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    Ultra mega power plants  future Ultra mega power plants future Document Transcript

    • Sanjay Kaul Mr. Sanjay Kaul is the founder President of the University of Petroleum & Energy Studies & Chancellor of University of Technology & Management in India. For more about the author please click here.Ultra Mega Power Projects: Future?  ‘Powerful’ predicament  UMPP = Large capacity addition + Efficiency + low carbon  UMPPs: a non-starter  Flawed business models  Way forward  Conclusion: UMPPs Future?  References 1Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.
    • In the era of scams, natural monopolies and archaic regulatory environment there has been fewmega schemes which have the potential of spurring industrial growth in specific sectors. IT Parks/SEZ/Private Ports/PCPIRs/NELP/Private Power production/Airport Privatization are someinitiatives which have seen the light of day after much wrangling and have succeeded moderately inattracting big ticket investments.A volatile world, domestic economic cycles and evolving nature of regulatory arena, deeply effectfinancial closure, viability projection, commissioning and continuing commercial attractiveness ofinfrastructure and energy projects which generally involve long gestation periods and upfrontinvestments.Announcement of 16 UMPPs, if completed could have resulted in 64,000 MW capacity addition and320,000 crore ($ 64 billion) investment which could have significantly met both peak hour & baseload and FDI targets. This is without taking into account the large multiplier effect this generationcapacity would have had in the areas of infrastructure, manufacturing, agriculture et al.Where do we go from here? This will be determined by an analysis of the current status of thescheme, techno-commercial viability and regulatory gaps which this article discusses.‘Powerful’ predicamentIndian power situation is about ‘spiraling demand out stripping supply’, further worsened by poorcapacity utilization, distribution losses and low quality transmission infrastructure.India consumes almost 51per cent of energy in form of Electricity. With the near double digiteconomic growth, power demand has grown to near 9 per cent CAGR (2002-2012) over the lastdecade. In contrast to this, generation has enhanced by a CAGR of just above 5per cent, leading tohuge power deficit.The country is struggling with a base load deficit of10.3per cent and peak shortage of 13per cent. Load deficit of 10.3per cent and peak shortage of 13per cent.Forty per cent of our citizen not having access toelectricity (in rural area) is further magnified by twopower outages in 2011 which left more than 600 Fundamental Rights not possiblemillion people across 21 states powerless; alarming without ‘Right to Energy’indicators for a country which had planned ‘Powerto all by 2012’ in its 2005 National Electricity Policy.Constitution of India gives us the Fundamental Right of Equality, Freedom, Expression, Religion,Life, Constitutional Remedies; recently Right to Education has been added. Today without energyno civilization is possible let alone safety of Fundamental Rights; reliable, affordable and accessibleenergy has become essential requirement for the citizens to enjoy and exercise their FundamentalRights. 2Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.
    • UMPP = Large capacity addition+ Efficiency + low carbonUMPP are not only a giant leap towards plugging the power deficit but the involved technology isefficient and has acceptable climate standards.At 600-1200 GW, the capacity addition that India is likely to do by 2050, is equal to the total powergeneration capacity of the European Union (EU-27) in 2005; hence, choice of technology & fuel willhave a grave impact on the global resourceavailability, cost, and most importantly Thermal power obvious choice forenvironment. th world’s 4 largest coal reserveFor a Petroleum deficit nation having world’s 4 th holderlargest coal reserve, coal was the obvious choice.Since 1968, thermal power plants started using sub Technology used in UMPP hascritical technology with efficiency levels of 32-33per cent, which was enhanced to 34-35per cent by enhanced efficiency to 42per centincreasing the size of units. Later the use of super critical technology has further appended theefficiency up to 40 per cent.UMPPs have raised the efficiency bar to 42 per cent. Table: 1.1: Typical comparison of various technologies and carbon emission of TPPType Size of Single Pressure Temperature up Efficiency Carbon Emission unit up to up to to / Unit of power generationSub Critical 220 MW 150 Bar 5600 C 32-34per 1.02 centSuper Critical 500 MW 180 Bar 6300C 40 per cent 0.97Ultra Mega 800 MW 252 Bar 6300 C 42per cent 0.96PPSource: American Petroleum InstituteSubsequently, government has discouraged setting up of Thermal Power Plants using sub criticaltechnology in 12th and 13th plan and completely deferred setting up of power plants using sub criticaltechnology in 14th plan. Use of Super critical technology improves efficiency and reduces carbonemission.Further, other technology improvements like the Circulating Fluid Bed Combustion (CFBC) whichenables use of low grade coal, lower SOx and NOx emissions, higher combustion efficiency andspace saving (no need for separate desulfurization, denitration, and fine-fuel crushing units) arepromising. Around 16 boilers using it including UMPPs are under-construction in India. 3Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.
