The Hindu Business Line : UMPPs: Vital step in journey towards ‘power for all’

With the Government assuming a key role in reducing early project development risk, the total capacity addition through the 14 UMPPs proposed in the next six years is expected to be 56,000 MW, or about 40 per cent of the total capacity added in the last 60 years. While “power for all” is still some distance away, the UMPP roll-out is a journey in the right direction, say THILLAI RAJAN and AUMESH KUMAR SHUKLA.

In spite of the growth of the power sector since Independence, substantial peak shortages (14 per cent) and energy shortages (11 per cent) prevail in the country due to inadequacies in generation, transmission and distribution, apart from the inefficient use of electricity. To achieve the mission of “Power for All” by 2012, the Government has envisaged a capacity addition of about 100,000 MW during the current Plan.

The development of Ultra Mega Power Projects (UMPPs) has been identified as a major thrust area to meet the above capacity addition target. The UMPPs are very large sized projects, approximately 4,000 MW each, involving an estimated investment of Rs 16,000 crore. Each of these projects would supply power to a number of power distribution entities located in different States and are being developed on a Build, Own, and Operate (BOO) basis.

Nine UMPPs have been identified so far (four at pithead and five at coastal locations) by the Central Electricity Authority (CEA) in consultation with the States. The pithead projects will have captive coal blocks and the coastal projects will use imported coal.

Table 1 gives a snapshot of the proposed UMPPs. In addition to the nine projects, the Government is toying with the idea of five more UMPPs — four in Orissa and one more in Gujarat, taking the total number of such projects in the country to 14.

Table 1 also lists some of the positive aspects of the UMPP programme: First, the projects are being proposed in different States, with no State getting more than one UMPP. Such a geographical spread will help to prevent creating pockets of surplus power, reduce the impact of State political risks on the UMPP programme, and ensure that ancillary development from the project benefits many states.

Second, there has been a near equal split between pithead and coastal plants, which reduces the fuel availability risk on the entire programme.

Operating Framework

The Power Finance Corporation (PFC), the PSU under the Ministry of Power, has set up Special Purpose Vehicles (SPVs) for each UMPP, which are independent companies whose sole purpose is to operate the respective project. These SPVs, which act as project development companies, are 100 per cent subsidiaries of PFC. The board of these SPVs consist of representatives from PFC and the distribution companies of major power procuring states from the respective UMPP. As a project development company, these SPVs form an important role in conceptualising and formulating the project.

During the project development phase, the SPVs coordinate between various ministries and agencies of the Central Government and State Government on many aspects such as ensuring coal block allotment/ coal linkage, environment/forest clearances, water linkage, rehabilitation & resettlement (R&R) of project affected people, and signing of power purchase agreements.

Once the project development reaches a certain stage, the SPV invites bids for implementing the project through an international competitive bidding process. The successful bidder is identified on the basis of the lowest 25 years levellised tariff. Upon completion of the entire process for selection of the project developer, the SPVs are to be transferred to the selected bidders.

This operating principle has many advantages: First, for successful implementation of any project, risks should be allocated to those participants who are in a best position to manage these risks. The government would be the best equipped to manage the initial risks in the UMPP such as environment and forest clearances, R&R issues, etc.

With a governmental entity taking these initial risks in the UMPP, the perceived risks to the subsequent private bidder gets substantially reduced. Financially speaking, this reduces the cost of capital for the project, which results in lower tariffs. Second, infrastructure investments involve significant upfront investments and assets have little alternative use. For example, in a power project, significant upfront investments are needed before a single unit of power can be generated. Involving the distribution companies as stakeholders during the project development phase reduces the scope for ‘opportunistic behaviour’ post investment.

Mission of “Power for all”

Increasing the efficiencies in the distribution sector by cutting down the transmission losses and improving the plant load factor of all the existing installations are required measures, but it will not help us to reach the destination. The growth in the economy will result in substantial increase in base load demand, and we need to have low cost and reliable power capacity to meet the increase in demand. UMPPs are a right step in that direction for the following reasons:

During the last 60 years since Independence, the total capacity addition has been only 136,889 MW. Total capacity addition through 14 UMPPs in next six years is expected to be the tune of 56,000 MW, which is about 40 per cent of the total capacity added in last 60 years. UMPPs would help us in achieving significant growth in capacity addition, which in turn would help in achieving the mission of ‘Power for all’.

Global warming and climate change have become important issues in international agenda. As large consumers of fossil fuels, power plants will be increasingly monitored for their emission levels. The UMPPs would use supercritical technology that would result in lower emission levels, and thereby reduce the environmental risks on these projects. Table 2 gives indicative emission levels that can be achieved in Mundra UMPP.

Table 3 gives the list of UMPPs for which the bids have been finalised. Average expected tariff from UMPPs would be about Rs 2 per kWh, which is much lower than the present generation tariff of Rs 3-4 per kWh and unscheduled interchange (UI) charges up to the maximum level of Rs 10/KwH, depending on the frequency of the grid. Thus UMPPs will help achieve the Government’s target of generating ‘affordable power’ and would help in lowering electricity tariffs in the country.

Looking forward

It is said that those who cannot remember the past are condemned to repeat it. As far as the progress till date goes in the UMPP programme we have managed to avoid the mistakes of the IPP programme of the late 1990s. Projects are being awarded on competitive bidding rather than on memorandum of understanding. Projects use coal as fuel rather than expensive and price volatile fuels such as naphtha.

The Government is assuming a key role in reducing the early project development risk by securing key physical linkages and statutory clearances. While we still have a long way to go in accomplishing the mission of “power for all”, the UMPP roll-out is a journey in the right direction.

(Thillai Rajan is a faculty member in the Department of Management Studies, IIT Madras. His email is: thillair@iitm.ac.in. Umesh KumarShukla isa PGPPM student at IIM Bangalore and has worked in Central Electricity Regulatory Commission. He may be contacted at umeshk07@iimb.ernet.in)