Bids for UMPPs likely to rise on capacity charge

Tags: News

New norms allow penalty for non-availability of plant

Even as the power companies demand tariff hikes for the existing ultra mega power projects (UMPPs), they are likely to bid higher for the two new UMPPs for which the financial bids will open on April 23 (Cheyuur, Tamil Nadu) and May 7 (Bedabahal, Odisha).

A senior Power Finance Corporation (PFC) official told Financial Chronicle that the bids for the Cheyuur and Bedabhal UMPPs would open in April and May, respectively, scotching rumours that the process would get delayed due to the general elections.

Earlier, the financial bids for the two UMPPs were expected to open by February-end.

Salil Garg, director of India Ratings, says the bidders are likely to factor in the development and capacity charges in the current bidding and it is highly possible that the bids would be very conservative compared with the previous biddings.

The bids are expected to be higher by Re 1 - Rs 1.5 per unit for import-based plants and by Re 1 to Rs 1.4 per unit for captive power plants, he said.

“There has been a shift in the UMPP risk matrix from fuel cost to capacity charge. The risk on fuel charge has come down as fuel cost has been made pass-through. But the risk on capacity charge has increased due to the possibility of cash flow mismatches. We believe the developers will price in these risks into tariffs benefiting from past experience,” said Garg.

The new bidding guidelines cater to the key issue of fuel risk being faced by UMPP developers by allowing complete pass-through of cost and a fixed percentage of cost recovery even when fuel availability is low.

At the same time, the new guidelines introduced new risks with respect to the capacity charge bidding methodology. They make cash flow mismatches inevitable for the developers. Bid prices would, therefore, reflect developers’ risk perception on these variables, said experts.

Kameswara Rao, energy utilities and mining leader at PricewaterhouseCoopers (PwC), said, “The bidders will most definitely quote higher rates as they are now cautious and will factor in various project development risks, and keep expectations of any upside to the minimum. Further, they will keep a safety margin for geological surprises as exploration studies are not complete.”

However, Rao believes bidders will take comfort from the recent CERC orders, and will not feel compelled to maintain additional provisions for extraordinary situations. This will reduce some of the risk premium they would have otherwise placed.

Under the new bidding guidelines or the standard bidding document, the machine availability is the complete responsibility of the developer while fuel availability risk has been shared. The new bidding guidelines allow for incentives or disincentives based on power station availability being higher or lower than 90 per cent of the installed capacity.

Besides, the developers have to maintain a minimum fuel stock sufficient for normative production for 10 days. However, if fuel is not available, but the plant is, its developer would be entitled to receive 70 per cent of the fixed charge for 80– 85 per cent of the total capacity tied with the utility.

This, consultants and market experts believe, is a positive development from the developer’s perspective and is in deviation with the earlier practice where fuel was the complete responsibility of the developer.

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