Does anyone have an update on the UMPPs ?
This article from ET may help(posting in full - Please edit if deemed necessary). The scene does not look good. Mega power stays a dream due to high input costs; Tata Power and Reliance Power can not import cheap coal
Rachita Prasad, ET Bureau Aug 25, 2011, 03.55am IST
MUMBAI: It has all come down to a rupee. But the one rupee increase in the cost of generation could set Tata Power back by Rs 1,800 crore when it switches on the first 800 mw unit of its 4,000 mw ultra-mega power project in Mundra next month. Tata Power is contracted to sell power from this project to five states at an average price of Rs 2.26 per unit. But imported coal prices have risen in the aftermath of Indonesia's decision to link prices to international benchmarks. The setback would make a mockery of the 14% return on equity norms provided by the Central Electricity Regulatory Commission for such projects.
So, the Tatas are renegotiating. But ADAG's Reliance Power has halted work on its 4,000 mw Krishnapatnam ultra-mega power project (UMPP) in Andhra Pradesh on similar concerns. "The issue is that we don't have sufficient coal today and we won't have it tomorrow," says Reliance Power's CEO JP Chalasani. "So we will have to supplement it with imported coal. Krishnapatnam is not the only project that has been impacted, it is a sector issue."
Both Tata Power and Reliance Power had bought coal mines in Indonesia to fuel their power plants. But the local government changed its policy, making cheap export of coal impossible. Under new norms, coal exported out of Indonesia would be up to 150% more expensive, thus making the project economics go awry.
But can private power producers ask for contracted rates to be renegotiated due to fuel price rise? The power ministry doesn't think so.
That's just one issue that has stymied UMPPs, but it is not the only one.
A third such project is yet to tie up funds even as interest rates continue to rise. Another has concluded initial bids but only after a delay of 18 months due to issues relating to environment clearance. Bids have been invited for yet another but it is yet to get the nod from the environment ministry.
About Rs 100,000 crore of investments are riding on just these five projects put together. But more than that, India's power security hinges on these UMPPs - a total of 16 such are planned in the 12th Five-Year Plan. Together, they were to add 64,000 mw, an increase of 40% from the nation's power generation capacity. They are desperately needed to achieve the target of 100,000 mw capacity addition in the 12th Five-Year Plan (which starts next year). Together, they could light up around 53 million households. They could have helped overcome a peak power deficit of almost 9%. They could also have shown how the private sector could catalyse infrastructure development. But none of this seems likely now.
Can contracted rates be renegotiated?
Private UMPP developers would want that, but the union power ministry won't oblige. The state electricity boards can't oblige given their poor finances. And making consumers pay higher tariffs is never easy.
"The power purchase agreement is between the buyer and the seller," Power Secretary P Uma Shankar told ET. "They need to discuss it to understand the issue and what can be done to resolve it." The buyers, in this case, happen to be 10 state electricity boards, most of which are starved for cash.
In the case of Tata Power, the contract provides for cost escalation for 45% of fuel cost, but the Reliance Power agreement is structured without any escalation clauses. Fuel accounts for almost 70% of the generation cost for a company. At the time of bidding, developers may quote lower charges for escalation in fuel prices to make their bids more competitive. But they have to bear the risk.
"The government cannot intervene in a contract between these companies and the procurers," a senior power ministry official said on condition of anonymity. "The competitive bids were based on companies' own assessment of risks and the burden of price risk has to be borne by the developer. Changes, if any, must be done in consultation with the buyers." But that would be a long drawn out process, because there are many contracts to be renegotiated with many electricity boards.
Tata Power is in pact with the electricity boards of Gujarat, Maharashtra, Punjab, Haryana and Rajasthan. Reliance Power is contracted to sell electricity at 2.33 a unit to Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra.
Ultimately, the country would lose if there are such delays. The industry lobby may be using that as leverage to make the best out of a bad situation.
"It (renegotiation) may violate the pure logic of a bid but the government needs to have a sympathetic approach as it is inconceivable for the private sector to make predictions for the next 25 years," says Vinayak Chatterjee, chairman of infrastructure consultancy firm Feedback Ventures. "These are assets where private and public money and interest is at stake. States should consider the reasonable solution looking at the larger picture."
"It is more than four years since the UMPP policy was framed. It is necessary to take stock and allow extensive feedback," says former power secretary RV Shahi, who spearheaded the policy when he was the power secretary from 2002-2007. He is now the chairman of consulting firm Energy Infratech. "If certain provisions (in the upcoming UMPPs) need to be changed, elaborated or added, it should be considered," he adds.
Under the UMPP policy, the government identifies a project and sets up a shell company that secures land and other clearances. The shell company is then transferred to the developer who is willing to develop the project for the lowest tariff.
Expect long-winding renegotiations in the old projects. But there is a rethink on UMPPs that will come up for bidding soon.
Light ahead in the tunnel
Power ministry sources say they are considering some changes in the bid conditions based on the problems faced by projects in the past. But these are only for upcoming UMPPs. They rule out any changes in existing contracts.
"We are looking at making some changes in the concession agreements for new projects, but it is too early to say what would be changed," Power Secretary Uma Shankar says. Only four of the 16 such projects have been awarded so far. The rest have run into delays relating to environment clearances, land acquisition and fuel linkages. The delays may now actually go in favour of UMPPs.
Despite setbacks to the first six, the fresh UMPPs that will come up for bidding will attract the private sector's interest, industry sources say. "UMPPs would continue to generate more interest than any other project," says Raaj Kumar, chief executive officer, GMR Energy. "It offers scale, and also other pre-requirements such as land, fuel linkage (in case of pit-head based projects) and clearances. To that extent fund-raising is easier."
Developers are keen that the remaining UMPPs are rolled out without further delays. But financing will pose a challenge.
"Clearly, we all are interested," says Lanco Infratech's Chief Financial Officer J Suresh Kumar. "But it will not be possible for every developer to finance these projects easily in an environment where interest rates are hardening."
Banks have hiked key rates by 200-250 basis points in the past one year following Reserve Bank of India's monetary tightening measures.
What will the price of Coal be doing in the future? Free report. MoneyMorning.com/Coal_Investors"Banks have become more circumspect and cautious, and are being selective," said S Vishvanathan, managing director & CEO of SBI Capital Markets. "Good projects are still being closed financially. But availability of cash with banks is not as plenty as before," he adds. The company managed fund-raising for two of the four UMPPs - Tata Power's Mundra project and Reliance Power's Sasan UMPP. Vishvanathan recalls that banks were earlier aggressive about financing infrastructure projects under the PPP route. Not any more.
Private investment in infrastructure from debt and equity sources has slowed and, consequently, power sector investment may now fall short of targets, Fitch Ratings said in a recent report.
But experts say these hurdles may be a blessing in disguise and can bring in a more realistic approach towards UMPPs. They believe the bids for the next round of these projects may not be as aggressive as developers learn to assess and manage the risk-return trade-offs better.
The last UMPP that was put up for bidding - the pit-head project at Tilaiya - met with a tepid response when financial bids were invited in January 2009. But now, there is renewed interest for the upcoming UMPPs at Orissa and Chhattisgarh, particularly among utilities which missed out on the opportunity for large-scale capacity addition earlier. "But the aggression we saw (in the bids) earlier may not be there anymore," says ICP Keshari, joint secretary in the ministry of power.
"Bankers will advise realistic bids. They will be the balancing factor," says Debashish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India. "Most bids are likely to come clustered around the same level." He does not rule out a freak high bid by a company which may have lost out earlier.