Arvind singh mahor -summer project report


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Arvind singh mahor -summer project report

  1. 1. Project Report On Faculty Guide: Submitted by – Prof. Prabina Rajib Arvind Singh Mahor Roll No. - 10BM60017, MBA (2010-12) Industry Guide: Vinod Gupta School of Management Prof. A P Dash IIT-KharagpurSenior Faculty, PMI NTPC A Project Report Submitted in partial fulfilment for the award of Master of Business Administration 1
  2. 2. ACKOWLEDGEMENTIt is with a sense of gratitude, I acknowledge the efforts of entire hosts of well-wishers whohave in some way or other contributed in their own special ways to the success andcompletion of this summer internship project. First of all, I express my sage sense of gratitude and indebtedness to our Dean,Prof. A. Tripathy and Placement In charge, Prof. Prithwis Mukherjee at―Vinod Gupta School of Management, IIT-Kharagpur‖, from the bottom of my heart, fortheir immense actions, support, and faith.I would also like to thank my project guide at VGSOM IIT Kharagpur, Prof. Prabina Rajibwho had sent me many papers related to my project and been very helpful in the completionof this projectI sincerely express my thanks to all our lecturers for their valuable guidance and intellectualsuggestions.Also, I also express my sincere thankfulness to my project guide and mentor,Prof. A. P. Dash at PMI NTPC Noida for his kind advice, suggestions and constant help in alot of various ways during project course. Also thank Prof. Behra of PMI NTPC whosuggestion many points to be considered in project like Five Year Plans and Clean Energy.Further I express my gratitude to all my MBA friends and NTPC Library People who werekind enough to help. I sincerely thank to all of them for their valuable suggestions, motivation andencouragement. I express my thanks to the entire NTPC for giving me an opportunity to workthere. Arvind Singh Mahor MBA, 2010-12 Class VGSoM, IIT Kharagpur 2
  4. 4. Table of ContentsACKOWLEDGEMENT ................................................................................................................................ 2CERTIFICATE FROM COMPANY................................................................................................................ 3EXECUTIVE SUMMARY............................................................................................................................. 5 OBJECTIVES.......................................................................................................................................... 5 METHODOLOGY................................................................................................................................... 5 RESULTS ............................................................................................................................................... 5COMPANY BACKGROUND ....................................................................................................................... 6 POWER INFRASTRUCTURE IN INDIA .................................................................................................... 6 NTPC PROFILE ...................................................................................................................................... 6PROJECT OBJECTIVE ................................................................................................................................ 9 MAIN DELIVERABLES ......................................................................................................................... 10 MAIN GOALS...................................................................................................................................... 10SURVEY OF LITERATURE ........................................................................................................................ 10 POWER PROJECT FINANCING TRENDS .............................................................................................. 10 PRIVATE POWER FINANCING: PROJECT FINANCE TO CORPORATE FINANCE ................................... 13 POWER REFORMS – TECHNOLOGICAL AND FINANCIAL PERSPECTIVE ............................................. 14METHODOLOGY..................................................................................................................................... 15 STATUS OF THE INDIAN POWER SECTOR .......................................................................................... 16 GLOBAL POWER SECTOR ANALYSIS ................................................................................................... 17 COMPARISON OF THE CHINESE AND INDIAN POWER SECTOR ........................................ 19 CAPITAL BUDGETING FOR A DUMMY POWER PROJECT ................................................................... 22 POWER CAPACITY ADDITION AND CAPITAL REQUIREMENT ............................................................. 31 FINANCIAL STRATEGIES AND FUND RAISING BY NTPC...................................................................... 32 CALCULATION OF COST OF CAPITAL ................................................................................................. 33 CAPITAL BUDGETING MODEL USING THE EXCEL .............................................................................. 38 CHALLENGES AND OPPORTUNITIES FOR NTPC ................................................................................. 43RESULTS ................................................................................................................................................. 43 CONCLUSION AND SUGGESTIONS ..................................................................................................... 44Appendix A ............................................................................................................................................ 45Appendix B ............................................................................................................................................ 55 CASE LET - NTPC: CURRENT STATUS, FUTURE DEMANDS AND INVESTMENT NEEDED .................... 55References: ............................................................................................................................................ 60 4
  5. 5. EXECUTIVE SUMMARYOBJECTIVES  To provide the optimum integrated financial model of Capital Budget & Capital Structure for the additional power capacity required as per the 12th Five Year Plan and Other Studies for the NTPC considering the public undertaking nature and various regulatory provisions related to pricing, contracting of raw material, operations, administration etc. by various regulatory authorities like CERC, Power Ministry and Environment Ministry  To analyse the Power generation policies of developing and the developed countries, particularly focusing on the India and China and recommending the changes for Indian Power Sector to enhance the Capacity in most efficient manner.METHODOLOGYMethodology will include the intensive and extensive research, study and analysis to come tothe required solutions and suggestions incorporating the Power Industry norms. It will havetwo sections: [see Exhibit 1]DATA COLLECTIONPrimary dataData gathered from the NTPC staff, discussion and internal survey.Secondary dataData gathered using the external sources like study reports by various agencies like AsianDevelopment Bank, World Bank, UNO and other consultancy organisations who worked inthe same area like KPMG etc.EXPLORATORY AND MATHEMATICAL STUDYIn Exploratory and Mathematical study various financial tools were used giving the inputsfrom values available in primary data & secondary data section. Using these exploratoryresults, future policies for Power Capacity addition and Operational, Fund Raising &Technical Efficiencies will be recommended.IT APPLICATIONFinally, using available software tools like MS Excel various charts and table drawn for thevisual representation of the study and analysis.RESULTSIndian Power sector greatly need to improve on various fronts to meet the 12th Five Yeartarget of the power capacity addition in terms of Operational, Functional, Funding, CostReduction, Environment Challenges, Human Resource, Administration, Regulations, Tariffs,and Distribution. Along it, India need to look for the alternative energy and sources alsoconsidering the cost involving in Oil and Coal import and their limited availability withfocusing on the environmental effects and the large power requirement for sustaining theeconomic and social growth. 5
  6. 6. COMPANY BACKGROUNDPOWER INFRASTRUCTURE IN INDIAIndia is the fifth largest producer of electricity in the world and according to the PlanningCommission, while the State Governments account for 51.5% of the total generation capacity,the central sector and the private sector account for 33.1% and 15.4% of the generationcapacity respectively. The Power industry in India derives its funds and financing from thegovernment, some private players that have entered the market recently, World Bank, publicissues and other global funds. India‘s total installed capacity of 173,626.40 MW as on March31, 2011, the installed capacity of central power sector utilities, state sector entities andprivate sector companies accounted for approximately 31.3%, 47.5% and 21.2%,respectively. The following table sets forth a summary of Indias energy generation capacityas of March 31, 2011 in terms of fuel source and ownership:See the organisation of Indian Power Sector Organisation [see Exhibit 2] Sector Thermal Nuclear Hydro Renewable energy Total sources Central 40,747.23 4,780.00 8,885.40 - 54,412.63 State 52186.73 - 27,257.00 3,008.85 82,452.58 Private 19890.52 - 1,425.00 15,445.67 36,761.19 Total 1,12,824.48 4,780.00 37,567.40 18,454.52 1,73,626.40NTPC PROFILENTPC Limited (formerly known as National Thermal Power Generation Limited), Indiaslargest power company, was set up in 1975 with a vision “A world class integrated powermajor, powering India‟s growth, with increasing global presence" to accelerate powerdevelopment in India. It has emerged as an „Integrated Power Major‟, with a significantpresence in the entire value chain of power generation business. NTPC is a Government-owned entity with 89.5% of its paid-up capital contributed by the Government and thebalance of 10.5% being held with foreign institutional investors, financial institutions, banks,and the general public. NTPC is primarily involved in constructing and operating powerstations. It is among the world‘s largest and most efficient power generation companies.NTPC has installed capacity of 29,394 MW. It has  15 coal based power stations (23,395 MW),  7 gas based power stations (3,955 MW) and  4 power stations in Joint Ventures (1,794 MW). The company has power generating facilities in all major regions of the country. Itplans to be a 75,000 MW company by 2017. NTPC is pursuing expansion of its businessactivities into hydroelectric generation, coal mining, gas exploration, and participation in theliquefied natural gas value chain, which supplements and supports its core power generationactivities.NTPC Organisational Structure [see Exhibit 3]Vision- A world class integrated power major, powering Indias growth with increasingglobal presence.Mission- Develop and provide reliable power related products and services at competitiveprices, integrating multiple energy resources with innovative & Eco-friendly technologies andcontribution to the society 6
