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Lata Chakravarthy
Faculty Member
ICFAI Business School
Bangalore
 ë   



‡ Objective of study
‡ Scope of study
‡ Sources data
‡ Methodology
‡ Study findings
‡ Conclusion

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‡ To identify best practices in power contracting to

encourage more private sector participation in
power generation.
‡ To identify scope for reduction in cost of power
purchased from existing IPPs, by analyzing the
various fixed and variable components of purchase
cost and their impact on total tariff.

Lata Chakravarthy 3
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‡ Study covers the following IPPs whose PPAs

were available in public domain and which are
operating in South India:
1. GVK Power Corporation Ltd.
2. Spectrum Power Generation Ltd.
3. Kondapalli Power Corporation Ltd.
4. Madurai (Balaji) Power Corporation Ltd.
5. Tanir Bavi Power Corporation Ltd.

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‡ The basis for computing the fixed costs, variable

costs and incentives as laid out in the Power
Purchase Agreements (PPAs) were compared
and analyzed.
‡ Terms of PPA which were amended/renegotiated
were studied to see the impact on tariff.

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Project MoU route MoU route Bid route MoU route Bid route
awarded
through

Completed Rs.1025 Rs.972.60 Rs.1112 cr. Rs.429.03 cr. Rs.880 cr.

Capital cost cr. cr.

Installed 216.824 208 368.144 106 220

Capacity in
MW

Capital cost per Rs.4.73 cr. Rs.4.68 cr. Rs.3.02 cr. Rs.4.05 cr Rs.4 cr.
MW

Term of PPA 18 years 18 years 15 years 15 years 7 years

Primary Fuel Gas Gas Gas (switched LSFO Naphtha

over from
naphtha
In Sep 2002).

Commercial June 1997 April 1998 October 2000 September July

Operation Date 2001 2001

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—



‡ Interest on term loans

‡ Interest on working capital
‡ Depreciation
‡ Return on Equity
‡ Insurance 1% of capital cost
‡ O&M expenses of 2% of capital cost
‡ Foreign exchange variation on interest, debt
repayment and Return on Equity

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‡  
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± Payment of interest on foreign currency loans
± Repayment of foreign currency loans
± Return on foreign equity
‡   c 
   
!"

    
± Payment of interest on rupee loans
± Repayment of rupee loans
± Return on rupee equity
± O&M and insurance charges

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MoU cases
‡ Risk of increase in capital cost after signing of PPA (Tariff can be
based on actual higher capital cost subject to approval)
‡ This has impact on
‡ Interest on debt
‡ Return on Equity
‡ Incentive payment
‡ Depreciation
‡ O & M expenses
‡ Insurance expenses
‡ Foreign exchange variation in interest, debt repayment and ROE
Bid route cases
‡ No such risk as a fixed amount is paid per unit of energy generated,
no matter what was the actual cost of completion of the project.

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MoU cases-other issues
‡ Increased burden on utility to constantly verify
the current sources of debt- IPPs keep swapping
high cost debt with low cost debt as a cost
reduction measure.
‡ Utility has to track the interest charged by banks
from time to time on working capital loans ±
each bank in the consortium may lend at
different rates.

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&&'
‡ Project cost of Rs.816 crores as per TEC was
fixed as ceiling though actual completed cost was
Rs.1025 crores.
‡ This saving of Rs.209 crores has positive impact
on all the fixed charge components ± interest,
depreciation, ROE, O & M and insurance
charges.
‡ The levelized tariff with Rs.1025 cr. of project
cost is Rs.2.6904 per Kwh vis-à-vis Rs. 2.6275
per Kwh with Rs.816 cr. of project cost.

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&&'
‡ Reduction in O & M charges from 2.5% to 2% -
this reduces the payment to IPP by Rs.40.8 cr
p.a.
‡ The effect on levelized tariff is a reduction by
2.54 paise per kwh.
‡ The term of PPA was reduced from 30 years to
18 years by an amendment to PPA.
‡ Amendment provided for a rebate of 2.5% to be
allowed to the utility if it settles a bill within 5
days ± reduces levelized tariff by 0.27 paise.

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Name of IPP Fixed cost

In Rs. Per kwh

GVK 1.52

Spectrum 1.61

Kondapalli 1.22

Balaji 1.52

Tannirbavi 1.98

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+ 


‡ GVK
For every 1% increase in PLF from 68.5% to 85%, .0525% of
additional ROE.
‡ Incentive payable on notional generation also.
‡ PPA was amended to reduce rate of incentive from .6% to
.525% and also to cap incentive payment at 85% PLF.
‡ Effect is to reduce maximum ROE payment including
incentives to 25% from 35%. Applied to equity of
Rs.243.23 crores, this amounts to a saving of Rs.24.32 cr
p.a.

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Spectrum Power
‡ Basis of payment
68.5% to 80.5% .4% for every 1% increase in PLF
80.5% to 85.5% .5% for every 1% increase in PLF
above 68.5%
> 85.5% .6% for every 1% increase in PLF
above 68.5%
Kondapalli Power
80% to 85% PLF 2% of Other Fixed Charges (OFC)
85% to 90% PLF 10% + 3% for every 1% increase in
ROE above 85%
> 90% Same as for 90% i.e 25% of OFC

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 O



GVK Spectrum Kondapalli

Maximum 25% 34.9% 26.7%

possible ROE
including
incentives

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‡ Floor for incentives should be at around 80% and

not at 68.5%
‡ No incentive on deemed/notional generation
‡ Term loans which are in strong currencies like
Euro should be swapped.
‡ Repayment of debt should be reimbursed rather
than depreciation.

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‡ PPAs of MoU projects provide for recovery of

capital by way of reimbursement of depreciation
‡ Entire project cost (including land cost in some
cases) is taken as comprising of depreciable fixed
assets
‡ Assets are depreciated on straight line basis over a
12 year period up to 90% of original value.

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,

‡ Depreciation is recovery of capital

‡ Reimbursing depreciation as part of fixed charges
amounts to recovery of not only debt but also
equity
‡ Power price is meant to include only return ‘

equity and not return ‘
equity,
‡ Major portion of equity is also returned to investor
in the process.

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,
‡ Example of GVK
Project cost Rs.816 cr
Entire project cost is depreciated up to 90% i.e.
Rs.734.4 cr.
Equity Rs.243.23 cr.
Amount recovered as depreciation Rs.734.40 cr
Less: debt component of project cost Rs.572.77 cr
Amount recovered towards equity Rs. 162.40 cr
Represents 66% of equity invested

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‡ It is possible to bring down cost of power generated even
by existing IPPs.
‡ IPP not a bad word!
‡ Negotiate-benchmark against the most competitive bid
received.
‡ Utility should set payment track record to generate
confidence among IPPs, rather than setting up payment
security mechanisms.
‡ Set up infrastructure on priority basis to distribute gas and
convert liquid fuel based projects to gas.
‡ Key role for regulator and utility in the entire process.

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