<p>The new bidding norms appeared to have revived investor interest in the power sector. </p>.<p>A case in point is the Kerala government, which had invited bids for supplying 450 MW of power for which 23 major power firms — the who's who among Indian power producers — prequalified for the bid. <br /><br />Experts in the sector ascribed the development partly to the new bidding norms which have been implemented and partly to the cleaning up of the books of state electricity boards(SEBs).</p>.<p>They said that SEBs have lowered the risk of electricity generating players while the latter has enabled SEBs to resume power purchases. <br /><br />The list of 23 firms available on the website of the Kerala State Electricity Board (KSEB) who have qualified for the bid includes Adani Power, Adhunik Power and Natural Resources, Bharat Aluminium, DB Power Essar Power and East Coast Energy.<br />|<br />Among others are GMR Kamalanga Energy, Ideal Energy Project, IndiaBulls Power JP Power Ventures, Jindal Power, KSSK Energy Ventures, and Lanco Power. <br /><br />Bids for power procurement are sought in two ways. In Case 1, the quantum and time period of power procurement is identified, but fuel type, sources and the plant location are not specified.</p>.<p> The KSEB bids, industry sources say, have been called through the so-called Case 1 route under which the players have to design, build finance, own and operate a power plant for a period of 25 years. <br /><br />Under that laid down provision, the quantum and time period of power procurement is identified, but fuel type sources and plant location are not specified. </p>.<p>However in a Case 2 bidding, such as the one for so-called UMPPs (Ultra Mega Power Projects), resources like fuel and water linkages are identified and provided to developers quoting the lowest amount. </p>.<p>With this, the KSEB contract is the first of its kind in the power sector offered by an SEB this fiscal year.<br /><br />In a Case 2 bidding scenario, such as the one for ultra mega power projects (UMPPs) of the order of 4,000 Mw or above, resources such as land, fuel and water linkages are identified and in some cases provided to the developer quoting the lowest amount. </p>.<p>“This is a test case for the new Case 1 bidding document, where bidders have to capture all risks and translate to a single first-year tariff number,” said Debasish Mishra, senior director (consulting) of Deloitte Touche Tohmatsu India Pvt Ltd.<br /><br />Minimising developer risk<br /><br />“The first year number would get escalated as per the index prescribed in the bid document,” Mishra said and pointed out that the earlier Case 1 norms required power firms to quote year-on-year tariff increases for the entire 25-year duration of the power purchase agreement (PPAs). They also had to specify the fixed and variable component of the tariff and mention whether it could be increased.<br /><br />Under the new norms, points out an expert, the developer’s risk has been minimised with the tariff increase based on indexation provided by the Central Electricity Regulatory Commission (CERC), the apex power sector regulator.</p>.<p>“Given the slowdown in demand for electricity, and hence, the drought in Case 1 procurement by discoms (distribution companies), there is tremendous interest among developers to participate and win this bid. Winning long-term contracts will also facilitate getting fuel supply from Coal India,” Mishra says.<br /><br />There have been instances wherein such PPAs have gone into litigation with the successful bidder unable to predict the unforeseen escalation in inputs such as cost of imported coal. <br /><br />Also, putting a value on tariff for 25 years became difficult as the debt taken for these projects is usually for a period of 11 years.<br /><br /> Many power projects, including those of state-owned NTPC, are currently operating at sub-optimal levels. “Over the last 12 months, many SEBs (such as Haryana, Rajasthan, West Bengal and Gujarat) have also lowered their plant utilisation because of demand issues. Thermal generation in 2013-14 grew only 4 per cent year-on-year despite 12 per cent growth in capacity,” says a recent UBS Global Equity Research report.<br /><br />“Currently, plant load factors are the lowest in the last 10 years,” the report says adding: “we think poor demand from state electricity boards reflects inability or unwillingness of distribution companies to buy enough power to meet real demand”. <br />Poor discom health<br /><br />Policy interventions, debt restructuring initiatives and tariff hikes are expected to improve the financial health of SEBs. Electricity distributors owe Rs 2 trillion to banks and other financial firms. </p>.