  7. 7. Core Values - BCOMIT  Business ethics  Customer Focus  Organizational & Professional Pride  Mutual Respect & Trust  Innovation & Speed  Total Quality for ExcellenceCorporate Mission―Develop and provide reliable power, related products and services at competitive prices,integrating multiple energy sources with innovative and eco-friendly technologies andcontribute to society‖.For the growth so far [see Exhibit: 4].PRODUCTS AND SERVICESPower generation- The Company has formulated a long term Corporate Plan for 15 years upto 2017. The Corporate Plan seeks to integrate the Companys vision, mission and strategiesfor growth with the national plans and to provide the company the cutting edge in theemerging competitive environment. NTPC is targeting to become a 75,000 MW plusCompany by 2017.Consultancy-The Consultancy Wing of NTPC, with an ISO 9001:2000 accreditation,undertakes all the Consultancy and turnkey project contracts for Domestic and Internationalclients in the different phases of Power plants. NTPC is registered as a consultant with severalleading international development and financial institutions such as The World Bank, TheAsian Development Bank, The African Development Bank and UNDP.Power Management Institute- NTPC has full-fledged facilities at the Power ManagementInstitute, NOIDA for providing training in all aspects of power Plant Management andSystems. It also has Full Scope Replica Training Simulators both for Coal as well as Gasbased Stations for training personnel in Operation and Maintenance of power plants.SUBSIDIARIES AND JOINT VENTURESBusiness development through Acquisition and Joint Ventures serves both NTPCs owncommercial interest as well as the interest of the Indian economy taking over being a part ofthe acquisition process, is also an opportunity for NTPC to add to its power generationcapacity through minimal investment and very low gestation period. Group NTPC has 5Subsidiaries and 17 Joint Ventures [see Exhibit: 5] in the following area:  Power Generation  Services  Equipment Manufacturing  Coal Acquisition  Power Trading 7
  8. 8. PERFORMANCE HIGHLIGHTSCoal based Stations performed at the highest ever Plan Load Factor (PLF) of 89.43 per centcompared to 87.67 per cent last year. [see exhibit 6]. Seven coal based stations (Dadri,Unchahar, Vindhyachal, Simhadri, Rihand, Tanda and Talcher-Kaniha) have achieved morethan 90 per cent PLF. Generated 188.74 Billion Units (BU) - an increase of 10.41 per centover the previous year. Contributed 28.50 per cent of the total electricity generated in thecountry during 2006-07 with 20.18 per cent share of the total installed capacity of the nation.PAF of both the coal and gas-based stations remained at healthy levels, which enabled thecompany to earn efficiency incentives. The company‘s Plant Availability Factor (PAF) forFY2011 as a whole stood at 91.67%, up 46bp Y-O-Y. During 4QFY2011, PAF of coal-basedplants stood at 96.4%, while PAF of gas-based plants stood at 96.87%. [Exhibit: 6]FINANCIAL RESULTSNTPC Ltd has declared its provisional unaudited revenues and profit for quarter and year-ended March 31, 2011. The audited results are expected by May 20, 2011 post which we willrelease a detailed results analysis. The provisional numbers indicate that the performance islikely to be in line with CRISIL Equities‘ estimates. CRISIL continue to believe that NTPC isbetter placed due to strong growth prospects, higher fuel security and a stable return model.NTPC maintains fundamental grade of 5/5, indicating that the fundamentals of the companyare excellent relative to other listed securities in India. [Exhibit: 7] & [Exhibit: 8]  100% realization of the billing for the eighth consecutive year.  Provisional and un-audited Net Sales of Rs. 53,721 crore during 2010-11 as against Rs. 46,169 crore (audited) during 2009-10, registering an increase of 16.36%. The provisional and un-audited Gross Revenue is Rs.56,331 crore during 2010-11 as against Rs.49,247 crore (audited) for the year 2009-10, an increase of 14.38%.  Provisional and un-audited Profit after tax for the year 2010-11 is Rs.8,826.16 crore s compared to Rs.8,728.2 crore (audited) during the year 2009-10, an increase of 1.12%.  Capital Expenditure of Rs.12,817.61 crore during 2010-11, an increase of 22.46% over the last year‘s figure of Rs.10,467.13 crore. NTPC Group‘s capital expenditure was Rs. 16,326.58 crore as against Rs.14,334.54 crore over the last year, an increase of 14%  Contributed Rs.6,243.99 crore to exchequer on account of Corporate tax, Dividend and tax thereon and wealth tax, an increase of 92% over the previous year.  Approved outlay for 2011-12 for NTPC‘s capital schemes is Rs.26,400 crore; for NTPC Group, the outlay is Rs.30,843.72 crore.For Financial Results [Exhibit: 11] 8
  9. 9. PROJECT OBJECTIVEThe Indian power sector has historically been beset by energy shortages which have beenrising over the years. In fiscal 2010, peak energy deficit was 12.7% and total energy deficitwas 10.1%. The demand for electricity has consistently exceeded the supply, and the demand-supply gap has been widening. Rapid growth of the economy places a heavy demand onelectric power. Although generation capacity has increased substantially in recent years, it hasnot kept pace with the continued growth of the Indian economy, despite low per capitaelectricity consumption. Hence, India needs to think in long term manner to chalk out theenergy plan for sustaining the growth rate at same or more rates. We have to think for thevarious alternative sources of energy also considering the environmental effects of globalwarming. So, there is an utmost need of look for the non-conventional energy sources likesolar/bio/waste based plants. Along it, the Indian Power sector is among the least efficient in the world in termsof output units of electricity per unit of fuel (coal/gas/oil). Even if we compare India withother developing nations like China and Korea, India is far behind in terms of generationefficiency. Therefore, there are following goals of this project:I. Future Power Capacity Additions12th Five Year Plan (2012-2017) (the "12th Plan")Power sector in the country is poised for record capacity addition of 15000MW during thisfinancial year said Shri Sushilkumar Shinde, Union Minister of Power inauguratingInternational O&M Event ―Indian Power Stations - 2011‖ . It needs to plan to be a 75000MWcompany by 2017. This is very important to sustain the growth rate of 9% yearly.II. Power requirement Projection as per the Five Year Plans.The analysis of power requirement considering the population and the economic growth uptothe 15th Five Year Plan i.e. 2031-32. Hence, incorporating the past trend and other majorfactors, draw the projected power plan using the Excel showing the each Five Year Plan‘sPower target, yearly power target, cumulative growth pattern and Growth rate of powerrequirement.III. Calculation of various Parameters related to power generationCalculation of cost of power generation per unit of primary and secondary fuel consideringtheir calorific value. Calculation of the fuel requirement to generate the power i.e. how muchto be imported and how much can be used from the domestically available coal store. Also,calculating the tariff values to project the revenue from sales of electricity to various StateElectricity Boards (SEBs).IV. Study of Long term Capital Requirement for the Power GenerationThe analysis of debt, equity, earnings and other financial values for the projected futurepower capacity considering the effects of Inflation, taxes, cost structure, tariffs and otherregulations. Hence, prepare a capital planning model using Excel showing the year wisepower generation, capital requirement, sales of power, profit, debt and equity. It will show theneed of future investment in the power sector.V. Study of Power Sector in developed and Developing countriesStudy and analysis of the differences between them in terms of functional, funding, technicaland regulatory methods, Particularly focusing on China and India and identifying the cause ofdifferences. Also, to recommend the various ways for the Indian Power Sector to Improve onvarious fronts to achieve same level of efficiency. 9
