No Free Mines with UMPPs Anymore

Coal ministry finalising norms for calculating the reserve price for the mines, bidding norms and a model agreement

Bidders for upcoming ultra mega power plants in Odisha and Chattisgarh will have to pay a reserve price to the state government for coal mines that come bundled with the project, ending a long established policy regime in which the mines were allotted free. The coal ministry is in the process of finalizing norms for calculating the reserve price for the mines, bidding norms and a model agreement for which it has received expression of interest from consultants, coal secretary Alok Perti said. The ministry plans to finalize these guidelines by September this year.

The new norms will change the economics of large power projects known as ultra mega power projects as they have till now been awarded based on the electricity tariff, while the mines came free. The coal ministry has been working on a series of policy initiatives to ensure transparency in allocation of coal blocks, particularly to industries like steel and power which are eligible for captive mines. Earlier, blocks were nominated to projects keeping in mind fuel requirement and its location. However, this has been discontinued and the government will now give blocks on captive basis only through the auction route, Mr Petri said.

The decision to charge for the mines comes in the backdrop of the recent controversy over allocation of spectrum in the telecom sector in 2008 at prices fixed in 2001 and a controversy stirred by a leaked draft report of the Comptroller and Auditor General (CAG) over alleged losses incurred by government in giving out mines. The CAG had reportedly alleged that private companies, who had been allotted coal blocks without bidding, might have made windfall gains at the cost of government-owned Coal India.

The supreme court judgment in the 2G case is very clear on how natural resources are to be given out and exploited.We had already adopted some of these measures in the auctioning rules and it will borne in mind for all further allocation, the coal secretary said.ET had earlier reported that the coal ministry has identified 54 coal blocks that would be given out for mining. Apart from selected industries, mines would also be allotted to state-run mining companies, he said.

On the recent controversy over coal allocation to power projects by CIL where the government had to resort to a presidential decree to force the public sector company to fal in line, the secretary said that it was unfortunate. The MOU and risk factors mentioned in the RHP is well documented and a public sector organization has to abide by those norms. It was known to the independent directors as well, he said.

Gujarat offers 500 hectare of land in Junagadh for second UMPP

The government of Gujarat has identified and agreed to allocate 500 hectare of land for second 4,000 mw ultra mega power project (UMPP) in the state. After exploring Jamnagar and Kutch districts in past couple of years, the Central Electricity Authority (CEA) zeroed in on Lodhva village in Junagadh district, better known for Asiatic lions and Geer forest.

On Thursday, a four-member team including CEA chief engineer MS Puri and representatives from Power Finance Corporation and a consulting firm held meeting with government of Gujarat officials in Gandhinagar.

Early this year, Tata Power already commissioned its first imported coal fired 800 mw unit of its UMPP at Mundra. Proposed project in Junagadh district will be the second UMPP in the state. Junagadh UMPP too will be based on imported coal. Contracts for UMPP at Sasan, Tilaiyya and Krishnapatnam have been awarded to Anil Ambani led Reliance Power. However, Reliance Power is yet to progress as per the original plans.

"Only Gujarat has been able to facilitate UMPP commissioning successfully in entire India. And CEA wants to set up yet another UMPP in a bid to achieve its 12 th Five Year Plan targets. We will take some three months before making final offer to the CEA," principal secretary for energy and petrochemicals of government of Gujarat DJ Pandian told ET. Commenting on Gujarat becoming lead buyer for yet another UMPP, Pandian said, "Gujarat has sufficient power generation capacity of 13,500 mw and we are expected to achieve 18,000 mw more in next couple of years. We will opt for becoming a lead buyer only if the tariff is attractive."

It may be mentioned here that Gujarat will avail 1,900 mw of power from Tata once Mundra UMPP becomes fully operational. Tata that was supply power for Rs 2.26 to beneficiary states is seeking escalation of Re 1 following the change in coal price regime in Indonesia. The government of Gujarat is opposing Tata' move.

A top government official with the department of energy said, "Originally, CEA wanted 648 hectare of land for the project. However, we have identified 490-500 hectare of land of which 20% is under private ownership. We have assured CEA team to assist the developers in getting right of use and right of way among other approvals." He added that the CEA has already conducted majority of the studies and it will invite bids once government of Gujarat acquires and allocates the land.

Reliance Power draws utilities' fire as 4 states slap Rs 400-crore fine on Krishnapatnam project delay

Four states have slapped a fine of Rs 400 crore on the Reliance Power entity setting up one of India's largest power projects, worsening troubles for a prestigious venture which has been in a limbo for about nine months. 

Andhra Pradesh, Tamil Nadu, Karnataka and Maharashtra, which have agreements to buy electricity from the 4,000-mw project, have also threatened to encash bank guarantees, terminate power purchase agreements and recover the land allotted for the coal-fired project. 

