In what seems to vindicate the stance of private players in the power sector against the revised Case-2 bidding norms...
In what seems to vindicate the stance of private players in the power sector against the revised Case-2 bidding norms for award of power projects, a high-level advisory group has proposed that the previous model that allowed developers to own the project be reintroduced but with unlimited pass-through of fuel costs based on actual escalations.
The recommendation made by the Suresh Prabhu-led group on power and coal comes in the wake of state-run NTPC emerging as the sole interested party for the two ultra mega power projects (UMPPs) — one in Tamil Nadu and the other in Odisha — proposed to be developed under the revised criteria.
The old and revised bidding norms differed primarily on two counts: First, the former allowed developers of a power project to operate it during the contract period — usually 25-30 years — and, additionally, own it thereafter, while the revised model that appears to be stillborn requires the developer to transfer the project to the state government concerned after the contracts with the procurers ended.
Second, the old system did not allow fuel cost as a pass-through whereas in the case of the latter fuel cost escalations due to various factors are allowed to be reflected in tariffs during the course of the power purchase agreements (PPAs), although the pass-through is capped.
The Prabhu group’s report reviewed by FE says the old model with the full fuel cost pas-through facility could be followed for award of power projects, given the stalemate in the bidding process for UMPPs in the last few years. If investor interest is not revived, it could have serious implications for capacity additions in the sector, culminating into commissioning of new projects becoming slow over the next four to five years, it noted. “..Under the circumstances, it appears more practical to make a few relevant changes, to address the problems caused by uncontrollable factors (e.g. coal, steep rupee depreciation) which have been faced while working with the previous documents (Case-1and Case-2), and move forward,” the group concluded.
In October 2014, Adani Power, Jindal Power and Sterlite Energy pulled out of the bidding process for a UMPP proposed at Bhedabahal in Odisha. Similarly, GMR Energy pulled out of a planned UMPP at Cheyyur in Tamil Nadu. The private players’ withdrawal came after they had raised several concerns over the bidding norms, particularly the design-build-finance-operate-transfer (DBFOT) model where the lenders’ exposure to a project is not fully secured, given the need for developers to finally transfer the project to the government.
The group said: “These developers as well as the Association (of power producers) have been suggesting that the previous document with a few changes, to address the major problems which have been faced, would be adequate for the UMPP Scheme to proceed.”
Independent power developers have told the power ministry that the DBFOT model relegate the developer to the status of a BOT (build-operate-transfer) contractor after he has brought in finance, technology and other inputs, adding that the Central Electricity Regulatory Commission (CERC) had also opined that the DBFOT model was better suited for natural monopoly businesses and not for de-licensed businesses like power generation. “The group has echoed our view that uncontrollable factors, that is, fuel and rupee needs to be passed through,” said Ashok Khurana, director general of the Association of Power Producers.
The developers have also raised objections to technical and operating norms for UMPPs, terming them as discriminatory vis-a-vis those for other plants, besides not being aligned to respective CERC norms. Further, changes have been sought to limit the role of independent inspector to a few parameters of the plant so as to restrict the intrusive nature of such inspections.
Moreover, developers pointed out that under the revised criteria, while a procurer utility can terminate its contract with the developer on account of default in 27 events, the developer only has three events of defaults under which a PPA can be terminated with a procurer. The association has sought equity in the termination clause citing that a developer could be dealing with up to 17 procurers at one time, leading to potential misuse of the provisions.
Sources said the power ministry is likely to take a view of the bidding process on Monday, after private companies’ withdrawal left only state-run NTPC in the fray for the TN and Odisha UMPPs. The ministry is likely to consider various options including the ones suggested by the advisory group, the sources added.
The old Case-2 bidding norms were used for four UMPPs — Sasan, Mundra, Krishnapatnam and Tilaiya. The government had issued request for qualification for the two proposed UMPPs in Tamil Nadu and Odisha based on the revised bidding norms. The Prabhu group also wanted the bidding norms for Case-1 instances (where the developer decides on the fuel source, location of the plant, and arranges for various clearances and, therefore, shoulders a higher risk in return for higher fixed costs and hence tariffs) to be reverted to the old system for such cases, but with fuel cost pass-through.
FE recently reported that in the first instance of revised Case-1 bidding, fixed cost accounted for a record 72% of the tariff discovered at a recent auction by the Kerala State Electricity Board (KSEB).
Before the new norms that provide for annual revision of tariffs were introduced, the Case-1 bidding was based on the concept of weighted levellised tariff for the life of a power purchase agreement and the fixed cost hovered around 30-40% of the tariff discovered.