  10. 10. MAIN DELIVERABLES  Identification of causes of weak efficiency of Indian Power Sector compared to China and other developed countries.  Study of funding the power projects and Borrowing from various financial agencies like Asian Development Bank, World Bank, Bank Loa n etc.  Analysis of future power capacity addition by NTPC as per the Five year Plans.  Tariff calculation, cost calculation considering the fuel quality and other technical parameters like calorific value, fuel consumption, auxiliary consumption etc.  Capital calculation to meet the future power capacity addition considering the inflation, tax and borrowing issues.  Developing a financial model using Excel showing growth trend, capital requirement, revenue, debt, earnings, equity and profit for each year.MAIN GOALS  Proposals for the improvement of the Indian Power Sector.  Projection for the Power Capacity addition and the Investment needed for that in future.  Financial Model using Excel and drawing the pictorial representation of the results.SURVEY OF LITERATUREFor the survey of the literature to know what had been done to meet similar targets satisfyingthe various criteria, I studied various cases, articles, reports and research papers fromAcademic Institutes and Industries related to the same situation.POWER PROJECT FINANCING TRENDSDespite the fact that coal-fired power projects are being cancelled at a quickening pace, coal-fi red power is not going away any time soon. The recent global recession has severelydisrupted the growth momentum achieved by many developing countries. Although thecurrent economic recovery has bestowed considerable benefits on many industrial nations, ithas only reached a few developing countries. In this context, as would be expected, thefinancial environment for power utilities around the world continues to be difficult.Reflecting both capital shortages and a slowing of demand growth, there have been majorreductions in investment programmes in the power sector. As an important instrument for changing the mix of a countrys energyconsumption; the critical need to improve efficiency and resource utilization; and, perhapsmost important, the availability of capital. Over the past few years, the slowing down ofeconomic activity has reduced the growth of electricity demand in most developing countries.However, in some countries — such as China (10.9%), India (6.6%), Indonesia (19%),Pakistan (9%), and Turkey (8%) - the growth of electricity consumption has been constrainedby supply and there is a large unsatisfied demand, which has a high economic cost for thosecountries.Investment patterns and the energy mix  Power systems offer efficient means of using coal, lignite, and gas to distribute energy to a wide range of users. Hydropower, nuclear, and, to some extent, geothermal energy can only be harnessed effectively in the generation of electrical power.  The large scope for this is evidenced by electricitys major share in the energy sector. For many countries, changing the energy sources from which electricity is generated is an essential part of adjusting to the higher price of oil. 10
  11. 11.  World Bank projections have indicated that the cost of imported oil for electric power generation will account for about one third of developing countries oil imports.  The economics for substitution are particularly attractive in countries that have an abundant supply of indigenous gas. The scope for changing the generation mix depends on the size of the system and the countrys specific conditions.  Several countries will continue to rely heavily on oil or expensive hydropower and will be unable to avoid costs of 12 to 24 cents per additional kilowatt-hour, but the use of imported coal is not economical because either power systems are modest in size or the countries are landlocked, raising transportation costs.  Two important considerations are the significant economies of scale in their construction and the fact that for technical and economic reasons they must operate close to their full available capacity.Co-financing arrangementsFor those World Bank borrowers that can borrow on commercial terms, export credits andcommercial banks constitute the most important source of external financing. Under thetraditional arrangement for co-financing with commercial banks, the World Bank and acommercial bank enter into separate loan agreements with the borrowing country. Loans fromthe commercial banks are on market terms and negotiated directly by the banks with theborrower. In an endeavour to strengthen its role as a catalyst for more commercialinvestment, the World Bank introduced innovative new co-financing instruments. The so-called "B" loan programme was designed to increase the participation of commercial banksin projects assisted by the World Bank. It was intended to supplement the Banks traditionalmethods of co-financing with the private sector and, to provide a wider of options forstructuring-financed operations. Under the "B" loan scheme, three additional options becomeavailable that permits the Bank to participate in financing from commercial sources, inaddition to making a direct loan, the new options are:  Direct financial participation in the later maturities of a "commercial loan‖  Guarantees of the later maturities of a private loan instead of direct funding  Contingent participation in the later maturities of a commercial loan that, initially, would be financed entirely by commercial lenders.Looking at new possibilities  In-the context of its overall energy lending operations, the Bank is actively looking at the possibilities for nonrecourse or limited recourse financing techniques as a means of mobilizing additional resources for power development.  These techniques allow commercial firms and lenders to finance attractive projects on the basis of the projects own cash flow, rather than on the basis of an overall guarantee offered by the host government or the project owner. 11
  12. 12.  The required conditions for successful project financing of this nature include a reasonable perception of country and project risks; a strong and internationally recognized project sponsor; preferably an export orientation of the project; and generally a long-term purchase contract.The World Banks electric power lending  The World Bank has been the largest single international financier of electric power in developing countries. In countries where the power sector is well developed and well managed, a sector loan may be made. An analysis of the projects financed shows that over the past six years there have been a distinct movement away from oil-fired thermal generation towards hydro-generation, with significant activities in transmission, distribution, and rural electrification.  On average. Bank finance covers about 30% of the total project costs. It also helps in strengthening institutions in the power sector — by advising on priorities for system development, management structure, electricity tariffs, financial and technical operating practices, and by enhancing their ability to raise funds for expansion from domestic as well as public or private external sources- other than the Bank.Local currency requirements  The availability of domestic resources also will be a decisive factor in the success or failure of power investment programmes. Many developing countries have difficulty in mobilizing domestic resources for power investment partly for reasons specific to the sector, partly because political pressure keeps rates below appropriate levels, and partly because domestic savings in general are low and financial markets are almost non-existent.  Revenues from power tariffs often covered local investment costs and external borrowings were used to finance foreign exchange requirements.  Investments now being contemplated have longer gestation periods and much higher costs requiring loans with longer maturities than are generally available. Reliance on budget support for financing power investment means that investment often has to be restrained when macroeconomic pressures on the budget become severe.  Inability to raise domestic financial resources has delayed the implementation of power investments in many countries, leading to shortages of power and heavy economic losses due to the disruption of production. Shortage of local currency also hampers maintenance programmes that reduce the output of existing generating plant.Power Projects Finance (PPF)The Power Project Finance (PPF) market, defined as the largest markets, represents animportant segment of the total power market in developing countries. Examination of the PPFmarket shows the following regulatory and financial trends:  A strong commitment by the host government to private power is a key determinant of activity in a country. Most projects have BOO structures and long-term contracts. Other structures and merchant pricing are rare.  There is relatively little private risk debt capital.  Countries with strong domestic capital markets provide a large portion of their own debt requirements  Projects development time is considerably shorter in the countries with private power experience than in countries without it. 12
  13. 13. PRIVATE POWER FINANCING: PROJECT FINANCE TO CORPORATE FINANCELimited recourse project financing of power generation projects has been widely promoted asa solution to the intractable problem of getting private credit to a sector dominated by nocreditworthy borrowers and public agencies— from the point of view of both those supplyingcapital and those needing it. In such a scenario project financing of independent powerproducers (IPPs) may seem the only way to get new capacity fast. In the developing world,however, the public-private partnership in project-financed IPP ventures has beendisappointingly slow to produce results. The need for corporate balance sheet support forprivate power sector investments is gradually being recognized, and the benefits of this shiftin financing structure are worth reflecting on because:(I) Balance sheet support by the main partners in an IPP financing offers greater security tolenders and provides easier (and perhaps cheaper) access to long-term debt—critical tosustainable power sector financing given that IPPs typically depend on debt for 60 to 75 percent of their financing requirements.(II) While equity in limited recourse project finance is almost exclusively private, balancesheet support by IPP sponsors can open access to public equity markets, which are deeper andgenerally cheaper.(III) Increased corporate balance sheet support is a corollary to the restructuring in theworld‘s power sectors.Project Finance is more expensive for an IPP  Project finance implies that the lenders to a project have recourse (or claim) only to the project‘s cash flows and assets. In effect, then, the project is financed ―off the balance sheet‖ of the project sponsors. Such project finance is termed nonrecourse and is at one extreme of the project finance–corporate finance continuum of financing possibilities.  In practice, project finance in developing countries is backed by sponsor or government guarantees provided to give lenders extra comfort. In traditional corporate financing, at the other extreme of the financing continuum, lenders rely on the overall creditworthiness of the enterprise financing a new project to provide them security.  This combination of security, liquidity, and information availability allows debt to be issued at a lower cost than through project finance. Further, because the enterprise‘s overall risk is diversified over all the activities that it is engaged in, the cost of equity is also usually lower.  The financing advantage for both debt and equity makes the overall cost of capital lower for corporate finance. It also has low transaction cost because it avoids the high cost of negotiating the web of carefully structured legal contracts with purchasers and commercial lenders necessary under project financing.  Purchasing utilities weigh the risk that state regulators will disallow investment costs against the perceived lower risk (and lower profits) of purchasing electricity from an IPP, an arrangement in which all costs can be passed through or expensed.Increasing balance sheet support for IPPsAs sector unbundling and self-generation expand choice for wholesale and (potentially) retailconsumers, and thus increase demand uncertainty, balance sheet support by IPPs will play animportant role in sharing demand risk among key participants.  Project developers operate in a fiercely competitive market for international projects. Assuming competitive bidding, the primary source of competitive advantage lies in the ability to find financing at the lowest cost, as differences in technical and operating abilities become virtually indistinguishable among the frontrunners. (Other attributes may, however, predominate in negotiated, non-competitive IPP deals.) 13