    • UMPP a non-starterExtending its 1995 Mega Power Plant policy, GOI conceived of UMPPs; of the sixteen 4000 MWthermal power plants only four have been approved till date. Of these two—Sasan, Tilaiya werepithead plants which were allotted captive mines and rest two- Mundra and Krishnapatnam coastalplants to operate on imported coal.Table 1.3: UMPPs at a GlanceSr. No. Particulars No. of UMPPs 1 Total UMPPs envisaged 16 2 SPVs incorporated 12 3 Awarded 4Source: Ministry of Power, GOITilaiya & Krishnapatnam are non-starters. The former which was bagged by Jharkhand IntegratedPower Ltd.(JIPL), has been pushed off scheduledue to land acquisition and even the pre- Out of 4 UMPPs contracted 2construction activities have not picked up pace.Further, JIPL has been facing R&R (Resettlement are non-starter and only& Rehabilitation) issues; operational UMPP is facingReliance Power’s Krishnapatnam is contending issues related to change in law inwith a deadlock due to the change in price of raw material sourcing country.imported coal. All the units of the projects werescheduled for commissioning by October 2015, as per the power purchase agreement. However,with work at the project stalled, the government is considering dropping it from the capacityprogramme for the period of the XII Plan.Tata Power’s imported coal based Mundra UMPP is also facing problems owing to a recent changein coal export regulations by the Indonesian government which has pushed up the cost ofgeneration. Mundra is fully commissioned but not operating to capacity.According to trusted source who requested anonymity, TATA Power has been asked to keep at leastthree of the five units (800MW each) to be operational for consideration of their request for pricingreconsideration (discussed later in the article).UMPP at Sasan, the fourth one, is likely to be commissioned as pithead project (based upon captivecoal mines) but is also mired by court cases.The time frame for the remaining twelve plants is unknown. 4Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.
    • Flawed business modelsIn-spite of having advantages like higher efficiency & lower Carbon Foot Prints, the revisedBusiness model, proposed by Ministry of Power (MoP) in Oct 2012, has proved to be a dampener.Bankers and industry bodies like CII (confederation of Indian Industry), FICCI (federation ofIndian Chambers of Commerce and Industry), ASSOCHAM, AAP (Association of PrivateProducers) have unanimously requested CERC to look into the matter. Also, some clauses commonto both models, old & revised, needs to be changed or fine-tuned.The concept of the Design, Build, Finance, Operate & Transfer (DBFOT) model, replacing theearlier BOO (build operate own), has been designated as a non-starter because neither the biddersnor the lenders (banks) are comfortable with the fact that this model requires assets to be transferred(after 25 years) back to the owner i.e. the nodal agency / Ministry of Power. CERC in its statutoryadvice said “In our views, DOBFT model issuited more for natural monopoly businesses like The new Design, Build, Finance, Operateroad, transport, transmission and distribution of & Transfer (DBFOT) model has beenelectricity etc. not for de-licensed business like designated as a non-startergeneration.” The land for the project would noteven be leased but allotted to the company on Bid document/PPA framework lacklicense-to-use basis, making this model several critical inclusionsunattractive in terms of financing because ofunsecured nature of assets in absence of clearownership with the bidder.SBC, of both the models, has no provision that takes into account change in the international lawslike that in Indonesia where incumbent government has bench marked exported coal prices atinternational prices. Thus, the cost of the coal supply for the Power plant has shot up drastically,thereby increasing the cost of generation. The RFP documents did not envisage a change of law inthe host country. Efforts by the generating company with the buyers i.e. distribution companies, didnot yield any results, thus Tata Power approached CERC in the month of July, 2012 for review ofthe tariff as provided in sections 61, 63 and 79 of the Electricity Act, 2003.As per the PPA, sale of power from the completed project would be based on competitive bidding.Majority of bidders at the supply end are the State operated limited number of SEBs. More flexibilityand assurance (for e.g. Support price mechanism) needs to be provided to the investors in thisregard.Several other parameters in the draft SBD need to be changed. Single variable bidding, introduced tosimplify the bidding process, will actually make it more ‘intrusive’ as compared to the cost plusregulated tariff regime. Deemed availability clause need to be removed because it enhances the riskexposure of both the procurer (distribution entities) and the generator; the new model PPAenvisages cost equivalent of Deemed Availability to be shared by them in the ratio of 70:30respectively. (30% loss for generator in case of less coal supply & 70% cost for utility despite the 5Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.
