Cost vs risk

The case for a ceiling on UMPPs is strong, but so is the case that there shouldn't be any limit

The case for limiting the number of “ultra mega” power projects (UMPPs) that a company can develop is not hard to make, but then, that applies also to the case for arguing that there should be no such limits. The issue is a live one after Reliance Power bagged the Tilaiya UMPP in Jharkhand — its third such project, after Sasan in Madhya Pradesh and Krishnapatnam in Andhra Pradesh. These projects, with a capacity of 4,000 MW each, cost Rs 50,000 crore or more.

There is merit in the argument that, so long as the bidding process is fair and the qualifying criteria stringent, there should be no case for intervention in the form of caps on any one project developer. Yes, 12,000 MW with a company which has yet to commission its first project does pose some risk, but the largest power generator in the country — the government-owned NTPC — has a capacity of almost 30,000 MW and started similarly from scratch, with four projects from the world go. Indeed, it might be argued that such concentration of projects brings with it certain advantages. If there are economies of scale that a project of 4,000 MW can wrest, the economies that can be managed by bunching 12,000 MW of capacity should be greater. Two of these projects — Sasan and Tilaiya — are pit-head, coal-based projects. The company can manage discounts on the bulk purchase of mining equipment, for instance.

The counter-argument is equally compelling. Projects equal to a tenth of the current installed capacity in the country (excluding renewables) are in the hands of a company which is yet to commission its first power project. This is not counting the non-UMPP projects that the company is working on. There are execution challenges there, and financial hurdles to cross. And what if the company is eligible for, bids and bags the next project and the one after also? Does the bidding process favour the concentration of projects in one hand? Perhaps there is a case for tightening the qualifying criteria, or the performance criteria, if not one for a straight cap on the number of UMPPs per company.

But then, there is a similar concentration of projects in the hands of one company when it comes to blocks being developed under the oil exploration programme. Shouldn’t there be policy consistency across sectors? And what is the additional cost of power if the lowest bidder is disqualified, and the next bid accepted? Is that extra cost worth the risk-reduction achieved by spreading projects over many bidders?

The issue of a cap was broached a couple of years ago, but an empowered group of ministers decided against imposing one. The group however enhanced the performance guarantees that need to be submitted with each additional project. While the guarantee required for the first project is Rs 300 crore, it is Rs 450 crore for the next project and Rs 600 crore for the third. Given this background, it may be wise to let things be for the time being, and watch how future contracts go.