  14. 14.  In the competitive international IPP market, several trends indicate that balance sheet support is the preferred means for achieving this cost-of-capital advantage. Project developers are putting their own balance sheets at risk—or those of their parent companies—to raise cheaper debt for projects and to finance their equity contribution.Creating consolidated balance sheetsDevelopers are pooling projects into entities that are then able to raise capital on the strengthof a combined balance sheet comprising the ―pooled‖ assets of the different projects.Providers of equity and debt then finance the business of building and operating privategeneration facilities rather than an individual power plant. Pooling spreads project risk.  For a multinational developer, it also reduces country-specific risk. And for a developer with a few projects already under commercial operation, pooling offers the advantage of an immediate revenue stream for repaying debt and paying dividends.  Pooling has two other benefits. - First, it enables project developers to tap public equity markets—most private project developers finance the equity component of a project privately. - Second, it enables developers to raise cheaper debt on a corporate finance basis.  IPP sponsors that have used this approach include Consolidated Electric Power Asia (CEPA), raised debt and equity in the capital markets on the basis of its corporate strategy of building multiple power plants in Asia.POWER REFORMS – TECHNOLOGICAL AND FINANCIAL PERSPECTIVEThe Government is convinced that rapid and self-sustaining growth of power sector and itsfinancial viability is essential for a speedier and sustained socio economic development.Recognizing the need for reforms in the power sector, the Government of India hasendeavoured to evolve a national consensus for reforms hence the Electricity RegulatoryCommission Act was enacted. The power sector reforms programme endeavours:  To supply electricity to the consumers under the most efficient conditions in terms of quality and cost in order to support the economic development of the State;  To take effective steps to enable the power sector to mobilize, from within the sector, adequate financial resources for financing grid expansion requirements;  To create an operating and regulatory environment conducive to investment and competition so as to foster entry of private participants into power generation, transmission and distribution and to attract the capital and expertise required to support power system up gradation, expansion and service quality improvement.The Electricity Act 2003 is an attempt to introduce competition into the power sector. The Billenvisages transforming the sector from a system of monopoly providers at regulated rates to asystem in which different companies compete to provide electricity. Key features are:1. To disaggregate the functions of generation, transmission and distribution with a view tocreating independent profit centres and accountability;2. Reorganization and restructuring of the State Electricity Boards in accordance with themodel, phasing and sequencing to be determined by the respective State Governments (Stateswould have the freedom to retain their Boards until they decide to restructure their industry);3. States to determine the extent, nature and pace of privatization. (public sector entities maycontinue if the States find them sustainable);4. Competition, economy and efficiency to be promoted in the best interests of the consumersand the national economy;5. Transmission to be separated as an independent function for creation of transmissionhighways that would enable viable public and private investments in the electricity industry; 14
  15. 15. 6. Facilitation of private investment in transmission to be broadly retained;7. Present entitlements of States to cheaper power from existing generating stations to remainundisturbed; and Compulsory metering for enhancing accountability and viability;8. Central and State Electricity Regulatory Commissions to continue broadly on the lines ofthe Electricity Regulatory Commissions Act, 1998;9. Special provisions for promoting access to electricity in rural areas and for theeconomically weaker persons and Stringent provisions to minimize theft and misuse; and10. Provisions for transition from a State-owned monopoly to a liberalized and competitiveindustry.Other recent changes include:  Electricity Regulatory Commission  Private Sector Investment in Power Transmission  Limit for Central Electricity Authority (CEA) approval raised  Liberalized Hydro Policy  Mega Power Policy:- The Cabinet approved a new policy for mega-power projects defined as a plant of more than 1000MW). This envisaged the establishment of a Power Trading Corporation; exemption of customs duty on equipment imports and easing administrative controls such as those relating to environmental clearances.  Second Generation Reforms:- Power as a subject falls under the concurrent list and hence is under the jurisdiction of the State Governments. With the Central Government putting in place a series of legislations to usher in reforms in the Power Sector, the onus now lies with the State Governments in the country to initiate and implement reforms in this sector.  Effective Market Monitoring Function for deregulated electricityMETHODOLOGYSince, this project is Analysis cum Financial model for the Power sector i.e. NTPC andparticular focus is on the analysing the Power Sector issues in developing world particularlyfocusing on India and China. Along it, to develop a Financial Model for the Capital Planningfor the NTPC to meet the Power Generation targets as per the Five Year Plans and proposethe ways for the improvement of Indian Power Sector. Therefore, methodology for thisproject included the following activities: Activity DescriptionActivity – I Study of the status of Indian Power Sector InfrastructureActivity – II Study of the Global Power Sector and Funding pattern of the Power Projects.Activity– III Comparing the Indian and Chinese Power Sector and pointed the learnings for Indian power sector from the China to enhance the efficiency.Activity – IV Capital Budgeting for a Dummy Project using assumptionsActivity – V Power Generation target for the India as per the Five Year Plans and the World Bank Report. And Projection of the Capital requirement.Activity – VI Financial Strategies & Fund Raising by NTPC.Activity – VII Calculating the Cost of the Capital i.e. Cost of Debt and Equity funding.Activity – VIII Developing the Capital Budgeting Model Using the Excel.Activity – IX Opportunities and Challenges.Activity – X Conclusion and Suggestions. 15
  16. 16. STATUS OF THE INDIAN POWER SECTORDemand and Supply AnalysisIndia ranks 5th in the world in terms of total installed capacity; it is one of the lowest in termsof per capita consumption of power. The Government adopts a system of successive FiveYear Plans that set out targets for economic development in various sectors, including thepower sector. Still, India has continuously experienced shortages in energy and peak powerrequirements. According to the Central Electricity Authoritys ("CEA") monthly review of thepower sector ("CEA Monthly Review") published in March 2011, the total energy deficit andpeak power deficit for March 2011 was approximately 7.5% and10.3%, respectively.Power Generation EfficiencyIndian power generation are among the least efficient in the world. After comparing thesestatistics to International Energy Agency (IEA) statistics it is noticed that thermal powergeneration in both sources is the same. The oil input in thermal power plants was also foundto be the same. For coal input a difference was found of 10–12% higher. The reason for thiscould be different conversion factors to convert from tonne coal to energy. IEA uses e.g. aconversion factor of 18 GJ/tonne coal for India for 2003, while Ministry of Statistics andProgramme Implementation(MOSPI) uses a conversion factor of 16.6 GJ/tonne coal basedon GCV for 2003 (16.1 GJ/tonne based on NCV, with 0.97 conversion from Gross calorificvalue (GCV) to Net calorific value (NCV)). This explains the difference in higher coal inputin IEA statistics. The Energy and Resource Institute (TERI) gives even lower values for coalinput for power generation than; 4.3 vs. 4.5 PJ in 2001. IEA gives 5.0 PJ for 2001. In thisanalysis we will use the fuel input data for coal (corrected to NCV) from to calculate theenergy efficiency for coal-fired power generation. 16
