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Life after the ultra-mega power deals
Leena Srivastava & Shahid Hasan
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January 20, 2007

After the unsuccessful attempt to augment generation capacity through Mega Power Projects of nearly 1000 MW capacity in the late nineties, the reincarnation of MPP in the form of Ultra Mega Power Projects of 4000 MW capacity was often viewed by industry watchers with some degree of scepticism.

However, the ministry of power believed that economies of scale combined with the efficient super-critical technology could bring down the tariffs of such projects. The linking of a coal mine for captive purposes would allay the risks of fuel supply and reduce costs further.

This could provide the much-needed relief to SEBs/Discoms from rising generation costs, both in the public and private sectors. In addition, the UMPPs would help the government to reduce the gap in targeted and actual additions to generation capacity.

The efforts made by the MoP and the support provided by the Power Finance Corporation to fill up the shortfall in capacity by developing new UMPPs of significant sizes are commendable. The price bids received in the first round for Sasan (Madhya Pradesh) and Mundra (Gujarat) UMPPs brought forth astoundingly low costs of generation leading to a justifiable sense of near euphoria within both the package and the competitive process.

Apart from revealing the possible costs for power generation, this exercise puts forward other learnings for the energy sector in India, which are elaborated below.

In the development of MPPs, it was feared that Indian developers might take a back seat due to various risks as perceived by the developers. However, the successful tariff-based competitive bidding of Sasan and Mundra should remove any doubts over Indian industry's ability to compete effectively when required.

These bids have laid the foundation for other such projects on a competitive bidding route. While Sasan received 10 proposals (Tata Power Company, REL, Larsen & Toubro, Essar Power, Sterlite Industries, Jindal Steel, the NTPC-BHEL combine, Torrent Power, Lanco, and JaiPrakash Associates), Mundra got six bids (Tata, REL, L&T, Essar, Sterlite, and Adani Exports Ltd).

If we go by the number of bidders for both these projects, it not only indicates a growing appetite on the part of private developers for entering into the business without any fear and concern but also builds up the pressure on other competing developers, which is an essential sign of true competition.

The price bids for both Sasan and Mundra have come as a surprise to industry experts including the public sector generator NTPC. This clearly shows that private developers are not averse to risks in the changed scenario, and are willing to develop big projects at much more competitive prices than their public sector counterparts.

However, these price discoveries (Rs 1.19 per unit for Sasan by Lanco and Rs 2.26 per unit for Mundra by Tata Power) also raise several questions. The most crucial question that comes to mind is to what extent are the price bids of private players predatory in nature and if so, what is the capacity of such organisations to bear possible losses?

For example, in the case of Sasan (pithead based plant), undoubtedly, the price bids received reflect the combined gains from efficient coal mining and electricity production. The possible predatory nature of pricing and its sustainability is presumably being evaluated by the concerned arms of government but the issue of efficiency in coal production and low costs raises a host of other issues.

How much inefficiency exists in our coal sector? What is the cost that the rest of the economy is paying for such inefficiencies? Who is accountable for the imposition of such costs? Clearly, there is a potential for bringing down the costs of electricity generation from existing sources if only we bring about the political will to restructure and reform the coal sector in India.

Natural gas was once considered the preferred fuel for power generation (along the coastal locations) but high volatility in international prices on account of geo-political developments and availability in the recent past has been adversely affecting its competitive edge over other indigenous/imported fuels.

The impasse between gas producers and consumers that has been witnessed in the recent past will only strengthen. While the earlier gas price of $5/MMBTU was considered competitive with coal for power generation, today gas prices would have to be at $1.4/MMBTU to compete with electricity generation from UMPPs.

This is even lower than the current subsidised APM gas price of about $1.8/MMBTU. This entire experience reinforces the need for creating a competitive environment for gas transactions while putting in place regulatory safeguards. If gas producers can get a better value for their product from sales to other consumers and electricity producers can lower their costs by using coal (domestic or imported), then so be it. Any attempt to force "acceptable" prices of natural gas to ensure its consumption for power generation can only be disastrous in the longer run.

The security of payments to the producers has always been a matter of concern to them. For UMPPs, in the event of default by first procurer, and unwillingness of other procurers to buy default power, the same is proposed to be sold in the all- India market through prevailing open access in transmission either directly or through traders.

However, it would require implementation of both intra and inter-state open access in the states. In order to avail the OA without any infrastructural bottlenecks, the transmission system (national grid) needs to be suitably strengthened and congestion points removed.

It is also essential to speed up the pace of efficiency improvement efforts in the states, which have not made any significant progress in this direction. As per the tentative allocations, Madhya Pradesh has a share of 1200 MW (nearly 30 per cent) in the 4000 MW Sasan project and stands 17th in the current overall rankings of states for its performance in the power sector (courtesy CRISIL and ICRA). Therefore, improving the commercial viability of the sector, particularly the distribution segment, should ideally be given a high priority for the successful implementation of such a payment security arrangement.

Lastly, environment implications, if any, of developing such UMPPs should not be ignored. The total emissions (SPM, CO2, SOx, and NOx) from each project of 4000 MW at a single location would be large.

It is hoped that proper "emission dispersion modelling" has been carried out by simulating likely emissions from a 4000 MW project and studying local conditions as part of the Environmental Impact Assessment studies.

Also, project developers continue to make efforts to meet the required "ambient air quality standards" to avoid any adverse local environmental impact, particularly for projects not located near the coast.

On the other hand, the concentration of such a large capacity in one location would facilitate the implementation of carbon capture and storage projects. It is hoped that the developers would plan for such facilities.

Undoubtedly, the country needs power and once more such projects are identified and put on the block, it will intensify the competition in the industry, and the competition would bring significant benefits to consumers. If successful, it could change the face of India's power sector.

Leena Srivastava is executive director and Shahid Hasan is Associate Director at TERI.

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