provides a mechanism to adjust the cost overrun due to buying coal from the open market,ö said a senior official from the Ministry of Power.
In the previous model, a bidder has to give nearly 54 price quotes spread over 25 years, while in the new model, fuel cost is made pass-through and the capacity charge would be linked to depreciation and loan repayment. While, at the same time, the new norm will be linked to the inflation index. In addition, the heat rate of the power plant will be determined at the time of commissioning. There is a provision for incentive if a developer can provide better heat rates.
Overall, the new model is based on 'better you perform better you get the returns'. Former Power Secretary P Umashankar said, ´In fact, the new bidding norms would provide more competitive environment for the developers and may also ensure some energy security to the states.´
The new norm changes the plants from a build-own-operate (BOO) model to DBFOT structure. In a DBFOT model, the project developer will not have ownership of the land and the plants.
Power sector already being a capital intensive sector, the development of ultra mega project becomes a huge task for the developers when it comes to arranging funds. At a thumb rule, in a case of supercritical units, the per MW cost of development may be in the range of Rs 6-6.5 crore, according to industry people, using equipment as per global standards. Taking this into account, a 4,000 MW would cost around Rs 24,000-26,000 crore. Out of this, at a normal calculation of equity-debt ratio of 30:70, one would have to raise about Rs 17,000-18,000 crore debt fund and the remaining in the form of equity fund.
Now the question arises: How many companies have the capacity to arrange equity fund at a time when they are already grappling with huge loss and debt pressure? According to market analysts, there are very few who have the sustainability. ´Big private players are heavily leveraged and on the other hand most of the big domestic financial institutions have exhausted their exposure limit to the sector. There are plenty of banks facing challenges due to rising NPAs on their book. Under these circumstances, banks would be very cautious while lending,´ said Rahool Pai Panandiker, Principal at the Boston Consulting Group.
According to the new model, the lenders are not allowed to create security on the land assets' lending. However, they can lend on the basis of company's running projects capabilities, performances and previous track record. In addition to this, the government has also tried to convince the bankers to extend loans to upcoming projects.
Banks such as ICICI Bank and State Bank of India agreed to the absence of security over project assets and mortgage of land. However such financing would be under unsecured lending. ´There would not be a problem for lending to the companies with good track records and running power projects. If the developer could ensure better efficiency of the project and better realisations lending would not be a problem,´ said a senior official with a public sector bank.
Supporting the same sentiment, KR Kamath, Chairman and Managing Director of Punjab National Bank, said, ´The basic principle of lending through banks envisages that it should have the first right of charge on the assets created by the bank funds.´
The government has been busy in de-bottlenecking the sector over the past few months so that new investments start again, which is a welcome move. However, this is not reflected in the sector´s earnings at large during the period. Many states have raised the tariffs and also the government has instructed the state regulators to clear the petitions regarding to discoms as soon as possible. However, the fate of new projects including the UMPPs depends on liquidity condition in the market and how the project implementations are taking place. If sector analysts and market observers are to be believed, the current market have enough frictions and big project would have to face hard time at least for few quarters. Under these circumstances, bidders for the UMPPs will also play a cautious role and bidding would be very different as compared to earlier one. And, also the projects to be fired from imported coal would have a very different story as international market is still very much unpredictable and tariff hike is a very political issue in a country like India.
UMPPs under Plan
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