  17. 17. Weighted average efficiency of fossil-fired power productionGLOBAL POWER SECTOR ANALYSIS80% of global population lives in developing areas. Of the 6.0 billion populations, in theOrganisation for Economic Co-operation and Development (OECD) countries the totalnumber is approximately 1.2 billion. As regards energy consumption, 16% of the globalpopulation in the OECD countries would consume, by the year 2030, more than 40% ofenergy and the balance about 84% of the global population in the non-OECD areas wouldconsume a little less than 60% of the total energy consumed in the world. World electricitygeneration rose at an average annual rate of 3.7%, greater than the 2.1% growth in totalprimary energy supply. De-regulation in areas of the global energy markets has led to fierce competition.Now more than ever electricity has to be produced at a lower cost with many countriesimposing ever tightening environmental legislation to reduce the impact power generation hason the environment. The enormous challenges are recognised in providing electricity asefficiently as possible and strive to develop technology to meet your needs. Collectively,developing countries use 30% of the worlds energy, but with projected population andeconomic growth in those markets, energy demands are expected to rise 95 %. Overall globalconsumption is expected to rise 50 % from 2005 to 2030. As mentioned earlier, coalconstitutes the most dominant constituent of the energy sector. Different types of coal powerplants contribute by 50% to the total global power generation at the end of the time horizonPower Sector Reforms worldwideMany countries are currently working to create more competitive environments for electricitymarkets in order to promote greater efficiency. These efforts affect  Regulation,  Funding and capital raising,  Industrial structure, and  Ownership. 17
  18. 18. Regulatory and Structural Changes  Regulatory changes can lead to the elimination of monopolies and reduction of governmental intervention in the electric power industry.  Reforms include the reduction of price controls and tariff restrictions and the elimination of subsidies. Structural changes are characterized by the division of the industry into its three major functions - generation, - transmission and - distribution and a commitment from governments to ensure that independent producer and other power-related enterprises will have full and fair participation in each of these functions.  Ownership trends include an emphasis on privatization and commercialization to attract private capital from foreign and domestic sources.Privatization and Funding pattern of the Power ProjectsMany non-OECD countries facing high electricity demand growth favour privatizing theirelectric power sectors and opening their markets to foreign firms. This approach can free uplarge amounts of public capital, which can be used instead for social programs. In addition,private ownership allows managerial accountability, market efficiency, and better customerservice while reducing government deficits and international debt. The reasons for electricutility privatization are numerous and vary from country to country. Some of the moreevident reasons include the following:  Raising revenues for the state through asset sales  Acquiring investment capital  Improving managerial performance  Moving toward market-determined prices  Technology transfer  Reducing the frequency of power shortages  Reducing the cost of electricity to consumers through efficiency gain  Taking advantage of creating national and regional power grids, andPrivatization of formerly state-owned electric power assets in developing countries hasopened up enormous investment opportunities. For foreign investors, investment in overseaselectricity assets offers opportunities to achieve potentially higher returns and, in many cases,to realize greater growth opportunities than are available at home. In many parts of the world, financial capital may be a greater resource constraintthan primary energy supplies. It has been estimated that over the period 1993 to 2010investment to sustain the power generation infrastructure will require from 0.1 to 0.2 per centof gross domestic product (GDP) in the industrialized countries, 0.6 to 1.1 per cent of GDPin China, and as much as 1.0 to 1.6 per cent of GDP in India. In the industrialized world, restructuring of electricity markets is seen as a way toenhance competition, bringing market forces to bear for the benefit of consumers. In thedeveloping world, privatization is seen as a way to attract foreign capital for investment in theenergy infrastructure while preserving public capital for other important projects.Private power is beginning to make large contributions to power sectors in developingcountries. Private power is introducing new sources of financing to developing country powersectors, providing new services, and creating competitive power markets. 18
  19. 19. Nearly two-thirds of all the capital raised for new private power projects wasprovided under Project finance structures, in which project cash flows and assets, rather thansponsors balance sheets, provide security to lenders. From a regulatory perspective, a strongcommitment to private power is a key determinant of PPF activity i n a country. Structurallypower project finance has involved largely build-own-operate (BOO) project structures andlong-term contract. Merchant power plants are rare. The vast majority of debt has involveddirect finance or credit enhancement from export credit agencies and multilateraldevelopment banks. Development times average two to three years, and is less in countrieswith PPF experience. The private sector uses a variety of mechanisms for managing risks. Inhalf of the projects examined it relied on central government guarantees. In the rest, it reliedon alternative mechanisms such as government loans, public insurance, local governmentsupport, and strong commitments by utility off-takers. Private power continues to face manychallenges in developing countries. Protracted contract renegotiations and a lack of adequategovernment risk assumption may erode investor confidence and restrain private investments.Continued growth may require greater private debt capital risk taking. The primary drivers forthese FDIs have been:  Competition and anti-trust regulations, preventing major acquisitions in the domestic markets.  The opening up of the domestic markets to international players, as a result of the restructuring in a number of countries.  The stagnation of electricity demand in most developed markets, due to improved energy efficiency.  The poor financial health of the power industry in many countries, which has resulted in the opening up of many domestic markets to foreign private investments.  A pressure on profit margins, as a result of increased competition.COMPARISON OF THE CHINESE AND INDIAN POWER SECTORThe comparison of India was made with China because, India, when just independent, wasmuch similar to China in terms of demographics and infrastructure availability. China hassurged far ahead of India in its quest to satisfy the demand for power. China and India havesimilar socioeconomic characteristics but distinct political setups. Unlike other emergingeconomies, these countries also constitute two huge, unexplored markets for consumerproducts. Both China and India are more heavily dependent on coal for electricity generationthan are the other developing Asian nations. China has been a role model, among thedeveloping countries, in carrying out reforms in various sectors in infrastructure.The Demand – Supply SituationGrowth in electricity generation averaged 8% per annum during the last 15 years.Nonetheless, electricity supply did not keep pace with growth in demand.Strong projected growth in electricity demand in China results from two factors.  Increased need for rural electrification.  The Chinese government is working to keep electric power growth in line with economic growth.Energy Consumption Projections for China  If electricity demand grows, as expected, at 8 to 9% per annum, China would need to add about 18-20 GW of capacity per year10.  Even with a growth rate of 7% (low-case scenario), the growth in China‘s power generating capacity will be about 16 GW per year. This still accounts for more than 20% of the world‘s new capacity. 19
  20. 20.  Under the base-case scenario, the projected mix of generating capacity indicates that the share of thermal power will remain stable at about 75-78%. This translates into an addition of about 15,000 MW/year to thermal capacity or an investment of approximately $15 billion/year in thermal power.  More than 90% of this investment will be directed to coal-based power generation. Given the projected huge increase in overall energy usage by 2020 (162 per cent), a massive investment in other energy infrastructure.By 2020 China will be consuming as much electricity as the U.S., although the latter willachieve that level through a modest 33 per cent increase over the 23-year time frame.POWER SECTOR REFORMS IN CHINAThe Chinese Ministry of Electric Power (MoEP) began reorganization and it had beencompletely dismantled now. Along with many other ministries, its commercial and regulatoryfunctions have been divided and now rest in the hands of several different Chineseorganizations. State Power Corporation of China (SPCC): As part of the ChineseGovernments efforts to "separate government functions from enterprises" the SPCCrepresents a wholly state-owned investment that controls approximately 80 per-cents of allpower assets in China. Encouraging the localization of production is this market has been akey objective of the Chinese Government. SPCCs Main Duties in this Respect are:  Formulating Chinas electric power development strategies, legislation and policies, including investment policy, technical policy and major energy production and consumption policies.  Formulating unified energy industry planning in collaboration with the State Development Planning Commission and other governmental agencies like CEC.  Supervising the implementation of related national policies, decrees and plans.  Providing services to regional and provincial electric power enterprises.Reform policies adopted by the Chinese GovernmentChina has a sound energy / electricity conservation record among developing countries.Various measures to improve the efficiency of electricity use have been introduced inattempts to reduce the need for new generating capacity, and these measures have beensuccessful, as is indicated by the low ratio of 0.86 for the elasticity of growth in electricitydemand to GDP growth achieved during the last decade.  Faced with fiscal revenue constraints, the government is now promoting a shift in the energy conservation programs to rely more on market-based incentives and introduce innovative and commercially based contractual and financing mechanisms.  The Government is also encouraging efficient energy use through reliance upon energy price increases.  Significant progress has been made in many ways to simplify the tariff, improve its structure and bring it into line with costs.  Consumer prices for electricity now reasonably reflect economic costs in many provinces as time of use pricing is being done.Tariffs in Chinas power sectorBoth Provincial and Central authorities have purview over the formulation and approval ofelectric power tariff rates. Tariff rate formula and application with regard to the grid system,is an area expected to change with the issuance of new regulations introducing competitioninto the grid. There are four kinds of tariffs.  State Base Tariff: It is also known as the catalogue price and generally only pertains to older, state-financed plants. 20