The stoppage of the project has caused irreparable loss to the electricity procurers, which would ultimately be detrimental to end-consumers of the four beneficiary states, said K Vidya Sagar Reddy, CMD of AP Southern Power Distribution Company, which served the notice on behalf of 11 utilities in the four states on March 15. 

The project is being implemented by Coastal Andhra Power, a special purpose entity set up by Reliance Power. On Tuesday, Reliance Power, a part of the Anil Dhirubhai Ambani Group, moved the Delhi High Court and obtained a stay on the notice to invoke bank guarantees of Rs 300 crore and terminate the power purchase agreements. 

The project in Krishnapatnam in coastal Andhra Pradesh is one of four ultra mega power projects that have been awarded to ease the acute electricity shortage in the country using the advantages of efficiencies of scale and advanced technologies. 

Similar to Tata's Gujarat UMPP 

Reliance Power won three of the bids for projects in Andhra Pradesh, Jharkhand and Madhya Pradesh, but only the project in the southern state relied on imported coal. Similarly, Tata Power, which won the bid to build a 4,000-mw project in Gujarat with imported coal as fuel, has also been struggling. 

A proposal by the Tatas to increase power tariff citing costly Indonesian coal has been turned down by the Gujarat government. It has advised Tata Power, which has already commissioned the first unit of 800 mw, to approach the central government for remedy. 

Reliance Power, too, has been pleading for an increase in power tariff saying its project will become unviable if the rate of Rs 2.33 per unit agreed in 2007 is not changed. The main reason, it says, is that Indonesia, from where it imports coal, has changed rules to benchmark the export price to that prevailing in the international market. 

Andhra Pradesh was to get a 40% share of the electricity while the three other states would share 20% each. The project cost is estimated at about Rs 17,500 crore. 

When Reliance Power stopped work at Krishnapatnam, among the reasons it cited were the Indonesian rule change, the delay in handing over of land by the Andhra Pradesh government and poor soil quality. It has also argued that the Indonesian rule change was beyond its control and could not have been envisaged when it bid for the project. 

"The change in regulations in Indonesia has impacted all imported coalbased projects in India. Reliance Power is committed to the Krishnapatnam project and favours amicable solution to this issue through mutual discussions as provided in the provisions of the PPAs signed with procurers," a spokesman for Reliance Power said. 

The buyers in the four states, on the other hand, say Reliance Power has not adhered to the timelines prescribed for financial closure, fuel supply agreements, awarding contracts, submission of additional bank guarantees and resuming work at Krishnapatnam.

"We will initiate action against them under the provisions in the power purchase agreement," said Ajay Jain, CMD of AP Power Transmission Corporation. 

The Reliance entity has taken refuge under the force majeure clause saying events beyond its control led to an increase in coal costs but the utilities counter that the agreements do not allow for a rate increase influenced by changes in policies by foreign governments. They have also told Reliance Power that fuel and consumables for the project were excluded from the force majeure clause. 

Kameswara Rao, an executive director specialising in energy, utilities and mining at consultancy PwC, said that power producers cannot be left in a limbo because of factors beyond their control and suggested a balanced approach. 

"We have to recognise the realities of global commodity markets and that we cannot guarantee that other countries, including Indonesia, will not change their regulations in future. So both power consumers and developers must take account of political and commercial risk in their calculations," he observed.

Jharkhand to get a second UMPP

The coal-rich Jharkhand state is set to get a second ultra mega power project (UMPP) soon, with the power ministry clearing a project in Deogarh district, sources said.

This will be the seventh UMPP to be launched in the country. Major industry players like Tata Power, Lanco, Adani, JSW Energy, Indiabulls, Jaiprakash Group as well as public sector generator, NTPC, are expected to participate in bidding for the project which would offer a R20,000 crore investment opportunity. Unlike in case of normal power projects, the government is required to tie up key physical inputs like land, coal and water supply besides environmental clearance for the project before transferring it to the successful bidder.

Power Finance Corporation (PFC), the government’s nodal agency for auction of UMPPs, has initiated process for registering a requisite special purpose vehicle (SPV). On Friday, PFC board of directors gave its go-ahead for setting up the proposed SPV, sources said.

“We are going to register SPV for a second UMPP in the state of Jharkhand,” PFC chairman Satnam Singh confirmed to FE.

UMPPs, which have standard capacity of 4,000 mw each, are allocated through tariff bidding route. Reliance Power bagged the first UMPP allocated to Jharkhand – that is, Tilaiya.

Sources said the state government has assured to

provide land and water supply for the project. Coal availability has been confirmed in the Rajmahal coalfield area, which is at a distance of 170 km.

The Centre launched the UMPP scheme in 2005 to expedite capacity addition in the power sector and overcome the rising gap between demand and supply of electricity. It has envisaged development of a total of sixteen projects under the scheme. The government has auctioned four projects at places like Sasan in Madhya Pradesh, Tilaiya in Jharkhand, Mundra in Gujarat and Krishnapatnam in Andhra Preadesh, paving the way for total investment of R80,000 crore.

