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Ultra mega power projects: coastal vs pithead debate

Posted: Tuesday, Dec 19, 2006 at 0000 hrs IST Tags: : Mondays announcement of the lowest bidders for the ultra mega power projects at Sasan (MP) and Mundra (Gujarat)Lanco Infratech and Tata Power, respectively comes in the backdrop of the substantive changes that have been wrought in the power sector since the implementation of the Electricity Act, 2003. This, along with the National Electricity Policy and the National Tariff Policy, has provided a uniform, consistent and competitive framework. It was not surprising, then, to have had an enthusiastic response from investors since the time these ultra mega projects were unveiled by the ministry of power in February this year. Three aspects stand out about the current process. First, the efforts of the ministry of power and Power Finance Corp in getting the projects to the current stage are unprecedented and exemplary. Racing against time to get the required consent and allocation of mining blocks, and finalising agreements through an effective consultative process have all been excellently coordinated, although one can find several areas which can and will surely be bettered in subsequent projects with the

experience gained from this round. This detailed groundwork has enhanced the confidence of investors significantly and has enabled them to concentrate largely on project development, instead of being worried about dealing with multiple bureaucratic procedures. One hopes this process does not stop with the award of the projects, but is continued even in the development stage with the central government and the respective state governments providing continuous administrative support and coordination. The second conspicuous aspect is the absence of international bidders, save for a few in consortia led by Indian companies. This, however, should not be a cause for concern. The large number of domestic bidders ready to invest in projects of such scale augurs well for the power sector in the country and signals a major change in confidence among investors and the financial institutions. In many ways, Indian companies are best placed to assess and assume the risks involved in such projects and to appreciate the significant changes that the power sector is undergoing in the country. Over time, there is reason to believe that international utilities would also be equally interested in such projects. The country would, however, gain significantly more if it could lure large generation equipment manufacturers to set shop in India, either directly or in collaboration with Indian manufacturers. Specific policy provisions in this regard would help India meet its ambitious generation capacity addition targets at reasonable cost. Thirdand this is important for subsequent projectsis the lower investor interest in Mundra, an imported coal-based coastal power project, compared to Sasan, a pithead power plant with a captive coal mine. This is on account of a few fundamental factors, which require deliberation for the future. The overall rationale of imported coal projects for a country like India is questionable in the long run, given Indias large domestic coal reserves and the on-going attempts to liberalise and encourage private participation in coal mining in the country. To compare the efficacy of Sasan and Mundra power projects, the levelised tariff for Sasan for the winning bidder is expected to be closer to Rs 1.50/kWh, while that for Mundra could be in the region of Rs 3.00/kWh. Although higher tariffs are expected for a coastal power project, it brings the risks into sharper focus. To use a clich, the most effective payment security for a generation project in India is having a low tariff. Coastal power projects will, therefore, be viewed as comparably risky. Under such circumstances, the rationale of lining up several more coastal ultra mega power projects with long-term power purchase agreements is debatable. Given that each project entails around $4 billion in capital investment, it is unlikely to have winning bidders participating in future projects. That would limit competition significantly in subsequent coastal projects. It is also worth debating whether the current bidding structure for coastal power projects is appropriate. For example, in the case of Mundra, because of the bidding structure and indexation proposed, the coal transportation charge alone could account for almost one-third of the levelised tariff, which is certainly not a reflection of the current cost structure. In such projects, the ability to source coal internationally becomes far more important than developing an efficient power plant. Not many bidders currently in the fray have complementary expertise in coal sourcing, which limits the competitiveness of such projects, and is a concern for future coastal power projects planned by the ministry. Hopefully, the lessons from the first round will be used to improve future bidding processes and the bidding structure for coastal power projects improved for the latter projects. For the sake of consumers, one also hopes pithead ultra mega power plants are pursued in preference to coastal power plants, which will ensure availability of substantially cheaper sources of power. The author is associate director, PricewaterhouseCoopers Multi Page Form at More from Top FM players will make m ost of the m oney, the rest will go to niche players Bollywood going digital overseasNot enough screens for film-obsessed South Back to the surgical knife?Transporting dreams Use Internet to review institutionsPitching for glob al m arkets RBI governors: Continuing the reform s storyline
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