  21. 21.  New Plan Tariff: It has a very complex formula and it applies to post-1985-built plants).  Additional Quota Tariff: It varies from province to province and is based on the state government‘s decision.Financing in Chinese Power SectorThe International Energy Agency (IEA) estimates China will need to invest 2.765 billion intothe industry by 2030 to cope with demand – an estimated one quarter of the total globalenergy sector investment within that period.  China has its own special set of barriers: investment controls incorporation rules, usury laws, and lending rules, as well as unclear and changing CDM regulations.  All profits from future generation were remitted back to the government. Chinese banks began to provide long term loan.  Foreign direct investment has played a critical role in financing the expansion of China‘s electric power infrastructure and is expected to play an even more important role in the future despite being restricted—for now—to strictly joint ventures involving less than 50 per cent ownership.  Private investors have been involved in developing power projects through three main methods: - Joint ventures (JVs), - Initial public offerings (IPOs) on stock exchanges, and - BOT agreements.Criteria for approval of foreign capital  The current power demand in the proposed region  The financing costs with regards to the international markets  Capability of the project to bear the tariff rate  Projects financial structure  Foreign exchange balancing planScope of Chinese power plants to utilise foreign capital  Construction of new thermal (including co-generation) power plants.  Construction of new hydroelectric plants (including pumped storage units).  Construction of new nuclear power stations.  Power generation projects involving renewable energy or new technology.  Expansion of or the technological renovation of an existing power plant.Rolling exploitation mechanismA "rolling exploitation mechanism" means that the income from the first plant does not needto be used for repayment of loans, but can be used for continued development of other powerprojects. It is being employed for both hydropower and nuclear power to provide financingfor new projects.FDI IN CHINAS POWER SECTORTo reduce chronic electricity shortages and enhance the efficiency of Chinese power plants,China opened its doors to foreign direct investment (FDI). The volume and characteristics ofFDI in Chinas power sector, its impact on energy efficiency, and the factors that limit thisimpact have the following characteristics: The volume FDI in Chinas power sector fell below target during 1995 - 2000 by a substantial margin, most likely because of persistent institutional barriers to FDI. 21
  22. 22.  To avoid the lengthy central government approval process for large plants and to minimize risk, early FDI tended to be in small-scale, gas- and oil-fired plants using imported equipment and located in coastal provinces. However, more recent FDI tends to be in larger coal-fired plants that use more Chinese equipment and tends to be located in the north as well as the east. FDI in china is likely having a significant positive impact on energy efficiency. Almost a third of the 20 FDI plants in our survey sample use advanced efficiency enhancing generating technologies, and a fifth are cogeneration plants. Institutional bias in favour of small-scale plants has hampered the contribution of FDI to energy efficiency and Uncertainty associated with the approval process of FDI projects, electricity sector regulation, and the risk of default on power purchase contracts.The institutional arrangements available for FDI in the Chinese power sector are:  Cooperative joint ventures, wholly-owned foreign ventures,  equity joint ventures,  build operate- transfer (BOT) projects,  build-operate-own (BOO) projects,  commercial loans, and  Stock and bond investments in existing Chinese power enterprisesLEARNING FOR INDIAFinancing of power projects Rolling Exploitation Mechanism and BOT (Build Operate Transfer) Prices for the generation from all new plants are now set by contract to cover financing and operating costs, on a plant-by-plant basis, and rolled into the average power tariff.Restructuring of Power Sector Decision and Policy makers  Divesting the amount of decision making closer to the state or province level.  The commercial and regulatory frameworks have been divided amongst various entities capable of doing certain things best.  Structured power monolith, Reforms in the state enterprise and Creation of electricity markets. Directing investments to the adoption of more energy-efficient measures instead of merely increasing the total energy supply will be crucial to meet this challenge.  Energy conservation for both economic and environmental terms by transmitting to the users more realistic and effective price signals. Physical quota systems, financial support, R&D, information dissemination  Setting up large scale plants and discouraging the setting up of small scale plants which won‘t be efficient generators as well as won‘t have adequate capital investment to take pollution control measures.Environmental considerations should be taken into account  Stressing upon using clean coal technologies.  R and D efforts in the development of clean coal technologies.CAPITAL BUDGETING FOR A DUMMY POWER PROJECTA dummy power project was given with the life of 25 years starting from April-2011. Someassumptions for the input values were given by NTPC (shown in the table below). Usingthese assumptions following parameters were calculated: A. Primary and Secondary Fuel Cost B. Depreciation, return on equity and Operations & Management (O&M) Cost C. Working Capital and Interest on working Capital 22
  23. 23. D. Term Loan and Interest E. Average fixed cost F. Tariff G. Profit and Loss statement H. Cash Flow statement and NPV, IRRA. Cost of Primary and Secondary Fuel 23
  24. 24. B. Depreciation, return on equity and Operations & Management (O&M) Cost 24
  25. 25. C. Working Capital and Interest on working Capital 25
  26. 26. D. Term Loan and Interest 26
  27. 27. E. Average fixed cost 27
  28. 28. F. Tariff 28
  29. 29. G. Profit and Loss statement 29
  30. 30. H. Cash Flow statement and NPV, IRR 30
  31. 31. From the Table- H, I got the values for capital budgeting as follows: IRR 11.40% WACC 10.41% NPV 160.44 Since, the value of NPV is positive also the value of IRR is more than WACC, so NTPC should accept this project. Cash Flow 1500.00 1000.00 500.00Rs. Crores 0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 -500.00 -1000.00 -1500.00 Time Period Net Cash Flow captial expenditure Gross Cash Accruals Cash from operations cash from invseting cash from financing POWER CAPACITY ADDITION AND CAPITAL REQUIREMENT The low per capita consumption of electricity in India presents significant potential for sustainable growth in the demand for electric power in India. The total energy consumption in India is estimated to grow to approximately 1,280 million tonnes of oil equivalent ("Mtoe") by Fiscal 2030. This implies growth of 3.5% CAGR in Indias energy requirement over the next 25-30 years, reflecting the huge potential for investments in the energy sector in India. Projecting the Investment needed to meet the target.  Installed generation capacity to increase by about 60,000 MW (from 125,000 MW to 185,000 MW)  Investment program estimated to cost US$100 billion - Generation – US$60 billion (Rs. 2,70,000 crores) - Transmission & Distribution – US$40 billion (Rs. 1,80,000 crores)  In addition: - About 20,000 MW of existing thermal capacity to be rehabilitated and modernized - Distribution networks to be upgraded and MIS strengthened Power target and capital requirement 31
  32. 32. FINANCIAL STRATEGIES AND FUND RAISING BY NTPCFund MobilisationLeveraging strong ratios to raise debt at optimal rates:A. Capital Structure  New projects to be financed with Debt equity ratio of 70:30.  Internal accruals sufficient to finance equity portion of the scheduled investment in NTPC  Deployment of equity in Subsidiaries/JVs selectively – preferably with control retention.B. Debt Funding  NTPC has the ―Most Favoured Borrower‖ status due to: - Low gearing and healthy coverage ratios - Debt servicing ability to remain strong due to certainty of revenue based on the cost plus regime.  Long term debt (term loans/bonds) preferred to match project cash flows-to be realised from domestic/international markets.  Projects executed by subsidiaries and JVs to be financed under projects finance route.C. 2010-2011  Total outlay Rs. 22350 crore, Rs. 12818 crore required as debt. For Sources of fund [Exhibit: 9] and Application of fund [Exhibit: 10] 32