    • plant not being available). Provision relating to Independent Engineer (IE) need to be deleted as it isintrusive and will lead to disputes, delays and litigation. Already power plants have to comply withvarious statutory requirements and are also subjected to review by Lender’s Engineers for substantialpart of their operating life, making the IE role redundant. The present SBD has no provision for IE,except for a limited role at the time of project commissioning.Other issue pertaining to Normative availability & incentives, Concept of open capacity, GrossCalorific Value (GCV), Indexed Fixed Charges, Change of scope, Right to dispatch et al also needrealignment so that the project is optimized.Way ForwardLessons learnt from the 4 UMPPs that have been contracted so far need to be taken as feedback inorder to revise the bid documents to make this investment opportunity attractive.Firstly, the new operating model needs to be changed back to BOO (build operate own) whichwould ensure longer life of critical national powerassets. It is after the initial years when the CAPEX New Operating & ownership model,has been recovered by depreciation accounting that preferably on BOO basisthe power producers enjoy the real returns oninvestments. Because of this clause the operator Comprehensive Bid document or PPAwould also not stop investing in the maintenance of including tariff adjustment provision withplant (as there is no 25 year deadline) leading to change in international lawsaccelerated asset development & up-gradation. Quick processing of land acquisition,Secondly, PPAs, originating out of both new & old environmental clearance, availability ofmodels, needs to include mechanism to consider water and R&R issuesprospective changes in International laws. CERC isalready taking this into account for other thermal Position UMPP as unbeatable FDI opportunitypower plants which would use imported coal inaddition to domestic supply. The recent Fuel Supply Government partial or full financing of theAgreements (FSAs) being signed between CIL and UMPPspower plants would only ensure about 80per cent ofthe coal requirement on a yearly basis. Domestic coal production being around 65per cent of thetotal requirement, the remaining 15per cent would be imported by CIL to meet the FSArequirements. The cost of the coal will be the pooled cost of domestic and imported coal prices andwould be a pass-through. Similar logic may be applied to the UMPPs where the coastal UMPPs hadrecently encountered changing policies of the sourcing nation. Currently, both the coastal basedpower plants are commercially unviable putting a question mark on the future of power plants basedupon imported coal.Australia has now also issued a draft mining law to impose tax on coal and iron ore projects fromnext year, it accounts for 5per cent of country’s coal import. 6Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.
    • Thirdly, parallel processing to obtain various clearance such as land acquisition, environmentalclearance, availability of water and other issues have not reached a stage to inspire confidence in thebidders. Making such large chunks of land available without compromising prosperity of farmers isyet another challenge. Taliya UMPP which is seeing the R&R expenditure shot up manifold to INR3,612 Cr ($ 0.72 billion), is likely to have a serious impact on the project cost and the correspondingtariff. Lessons may have been learnt from the fair & quick R&R (resettlement & rehabilitation) inthe case of Sasan & Mundra UMPPs.Once these uncertainties for the developer would be reduced, the decreased insurance and hedgingcost would result in the proposition becoming far more attractive for domestic and foreign players.Fourthly, if the GOI is able to remove the fore-mentioned challenges UMPP, may also bepositioned as an unbeatable FDI opportunity. Each of these UMPPs entails an investment of INR18,000-24,000 crores (approximately $3.6-4.8 billion). It makes it an excellent opportunity toencourage FDI and bolster the investment mood in India. Compared to $ 6-8 billion expected FDIin Retail Sector over next 5 years foreign investment in UMPPs could have reached $ 32 billion(assuming a conservative 50per cent of 16 of the approved or proposed project would have attractedforeign investors). Not only would it have been smoother to implement from a political stand pointbut also, far more beneficial for the economic growth.Fifthly, GOI may consider introducing financing support to the private developer making theprojects even more attractive; a completely or partially support may be offered linked to time ofcommissioning. Petroleum subsidy alone for 2011-12 was of nearly INR 1,40,000 crores ($ 28billion) enough for supporting 7-8 UMPPs!Conclusion: Reenergizing Power Sector by UMPPs?On one hand there is a possibility that with adequate power, Indian economy will gallop ahead to adouble digit growth, would be able to lift more than 300 million population above poverty line, onthe other hand, if the power gap continues, the criticality and cascading effects of the powershortage on various power intensive industrial sectors will ultimately further depress the economicgrowth.UMPPs still has the potential to change the Indian Power sector landscape. Political will & focus isrequired for modifications in the Business Model, extended government support in projectfinancing, center staging the sector for FDI, time bound provision of issuing clearances andtransparent R&R. 7Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.
