Winning firm thinks big

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Hemant Sahai and Sunei Kapur of HSA Advocates, a winner of the ‘energy, projects & infrastructure’ award, look into the future of ultra-mega power projects

After the unsuccessful attempt to augment generation capacity through mega power projects in the late 1990s, the concept of ultra-mega power projects (UMPPs) was introduced in 2005-06, with the aim of bringing down the cost of generating power through scale and competition. Since 2005-06, four UMPPs with an aggregate capacity of 15,920 MW have been awarded by the government.

Hemant Sahai
Hemant Sahai

The idea behind the UMPP programme was to have the government assume the developmental risks and provide a secure foundation to the private developer to undertake construction of the UMPPs.

The developers were expected to assume the risks related to construction and operation of UMPPs, including the long-term fuel risk. The UMPPs at Mundra in Gujarat and Krishnapatnam in Andhra Pradesh being situated at coastal locations were designed to be run on imported coal, while the Sasan UMPP in Madhya Pradesh and Tilaiya UMPP in Jharkhand being situated at coal pitheads were proposed to be integrated with dedicated captive coal blocks.

While the risk associated with fuel availability was ostensibly assumed by the government, the risk associated with imported fuel is borne by the developer. The purpose behind the government assuming development risks was to afford the developer an opportunity to generate power at a low cost. Although, the contractual framework provided for an escalable fuel energy charge, the escalable component was insufficient to insulate the developer from the extreme changes in the imported fuel price.

New economic structure

UMPPs were introduced as a response to the deficit in electricity faced in India but have been a failure by any benchmark. In order to revive the UMPP programme the Ministry of Power has introduced a new economic structure that seeks to address the issues recognized during the implementation of the first four UMPPs and the primary apprehensions with respect to financing of any infrastructure project.

Fuel charge: The underlying principle of a public-private partnership is that risks are allocated to the parties that are best suited to manage them. As the risk of variation in fuel price cannot normally be managed by the developer, the new economic structure provides for pass through fuel charges to the utilities, which, in turn, will be reflected in the tariff to be paid by the end consumers.

Alternative formulations for determining the fuel costs based on the source and pricing of the fuel supplies have been provided to ensure that the fuel charges are determined based on actual considerations. It may be argued that the new economic structure does not provide for pass through of imported fuel charges in entirety as the mechanism provided for computation of charges for imported fuel, being based on pre-selected coal indices, might not reflect the actual market prices.

Foreign exchange risk: UMPPs require a massive investment and developers usually seek lending from foreign institutions. Recognizing that developers would have no means to hedge long-term risk associated with foreign exchange fluctuations, the new regime provides that the foreign exchange risk would have to be borne by the procurers (utilities).

Development model: Under the earlier regime the ownership of the project assets was transferred to the developer, however, under the new regime the ownership of the project assets is retained by the utility.

Bid parameters: The new regime affords a simplified bid structure, requiring the developer to bid only a fixed charge to be revised annually as per a predetermined mechanism. Fuel charge is no longer one of the bid parameters, which reduces the risks to be assumed by the developer.

Alignment: Recognizing the importance of aligning the provisions of the power purchase agreement (PPA) with the fuel supply agreement (FSA), the PPA, as a condition precedent, requires the developer to execute a FSA incorporating the essentials of the PPA, thereby, putting all the developers on the same footing.

The new regime notified by the Ministry of Power represents a paradigm shift in the power sector. The new economic structure could enhance the bankability of UMPPs considerably and revive investor interest in the thermal power sector. The response to requests for quotations for the two recently announced 4,000-MW UMPPs – at Bhedabahal in Orissa and Cheyyur in Tamil Nadu – suggests a positive outlook of the industry, with participation by most of the country’s major power players. However, it remains to be seen whether the revisions in the standard bidding documents have any tangible effect on the fate of UMPPs in the long run.

Hemant Sahai is the managing partner of HSA Advocates. He can be reached at hemant.sahai@hsalegal.com. Sunei Kapur is an associate at the firm. HSA Advocates advised the Association of Power Producers in negotiating the revised power purchase agreemens for the new structure, with the government of India.