  33. 33. CALCULATION OF COST OF CAPITALThe Weighted average cost of capital has been calculated as on 31st march 2009. We havetaken the current annual report for the calculation i.e. for the financial year ended Mar 2009.The calculation of cost of capital requires the following steps1) Calculation of Cost of equity2) Calculation of cost of debt3) Calculation of cost of retained earningsCALCULATION OF COST OF EQUITYThe cost of equity capital for a particular company is the rate of return, both dividend andcapital gains, on investment that is required by the companys ordinary shareholders. Thereturns are expected future returns, not historical returns, and so the returns on equity can beexpressed as the anticipated dividends on the shares every year in perpetuity. The cost of equity reflects the opportunity cost of investment for individualshareholders. It will vary from company to company because of the differences in thebusiness risk and financial or gearing risk of different companies.Cost of equity is calculated by using CAPM approach in which: re = rf + (rm ± rf)*βWhere,rf = Risk free return (Obtained from 364 days Treasury bill of Government)rm = Average return of marketβ = Systematic Risk Factor 33
  34. 34. 34
  35. 35. Market risk premium It is the excess of market return over the risk free return. We have calculated the Market return Using SENSEX values for the last 5 yrs. The market return is approximately 26.19% CAPM Model Rf = 4.45% Rm = 26.19% Beta (NTPC) =0.76 Cost of equity = Ke Ke = Rf + β (Rm-rf) Ke = 4.45+0.76(26.19-4.45) Ke = 20.97% Hence the cost of equity is calculated as 20.97% CALCULATION OF COST OF THE DEBT The cost of Debt has been calculated as follows: DEBT COMPONENT WEIGHTS COST WEIGTH X COST10.00% Secured Non-Convertible 3000 3000/89696 10.00% 0.0033Taxable Bonds of Rs. 10,00,000/- =0.033each with five equal SeparatelyTransferable Redeemable Principal Parts (STRPP)redeemable at par at the end of the 6th year and inannual instalments thereafter up to the end of 10th yearrespectively from 5th September 20019.55% Secured Non-Cumulative Non-Convertible 6750 6750/89696 9.55% 0.0072Taxable Redeemable Bonds of Rs. 10,00,000/- each =0.075redeemable at par in ten equal annual instalmentscommencing from the end of 6th year and up to the endof 15th year respectively from 18th April 20029.55% Secured Non-Cumulative Non-Convertible 6750 6750/89696 9.55% 0.0072Taxable Redeemable Bonds of Rs. 10,00,000/- each =0.075with ten equal Separately Transferable RedeemablePrincipal Parts (STRPP) redeemable at par at the end ofthe 6th year and in annual instalments thereafter up tothe end of 15th year respectively from 30th April 20028.00% Secured Non-Cumulative Non-Convertible 1000 1000/89696 8.00% 0.0009Redeemable Taxable Bonds of Rs. 10,00,000/- each =0.011redeemable at par on 10th April 20188.48% Secured Non-Cumulative Non-Convertible 500 500/89696 8.48% 0.0005Redeemable Taxable Bonds of Rs. 10,00,000/- each =0.006redeemable at par on 1st May 20235.95% Secured Non-Cumulative Non-Convertible 5000 5000/89696 5.95% 0.0033Redeemable Taxable Bonds of Rs. 10,00,000/- each =0.056 35
  36. 36. with five equal Separately Transferable RedeemablePrincipal Parts (STRPP) redeemable at par at the end of6th year and in annual instalments up to the end of 10thyear respectively from 15th September 20037.50% Secured Non-Cumulative Non-Convertible 500 500/89696 7.50% 0.0004Redeemable Taxable Bonds of Rs. 10,00,000/- each =0.006redeemable at par on 12th January 20197.552% Secured Non-Cumulative Non-Convertible 5000 5000/89696 7.552% 0.0042Redeemable Taxable Bonds of Rs. 20,00,000/- each =0.056with twenty equal Separately Transferable RedeemablePrincipal Parts (STRPP) redeemable at par semi-annually commencing from 23rd September 2009 andending on 23rd March 20197.7125% Secured Non-Cumulative Non-Convertible 10000 10000/89696 7.7125% 0.0086Redeemable Taxable Bonds of Rs. 20,00,000/- each =0.111with twenty equal Separately Transferable RedeemablePrincipal Parts (STRPP) redeemable at par semi-annually commencing from 2nd August 2010 andending on 2nd February 20208.1771% Secured Non-Cumulative Non-Convertible 5000 5000/89696 8.1771% 0.0046Redeemable Taxable Bonds of Rs. 20,00,000/- each =0.056with twenty equal Separately Transferable RedeemablePrincipal Parts (STRPP) redeemable at par semi-annually commencing from 2nd July 2011 and endingon 2nd January 20218.3796% Secured Non-Cumulative Non-Convertible 5000 5000/89696 8.3796% 0.0047Redeemable Taxable Bonds of Rs. 20,00,000/- each =0.056with twenty equal Separately Transferable RedeemablePrincipal Parts (STRPP) redeemable at par semi-annually commencing from 5th August 2011 and endingon 5th February 20218.6077% Secured Non-Cumulative Non-Convertible 5000 5000/89696 8.6077% 0.0048Redeemable Taxable Bonds of Rs. 20,00,000/- each =0.056with twenty equal Separately Transferable RedeemablePrincipal Parts (STRPP) redeemable at par semi-annually commencing from 9th September 2011 andending on 9th March 20219.37% Secured Non-Cumulative Non-Convertible 5000 5000/89696 9.37% 0.0052Redeemable Taxable Bonds of Rs.70,00,000/- each with =0.056fourteen Separately Transferable Redeemable PrincipalParts (STRPP) redeemable at par semi-annuallycommencing from 4th June 2012 and ending on 4thDecember 2018 36
  37. 37. 9.06% Secured Non-Cumulative Non-Convertible 5000 5000/89696 9.06% 0.0051Redeemable Taxable Bonds of Rs.70,00,000/- each with =0.056fourteen Separately Transferable Redeemable PrincipalParts (STRPP) redeemable at par semi-annuallycommencing from 4th June 2012 and ending on 4thDecember 201811.25% Secured Non-Cumulative Non-Convertible 3500 3500/89696 11.25% 0.0044Redeemable Taxable Bonds of Rs.10,00,000/- each =0.039redeemable at par in five equal annual instalmentscommencing from Nov 2019 and ending on Nov 202311% Secured Non-Cumulative Non- 10000 10000/89696 11% 0.0122Convertible Redeemable Taxable Bonds of =0.111Rs.10,00,000/- each redeemable at par on 21stNovember 20188.65% Secured Non-Cumulative Non-Convertible 5500 5500/89696 8.65% 0.0053Redeemable Taxable Bonds of Rs.10,00,000/- each =0.061redeemable at par on 4th February 2019Foreign currency term loans 7180 7180/89696 0.080 =0.080others 16 16/89696 0.0002 =0.0002COST OF DEBT= 0.1621= 16.21% Therefore, the cost of debt has come out to be 16.21% CALCULATION OF COST OF RETAINED EARNINGS Cost of retained earnings is the residual of an entitys earnings over expenditures, including taxes and dividends that are reinvested in its business. The cost of these funds is always lower than the cost of new equity capital, due to taxes and transactions costs. Therefore, the cost of retained earnings is the yield that retained earnings accrue upon reinvestment. There are basically three approaches to calculate the cost of retained earnings. One way is CAPM (Capital Asset Pricing Model). Another way is the bond yield plus risk premium approach, in which we take the interest rate on the companys own long term debt and then add between 5% and 7% which is more of a kind of guessing and thus is not very accurate. A third way is the discounted cash flow method, in which we divide the dividend by the price of stock and add the growth rate. It again involves a lot of approximation. Thus in order to get the most accurate fit we have utilized the CAPM approach for calculating the cost of retained earnings. This entails calculating the cost of capital using the CAPM approach. We first estimate the risk-free rate (Rf) as well as the market rate of return (Rm). The next step is to estimate the company‘s beta (β), which is an estimate of the stock‘s risk. Inputting these assumptions into the CAPM equation, we can then calculate the cost of retained earnings which is listed as follows- 37
  38. 38. Cost of retained earnings = Rf + β*(Rm - Rf)The main difference between the cost of equity and cost of retained earnings is the floatationcosts. Since, flotation cost is not available for this calculation; we will take cost of retainedearnings as equal to cost of equity. Cost of equity we have already calculated above using theCAPM, which is given by the following equation:Cost of Retained Earnings = 4.45+0.76(26.19-4.45)Cost of retained earnings = 20.97%CALCULATION OF WEIGHTED AVERAGE COST OF CAPITALAfter obtaining the costs of various sources, the total cost of capital to the company would bethe weighted average cost of capital. In the weighted average cost method, weights areassigned to each source, depending on the proportion they contribute in the overall capitalstructure. Depending on that, the cost is multiplied by that weight, to arrive at weighted cost.Then all these weighted costs are added together to achieve at the weighted average cost ofcapital, which is the actual cost of capital to the company. Also to take the part of capitalassigned by each source, market value is taken rather than the book value. This is to considerthe market risks associated with various types of costs, like shares etc. The following tableshows the proportion of each source to the capital structure, its cost and weights.Weighted Average Cost of Capital = ∑ W i*Cost iWhere, Wi is weight assigned to ith Cost, where costs are of debt, equity, preference sharesand retained earnings. Substituting the values in the above formula, from the table we get.Weighted Average Cost of Capital = (0.124*20.97) + (0.135*16.21) + (0.741*20.97)Weighted Average Cost of Capital = 0.026 + 0.022 + 0.155 = 0.203 or 20.3%From the above calculations we can see that the cost of capital of NTPC LTD. comes out tobe 20.3%.CAPITAL BUDGETING MODEL USING THE EXCELAs per the additional Power capacity requirement and the investment needed to meet thetarget. First, I had to consider some of the assumptions for the input parameters as per theindustry standard and the regulations in force. On the basis of these assumptions as inputparameters, First, I calculated various costs related to: Fuel efficiency, Operational efficiencyand Functional efficiency.Finally for Capital Budgeting analysis, I have considered two cases considered-A. GDP growth rate is 8%B. GDP growth rate is 9% 38
  39. 39. 39
  40. 40. 1000000 Power Requirement 800000Power in MW 600000 400000 200000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Time Period Addional power requirement(per year) cummulative power requirement Financial Ratios 2.50 2.00 1.50 Ratios 1.00 0.50 0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Time Period Debt to Assets ratio Equity to asset ratio Debt to Equity ratio 40
  41. 41. 41
  42. 42. Power Requirement 1500000Power in MW 1000000 500000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Time Period Additional Power Per year Cummulative Power amount Financial Ratios 2.50 2.00 1.50Ratios 1.00 0.50 0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Time Period Debt to Asset ratio Equity to asset ratio Debt to Equity Ratio 42