    • References 1. http://www.cea.nic.in/reports/proj_mon/broad_status.pdf 2. http://www.electricalmonitor.com/ArticleDetails.aspx?aid=1421&sid=2 3. http://www.pfcindia.com/Content/UltraMegaPower.aspx 4. http://www.cercind.gov.in/2012/Advice_Gov/26oct12.pdf 5. http://powermin.nic.in/whats_new/pdf/development_of_project.pdf 6. www.wikipedia.com 7. http://www.powermin.nic.in/generation/pdf/17thper cent20EPS.pdf 8. http://www.business-standard.com/india/news/power-deficit-for-2011-12-pegged-at-103- per-cent/438884/ 9. http://philip9876.com/tag/umpp/ 10. http://blogs.wsj.com/indiarealtime/2012/10/12/retail-fdi-is-80-billion-opportunity-study/ 11. http://www.business-standard.com/india/news/per cent5Cmulti-brand-retail-may-attract- fdiup-to-3bn-in-2-yrsper cent5C/187206/on 12. http://www.pwc.in/assets/pdfs/publications-2011/wec-pwc-report.pdf 8Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.
    • About the author:Mr. Sanjay Kaul is the founder President of the University of Petroleum & Energy Studiesin India (www.upes.ac.in). His responsibilities include positioning of the University nationally andglobally among the stakeholders i.e. policy makers, key influencers, academic and researchinstitutions and the industry. He in turn provides valuable and strategic input to the management,board and faculty of the University in preparing to meet the challenges of futureindussry scenarios and skill sets required for the generation next professionals in a ‘Glocal’world.Mr. Kaul is a Management Graduate with distinction from St. Xavier Institute of Management,Mumbai and has over 25 years of professional experience with Chevron, Shell, PwC andDeloitte in the Energy Sector.Mr. Sanjay Kaul is the former Leader for Energy & Resources Practice for Deloitte in India.During his tenure he successfully led Deloitte’s initiative to respond to the aggressive growth inOil & Gas, Power, Mining, Renewable, and Nuclear Energy sectors. While with PwC and Deloitte,he has advised most energy companies operating in India and has deep cross borderexperience with most emerging economies of the Asian region.Mr. Kaul was Regulatory advisor to Govt. on exploration licensing policy, drafting to enactmentadvisory for legislations and policy framework to various State Governments (State entities.SEZs, tariffs, emission norms, fuel quality, gas pricing, and pipeline policy).Mr. Sanjay Kaul is also the founder Chancellor of University of Technology and Management,a State University legislated by the Government of Meghalaya (www.utm.ac.in).He is also a Director in the Indian School of Petroleum and Energy (www.isp.co.in) which is aleading training and business solutions provider in the Energy Sector and has trained over 15,000Energy professionals in India and abroad in the last 10 years.He has been visiting faculty to several Universities, Business Schools and Industry Forums.Led over 100 training programs, workshops on energy topics where more than 5000 senior energyprofessionals have been trained. He is also a Fellow of the Energy Institute (EI, UK).Awards: ‘Outstanding Individual Achievement Award’, 2005, by the Energy Institute, U.K. for hiscontribution to the energy sector. Recently, he was felicitated at India Drilling & ExplorationConference (IDEC) 2012 for his ‘invaluable contribution to the Petroleum industry, in differentroles’.His believes: ‘That the future of Energy hinges upon leveraging the power of education &innovation’ thus balancing the twin objectives of providing affordable energy and sustainabledevelopment. 9Serial No. III/Energy/Dec-12-2012For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.