<p>So, the health of the power distribution sector holds the key to the success of power generation projects in a sector seen as a key bottleneck in efforts to sustain and boost growth. <br /><br />Notwithstanding the new bidding norms, experts maintain that several transactions were in play and cited investments made or interest evinced by foreign entities other than domestic corporates.</p>.<p> For instance, the Piramal Group led by Ajay Piramal is scouting for investment opportunities in the Indian power sector, in a move that is as much an indication of the intentions of a conglomerate with money to invest as it is of growing investor interest in the business. <br /><br /> “The Piramal Group is looking at investment options and is evaluating opportunities. It has the resources and the appetite,” said a Mumbai-based power sector analyst, speaking on condition of anonymity.<br /><br />Foreign entities evincing interest in the power sector include JP Morgan Chase and Co’s asset management unit, Sembcorp Industries Ltd of Singapore and France’s GDF Suez SA, among others.<br /><br /> JP Morgan Asset Management invested $150 million in the Bhaskar Group’s Diligent Power in May 2013; Nagarjuna Construction Co has been reported to be in talks with Sembcorp to sell a stake in a power plant; and Meenakshi Energy and Infrastructure Holdings has agreed to sell a 74 per cent stake in a 1,000 MW coal-fired power project to GDF Suez.<br /><br /> The debt-laden Jaypee Group is close to selling two of its three operating hydroelectric projects to a consortium led by Abu Dhabi National Energy Co.<br /><br /> PJSC, known as TAQA. Analysts explain that reasonable valuations have played a part in reviving investor interest in the power sector, as has rupee depreciation, which has sweetened such deals for foreign buyers. <br /><br />The rupee has depreciated 11 per cent against the dollar this year, making Indian assets cheaper for foreign buyers to acquire. <br /><br />Investor interest reviving<br /><br />Energy experts say the evidence on hand does suggest a return of investor interest in the power business.</p>.<p>“There are some transactions that are happening. There are distressed assets; with valuations being depressed, it make sense,” former power secretary Anil Razdan says, adding, “For the sector to fully recover, more financial closures need to be done for which fuel issues need to be resolved. Projects need to run on full capacity to earn revenue.”|<br /><br />Power plants have been operating below production capacity because of fuel shortages. Things now seems to be improving with utilities tieing up fuel supply agreements for 157 units totalling 71,000 MW till November.</p>.<p>Trading in electricity witnessed a spike as the states of Madhya Pradesh, Rajasthan, Chhattisgarh, Delhi and Mizoram, fearful of political backlash, bought additional power to avoid outtages (and consequent voter outrage) during the November-December state assembly elections.<br /><br />“We have to also keep in mind that these asset sales are happening in projects that are operational or will soon start commercial operations. This mitigates the risk of land acquisition, approvals, clearances and project development. It appeals to foreign investors,” a power sector analyst said.<br /><br />Sambitosh Mohapatra, an ex-director with PricewaterhouseCoopers, said, “India is witnessing a revival of interest in investments, especially from international operators and investors from the Middle East, Europe and Japan, in the areas of renewables, conventional power generation (in advanced stages of construction or operational) and electrical equipment.”<br /><br />“It’s on the back of a positive outlook on the changing contours of the economy and expectations of improved governance. It also marks a phase of consolidation with the entry of large strategic operators bringing in synergies buying out small local players more interested in EPC (engineering, procurement and construction) play,” Mohapatra added.<br /><br />An ambitious bailout plan for state government-owned distribution companies announced in September last year is also expected to help improve the finances of state electricity boards and hence their ability to procure power. </p>.<p>“The scheme has been successfully implemented in Tamil Nadu, UP (Uttar Pradesh), Rajasthan and Haryana. FRPs (financial restructuring plans) have also been finalised for the states of Bihar, Jharkhand and Andhra Pradesh. <br /><br />Rationalisation of tariffs has already been carried out by 24 state and joint electricity regulatory commissions,” the power ministry said in a statement recently.</p>.<p>With attempts being made to bridge the gap between the cost of electricity procurement and tariff realisation, the bailout plan for discoms from the Centre will most likely include regular tariff revisions as part of the conditions, say experts.<br /><br /> This should be cause for cheer for both existing and prospective investors in the sector.</p>