Meanwhile, bidding is on for two UMPPs, one in Orissa and one in Chhattisgarh. As of now, Jharkhand is the only state where the Centre has given the go-ahead for setting up a second UMPP.

The Planning Commission has recommended a special funding dispensation for UMPPs which need huge investments but carry relative fewer risks for lenders due to their stringent commercial terms relating to power supply.

Power producers voice concern over UMPP equipment sourcing

Private power producers have raised concerns over the Government’s proposed move to make it compulsory to source equipment from indigenous manufacturers by companies setting up ultra mega power projects in the country.

Companies are of the view that this move would further discourage power generation companies to execute ultra mega power projects in the country, which are already fighting environmental hurdles.

“Nobody is in favour of this proposal ... there is no guarantee that this move would lead to decrease in tariff ... you don’t even know whether domestic equipment would be delivered in time or not,” industry sources said.

“We are against any kind of protectionist measures,” they added.

The Ministry of Heavy Industry and Public Enetrprises has proposed to make domestic sourcing of equipment for the ultra mega power projects mandatory, a move to encourage indigenous manufacturers such as BHEL and L&T.

Meanwhile, the Association of Power Producers (APP), a body representing 22 private power companies in the country, feels the indigenous equipment makers have their plates full.

“The domestic manufacturers are already overburdened with existing orders and are not in a position to meet the demand of the project developers,” Mr Ashok Khurana, Director General, APP, said in a letter to the Finance Minister, Mr Pranab Mukherjee.

Indian producers have lacked the capacity to supply power plant equipment at desired schedules, import of equipment for power projects has been a major contributor in the capacity addition in the current plan period, Mr Khurana said.

He said, that in the absence of competition to the domestic power equipment manufacturing sector, there will be a likelihood of price hike and supply timelines also reverting to 60 months as has been witnessed in the past.

Meanwhile, industry sources said that BHEL has never been able to supply equipment in the stipulated timeline and are sceptical whether L&T would be able to do so.

“There is a big question ... can BHEL and L&T supply equipment in 48 months,” sources said.

The power industry is also of the view that any such move would lead to delay in implementation of the projects and would also lead to cost escalation of the UMPPs.

UMPPs are 4,000 MW projects envisaged by the Government to add bulk power capacity in the country.

State-run Power Finance Corporation is the nodal agency for these projects. It has so far awarded four UMPPs to the successful bidders.

Three of the four UMPPs at Sasan (Madhya Pradesh), Krishnapatnam (Andhra Pradesh) and Tilaiya (Jharkhand) have been bagged by Reliance Power. Tata Power is executing the Mundra UMPP in Gujarat.

Competition panel approves Sasan Power merger with Reliance Power

The Competition Commission of India (CCI) has approved the merger of Sasan Power Infrastructure with its parent firm Reliance Power, which is promoted by Mr Anil Ambani.

The competition watchdog, in an order, said: “Based on the facts on record and the details provided in the notice filed under sub-section (2) of Section 6, the proposed combination is not likely to give rise to any adverse competition concern ... the Commission hereby approves the proposed combination.”

The CCI further noted that Sasan Power Infrastructure (SPIL) and Reliance Power (RPL) are not engaged in production, supply, distribution, storage, sale or trade of identical or similar goods or provision of services.

“The activities of SPIL and RPL are also not related at different stages of levels of production chain in different markets,” it said, adding, “Further, the control over the activities carried on by SPIL and RPL before and after the proposed combination remains with the management of RPL.’’

Reliance Power is engaged in the development, construction and operation of power generation projects, and development of coal mines associated with such projects.

The CCI added that in its filing that Reliance Power has stated that Sasan Power (RPL’s wholly owned subsidiary) is currently not carrying on any business activities and is holding investments in the group companies. It is to be noted that SPIL is not implementing the Sasan ultra-mega power project.

The Competition Commission of India is empowered by an Act of Parliament to scan high voltage merger and acquisition deals.

Under the Competition Act, 2002, companies with a turnover of more than Rs 1,500 crore will have to approach the CCI for approval before merging with another firm. Also, companies with combined assets of Rs 1,000 crore or more, or a combined turnover of Rs 3,000 crore or more, would require the CCI’s nod.

UMPPs using local coal may have to buy domestic equipment

In a policy shift, the government proposes to make domestic procurement of power generation equipment mandatory for all bidders of ultra mega power projects (UMPPs) that enjoy the benefit of domestic coal linkage. The move is aimed at helping domestic equipment manufacturers such as Bhel, L&T, BGR Energy, JSW and Bharat Forge. It is also expected to encourage setting up of new manufacturing facilities for electrical equipment in India to cater to the growing demand from the power sector.

