Gujarat government against second UMPP in the state

The Gujarat government has opposed the setting up of a second ultra-mega power project (UMPP) in the state on the grounds that its present terms of allowing a pass-through of any escalation in the cost of imported coal to consumers through higher tariffs were not acceptable to the state government.

If the Congress-led United Progressive Alliance (UPA) does concede the demand of the Bharatiya Janata Party-ruled Gujarat government, it would have to revisit its marquee policy towards the setting up of UMPPs based on imported fuel.

The state government wants the tariff to be fixed. Its commitment is critical in developing a UMPP as it is required to give a host of clearances ahead of the project being bid-out.As an incentive, states where UMPPs are set up are allowed to use a substantial part of the electricity generated.

At present, Gujarat already has a UMPP. Tata Power Co. Ltd is building a Rs17,000 crore project that will have a generation capacity of 4,000MW in the state at Mundra. Though this is also coal-based, it will not be affected because the state government is opposing the tariff model for only future imported coal-based UMPPs.

“There are two types of costs for fixing the power tariff. One is the fixed cost and the other is the fuel cost. At present there is no cap on fuel cost. We have purchased long-term power at one price. If we can do it, why can’t the government of India get a UMPP on a fixed-price formula?” said Saurabh Patel, state energy and petrochemicals minister, who also oversees the ministries of civil aviation, mines, minerals, planning and finance, among others. “We will not allow the second project to come up if this is not resolved.”

The Gujarat government has tied up 1,600MW of power based on imported coal at a levelized tariff of Rs2.80 per unit with firm year-on-year tariffs. For the Mundra UMPP, Tata Power’s winning bid was Rs2.26 per unit, while Reliance Power Ltd made a winning bid of Rs2.33 per unit for the Krishnapatnam UMPP in Andhra Pradesh.

“Fifteen years down the line, the tariff will go up significantly. Why should we pay for an increase in the price of coal to a foreign country?” Patel said. “We have asked for certain conditions. One of the main conditions is that it can’t be open ended. We have stated this clearly to Central government officials.”

UMPPs follow a competitive tariff-based bidding process in which a special purpose vehicle (SPV) is set up to reduce risk perceptions and increase investor confidence.The SPV takes care of regulatory requirements such as land acquisition and environmental clearances, and transfers these to the winning bidder.

“There is no cap on fuel cost. It will keep on increasing in tandem with coal prices. There is a variation allowed which is as per the Central Electricity Regulatory Commission’s (CERC) formula. CERC will notify how will it vary every six months,” said a person associated with the UMPP bid process, who did not want to be identified.Four alternative sites have been offered for setting up the second UMPP in the state.

“The project size is big and (the project) requires huge investment. For such a large-scale project, there will be very few players willing to take a risk on coal prices,” said Rupesh Sankhe, an equity research analyst at Angel Broking Ltd. “However, in the absence of state government support, it will be difficult to set up such a project.”

India plans to set up seven more power projects that have a generation capacity of 4,000MW at a cost of Rs20,000 crore each, taking the total number of such projects in the country to 16. Large power projects are crucial to India’s efforts to boost generation capacity to meet demand for power in the world’s second fastest growing economy.

India has a power generation capacity of 161,000MW and expects to add 62,000MW by 2012.

Gujarat has an installed power generation capacity of around 11,711MW with no load shedding. It has a per capita consumption of 1,446 kWh (kilowatt-hour), which is twice the national average.