Draft norms for UMPPs to breathe fresh life into power sector

Power Ministry's proposed changes in bidding guidelines could increase developers' interest in ultra mega power plants (UMPPs) as they try to address the concerns of investors and lenders, says India Ratings and Research.
Failure of earlier UMPPs was largely due to unwillingness of lenders to fund a Rs 20,000-crore power project with 4,000 MW of capacity on a design, build, finance, operate and transfer model where the asset ownership did not vest with the developer.
The current guidelines propose a build, own and operate model which, Ind-Ra believes, will result in greater acceptance from lenders for financing.
"The guidelines cover key investor/developer risks including fuel price variation, fixed charge quote, ownership of asset, incentive/disincentive for performance, land acquisition and termination of contract," Ind-Ra said.

The guidelines, it said in a statement, provide for a better fuel cost pass-through as they envisage a full escalation on the base tariff based on the Central Electricity Regulatory Commission (CERC) norms.
Earlier, a fuel cost bid was divided into two parts which required the developer to project the non-escalable part of the fuel cost over the life of the project, leading to viability issues.

"Escalations based on the CERC norms should provide sufficient cushion to developers to manage the inflation associated with mining costs," it said.
However, Ind-Ra said developers will be cautious while quoting fuel costs as operational UMPPs have seen challenges on account of aggressive bidding.

The fuel cost variation over the life of a power purchase agreement is unlikely to be high, given that the proposed guidelines speak about UMPPs based on captive domestic coal.
Additionally, the current guidelines do not provide for any open capacity which could be sold as merchant power as against the earlier guidelines which had a 15 per cent open capacity.
"Ind-Ra considers this to be more prudent as the 15 per cent open capacity added an additional uncontrolled variable (per unit price of merchant tariffs) in the bidding, and developer's assumption on merchant tariffs alone could have altered the project viability," the statement said.

The current guidelines propose the bidding of a separate fixed charge for each year over the life of a power purchase agreement as compared to the earlier guideline of a single fixed charge quote with annual escalation.
The draft norms also propose a segregation of operating and infrastructure assets into two separate special purpose vehicles (SPVs). The land for coal block as well as power plant would be housed under an infra SPV while the plant would be developed under an operating SPV.
"The move will lead to the mortgage of land and power asset separately to raise finances, however, this could pose challenges in the sale of asset," it said.