<p>The new bidding norms appeared to have revived investor interest in the power sector. </p>.<p>A case in point is the Kerala government, which had invited bids for supplying 450 MW of power for which 23 major power firms — the who's who among Indian power producers — prequalified for the bid. <br /><br />Experts in the sector ascribed the development partly to the new bidding norms which have been implemented and partly to the cleaning up of the books of state electricity boards(SEBs).</p>.<p>They said that SEBs have lowered the risk of electricity generating players while the latter has enabled SEBs to resume power purchases. <br /><br />The list of 23 firms available on the website of the Kerala State Electricity Board (KSEB) who have qualified for the bid includes Adani Power, Adhunik Power and Natural Resources, Bharat Aluminium, DB Power Essar Power and East Coast Energy.<br />|<br />Among others are GMR Kamalanga Energy, Ideal Energy Project, IndiaBulls Power JP Power Ventures, Jindal Power, KSSK Energy Ventures, and Lanco Power. <br /><br />Bids for power procurement are sought in two ways. In Case 1, the quantum and time period of power procurement is identified, but fuel type, sources and the plant location are not specified.</p>.<p> The KSEB bids, industry sources say, have been called through the so-called Case 1 route under which the players have to design, build finance, own and operate a power plant for a period of 25 years. <br /><br />Under that laid down provision, the quantum and time period of power procurement is identified, but fuel type sources and plant location are not specified. </p>.<p>However in a Case 2 bidding, such as the one for so-called UMPPs (Ultra Mega Power Projects), resources like fuel and water linkages are identified and provided to developers quoting the lowest amount. </p>.<p>With this, the KSEB contract is the first of its kind in the power sector offered by an SEB this fiscal year.<br /><br />In a Case 2 bidding scenario, such as the one for ultra mega power projects (UMPPs) of the order of 4,000 Mw or above, resources such as land, fuel and water linkages are identified and in some cases provided to the developer quoting the lowest amount. </p>.<p>“This is a test case for the new Case 1 bidding document, where bidders have to capture all risks and translate to a single first-year tariff number,” said Debasish Mishra, senior director (consulting) of Deloitte Touche Tohmatsu India Pvt Ltd.<br /><br />Minimising developer risk<br /><br />“The first year number would get escalated as per the index prescribed in the bid document,” Mishra said and pointed out that the earlier Case 1 norms required power firms to quote year-on-year tariff increases for the entire 25-year duration of the power purchase agreement (PPAs). They also had to specify the fixed and variable component of the tariff and mention whether it could be increased.<br /><br />Under the new norms, points out an expert, the developer’s risk has been minimised with the tariff increase based on indexation provided by the Central Electricity Regulatory Commission (CERC), the apex power sector regulator.</p>.<p>“Given the slowdown in demand for electricity, and hence, the drought in Case 1 procurement by discoms (distribution companies), there is tremendous interest among developers to participate and win this bid. Winning long-term contracts will also facilitate getting fuel supply from Coal India,” Mishra says.<br /><br />There have been instances wherein such PPAs have gone into litigation with the successful bidder unable to predict the unforeseen escalation in inputs such as cost of imported coal. <br /><br />Also, putting a value on tariff for 25 years became difficult as the debt taken for these projects is usually for a period of 11 years.<br /><br /> Many power projects, including those of state-owned NTPC, are currently operating at sub-optimal levels. “Over the last 12 months, many SEBs (such as Haryana, Rajasthan, West Bengal and Gujarat) have also lowered their plant utilisation because of demand issues. Thermal generation in 2013-14 grew only 4 per cent year-on-year despite 12 per cent growth in capacity,” says a recent UBS Global Equity Research report.<br /><br />“Currently, plant load factors are the lowest in the last 10 years,” the report says adding: “we think poor demand from state electricity boards reflects inability or unwillingness of distribution companies to buy enough power to meet real demand”. <br />Poor discom health<br /><br />Policy interventions, debt restructuring initiatives and tariff hikes are expected to improve the financial health of SEBs. Electricity distributors owe Rs 2 trillion to banks and other financial firms. </p>.