Month: March 2013

UMPPs(Ultra Mega Power Projects) – Tangled things!!

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Ultra Mega Power Projects(UMPPs- http://en.wikipedia.org/wiki/Ultra_Mega_Power_Projects) ,launched in 2006 has been facing critical issues like fuel availability,escalation in fuel prices,delay in clearances.During the time of signing of PPAs by these UMPPs, developers were unaware of the fact that the fuel prices could escalate by 10-15%.Power developers are seeking a revision of PPAs to allow pass through of coal costs.TATA power has taken the foremost step relating to imported coal price issue in front of CERC (http://cercind.gov.in/2012/rop/Record%20of%20Proceeding%20in%20159%20of%202012%20CGPL%20.pdf)

Projects Awarded till date..
As of now, PFC(Power Finance Corporation) being the nodal agency has awarded 4 UMPPs – Sasan UMPP in Madhya Pradesh( Reliance Power),Tilaiya UMPP in Jharkhand(R Power),Krishnapatnam UMPP in Andhra Pradesh and MUndra UMPP in Gujarat (TATA Power). Mundra and Krishnapatnam is based on Imported Coal from Indonesia whereas Sasan and Tilaiya have been allotted coal blocks.Tariffs were highly competitive striking an average figure of Rs 1.88/unit.

UMPPs awarded (http://saiindia.gov.in/english/home/Our_Products/Audit_report/Government_Wise/union_audit/recent_reports/union_performance/2012_2013/commercial/Report_No_6/Annexures.pdf)
1. Sasan Power Limited, Sasan UMPP, Madhya Pradesh – Rs 1.196/unit
2. Coastal Gujarat Power Limited, Mundra UMPP, Gujarat – Rs 2.264/unit
3. Coastal Andhra Power Ltd., Krishnapatnam UMPP, Andhra Pradesh – Rs 2.33/unit
4. Jharkhand Integrated Power Ltd., Tilaiya UMPP, Jharkhand – Rs 1.770/unit

Mundra UMPP was first to commence its operations with commissioning of 3 x 800 MW units in 2012 and last unit was synchronized in Jan 2013 which were quite ahead of their schedule. CGPL (Coastal Gujarat Power Ltd.) -TATA’s wholly owned subsidiary(SPV) has been incurring losses due to change in the regulatory framework in Indonesia’s coal regime(http://news.mitraismining.com/pages/IndonesianMiningRegulation.aspx)
In July 2012,TATA Power sought a tariff hike in lieu of change in coal prices as DISCOMs refused to revise the PPA terms.In its tariff petition of TATA,it has stated that hike in Indonesia coal prices will lead to rise in generation cost by Re 0.67- Re 0.70/Unit,thereby denting the cash flow statements of TATA Power.Inspite of this deadlock of tariff,TATA Power continue its operations of Mundra while R Power stalled work at the Krishnapatnam UMPP.R-Power held that the operations could start only after the revision of Standard Bidding Documents signed with DISCOMs.Delhi High Court has suspended the petition filed by R Power and thus they have plans to approach CERC.

On the other hand,Sasan UMPP has made the steady progress. The first 660 MW unit is expected to commission by 2012-13.In Jan 2013,465 kV switchyard was commissioned in order to provided initial start up power.R Power has plans to commission the remaining units with a time interval of 3-4 months.As far as Coal production is concerned from Moher and Mpher Almohri,its much ahead of the targeted time frame. R Power is also struggling with legal hurdles w.r.t ambiguity of coal usage.Company was asked to stop production in the aforesaid coal blocks in lieu of R Power’s linking the Coal Scam by CAG.

R Power’s third UMPP Tilaiya has faced many delays due to challenges in obtaining forest clearances and land acquisition. As of Nov 2013,Stage II forest clearance has been awarded thereby keeping the project in limbo.

Progress Report of UMPPs released by CEA can be found at : http://cea.nic.in/reports/articles/thermal/umpp.pdf

Future Scenario!!
The Power Ministry has identified additional 12 sites to set up UMPPs in different states and these are:
UMPPs in Process:
1.Chhattisgarh Surguja Power Ltd., Chhattisgarh UMPP , District Surguja
2.Orissa Integrated Power Ltd., Orissa UMPP, District Sundargarh
3.Coastal Tamil Nadu Power Ltd., Cheyyur UMPP, Tamil Nadu , District Kanchipuram
4.Tatiya Andhra Mega Power Ltd., Andhra Pradesh 2nd UMPP, District Prakasam
5.Deoghar Mega Power Ltd, Jharkhand 2nd UMP, Disrtict Deoghar
6.Sakhigopal Integrated Power Co. Ltd., Orissa 1st Additional UMPP, District Bhadrak
7.Ghogarpalli Integrated Power Co. Ltd., Orissa 2nd Additional UMPP, District Kalahandi
8.Coastal Maharashtra Mega Power Ltd. Maharashtra UMPP, District Sindhudurg
9.Coastal Karnataka Power Ltd., Karnataka UMPP
10.Bihar UMPP
11.2nd UMPP in Tamil Nadu
12.2nd UMPP in Gujarat

