Ultra mega power plants future

Sanjay Kaul

Mr. Sanjay Kaul is the founder President of
the University of Petroleum & Energy
Studies & Chancellor of University of
Technology & Management in India.

For more about the author please click here.

Ultra Mega Power Projects: Future?
 ‘Powerful’ predicament

 UMPP = Large capacity addition + Efficiency + low carbon

 UMPPs: a non-starter

 Flawed business models

 Way forward

 Conclusion: UMPPs Future?

 References

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Serial No. III/Energy/Dec-12-2012
For any query or feedback please write at president@upes.ac.in|© UPES. All right reserved.

In the era of scams, natural monopolies and archaic regulatory environment there has been few
mega schemes which have the potential of spurring industrial growth in specific sectors. IT Parks/
SEZ/Private Ports/PCPIRs/NELP/Private Power production/Airport Privatization are some
initiatives which have seen the light of day after much wrangling and have succeeded moderately in
attracting big ticket investments.

A volatile world, domestic economic cycles and evolving nature of regulatory arena, deeply effect
financial closure, viability projection, commissioning and continuing commercial attractiveness of
infrastructure and energy projects which generally involve long gestation periods and upfront
investments.

Announcement of 16 UMPPs, if completed could have resulted in 64,000 MW capacity addition and
320,000 crore ($ 64 billion) investment which could have significantly met both peak hour & base
load and FDI targets. This is without taking into account the large multiplier effect this generation
capacity would have had in the areas of infrastructure, manufacturing, agriculture et al.

Where do we go from here? This will be determined by an analysis of the current status of the
scheme, techno-commercial viability and regulatory gaps which this article discusses.

‘Powerful’ predicament
Indian power situation is about ‘spiraling demand out stripping supply’, further worsened by poor
capacity utilization, distribution losses and low quality transmission infrastructure.

India consumes almost 51per cent of energy in form of Electricity. With the near double digit
economic growth, power demand has grown to near 9 per cent CAGR (2002-2012) over the last
decade. In contrast to this, generation has enhanced by a CAGR of just above 5per cent, leading to
huge power deficit.

The country is struggling with a base load deficit of
10.3per cent and peak shortage of 13per cent.
Load deficit of 10.3per cent and
peak shortage of 13per cent.
Forty per cent of our citizen not having access to
electricity (in rural area) is further magnified by two
power outages in 2011 which left more than 600
Fundamental Rights not possible
million people across 21 states powerless; alarming without ‘Right to Energy’
indicators for a country which had planned ‘Power
to all by 2012’ in its 2005 National Electricity Policy.

Constitution of India gives us the Fundamental Right of Equality, Freedom, Expression, Religion,
Life, Constitutional Remedies; recently Right to Education has been added. Today without energy
no civilization is possible let alone safety of Fundamental Rights; reliable, affordable and accessible
energy has become essential requirement for the citizens to enjoy and exercise their Fundamental
Rights.

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UMPP = Large capacity addition+ Efficiency + low carbon
UMPP are not only a giant leap towards plugging the power deficit but the involved technology is
efficient and has acceptable climate standards.

At 600-1200 GW, the capacity addition that India is likely to do by 2050, is equal to the total power
generation capacity of the European Union (EU-27) in 2005; hence, choice of technology & fuel will
have a grave impact on the global resource
availability, cost, and most importantly Thermal power obvious choice for
environment. th
world’s 4 largest coal reserve
For a Petroleum deficit nation having world’s 4 th
holder
largest coal reserve, coal was the obvious choice.
Since 1968, thermal power plants started using sub Technology used in UMPP has
critical technology with efficiency levels of 32-33
per cent, which was enhanced to 34-35per cent by enhanced efficiency to 42per cent
increasing the size of units. Later the use of super critical technology has further appended the
efficiency up to 40 per cent.

UMPPs have raised the efficiency bar to 42 per cent.

Table: 1.1: Typical comparison of various technologies and carbon emission of TPP

Type Size of Single Pressure Temperature up Efficiency Carbon Emission
unit up to up to to / Unit of power
generation
Sub Critical 220 MW 150 Bar 5600 C 32-34per 1.02
cent
Super Critical 500 MW 180 Bar 6300C 40 per cent 0.97
Ultra Mega 800 MW 252 Bar 6300 C 42per cent 0.96
PP
Source: American Petroleum Institute

Subsequently, government has discouraged setting up of Thermal Power Plants using sub critical
technology in 12th and 13th plan and completely deferred setting up of power plants using sub critical
technology in 14th plan. Use of Super critical technology improves efficiency and reduces carbon
emission.