The Prime Ministers Office has given its nod for the proposal and the power ministry would now move a note for approval of the Cabinet committee on Economic Affairs (CCEA), a top source in power ministry said.

PMO principal secretary Pulok Chaterjee, who took a meeting on the issue in the first week of February, has set March 31 as the deadline for the power ministry to place its note with comments of all other ministries before the CCEA.

The proposal would be implemented for all the new UMPPs. Power ministry will recommend changes in the tender document for inclusion of mandatory domestic sourcing of equipment for all upcoming UMPP projects. It would immediately impact bidding process Bedabahal UMPP in Orissa and another project in Chhattisgarh. Both the projects are expected top come up for bidding soon and are based on domestic coal. Another project - Sakhigopal in Orissa — could be impacted when its terms are finalised later by PFC.

Reliance Power's two UMPP projects at Sasan and Tilaiya would not be impacted by the decision even though they are based on domestic coal. The project has already been awarded and the company has finalised vendors for the projects.

“The ministry of power will propose the extent and nature of domestic procurement. This could mean that entire procurement may not be mandated from domestic market as everything is not available in the country. We will also see that the condition does not results in escalation of the project cost that could be detrimental to the interest of electricity consumers,” said another government official privy to the development.

The country right now has domestic equipment manufacturing capacity of mere 18,000 MW largely supported by two major players Bhel and L&T. It is expected that capacity would go up to 35,000 Mw over next few years with new manufactures such as BGR Energy, JSW, Alstom-Bharat Forge starting their facilities. Bhel is also expected to ramp up its capacity to 20,000 MW by the end of year.

“Many of the domestic equipment manufacturing projects may not come up with full capacity, if domestic manufacturing is not encouraged by the government,” said an executive of private sector power equipment maker who did not want to be identified.

Another executive, however, said that mandatory domestic procurement of equipment would jack up cost and could delay projects as imported equipment not only come cheap but are also delivered fast.

The meeting taken by PMO also took note of this and asked power ministry to take necessary precaution in its proposal so that project cost did not escalate.

Power Ministers' meeting on Sasan deferred

A meeting of a panel of min isters scheduled for Thursday to discuss the issue of allowing Reliance Power Ltd to divert surplus coal from captive mines associated with its 4,000MW power project in Sasan, Madhya Prad esh, to other plants owned by the com pany, has been deferred.

The Comptroller and Auditor General of India had earlier questioned the deci sion by the empowered group of minis ters to allow such diversion by the Anil Ambanicontrolled Reliance Group firm.

“The meeting has been deferred. We are still awaiting the legal opinion from the attorney general Goolam

Vahanvati,“ a power ministry official said, requesting anonymity.

Tata Power’s Mundra UMPP begins generation

Tata Power has said that the first 800-MW unit of the Mundra Ultra Mega Power Project (UMPP) has started power generation.

“Tata Power’s Mundra UMPP has successfully synchronised India’s first 800-MW super critical unit 1 at Mundra,” the company said in a statement today.

The project at Mundra in Kutch district of Gujarat, shall have five units of 800 MW each, generating 4,000 MW of power using supercritical technology.

The first unit was slated to be ready for commissioning by September 2011.

Power Finance Corporation, the nodal agency for these UMPPs, has so far awarded four such projects. The other three projects — Sasan (Madhya Pradesh), Krishnapatnam (Andhra Pradesh) and Tilaiya (Jharkhand) — have been bagged by Reliance Power.

The Tata Group firm, which currently has a power generation capacity of 3,797 MW, has plans for 25,000-MW capacity by 2017. Of this, 4,000 MW will come from Mundra.

UMPPs not getting delayed due to coal blocks allocation: Govt

The 4,000-MW capacity ultra mega power projects in the country are not getting delayed due to allocation of coal blocks, the Minister of State for Power, Mr K.C. Venugopal, informed Parliament today.

“There is no delay in commissioning of ultra mega power projects (UMPPs) due to reasons attributable to problems in the allocation of coal blocks,” he said in the Lok Sabha.

For pit-head UMPPs or where the coal mines are attached to the projects, one of the pre-requisite for calling Request for Qualification (RFQ) is allocation of coal block by the Ministry of Coal.

And since the coal blocks are allocated even before the initiation of bidding process, the delay could not occur for want of allocation of coal blocks, he added.

However, he said that the last date of submission of RFQs for Chhattisgarh UMPP has been extended nine times as the coal blocks of these UMPPs were categorised as no-go area by the Ministry of Environment and Forests.

The last date of submission of RFQ for Chhattisgarh is December 5.

However, in view of the decision of Group of Ministers (GoM) on environmental and development issues, relating to coal mining and other development projects, to do away with the go/no-go concept, the MoEF has been requested to clarify the matter for proceeding ahead with the bidding process of Chhattisgarh UMPP.

At present, the preliminary bids for the Bedabahal UMPP in Orissa have been invited and as many as 20 bidders have evinced interest in setting up the project.

