1. More discomforts for discoms

More discomforts for discoms

Proposed UMPP guidelines seem loaded in favour of developers

By: | Published: August 26, 2015 12:05 AM

The government-appointed committee tasked to propose changes in the existing bidding guidelines for 4000 MW ultra-mega power plants (UMPPs) has suggested several clauses that are likely to reignite the interest of developers in such domestic coal-based projects. But these would also expose discoms, or procurers, to greater risk.

The revised draft bidding norms have reverted to the pre-2013 model of build-own-operate (BOO) whereby the project ownership would lie with the developers against the existing model of design-build-finance-operate-transfer model (DBFOT), which makes procurers as the owners of the project. This clause was cited by independent developers as the single biggest reason for the failure of UMPP bidding process last year.

The developers, along with lenders, had expressed their inability to secure finance for such projects where developers didn’t own the project, as financial institutions felt circumspect about lending without adequate collateral.

Industry sources say the second most important and developer-friendly intervention in the draft norms is the termination clause, which allows all the three parties–developer, procurer and lenders–an option to find a substitute entity in the event of defaults.

“Under the current bidding model, there are few options for a developer to exit a project and this has restricted private power generation companies’ interest in UMPPs. The proposed guidelines also provide for a termination option to lenders/procurers who can look for a new developer to take over the asset,” said India Ratings and Research (Ind-Ra), a Fitch Group company.

In July, FE had reported that the Pratyush Sinha committee favoured bringing these modifications to the standard bidding documents that was revised in 2013. The committee was set up by the Union power ministry after private players withdrew from the bidding process for the UMPPs in Tamil Nadu and Odisha late last year, citing inability to convince lenders and arrange finances. Independent power producers had pulled out of the technical qualification stage of the bidding process, blaming unreasonable clauses in the guidelines, leaving NTPC as the sole interested bidder.

Additionally, the proposed guidelines have made provision for developers/lenders risk mitigation with respect to fuel price variation, fixed charge quote, ownership of asset and land acquisition.

“The provision to allow pass through of cost for land acquired post-bidding could expose discoms to the risk of higher tariff if land prices go up by more than 10% from the pre-bidding rates or the declared price. Therefore, a transparent method of evaluation of such costs will be necessary.,” Salil Garg, director, Ind-Ra, said. The draft bidding norms provide developers with many risk mitigating provision and are on the other end of the spectrum compared to the existing one, he said.

Further, the draft norms also propose a segregation of operating and infrastructure assets into two separate special purpose vehicles (SPVs). The land for coal block as well as power plant would be housed under an infrastructure SPV while the plant would be developed under an operating SPV. Prior to the request for qualification, an infrastructure SPV will have to acquire partial land and the remaining land will need to be acquired by developers with assistance from state power utilities.

By the draft norms, the developer does not need to keep 15% of the capacity as free unlike in the current guidelines.

This would further reduce the risk that developers would have had to factor in their bidding strategy. Industry experts told FE that this could also translate into lower tariff if the developers are allowed to enter into power purchase agreements (PPAs) for the entire 4,000 MW capacity.

“The changes in bidding norms are in line with the government’s intentions to meet this objective,” Ind-Ra said. It expects higher interest from private developers in the next rounds of the UMPP bidding process.

Industry experts opined that the guideline seem favourable to the developers on the face of it, it may expose discoms to risks that would have to be assessed by the state-owned distribution utilities.

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