Progress on the bidding process of only 2 UMPPs (Sarguja-CHattisgarh and Bedabahal-Odisha) have stalled as the coal block areas have been classified as No- Go areas. by MoEF. Despite the elimination of problem of Go/No Go areas ,the bad omen of clearances still pending with Sarguja UMPP.Bedabahal UMPP re invited pre qualification bids as it has been awarded green signal as far as MoEF is concerned.
MoP has finalized a new set of SBDs for UMPPs but the approval is still awaited from EGoM.The ministry has proposed separate rounds for Coal linkage and Captive coal blocks. Moreover,the bidding of UMPP will be based on first year tariff rather than 25 year levellised tariff.(http://www.powermin.nic.in/whats_new/pdf/Guideline_for_determination_of_tariff_and_SBD_for_case_1.pdf)
Earlier, in Oct 2012 CERC had suggested revising UMPPs on BOO Model rather than DBFOT Model. Moreover,there was a proposal to supply 100% of the coal to the power plants fulfilling the shortage through coal import.
Thus in the light of various issues,the development if UMPPs have been questioned by power plant developers.There is a need to build flexibility within the PPA structure to deal with uncertainties in a manner that is quantifiable for the prospective investors.

References : PFC India,UMPP,Wikipedia,Powerline Magazine

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Rangrajan Committee report on natural gas pricing and its Repercussions on sector:

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Fossil fuels play a major role in meeting the energy demand of the nation and are expected to continue doing so in the foreseeable future. Oil & gas resources form a major part of our primary energy mix and touch our lives in more ways than one. The developing Indian economy has been constantly challenged for sourcing primary energy. India is dependent on imported crude oil to the extent that recently the US Energy Information Administration (EIA) has observed that India was the world’s fifth largest net importer of oil in 2012, importing more than 2.2 million bbl. /d , or about 70 percent of consumption.
Natural gas pricing in India is diverse and complex in nature. India is one of the few countries where different types of basic prices of gas are prevalent. Across the gas value chain and particularly for consumers, the complexity in the pricing of natural gas in India has resulted in enormous problems.
OILProposed pricing formula by Rangarajan Committee implies gas price at USD8/mmbtu
Background for gas pricing in India: Committee observed that as there is no gas on-gas competition in India, which is unlikely to happen for several years, it proposed a formula based on wider global prices. Further, even as the global gas markets are not coherent like oil markets, committee proposed a formula based on average of net-backs for producers and average of exchange traded prices.
Formula proposed by the committee: Arms-length price in India = 12-month average of:
a) volume-weighted net-back pricing at well head for gas producers who export to India and
b) volume-weighted price of US’s Henry Hub, UK’s NBP and Japan’s JCC linked price. Committee has not commented on domestic gas allocation to sectors.
The suggested formula will apply to pricing decisions made in future, and can be reviewed after five years when the possibility of pricing based on direct gas-on-gas competition may be assessed.

Review of recommendations related to Natural Gas Price:

•Since the PSC-related key financial recommendations are on prospective basis, they would not impact current PSCs and hence would not impact the profitability/NAV of current producing blocks of RIL/Cairn India.
•However, the proposed gas pricing formula will have a meaningful impact on the domestic gas producers (RIL, ONGC, Oil India) as RIL’s KG-D6 gas price revision is due in March 2014 and would also influence prices for other gas producers like ONGC.
• Committee’s recommendation to determine gas price through arms-length is a very positive one. However, views/affordability of the key consuming sectors like power and fertilizer would also weigh heavily on the final gas price decision in March 2014. The higher input price for fertilizer will have implications.

Impact of Recommendations:
•Domestically produced gas price in the country would then be around $7-8/mmBtu at the current rate.
However, any increase in domestic prices would negatively impact the downstream consuming sectors, predominantly power and fertilizer sectors. While power generation cost would increase compelling an increase in power tariffs, increase in feedstock cost for fertilizer sector would lead to increase in governments’ outlay on fertilizer subsidy. Currently power and fertilizer sectors consume about 2/3rd of domestic gas. For other industries which consume domestic gas as fuel the alternative fuel choice is liquid fuels. As a result any increase in domestic gas price is not likely to affect its competitiveness vis – a vis other liquid fuels.
Moreover ,other effects which can be summarized are as follows:
-ise in inflation sharply which is around 10.16 % already in double digit.
-rise in prices in almost all sectors major sectors affected will be Transport, Auto, FMCG, Textiles.
-The rise in LPG gas will cut the common man’s pocket deeply.
-Impact on banking sectors as the hike may lead to raise in inflation which will urge RBI to raise interest rates thus affecting banks due to tightening of CRR.
-The decision will help to rein in the fiscal deficit, which is projected at 5.5 percent of the gross domestic product in 2010/11 and free up revenues for other programs.
-State oil firms currently lose about Rs 215 crores per day on selling fuel below the imported cost. Thus it will help these companies to make profits.

Thus this can be summarized with a view point that there are some of the key issues that need to be taken care before implementing the recommendations by the Rangrajan committee because ultimately it is the end user or consumer who will be facing the brunt of the increase in net price in natural gas and LPG.
There is an urgent need for Indian policymakers to draw on market oriented solutions to resolve the immense uncertainty that exists in the gas sector.
References :Report of the Committee on Pricing and Taxation of Petroleum Products , 2006 (Rangrajan Committee Report),CII,MoPNG