EGoM meet on UMPP bidding norms in Orissa on December 5

The EGoM is likely to meet on December 5 and approve certain changes in the bidding norms for the upcoming UMPP in Orissa and Chhattisgarh.

"The meeting is on December 5, they are likely to discuss the changes to be made in the bidding documents for Orissa and Chhattisgarh UMPPs," a power ministry official said. The new bidding norms are likely to accommodate fuel availability risk, price risk due to change in prices of the fuel in coal-exporting countries, etc.

'Sasan will supply power at R1.19 to 35 crore Indians'

The Sasan ultra mega power project being developed by Reliance Power in Madhya Pradesh will supply power at the levelised tariff of R1.19 a unit, the lowest in India, as per the contract, when it starts generation by the end of the next year. The success of the project will critically depend on the private developer's ability to optimise coal production cost from the nearby captive mines–Moher, Moher Amlori extension and Chhatrasal—given that fuel accounts for about 80% of the power generation cost. In this context, the task of Russel Taylor, who is in charge of mining coal for the project, is cut out. In an interview with FE’s Noor Mohammad in Sasan recently, Taylor spells out his strategy to optimise coal production costs while meeting environmental concerns. Excerpts:

When does Reliance Power expect to start production from the captive coal mines in Sasan? What are the key milestones in the development work?

Reliance Power has started mine development work in Sasan. Contractors are working on the initial ‘removal of overburden.’ This will help the deployment of our own large sized, state-of-the-art, mining equipment at the mine faces. Many of these equipment have reached the project site and some are on the way from the US. We plan to start coal production in time to meet the coal needs of the first unit of Sasan power plant, scheduled for commissioning in January 2013.

A lot of things have to come together for starting coal production from a greenfield mine. For us, many of these milestones have been achieved, like environment & forest clearances, mining lease, etc. We expect that our own large sized equipment viz. rope shovels and dumpers, would start to work in December 2011. Work has also started on mine infrastructure and coal handling plant.

What challenges have you encountered in developing the blocks and how did you deal with them?

Like any greenfield mine we have faced challenges in Sasan and have been able to overcome them. Going forward, we would have to ensure the contractors and suppliers engaged for commissioning large mining equipment and developing the mine infrastructure deliver quality work while meeting the agreed schedule. The other major challenges would be to attract and retain the best talent to operate and maintain the equipment fleet, manage the mines, impart world-class training and inculcate a culture based on productivity. We believe that we have recruited the best mining team, which includes global experts, to achieve our objective of developing a leading world-class mine.

We have entered into a partnership with North American Coal Corporation (NACoal) for assistance in development, operation and maintenance of coal mines. NACoal, a subsidiary of NACCO Industries (a NYSE-listed company), mines and markets lignite coal primarily as fuel for power generation and is one of the top ten coal and lignite mining companies in the US.

What are the key features of the mining technology being used by Reliance Power in the blocks?

The choice of mining technology is influenced by the geo-mining conditions of the coal mine. We have proposed a combined system of draglines and shovel-dumper combination for overburden removal. Draglines are one of the most reliable mining equipment and provide the lowest cost of mining per cubic metre of overburden. Coal would be mined using large-sized, front-end loaders and dumpers. Many of these equipment are being used for the first time in India, but are extensively used by leading global mining companies like Peabody, Rio Tinto and BHP Billiton.

Reliance Power is in the process of implementing a state-of-the-art mine information management system. This will monitor equipment health in real time, minimise equipment idling, reduce human operational mistakes, and increase equipment capacity utilisation & equipment uptime. With proper training, we expect these systems to deliver 20-30% productivity improvement over the next two-three years

What will be your cost of coal production from Sasan mines?

We have paid a great deal of attention to equipment selection, which has been based on evaluating the total cost of ownership. In Sasan, we are utilising large-sized mining equipment, which would deliver competitive cost due to economies of scale. We would also be deploying latest systems and processes to deliver significant productivity improvements. We also have the advantage of lower manpower costs in India, compared to mining companies operating in the USA, Australia and South Africa. Considering all of the above, we expect that we would be able to deliver coal at a cost that enables Sasan UMPP to fulfill its promise of supplying power at a landmark tariff of R1.19 a unit to more than 35 crore Indians in seven states.

How does Reliance Power plan to address environmental concerns?

Protection and conservation of environment is one of our primary goals. We would have dedicated personnel for implementing and monitoring our environment and social management plans. Our plans deal with various aspects of environment protection such as land conservation and reclamation, air pollution, water pollution, noise pollution and ecological and social impacts. The top soil would be removed carefully during mining and preserved separately in a manner so as to protect its productivity for plantation and land reclamation purpose.

The ground water inflow into the mines will be channelised through garland drains into sedimentation tanks and then discharged into natural drains. This will preserve the ground water table of the mine area. Mine waste water would be treated and clean water would be discharged.

