Column: Making power projects unviable

Instead of addressing fuel shortage & price volatility, the new bidding norms are on the lines of PPP for highways

On the private players withdrawing from the second stage of auctions for the two upcoming ultra mega power projects (UMPPs) of 4,000 MW in Odisha and Tamil Nadu worth R25,000 crore each, Union power minister Piyush Goyal reportedly said, “It is their choice. I do not dictate what companies do. Bidding is an open forum for everybody to choose.” This has left the public sector company, NTPC, alone in the race. What are the implications of this development?

In prior communications with the power ministry, the Association of Power Producers (APP) had raised concerns over the design-build-finance-operate-transfer (DBFOT) model for the UMPPs and warned investments might not be forthcoming.

They argued in a recent letter to the minister that the DBFOT model “relegates the developer to the status of a BOT contractor after he has brought in finance, technology and other inputs.” While the intent of the bidding documents was to ensure that the volatility in fuel prices is passed on to the consumer, this has not been implemented in practice owing to the way the norms are formulated. The contracts, they said, attempted to predetermine the fuel pricing trajectory over the full project cycle through price caps.

Two years ago the Central Electricity Regulatory Commission (CERC) in its statutory advice to the power ministry had stated that the DBFOT model is suited more for natural monopoly businesses such as road, transport, transmission and distribution of electricity and not for de-licensed businesses such as generation. It was felt that the DBFOT model may not inspire the developer to adopt prudent maintenance towards the end of concession period leading to high degree of deterioration of the plant. This model may also create uncertainty in terms of financing because of the unsecured nature of the assets in the absence of a clear title/ownership of such assets with the bidder. The CERC, therefore, suggested that the document should be designed based on the build-own-operate (BOO) model instead of the DBFOT model, as in the existing standard bidding document.

The CERC also observed that in bidding document the concept of an independent engineer has been introduced at various stages of the project. The provision of the appointment of an independent engineer by the “utility”, with such elaborate roles and functions of overseeing/certifying inter alia, the technical parameters of the plant would be tantamount to creating an independent authority not envisaged under the Electricity Act 2003. This may lead to disputes and should ideally be dispensed with. For greater acceptability, it is desirable that both the parties should be jointly involved to undertake measurement and monitoring issues.

But going beyond all these details of competitive bidding, what is at stake is the ultimate goal of securing electricity at affordable prices for the consumers. In June and September 2010, the CERC conveyed its advice to the central government that the deadline of January 2011 for completing the transition to procurement of power through tariff-based competitive bidding even from state/central government-owned entities should not be extended except in case of large-sized multi-purpose storage hydro projects and peaking stations. Procurement from private players was already through competitive route.

The CERC had undertaken a detailed exercise to verify the finding that the tariffs being discovered through competitive bidding are lower than the cost-plus tariffs. The study has concluded that the computed prices under cost-plus methodology (even after computing the same conservatively) are higher than the levelised tariffs discovered under competitive bidding in respect of 12 out of 14 projects. The differences in the prices, too, are significant.

The study drew attention to the fact that the capital cost of the project in cost-plus tariff route is open-ended as there are numerous subsequent “additional capitalisation” which keep on expanding the equity base for allowing return on equity. Further, subsequent unforeseen increase in tariffs in case of cost-plus tariffs is fully passed on to the consumers whereas a sizeable portion of such subsequent increase in tariffs is borne by the suppliers in case of tariff-based competitive bidding because the seller often quotes non-escalable components both in capacity charges and energy charges.

The above advice of the CERC came under severe scrutiny when it allowed “compensatory tariff” to two large projects at Mundra. What had changed was acute shortage of coal in a monopolistic domestic market and uncertainty in pricing of “captive” imported coal. It is against this background that new bidding documents had to be introduced to ensure that the volatility in fuel prices is passed on to the consumer to an extent.

However, what has happened is that instead of amending the original standard bidding documents to take care of fuel shortage and price volatility, they have been modelled on the line of public-private partnership model for highways. If we persist with such an approach, no investment from private players will take place in power generation in the future. The NTPC will be the only public sector player “successfully bidding” for all projects. It cannot suddenly expand its organisation to construct more than 15,000 MW projects in the next five years. This will defeat the purpose of a national tariff policy to secure power at competitive rates for the consumers.

By Pramod Deo
The author is former chairman, CERC

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express Telegram Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.