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A few recent issues in Power Sector, Shri R V Shahi, Former Secretary, Ministry of Power

In the last couple of weeks a few important issues concerning power sector have been reported. I propose to pick-up the following two, analyse them and present my own perspectives:

  1. In case of Ultra Mega Power projects, there is a possibility that an individual company may not be allowed to bid and have more than three projects.

  2. Again, in case of Ultra Mega Projects, there is an apprehension that Chinese equipment may not be permitted.

a.

Incase of Ultra Mega Power projects, there is a possibility that an individual company may not be allowed to bid and have more than three projects

When the Ultra Mega Project Scheme was conceived and formulated in the year 2006, we did not envisage that as many as three projects would be won by the same developer. This issue has arisen because Reliance Power has been allotted three Ultra Mega Projects viz. Sasan (Madhya Pradesh), Krishnapatnam (Andhra Pradesh), Tilaiya (Jharkhand). The concern is relevant. Each Ultra Mega Project, of the capacity of 4,000 MW, requires huge capital investments. If we include the financing required for coal mining, in case of Pit Head Power Projects, the fund requirement would be as high as Rs. 18,000 crores (US $ 4 billion) in each of these projects.

If we recall the background of conceptualising this Scheme, the first and foremost concern was whether the developers would have the confidence and support of lenders to finance these projects. I have written a comprehensive Article on the genesis, problems, concerns, which all had to be appropriately addressed while finalising the structure of the Ultra Mega Project Scheme. This Article is contained in my book "Towards Powering India" (2007). The concerns of financing used to be so strong those days, and rightly so, that the first group of senior most functionaries that we, in the Ministry of Power, interacted, was the group consisting of heads of major financial institutions and banks. We made it clear that this Scheme was not proposed to be launched on the props of Government guarantees, and that payment security mechanism would have to be internalised through various mechanisms that would ensure that there was no default. The support of the heads of financial institutions, I must say, was beyond our expectation. They not only confirmed that they were not keen on Government guarantees but went to the extent of confirming that, if they were certain about credibility and capability of the developers, fund would not be allowed to be a problem. They recognised that unless power sector performed at a healthy growth rate, nothing else could propel the desired economic growth rates. Encouraged by their response we went ahead and launched the Scheme. The subsequent experience has adequately established the validity of assumptions.

Therefore, capping on the number of projects has to be seen in the context of genuine concerns of lenders and these concerns hinge upon one vital element viz. "Capability" of the developer. In the last few years of this Scheme, a number of other issues concerning financing of power projects have been discussed. In the Working Group on Power for the Eleventh Plan, which I chaired, we recommended, and subsequently Deepak Parikh Committee also recommended, for raising the limits on Sectoral Capping and on Group Capping while dealing with the issue of debt funding for large size Ultra Mega Projects. It was found that unless these limits were suitably enhanced it would be difficult for project developers to mobilise adequate debt financing.

Thus, two issues are relevant while commenting on the capping on the number of projects for a developer. Firstly, however big a particular company may be, developing a number of Ultra Mega Projects of 4,000 MW capacity each, and that too concurrently, does present a highly challenging task. Therefore, the number is not something which is irrelevant. After all, these projects are awarded with the objective that they are completed on time. The issue is not whether a particular organisation can handle a large number of projects. The issue is that capability to implement and complete is not insensitive to the number of projects that have to be handled at a time. Therefore, we should conclude that the number of projects to be awarded is relevant, and so relevant is the need for capping. It is also relevant issue to consider that any project developer who is participating in the Ultra Mega Project Bidding, is, in addition to these projects, also engaged in other projects. Therefore, the capability assessment must also capture the likely diffusion of resources needed for all these projects. The second issue is the ability to complete financial closures. Inspite of some enhancement in the Sectoral Capping and Group Capping, which different financial institutions and banks would be subjected to, it may not be possible for anyone developer to successfully organise debt financing of a large number of projects with such large capacities.

Three Ultra Mega Projects would mean financing of the order of over Rs. 50,000 crores. This is, by any standard a huge financing need. Considering the background under which the banks expressed their willingness to support this initiative, as mentioned earlier in this paper, and also keeping in view the financial track record of power sector, obviously a number of banks would be reluctant for putting so much of finances into one organisation. In view of this, it appears that the approach to cap the number of projects is the right approach.

b.