We are also implementing a comprehensive and purposeful rehabilitation plan approved by the government of Madhya Pradesh that aims to assist affected families and persons to not only regain but also improve their existing standard of living, earning capacity and production levels. The social initiatives taken up by us so far have already set a new benchmark in the country with strong commendations from many experts. Sasan UMPP has been registered as a green project with UNFCCC Executive Board to earn carbon credits and our mining will continue the green philosophy of the project forward.

Future investments depend on solution to Mundra issue: Tata Power

Tata Power's ambitious plan to generate 25,000 MW, with about Rs 1 lakh crore investment, will largely depend on sale price of electricity from its 4,000-MW Mundra project amid concerns that its costs could become commercially unviable due to higher price of coal.

The Tata Group firm is staring at an annual loss of Rs 500 crore from the very first year of Mundra Ultra Mega Power Project's operations, as higher prices of coal, which was to be imported from Indonesia, have derailed the company's cost calculations.

"Now all our investment portfolio will depend on decision on solution to Mundra UMPP. We are very clear that unless this issue is settled, we should not decide as far as our future capacity addition is concerned," Tata Power Managing Director Anil Sardana told PTI.

At current coal prices, the cost per unit of electricity generated from Rs 17,000 crore Mundra UMPP, would go up by 60 to 65 paise from the present tariff -- fixed at Rs 2.26 per unit through competitive bidding in 2006.

"Suppose at current price of USD 120 per tonne, we will have huge losses in the variable side and which could mean that we will have a first-year loss of Rs 500 crore," Sardana said.

The Tata Group firm, which currently has power generation capacity of 3,797 MW, has ambitious plans for 25,000 MW capacity by 2017. Of this, 4,000 MW will come from Mundra, the first Ultra Mega Power Project (UMPP) in the country.

According to industry standards of Rs 4-5 crore cost for 1 MW power generation, the company would require investments of Rs 85,000 crore to Rs 1,00,000 crore to achieve the target.

However, a new Indonesian law has deprived the Tatas from the cost advantage on coal imports from the East-Asian country as it will not be able to source the Indonesian coal at discounted rates.

The Indonesian Coal Price Regulation (ICPR) of last year requires benchmarking of coal sales to an index-based price linked to global rates and entailed the modification of all sale contracts by September, 2011.

This has restricted mining companies from selling any coal below the set minimum price, unlike previously, when the prices were determined mutually by buyers and sellers.

Tata Power has sought a meeting with all the buyer states and the Centre by month-end to find a solution, Sardana said, adding that "they (the buyers) have to find out the answers. We don't know what view they will take".

Five state, Gujarat, Maharashtra, Punjab, Haryana and Rajasthan, are to buy power from the Mundra UMPP. The options before Tata Power include increasing the tariffs or getting compensated by the buyer states among others.

"We will decide our future strategy and investments in India according to the outcome of the issue," he added.

Rel Power’s Tilaiya UMPP to generate over R2k cr in carbon credits

Reliance Power’s 3,960 mw Tilaiya ultra mega power project in Jharkhand has bagged entitlement for carbon credit benefits under the UNFCC’s clean development mechanism programme, in a move that should help it generate additional revenue of over R2,000 crore over the initial ten years of its operations.

The project, which is to be based on supercritical equipment, will start generation from the year 2015. It will generate 21.3 million certified emission reduction (CER) certificates, which can be sold in the market. Reliance Power’s Sasan and Krishnaptnam UMPPs are already registered with the UN agency for similar carbon credit benefits.

Tilaiya is a pit-head power project with two captive coal mine blocks — Kerandari ‘B’ and ‘C’ — that have estimated reserves of almost 1.3 billion tonnes. The mining plan approved for the project envisages production of almost 40 million tonne of coal a year.

On completion, the Tilaiya UMPP will become India’s largest integrated power plant. Power generated form the proposed will be supplied to ten states of northern and eastern India at a levelised tariff of R1.77 a unit. The developer plans to finance the integrated power project, which is estimated to cost R24,000 crore, in the debt and equity ratio of 75 and 25. It expects to achieve financial closure for the project soon.

Power Grid commissions transmission lines for Mundra UMPP

Power Grid Corporation of India (PGCIL) today said it had commissioned the transmission system for two units of the Mundra Ultra Mega Power Project (UMPP) in Gujarat.

The 4,000 MW Mundra project, being developed by Tata Power, would be the first UMPP to start power generation in the country.

"The line is ready to evacuate power from two units of Mundra UMPP (2X800 MW) in normal condition and more than 1,200 MW in the contingency from today onwards," Power Grid said in a statement. The transmission system was commissioned today.

According to the statement, the system commissioned consists of high capacity Mundra-Bachau-Ranchodpura 400 kV Double circuit line along with 630 MVA Bachau 400/220 kV sub-station.