Further, other technology improvements like the Circulating Fluid Bed Combustion (CFBC) which
enables use of low grade coal, lower SOx and NOx emissions, higher combustion efficiency and
space saving (no need for separate desulfurization, denitration, and fine-fuel crushing units) are
promising. Around 16 boilers using it including UMPPs are under-construction in India.

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UMPP a non-starter

Extending its 1995 Mega Power Plant policy, GOI conceived of UMPPs; of the sixteen 4000 MW
thermal power plants only four have been approved till date. Of these two—Sasan, Tilaiya were
pithead plants which were allotted captive mines and rest two- Mundra and Krishnapatnam coastal
plants to operate on imported coal.

Table 1.3: UMPPs at a Glance

Sr. No. Particulars No. of UMPPs
1 Total UMPPs envisaged 16
2 SPVs incorporated 12
3 Awarded 4
Source: Ministry of Power, GOI

Tilaiya & Krishnapatnam are non-starters. The former which was bagged by Jharkhand Integrated
Power Ltd.(JIPL), has been pushed off schedule
due to land acquisition and even the pre- Out of 4 UMPPs contracted 2
construction activities have not picked up pace.
Further, JIPL has been facing R&R (Resettlement are non-starter and only
& Rehabilitation) issues; operational UMPP is facing
Reliance Power’s Krishnapatnam is contending
issues related to change in law in
with a deadlock due to the change in price of raw material sourcing country.
imported coal. All the units of the projects were
scheduled for commissioning by October 2015, as per the power purchase agreement. However,
with work at the project stalled, the government is considering dropping it from the capacity
programme for the period of the XII Plan.

Tata Power’s imported coal based Mundra UMPP is also facing problems owing to a recent change
in coal export regulations by the Indonesian government which has pushed up the cost of
generation. Mundra is fully commissioned but not operating to capacity.

According to trusted source who requested anonymity, TATA Power has been asked to keep at least
three of the five units (800MW each) to be operational for consideration of their request for pricing
reconsideration (discussed later in the article).

UMPP at Sasan, the fourth one, is likely to be commissioned as pithead project (based upon captive
coal mines) but is also mired by court cases.

The time frame for the remaining twelve plants is unknown.

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Flawed business models
In-spite of having advantages like higher efficiency & lower Carbon Foot Prints, the revised
Business model, proposed by Ministry of Power (MoP) in Oct 2012, has proved to be a dampener.
Bankers and industry bodies like CII (confederation of Indian Industry), FICCI (federation of
Indian Chambers of Commerce and Industry), ASSOCHAM, AAP (Association of Private
Producers) have unanimously requested CERC to look into the matter. Also, some clauses common
to both models, old & revised, needs to be changed or fine-tuned.

The concept of the Design, Build, Finance, Operate & Transfer (DBFOT) model, replacing the
earlier BOO (build operate own), has been designated as a non-starter because neither the bidders
nor the lenders (banks) are comfortable with the fact that this model requires assets to be transferred
(after 25 years) back to the owner i.e. the nodal agency / Ministry of Power. CERC in its statutory
advice said “In our views, DOBFT model is
suited more for natural monopoly businesses like The new Design, Build, Finance, Operate
road, transport, transmission and distribution of & Transfer (DBFOT) model has been
electricity etc. not for de-licensed business like designated as a non-starter
generation.” The land for the project would not
even be leased but allotted to the company on Bid document/PPA framework lack
license-to-use basis, making this model several critical inclusions
unattractive in terms of financing because of
unsecured nature of assets in absence of clear
ownership with the bidder.

SBC, of both the models, has no provision that takes into account change in the international laws
like that in Indonesia where incumbent government has bench marked exported coal prices at
international prices. Thus, the cost of the coal supply for the Power plant has shot up drastically,
thereby increasing the cost of generation. The RFP documents did not envisage a change of law in
the host country. Efforts by the generating company with the buyers i.e. distribution companies, did
not yield any results, thus Tata Power approached CERC in the month of July, 2012 for review of
the tariff as provided in sections 61, 63 and 79 of the Electricity Act, 2003.

