New norms may lead to higher tariffs for upcoming UMPPs: Co

Tariffs for the Tamil Nadu and Odisha Ultra Mega Power Projects (UMPPs), currently under bidding, will be substantially higher mainly because the risk matrix in the new guidelines has shifted from fuel to capacity charge risk, India Ratings said today.
According to the guidelines, bidding will be done on capacity charge, which comprises return on equity, interest on loan capital, depreciation, interest on working capital, operation and maintenance cost, cost of secondary fuel and special allowances in case of renovation and modernisation of a thermal power plant.
"The risk matrix in the new guidelines has shifted from fuel risk to capacity charge risk. The risk on fuel charge has reduced by fuel cost pass-through. However, risk on capacity charge (fixed cost) has increased by a possibility of cash- flow mismatches as developers would now have to quote a single base year tariff only," the rating agency said.

India Ratings and Research believes tariffs for the Tamil Nadu and Odisha projects will be substantially higher than the previous round of UMPP bidding.
The agency expected an imported coal-based UMPP to cover major risks with tariff in the range of Rs 3.25-3.65 per unit, which is 45-60 per cent higher than the levelised tariff of Rs 2.26 per unit for Coastal Gujarat Power (Tata Power unit which operates Mundra UMPP).
For domestic coal-based UMPP in Odisha, India Ratings expected bids to be in the range of Rs 2-2.4 per unit, which is nearly 70-100 per cent higher than Rs 1.19 a unit for Sasan Power (another UMPP in Madhya Pradesh).

"The new guidelines allow a complete pass-through of fuel risk to off-takers, thus preventing developers from facing significant risks. The key risks now vested with developers are escalation index for coal and quantum of domestic fuel charge pre-specified at the time of bid."

Earlier, UMPP bidding guidelines required bidders to quote escalable and non-escalable fuel charges, thus retaining fuel price risk with developers.
Under the old norms, aggressive bids through higher non-escalable fuel charges coupled with rising fuel costs and the falling rupee led to operating losses, especially for UMPPs based on imported coal.
But now developers will have to quote a single capacity charge bid for the first year, which would be escalated at a suitable index, the rating outfit said.