These are part of the transmission system associated with Mundra UMPP, being implemented by Power Grid at an estimated cost of about Rs 5,000 crore, it added.

"About 770 circuit kilometre transmission line has been commissioned in challenging conditions like passing through tough terrains in creek area of Arabian Sea... Excessive water logging due to heavy rains, etc," the statement said.

The first unit of Tata Power is expected to be commissioned by end of December this year.

Tata Power plans to run Mundra UMPP at low capacity

Tata Power has approached the ministry of power expressing its concerns over the viability of tariff and seeking an increase in rates,says report.

Tata Power Company is preparing contingency plans to minimise loss from running the plant as the cost of imported coal from Indonesia has risen sharply, according to a report.

The report stated that Tata Group utility plans to run the 4,000-megawatt Mundra unit at low capacity, at around 72-78%, and is considering blending the fuel with cheaper coal of low calorific value.

Tata Power has approached the ministry of power expressing its concerns over the viability of tariff and seeking an increase in rates,says report.

Gujarat against raising tariff at Mundra project

The Gujarat government has refused to consider any move to allow a higher tariff at Tata Power Co. Ltd’s 4,000 megawatt (MW) Mundra power project, two units of which are expected to be commissioned by March next year.

This may affect the financial viability of the project because its fuel costs are set to be higher than seen earlier. While developers factor in risk before placing bids for big power plants such as Mundra that would be fired by imported coal, experts are of the opinion that there will be muted interest in similar projects such as the one proposed in Cheyyur, Tamil Nadu, if developers are not allowed to raise tariff on higher input costs due to a change in overseas law or regulations.

Tata Power, which has been lobbying the Union power ministry in pursuit of a higher tariff, acquired a 30% stake in two coal mining units and a trading company from Indonesia’s PT Bumi Resources Tbk for $1.1 billion in 2007 to source fuel for the Mundra plant. But Indonesia has stipulated that starting 23 September, the coal that the country produces will be pegged at prevailing international prices.

“They (Tata Power) have written a letter to the Union power minister to call a meeting for discussion on the issue,” said Saurabh Patel, Gujarat’s energy minister. “The centre then wrote a letter to the Gujarat government to call a meeting of all procurer state governments since we are the major procurer of power (1,900MW). We have flatly refused it. Tata Power had asked for fuel increase as a pass through.”

The other states that will buy power from the plant are Maharashtra (800MW), Punjab (500MW), Haryana (400MW) and Rajasthan (400MW). Mint could not contact the power ministers of these states by the time of going to press.

“The financial position of the Mundra projects was done on the basis of certain assumption of coal prices. A new regulation in Indonesia...makes it mandatory for all the coal companies in the island nation to sell coal at prevailing international (benchmark) prices. This move will impact the margins of power generation due to the fuel being secured from Indonesia,” said an external spokesperson for Tata Power.

The chief executive officer of Coastal Gujarat Power Ltd, a special purpose vehicle (SPV) of Tata Power, has kept the Union government and the concerned state governments aware of the changed situation, the spokesperson added.

The progress till the end of March 2011 was approximately 77%, with total capital commitments of 100% of total equipment ordering and a total actual expenditure of Rs. 13,166 crore. The total estimated cost of the project is Rs. 17,500 crore.

The debt-equity ratio is 3:1 (75%-25%). The financing comprises equity of Rs. 4,250 crore, external commercial borrowings of up to $1.8 billion, and rupee loans of up to Rs. 5,550 crore, according to the external spokesperson.

The states are to buy power at Rs. 2.26 per unit, according to the power purchase agreements that have been signed.

“We have written to the centre. Why should the state get involved? UMPP (ultra-mega power project) is the centre’s project and they have bid it out,” Patel said. “If imported coal is the issue, then the government of India should take the issue up with the Indonesian government.”

Tata Power may struggle to keep the project viable given the volatility of the market, said two industry experts, on condition of anonymity.

UMPPs follow a competitive tariff-based bidding process in which an 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.

The Union government has distanced itself from the issue.

“It is between the developer and the procurers and has got nothing to do with us. We had advised the developer to take up the issue with the procurers,” said a top power ministry official, who did not want to be identified.

A top executive of Power Finance Corp. Ltd, the nodal agency appointed for the award of such large projects, said: “Our job was to bid out the SPV, which we have done. Beyond that it is between the developers and the procurers.”

The UMPP programme has had its share of problems, with ecological concerns and local resistance. The government wants to set up 16 UMPPs to meet the needs of the world’s second-fastest growing major economy after China. Of these, four have been already awarded. India has a power generation capacity of 180,000MW and expects to add 62,374MW by 2012.

PFC to restart process for award of UMPPs in Orissa, Tamil Nadu

Cheyyur plant to be bid out in September and request for proposals for Orissa project to be called for in October

The stalled process for awarding ultra-mega power projects (UMPPs) could soon be back on track, with Power Finance Corp. Ltd (PFC), the nodal agency for awarding the projects, planning to bid out the Cheyyur project in September and proceed to the second stage of bidding for an Orissa plant in October.