As per the PPA, sale of power from the completed project would be based on competitive bidding.
Majority of bidders at the supply end are the State operated limited number of SEBs. More flexibility
and assurance (for e.g. Support price mechanism) needs to be provided to the investors in this
regard.

Several other parameters in the draft SBD need to be changed. Single variable bidding, introduced to
simplify the bidding process, will actually make it more ‘intrusive’ as compared to the cost plus
regulated tariff regime. Deemed availability clause need to be removed because it enhances the risk
exposure of both the procurer (distribution entities) and the generator; the new model PPA
envisages cost equivalent of Deemed Availability to be shared by them in the ratio of 70:30
respectively. (30% loss for generator in case of less coal supply & 70% cost for utility despite the

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plant not being available). Provision relating to Independent Engineer (IE) need to be deleted as it is
intrusive and will lead to disputes, delays and litigation. Already power plants have to comply with
various statutory requirements and are also subjected to review by Lender’s Engineers for substantial
part of their operating life, making the IE role redundant. The present SBD has no provision for IE,
except for a limited role at the time of project commissioning.

Other issue pertaining to Normative availability & incentives, Concept of open capacity, Gross
Calorific Value (GCV), Indexed Fixed Charges, Change of scope, Right to dispatch et al also need
realignment so that the project is optimized.

Way Forward
Lessons learnt from the 4 UMPPs that have been contracted so far need to be taken as feedback in
order to revise the bid documents to make this investment opportunity attractive.

Firstly, the new operating model needs to be changed back to BOO (build operate own) which
would ensure longer life of critical national power
assets. It is after the initial years when the CAPEX New Operating & ownership model,
has been recovered by depreciation accounting that preferably on BOO basis
the power producers enjoy the real returns on
investments. Because of this clause the operator Comprehensive Bid document or PPA
would also not stop investing in the maintenance of including tariff adjustment provision with
plant (as there is no 25 year deadline) leading to change in international laws
accelerated asset development & up-gradation.
Quick processing of land acquisition,
Secondly, PPAs, originating out of both new & old environmental clearance, availability of
models, needs to include mechanism to consider water and R&R issues
prospective changes in International laws. CERC is
already taking this into account for other thermal Position UMPP as unbeatable FDI
opportunity
power plants which would use imported coal in
addition to domestic supply. The recent Fuel Supply Government partial or full financing of the
Agreements (FSAs) being signed between CIL and UMPPs
power plants would only ensure about 80per cent of
the coal requirement on a yearly basis. Domestic coal production being around 65per cent of the
total requirement, the remaining 15per cent would be imported by CIL to meet the FSA
requirements. The cost of the coal will be the pooled cost of domestic and imported coal prices and
would be a pass-through. Similar logic may be applied to the UMPPs where the coastal UMPPs had
recently encountered changing policies of the sourcing nation. Currently, both the coastal based
power plants are commercially unviable putting a question mark on the future of power plants based
upon imported coal.

Australia has now also issued a draft mining law to impose tax on coal and iron ore projects from
next year, it accounts for 5per cent of country’s coal import.
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Thirdly, parallel processing to obtain various clearance such as land acquisition, environmental
clearance, availability of water and other issues have not reached a stage to inspire confidence in the
bidders. Making such large chunks of land available without compromising prosperity of farmers is
yet another challenge. Taliya UMPP which is seeing the R&R expenditure shot up manifold to INR
3,612 Cr ($ 0.72 billion), is likely to have a serious impact on the project cost and the corresponding
tariff. Lessons may have been learnt from the fair & quick R&R (resettlement & rehabilitation) in
the case of Sasan & Mundra UMPPs.

Once these uncertainties for the developer would be reduced, the decreased insurance and hedging
cost would result in the proposition becoming far more attractive for domestic and foreign players.

Fourthly, if the GOI is able to remove the fore-mentioned challenges UMPP, may also be
positioned as an unbeatable FDI opportunity. Each of these UMPPs entails an investment of INR
18,000-24,000 crores (approximately $3.6-4.8 billion). It makes it an excellent opportunity to
encourage FDI and bolster the investment mood in India. Compared to $ 6-8 billion expected FDI
in Retail Sector over next 5 years foreign investment in UMPPs could have reached $ 32 billion
(assuming a conservative 50per cent of 16 of the approved or proposed project would have attracted
foreign investors). Not only would it have been smoother to implement from a political stand point
but also, far more beneficial for the economic growth.