<p>So, the health of the power distribution sector holds the key to the success of power generation projects in a sector seen as a key bottleneck in efforts to sustain and boost growth. <br /><br />Notwithstanding the new bidding norms, experts maintain that several transactions were in play and cited investments made or interest evinced by foreign entities other than domestic corporates.</p>.<p> For instance, the Piramal Group led by Ajay Piramal is scouting for investment opportunities in the Indian power sector, in a move that is as much an indication of the intentions of a conglomerate with money to invest as it is of growing investor interest in the business. <br /><br /> “The Piramal Group is looking at investment options and is evaluating opportunities. It has the resources and the appetite,” said a Mumbai-based power sector analyst, speaking on condition of anonymity.<br /><br />Foreign entities evincing interest in the power sector include JP Morgan Chase and Co’s asset management unit, Sembcorp Industries Ltd of Singapore and France’s GDF Suez SA, among others.<br /><br /> JP Morgan Asset Management invested $150 million in the Bhaskar Group’s Diligent Power in May 2013; Nagarjuna Construction Co has been reported to be in talks with Sembcorp to sell a stake in a power plant; and Meenakshi Energy and Infrastructure Holdings has agreed to sell a 74 per cent stake in a 1,000 MW coal-fired power project to GDF Suez.<br /><br /> The debt-laden Jaypee Group is close to selling two of its three operating hydroelectric projects to a consortium led by Abu Dhabi National Energy Co.<br /><br /> PJSC, known as TAQA. Analysts explain that reasonable valuations have played a part in reviving investor interest in the power sector, as has rupee depreciation, which has sweetened such deals for foreign buyers. <br /><br />The rupee has depreciated 11 per cent against the dollar this year, making Indian assets cheaper for foreign buyers to acquire. <br /><br />Investor interest reviving<br /><br />Energy experts say the evidence on hand does suggest a return of investor interest in the power business.</p>.<p>“There are some transactions that are happening. There are distressed assets; with valuations being depressed, it make sense,” former power secretary Anil Razdan says, adding, “For the sector to fully recover, more financial closures need to be done for which fuel issues need to be resolved. Projects need to run on full capacity to earn revenue.”|<br /><br />Power plants have been operating below production capacity because of fuel shortages. Things now seems to be improving with utilities tieing up fuel supply agreements for 157 units totalling 71,000 MW till November.</p>.<p>Trading in electricity witnessed a spike as the states of Madhya Pradesh, Rajasthan, Chhattisgarh, Delhi and Mizoram, fearful of political backlash, bought additional power to avoid outtages (and consequent voter outrage) during the November-December state assembly elections.<br /><br />“We have to also keep in mind that these asset sales are happening in projects that are operational or will soon start commercial operations. This mitigates the risk of land acquisition, approvals, clearances and project development. It appeals to foreign investors,” a power sector analyst said.<br /><br />Sambitosh Mohapatra, an ex-director with PricewaterhouseCoopers, said, “India is witnessing a revival of interest in investments, especially from international operators and investors from the Middle East, Europe and Japan, in the areas of renewables, conventional power generation (in advanced stages of construction or operational) and electrical equipment.”<br /><br />“It’s on the back of a positive outlook on the changing contours of the economy and expectations of improved governance. It also marks a phase of consolidation with the entry of large strategic operators bringing in synergies buying out small local players more interested in EPC (engineering, procurement and construction) play,” Mohapatra added.<br /><br />An ambitious bailout plan for state government-owned distribution companies announced in September last year is also expected to help improve the finances of state electricity boards and hence their ability to procure power. </p>.<p>“The scheme has been successfully implemented in Tamil Nadu, UP (Uttar Pradesh), Rajasthan and Haryana. FRPs (financial restructuring plans) have also been finalised for the states of Bihar, Jharkhand and Andhra Pradesh. <br /><br />Rationalisation of tariffs has already been carried out by 24 state and joint electricity regulatory commissions,” the power ministry said in a statement recently.</p>.<p>With attempts being made to bridge the gap between the cost of electricity procurement and tariff realisation, the bailout plan for discoms from the Centre will most likely include regular tariff revisions as part of the conditions, say experts.<br /><br /> This should be cause for cheer for both existing and prospective investors in the sector.</p>
