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Investor interest in power revives after bid norms are revamped

LiveMint logoLiveMint 05-06-2014 Utpal Bhaskar

New Delhi: Is investor interest reviving in the Indian power sector? The bid for supplying 450 megawatts (MW) to Kerala seems to suggest that it indeed is; 23 firms, the who’s who of Indian power producers, have pre-qualified for the bid.

The interest is being attributed to the new bid norms that have been put in place, as well as a clean-up of the books of state electricity boards (SEBs). The former has lowered the risk for electricity generating companies and the latter has enabled SEBs to resume power purchases.

According to documents available on the Kerala State Electricity Board’s (KSEB) website, the 23 who have pre-qualified for the bid include Adani Power Ltd, Adhunik Power and Natural Resources Ltd, Bharat Aluminium Co. Ltd, DB Power Ltd, East Coast Energy Pvt. Ltd and Essar Power M.P. Ltd.

GMR Kamalanga Energy Ltd, Ideal Energy Projects Ltd, IndiaBulls Power Ltd, Jaiprakash Power Ventures Ltd, Jindal Power Ltd, KSK Energy Ventures Ltd and Lanco Power Ltd have also pre-qualified.

The KSEB contract is the first such offered by an SEB this fiscal year. Queries posted on the KSEB website on Wednesday remained unanswered as of press time.

These bids have been called through the so-called Case 1 route, wherein the developers have to design, build, finance, own and operate a power plant for a period of 25 years.

Bids for power procurement are sought in two ways. In Case 1, the quantum and time period of power procurement is identified, but fuel type, sources and the plant location are not specified. In a Case 2 bidding scenario, such as the one for so-called ultra mega power projects (UMPPs) that are of the order of 4,000MW, resources such as land, fuel and water linkages are identified and in some cases also provided to the developer quoting the lowest.

“This is a test case for the new Case 1 bidding document, where bidders have to capture all risks and translate to a single first-year tariff number,” said Debasish Mishra, senior director, consulting, Deloitte Touche Tohmatsu India Pvt. Ltd.

“First year number would get escalated as per the index prescribed in the bid document,” Mishra said.

Earlier Case 1 norms required power firms to quote year-on-year tariff increases for the entire 25-year duration of the power purchase agreement (PPAs).

They also had to specify the fixed and variable component of the tariff and mention whether it could be increased.

Under the new norms, the developer’s risk has been minimized with the tariff increase based on the indexation provided by Central Electricity Regulatory Commission (CERC), the apex power sector regulator.

“Given the slowdown in demand for electricity and hence drought in Case 1 procurement by discoms (distribution companies), there is tremendous interest among developers to participate and win this bid. Winning long term contracts will also facilitate getting fuel supply from Coal India Ltd,” said Mishra.

There have been instances wherein such PPAs have gone into litigation with the successful bidder unable to predict the unforeseen escalation such as the cost of the imported coal. Also, putting a value on tariff for 25 years became difficult as the debt taken for these projects is usually for a period of 11 years.

Many power projects, including those of state-owned NTPC Ltd, are currently operating at sub optimal levels.

“Over the last 12 months, many SEBs (such as Haryana, Rajasthan, West Bengal and Gujarat) have also lowered their plant utilisation because of demand issues. FY14 thermal generation grew only 4% y/y despite 12% growth in capacity,” said a 21 April UBS Global Equity Research report.

“Currently plant load factors are at the lowest in the last 10 years,” the report said and added, “we think the poor demand from state electricity boards reflects the inability or unwillingness of distribution companies to buy enough power to meet real demand”.

Policy interventions, debt restructuring initiatives and tariff hikes are expected to improve the financial health of SEBs. Electricity distributors owe `2 trillion to banks and other financial firms.

The health of the power distribution sector holds the key to the success of generation projects in a sector seen as a key bottleneck in efforts to sustain and boost growth.

With attempts being made to bridge the gap between the cost of electricity procurement and tariff realization, the central government’s bailout plan for discoms included regular tariff revisions as part of the conditions to be met.

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