Fifthly, GOI may consider introducing financing support to the private developer making the
projects even more attractive; a completely or partially support may be offered linked to time of
commissioning. Petroleum subsidy alone for 2011-12 was of nearly INR 1,40,000 crores ($ 28
billion) enough for supporting 7-8 UMPPs!

Conclusion: Reenergizing Power Sector by UMPPs?
On one hand there is a possibility that with adequate power, Indian economy will gallop ahead to a
double digit growth, would be able to lift more than 300 million population above poverty line, on
the other hand, if the power gap continues, the criticality and cascading effects of the power
shortage on various power intensive industrial sectors will ultimately further depress the economic
growth.

UMPPs still has the potential to change the Indian Power sector landscape. Political will & focus is
required for modifications in the Business Model, extended government support in project
financing, center staging the sector for FDI, time bound provision of issuing clearances and
transparent R&R.

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References
1. http://www.cea.nic.in/reports/proj_mon/broad_status.pdf
2. http://www.electricalmonitor.com/ArticleDetails.aspx?aid=1421&sid=2
3. http://www.pfcindia.com/Content/UltraMegaPower.aspx
4. http://www.cercind.gov.in/2012/Advice_Gov/26oct12.pdf
5. http://powermin.nic.in/whats_new/pdf/development_of_project.pdf
6. www.wikipedia.com
7. http://www.powermin.nic.in/generation/pdf/17thper cent20EPS.pdf
8. http://www.business-standard.com/india/news/power-deficit-for-2011-12-pegged-at-103-
per-cent/438884/
9. http://philip9876.com/tag/umpp/
10. http://blogs.wsj.com/indiarealtime/2012/10/12/retail-fdi-is-80-billion-opportunity-study/
11. http://www.business-standard.com/india/news/per cent5Cmulti-brand-retail-may-attract-
fdiup-to-3bn-in-2-yrsper cent5C/187206/on
12. http://www.pwc.in/assets/pdfs/publications-2011/wec-pwc-report.pdf

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About the author:

Mr. Sanjay Kaul is the founder President of the University of Petroleum & Energy Studies
in India (www.upes.ac.in). His responsibilities include positioning of the University nationally and
globally among the stakeholders i.e. policy makers, key influencers, academic and research
institutions and the industry. He in turn provides valuable and strategic input to the management,
board and faculty of the University in preparing to meet the challenges of future
indussry scenarios and skill sets required for the generation next professionals in a ‘Glocal’
world.

Mr. Kaul is a Management Graduate with distinction from St. Xavier Institute of Management,
Mumbai and has over 25 years of professional experience with Chevron, Shell, PwC and
Deloitte in the Energy Sector.

Mr. Sanjay Kaul is the former Leader for Energy & Resources Practice for Deloitte in India.
During his tenure he successfully led Deloitte’s initiative to respond to the aggressive growth in
Oil & Gas, Power, Mining, Renewable, and Nuclear Energy sectors. While with PwC and Deloitte,
he has advised most energy companies operating in India and has deep cross border
experience with most emerging economies of the Asian region.

Mr. Kaul was Regulatory advisor to Govt. on exploration licensing policy, drafting to enactment
advisory for legislations and policy framework to various State Governments (State entities.
SEZs, tariffs, emission norms, fuel quality, gas pricing, and pipeline policy).

Mr. Sanjay Kaul is also the founder Chancellor of University of Technology and Management,
a State University legislated by the Government of Meghalaya (www.utm.ac.in).

He is also a Director in the Indian School of Petroleum and Energy (www.isp.co.in) which is a
leading training and business solutions provider in the Energy Sector and has trained over 15,000
Energy professionals in India and abroad in the last 10 years.

He has been visiting faculty to several Universities, Business Schools and Industry Forums.
Led over 100 training programs, workshops on energy topics where more than 5000 senior energy
professionals have been trained. He is also a Fellow of the Energy Institute (EI, UK).

Awards: ‘Outstanding Individual Achievement Award’, 2005, by the Energy Institute, U.K. for his
contribution to the energy sector. Recently, he was felicitated at India Drilling & Exploration
Conference (IDEC) 2012 for his ‘invaluable contribution to the Petroleum industry, in different
roles’.

His believes: ‘That the future of Energy hinges upon leveraging the power of education &
innovation’ thus balancing the twin objectives of providing affordable energy and sustainable
development.

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