In case of Ultra Mega Projects, there is an apprehension that Chinese equipment may not be permitted

Even before the discussions on climate change, all over the world, in the wake of the Fourth Report of the IPCC, assumed a high pitch, we, in the Ministry of Power, while formulating the important features of the Ultra Mega Project Scheme, were convinced that these large size projects must deploy Super Critical Technologies which will provide greater degree of fuel efficiency. This issue was particularly discussed in the Energy Co-ordination Committee, presided by the Prime Minister, and it was concluded that temperature and pressure parameters needed to be provided so as to ensure energy efficient technologies to be deployed in these projects. Keeping this in view, it is less important to identify the sources of supply whether from India or from other countries. If Chinese equipment meets the prescribed requirements, there would hardly be a case to rule that out.

Another important consideration, which went behind formulation of UMPP Scheme, was the need for Indian power sector to access comparatively cheaper power. The entire concept of preconstruction risks mitigation through the Shell Company was aimed at assuring the developers that all that is possible by various Government agencies on different project management issues prior to commencement of construction would be resolved. It is this feature and assurance that led to more than expected response, and, more importantly, more competitive tariff than expected. If now we provide restrictions which will go counter to this major objective of least cost power, it would not only be counter productive, but also not desirable. Any provision which restricts or throttles competition, possibility of cartels by a few manufacturing organisations cannot be ruled out. This will obviously lead to jacking up of the power price.

There are, no doubt, a few genuine concerns about Chinese equipment. These are, however, resolvable. These only require some precautions and preparations. Having said that, it needs to be clarified that there should be no apprehension in general about the quality of Chinese equipment. The power sector raised, right from 2005, lot of noises about the need for expanding the domestic manufacturing capacity for power plant equipment. Though delayed, there have been good developments. BHEL has expanded and is going to expand further. Atleast three more new agencies are seriously creating manufacturing capacities for boiler, turbine and generator. They must be able to get suitable number of orders from the Indian power sector, which is on a massive expansion drive. But, this cannot be the case that others are debarred from entering into competition. On valid grounds the Government decided to exempt Indian power sector, in 2005, from the purchase preference from public sector suppliers. The ground was that such a preference was restraining competition and quotations offered by domestic public sector manufacturers tended to be on the higher side. The moment any attempt is made to reduce the size of competition from amongst the manufacturers, it is certain that its effect on price would be adverse against the interest of power sector. Indian manufacturing needs to be encouraged. Size of demand from Indian power sector is going to be so large that everyone will have his share of the cake, provided there is responsible approach on pricing. We must also recognise that China has built up an installed capacity of over 800,000 MW and has an annual manufacturing capacity for power plant equipment of the order of about 100,000 MW. Thus, it would be too simplistic to have a casual view about their capability on the quality of their equipment, particularly manufactured by their large companies.

As regards the concerns on supplies from Chinese manufacturers, the subsequent issue of maintenance and spare parts is indeed a relevant issue. Another relevant issue is the proper contractual arrangement on guaranteed performance. If both of these are adequately addressed, we need not be unduly concerned about the capability of boiler, turbine and generator from major manufacturers of China. We need to recognise that at present almost 20,000 MW capacity of projects from Chinese supply are under construction. Some of the projects (for example, the unit Commissioned by Adani Project) has demonstrated high degree of availability and Plant Load Factor of over 95% within a few months of commissioning. A recent report by Central Electricity Authority has established that given the right and prescribed quality of coal, these units could perform at expected level of availability and achieve other designed parameters.

My recommendations to the developers sourcing supplies from China include - (a) To make proper contractual arrangement for guarantees of performance, (b) Long term arrangement for supply of spares, (c) The manufacturers may be persuaded to set up repair and manufacturing facilities in India, so that repairs of large and critical components could be handled in India rather than sending them to their factories, (d) Adequate number of spares for items like rotors and generators, if large number of similar units are being set up. It may be seen that all these issues are resolvable. If these are resolved and Indian power sector also gets a competitive price advantage of the order of 20% or so, why should the sector be deprived of producing cheaper power? As regards domestic manufacturers, both in the private and public sectors, as mentioned earlier, there would be enough opportunities. They need also to workout their cost structure well, attend to various productivity measures, so that the extent of their competitiveness improves.