  43. 43. CHALLENGES AND OPPORTUNITIES FOR NTPC  Considering the existing supply-demand gap and the expected increase in per capita consumption (in view of the overall GDP growth targets for the economy), the 16th Electricity Power Survey has projected a peak load demand of 157,107 MW and energy demand of 975 billion kilowatt-hours by the end of March 2012 (i.e., end of the 11th Plan).  To meet this projected growth in peak demand and account for transmission and distribution system losses, India will require 212,000 MW of generating capacity by 2012.  To accomplish this ambitious goal, both the public and private sector will be needed to substantially contribute to generation and high-voltage transmission capacity.  Given the limited SEB resources and limited success of independent power producers in achieving financial closure of projects, the onus of adding to the country‘s generation capacity rests largely with NTPC.  NTPC‘s ability to develop and construct large projects reasonably within budget and on time is fundamental to India‘s economic growth targets.  The focus of power sector reforms in the past decade has been on reforming the state regulatory framework and improving the state transmission and distribution networks. On these accounts, moderate progress has been made.  However, in the process, power generation capacity and interstate transmission investment programs have continued to suffer from relatively inadequate attention. Capacity additions have been made, but not enough to meet demand.  Private sector investment in generation to complement public expenditures has been very limited. Recent announcements by the Government to promote the ultra-mega power projects (a series of 4,000 MW power generation complexes to be awarded through competitive bidding by the end of 2006) recognize this on-going challenge.  The Government is also undertaking plans through Powergrid to develop a national grid by 2012, which will involve construction of 60,000 kilometres of high voltage lines to evacuate 100,000 MW of power from new generating stations.  Implementation of the 2003 Electricity Act could result in the development of a more competitive market for power in India, but the challenge will be to sustain the pace of national and state reform and the relative financial recovery of the sector.  The Electricity Act has opened up several opportunities for existing power sector players such as NTPC, including direct supply to large customers, retail supply, distribution, power trading, etc.  In such a competitive environment, NTPC will continue to benefit from its extremely competitive tariffs, multi-location facilities (and diverse customer base, reducing the credit risk of any one particular off taker), and the ability to sell directly to creditworthy bulk consumers who are allowed open access.RESULTSAs per the objectives and goals mentioned earlier, I got the following results:  Indian power sectors needs to bring several reforms from Operational, Functional and Human resource to Financing of the Power Projects.  The given dummy project for capital budgeting gives the positive NPV as well as IRR is more than the WACC, hence that project should be accepted, and still there are some risks that have to be incorporated in analysis like Political, Environmental and Social before actually deciding to implement the project.  Weighted average cost comes around 20.30% for financing the power project. 43
  44. 44.  As per demand of power and needed investment projection (Section: POWER CAPACITY ADDITION AND CAPITAL REQUIREMENT), India need to encourage FDI and private participation to meet the huge fund requirement. And should take it as the opportunity due to certainty of returns.  Further, due to limited availability of fossil fuels like Oil and Coal, Indian Power Sector also need to look for alternate and viable options considering the environmental consequences as the long term measures towards the all-around developmentCONCLUSION AND SUGGESTIONSIndia targets 9 – 10% economic growth rate in a sustainable manner over next 10-15 years.Adequate availability of energy would be sine–qua–non for this objective to materialize.Substantial expansion of capacities in coal, petroleum, gas and electricity is, therefore, thethrust of the Government policies and programmes. Ultimate goal is to develop these marketsand facilitate, through various policy initiatives, their matured functioning in a competitivemanner. Skilful development of road maps to reach the goal is a challenge. During the periodof transition, therefore, regulatory interventions to harmonize the interests of investors,developers and consumers, is an approach, which is being pursued by various energy groups.In most cases, development of energy sector, in various segments, has happened undergovernment-controlled organizations. Over last 10-15 years, private investments are beingencouraged, particularly in petroleum, natural gas and power. While India is fully committedto develop and expand its energy markets, it is equally committed to ensure environmentalsafeguards. Using latest cost effective technologies in all the energy segments forms animportant part of policy and strategy.Greater corporate finance support will make it possible to raise private capital for independentpower financing from wider, deeper, and cheaper sources. But innovative strategies will berequired from governments, lenders, investors, and power sector enterprises alike. Thefollowing strategies are worth considering:  Encourage the formation of large, well-capitalized independent generation companies. Purely private and quasi-private variants of the Huaneng merchant generation model in China might be workable in large power systems. Healthy competition should be engendered through prudent regulatory reviews of the market power of the IPP in a particular system.  Encourage divestiture of commercially operating (and perhaps underperforming) generation plants by incumbent utilities to IPP developers. These sales should be conditional on the purchaser‘s commitment to making specified investments. By making positive revenue streams available to IPP developers immediately, such transactions would give them the financial base to invest in multiple plants.  In IPP prequalification under competitive bidding, give greater weighting to IPP developers with businesses listed on a stock exchange and to those with well- capitalized balance sheets. The strategic goals of publicly held entities are likely to be more transparent and longer term because of these entities‘ obligations to public shareholders.  Encourage project sponsors to use balance sheet support for subordinated debt and quasiequity portions of the project financing plan in order to increase corporate financing. This strategy would ease the overall financing costs of projects and could be a transitional strategy for meeting the huge financing needs for IPPs in developing countries. 44
  45. 45. Appendix A Exhibit: 1 45
  46. 46. Exhibit: 2Exhibit: 3 46
  47. 47. Exhibit: 4Maharatna Status- More power to empower 47
  48. 48. Exhibit: 5 Exhibit: 6Operational performance 48
  49. 49. Exhibit: 7 49
  50. 50. Exhibit: 8 50
  51. 51. Exhibit: 9Exhibit: 10 51
  52. 52. Exhibit: 11 52
  53. 53. 53
  54. 54. 54
  55. 55. Appendix BCASE LET - NTPC: CURRENT STATUS, FUTURE DEMANDS AND INVESTMENT NEEDED On May 5th, 2011, a hot day, as it usually it happens in Delhi or other North IndianPlaces during summer season, Power Management Institute (PMI), management trainingwing of National Thermal Power Corporation (NTPC) at Noida (Uttar Pradesh, India) hadgot new interns for their MBA training at NPTC from IIT Kharagpur were coming to havetheir first glimpse of NTPC and future corporate life. All people were informed to report toProf. Dash, a senior and very renowned faculty at PMI Noida. After sometime, Prof. Dash called everybody and gave short introduction of self,the PMI (NPTC) and the various projects in Indian Power Sector being carried out. Later, heasked everybody to give their details about profile and background knowledge before askingabout the choice of projects. Arvind Mahor, an intern among them, told of his profile asfinance and expressed his desire to work in Capital Budgeting and Capital Structuring atPower Projects. Prof. Dash asked him some questions in the area of Corporate Finance anddiscussed with him about the demand and supply of power scenario in India and focused onthe 12th Five Year Plan and its target by 2017 in energy sector. He told him to carry out withthe project in “Capital Budgeting, Capital Planning and Comparative study of Power Sectorfocusing on China and India and proposing the ways for the improvements”.INDIAN POWER SECTOR STATUSThe power sector in India is mainly governed by the Ministry of Power. As far as generationis concerned it is mainly divided into three sectors these are Central Sector, State Sector, andPrivate Sector. Due to India‘s economic rise, the demand for energy has grown at an averageof 3.6% per annum over the past 30 years. At the end of April 2011, the installed powergeneration capacity of India stood at 174361.40MW. The total thermal capacity, includinggas stations and diesel generation accounts for about 64.27% of installed capacity of thecountry followed by hydro capacity at 23.13%. Nuclear stations account for 2.86% and thebalance 9.74% is contributed by Renewable Energy Sources [Exhibit: 1]. Still, Power SectorUnits (PSUs) are the measure players, NTPC is one of them.PROFILE OF NTPCNTPC Limited (formerly known as National Thermal Power Generation Limited), Indiaslargest power company, was set up in 1975. It has emerged as an „Integrated Power Major‟,with a significant presence in the entire value chain of power generation business. NTPC is aGovernment-owned entity with 89.5% of its paid-up capital contributed by the Governmentand the balance of 10.5% being held with foreign institutional investors, financial institutions,banks, and the general public. It plans to be a 75,000 MW company by 2017. NTPC isprimarily involved in constructing and operating power stations. It is among the world‘slargest and most efficient power generation companies. NTPC has installed capacity of29,394 MW. It has  15 coal based power stations (23,395 MW),  7 gas based power stations (3,955 MW) and  4 power stations in Joint Ventures (1,794 MW). 55