Model PPA: Industry bodies, lenders increase doubts

They call for modifications in existing PPA to attract more investments in power sector

Industry bodies have expressed doubt over attracting investments based on the model Power Purchase Agreement (PPA) issued by the Union power ministry.

The issue is development of power projects on a design, build, finance, operate and transfer (DBFOT) basis. The model PPA proposes payment of a fixed charge by the utility to the concesssionaire, revised annually to reflect 30 per cent of the variation in a composite index comprising the wholesale and consumer price indices.

For ultra mega power projects based on imported fuel, the model PPA says the price of fuel procured from captive mines outside India or from a long-term fuel supply contract would be the lower of the indicative price of fuel as specified in the bid and 80/85/90 per cent of the price computed with reference to the average API4 Index (South Africa). This price would be increased every year at a compounded annual rate of four per cent.  

R V Shahi, former Union power secretary, said the DBFOT model was unlikely to attract enough response. Those who do so would bid with so much of risk perception that the rate of supply offered would be excessively high. Financial closures in such projects would be nearly impossible.

"The main thrust of the Electricity Act, 2003, is creation of an electricity market through a competitive process and de-licensing of generation is one of the main instruments.  The structure of DBFOT runs counter to this main objective. The proposed scheme puts the whole progressive approach in reverse gear," Shahi added.

Coal being a tradable commodity, why should the owner of a mine use his coal at a discount for power production, supply power and then wait for payment, asks Ashok Khurana, director general, Association of Power Producers, when he can easily sell the coal at a spot price in the market.  

"The question is why an increase at four per cent? International spot prices are subject to fluctuation and in the past three years, they have hovered between $70 and 120 a tonne. This formulation can lead to absurd situations of heavy losses/windfall profits, depending upon the market movement in the six months before a bid. If the bids are invited at a time when the market is subdued and thereafter the market shoots up, the bidder will suffer heavy losses. On the other hand, if the market was very high and thereafter the market dips, the developer stands to gain windfall profits. Further the rationale of four per cent compounded increase is not understood," Khurana said.

More, says the Federation of Indian Chambers of Commerce and Industry, the present structure of Build, Own and Operate (BOO) is more suitable to power projects instead of a DBFOT structure. The BOO model will make it easier to finance the project, as it puts the onus of efficient operation and maintenance of the plant on the concessionaire. Thus, the ownership and stake of the concessionaire increases and the viability of the power project is significantly enhanced.

Also, lenders, including State Bank of India, say the DBFOT model might be a major disincentive to domestic and foreign lenders.

Besides, the private sector might find it difficult to take up fresh investment. The lenders say the present PPA, a well established one, can be made more responsive by way of modifications and additions to improve the bankability.