Pass through test begins with Odisha, Cheyyur UMPPs

Written by Santosh Tiwari | Updated: Oct 15 2013, 09:14am hrs
The power sector is suddenly brimming with newfound energy with the government clearing bidding norms that allow pass through of the rise in fuel costs.

The process for awarding ultra mega power projects (UMPPs) is starting today with a pre-application conference for two projects of 4,000 MW each, in Odisha and Cheyyur, Tamil Nadu. According to the schedule fixed by the government, the projected dates for signing of power purchase agreements (PPAs) are March 27, 2014 for Odisha and March 28 for Cheyyur. The evaluation of the bids and the award of both the projects will be completed in February. If all goes as scheduled, the total number of UMPPs awarded would become sixfour projects have been awarded since the UMPP initiative began in 2005-06.

However, the ground reality is that all four UMPPs awarded earlierReliance Power has three and Tata Power has oneare facing problems due to the escalation in fuel and other costs. The question here is what has changed now, giving the government the confidence to go ahead and start the bidding process for two new UMPPs.

Going by the power ministry officials, currently, the biggest bottleneck faced in the running of plants is pass through of the additional fuel costs. However, this is now resolved with the empowered group of ministers (EGoM) clearing the new bidding framework for the projects in which the state governments provide land and fuel linkages to the power producers (termed case-2 projects which include UMPPs). Odisha and Cheyyur UMPPs are the first two projects bid under the new norms and pass through would be possible here for both domestic and imported fuel.

Additionally, the level of preparation before the actual award is also much higher as compared to the earlier projects (2006-07). Under the framework for setting up UMPPs in the country, the Power Finance Corporation (PFC) incorporates special purpose vehicles (SPVs) for each project to undertake the bidding process on behalf of the power-procuring states. The role of the SPV is to enhance investors confidence, reduce risk perception and get good response to competitive bidding.

Besides carrying out the bid process management, it also obtains various clearances and consents for the projects which can be transferred to the successful bidder along with the SPV. This process is already at an advanced stage for the two new UMPPs.

The Cheyyur UMPP is a coastal power project based on imported coal with a captive port at Panaiyur, and the beneficiary states are Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Kerala, Uttar Pradesh and Punjab. The project is located near Cheyyur Village in the Kancheepuram district of Tamil Nadu. The nearest railway station is Acharapakkam, about 21 km from the location of the project, and the nearest airport is Chennai, which is about 96 km away. The Odisha UMPP, near Bhedabahal village in Sundargarh district, is a coal-fired pithead power project. The coal for the project would be sourced from the coal blocksMeenakshi, Meenakshi B and Dip side of Meenakshi in Ib valley coalfields. The states to draw power from the project are Odisha, Punjab, Haryana, Madhya Pradesh, Rajasthan, Uttar Pradesh, Tamil Nadu, Uttarakhand and Chattisgarh. The nearest railway station, Jharsuguda, is about 20 km from the project and and the nearest airport, Ranchi, is about 280 km away.

In the case of the Odisha UMPP, the land acquisition for the project is at an advanced stage3,246 acres have already been acquired in six villages, out of which only 69 acre is in forest landand it is set to be completed before the bidding process is over. Clearances for the rehabilitation package and water linkages for the project from the Hirakud reservoir have been obtained. The necessary approval from the defence ministry for setting up a power plant in the region has also been obtained.

For the Cheyyur project too, all the environment, civil-aviation, roads, land and port-related clearances have been taken.

Officials say both the projects have good locations in terms of connectivity and the idea is to hand over these projects to the successful bidders with most of the clearances so that they take off fast. A successful completion of the process for awarding these two UMPPs, combined with the new bidding document for case-1 projects also, can revitalise the investment scenario in the sector.

The new bidding document for the projects in which fuel and land are to be arranged by the power producers themselves (termed case-1 projects) has been cleared by the inter-ministerial group (IMG) on Friday. It awaits the final approval of power minister Jyotiraditya Scindia now, which is expected any time this month itself. The new bidding norms here also allow pass through of fuel costs, which has been a major bottleneck holding up signing of PPAs in the last few years. PPAs signed on the basis of new document will also allow pass through for imported fuel.

Indeed, PPAs signed with a pass through clause would help in planning and executing the projects. But how far the situation would improve in terms of running them would still depend on whether the companies are allowed to raise power tariff in case of a rise in fuel cost or not.