“We plan to issue the requests for qualification (for) Cheyyur in September,” said Satnam Singh, chairman and managing director, PFC.

A request for qualification (RFQ) indicates a company’s intention to compete for a project. After shortlisting from among the companies that submit RFQs, requests for proposals (RFPs) are called for.

All clearances for the coal-based project in Cheyyur, Tamil Nadu, are in place except environmental clearance for a port that will be used to bring in imported coal. The district administration has cleared the port, and an approval is awaited from the state government. Once that is done, the Union government will have to give its approval.

Analysts are not enthused.

“While it is good to know that the Cheyyur bids will be called next month, the real question is the coal availability,” said Amol Kotwal, deputy director of energy and power systems practice for South Asia and West Asia at Frost and Sullivan. “Where is it going to come from, given the fact that there is volatility in the prices due to the changing policies of the coal exporting nations?”

The Cheyyur project will rely on imported coal, whose price, including freight charges, is prone to fluctuations. It will, thus, be crucial for companies to secure coal supplies to bid for the project, as movement in international coal prices could impact input costs.

UMPPs follow competitive tariff-based bidding, and special purpose vehicles (SPVs) are set up to reduce risk perception and to increase investor confidence. These SPVs take care of regulatory requirements such as land acquisition and environmental clearance, and transfer these to the winning bidder. Each 4,000 megawatts (MW) project requires an investment of around Rs.20,000 crore.

The UMPP programme has been weighed by ecological concerns and local resistance. The much-delayed process is back on track with the Orissa project set to be awarded next.

The environment ministry in June opened for mining six coal blocks in the state that earlier fell under its so-called “no go” areas, paving the way for the award of the project.

The environment and coal ministries announced the concept of “go” and “no go” areas for coal mining in 2009 to protect India’s best forests.

PFC, which is evaluating RFQs for the Bedabahal UMPP in Orissa, plans to invite RFPs for the project in a couple of months. The coalpit head project has got responses from 22 companies.

“The bids are being evaluated, and once the companies are shortlisted, we plan to issue RFP in October,” said Singh.

As for the UMPP in Chhattisgarh, the last date for submitting RFQs is likely to be extended again, he added. The present deadline for RFQs for the Surguja UMPP in Chhattisgarh is 5 September.

PFC has so far extended deadlines for companies to respond to RFQs for the Orissa and Chhattisgarh projects seven and six times, respectively.

The government wants to set up 16 UMPPs to meet the energy needs of the world’s second fastest growing major economy after China. India has a power generation capacity of 180,000MW and expects to add 62,374MW by 2012.

Nine UMPPs were originally planned, but only four have been awarded—at Mundra in Gujarat, Sasan in Madhya Pradesh, Krishnapatnam in Andhra Pradesh, and Tilaiya in Jharkhand. Two projects, at Girye in Maharashtra and Tadri in Karnataka, were abandoned due to local resistance

Twist in Mundra tale

At the tariff end of Mundra UMPP (ultra-mega power project), 45% of the fuel cost is escalable and 55% is exposed to fluctuations in fuel cost. At the fuel supply end, 25% of coal was set to come at a fixed price for five years with remaining 75% at market prices. After five years the entire quantity would come at market prices. Indonesia has imposed a minimum sale price for coal, which is $35-40/ton, higher than the fixed price at which Tata Power is set to get 25% of Mundra UMPP’s requirement.

Tata Power is trying to represent to the government of Indonesia that the coal mine is integrated to the power plant so they should be given an exemption. However, we are unsure if the Indonesian government would give such an exemption. The company is evaluating options like sourcing coal from alternative mines which could be low grade.

According to media reports, in a communication to the power minister the CEO and ED of Mundra UMPP has said that coal prices have shot up so much that, at current rates, it was unviable. According to initial calculations of 14% RoE (return on equity), Mundra UMPP was supposed to make profits of R6 bn while the impact of the price change could be up to R18 bn. The company has also sought the ministry’s intervention to open a dialogue to address the issue of imported coal pricing. If the Indian government allows a pass through for the remaining 55% exposed portion or a smaller portion of the same, similar demands could be raised by other electric utilities, which would adversely affect the finances of the SEBs (state electricity boards).

As a consequence the economics of the Mundra UMPP + coal SPVs (special purpose vehicles) could get significantly impacted.

We believe the recent 16% stock correction already factors in the same from a DCF (discounted cash flow) perspective so we maintain a Buy (1L) rating, with a lower target price of R1,290.

Mundra UMPP is a 25-year duration project in which the losses will peak in FY14e (estimate) and then start coming off and will turn profitable by FY20e under the current coal price scenario. So even though the recent stock price correction factors in the new operating environment, we wonder if there will be more pressure on the stock.