The
Indian government has revised the standard bidding document (SBD)
post consultation with stakeholders for Case II bids. The current
round of UMPP bidding based on the new SBD would be a litmus test to
gauge the re..
NEW
DELHI
(Commodity
Online):
India
Ratings & Research (Ind-Ra) believes tariffs for the Tamil Nadu
and Odisha ultra mega power projects (UMPPs) under bidding currently
will be substantially higher than the previous round of UMPP bidding.
Ind-Ra expects that an imported coal-based UMPP could cover major
risks with tariff in the range of INR3.25/kwh-INR3.65/kwh which is
45%-60% higher than the levelised tariff of INR2.26/kwh for Coastal
Gujarat Power Limited.
For
domestic coal-based UMPPs in Odisha, Ind-Ra expects that bids could
emerge in the range of INR2/kwh-INR2.4/kwh which is 70%-100% higher
than INR1.19/kwh for Sasan Power Limited. Furthermore, variability in
bids can exist on account of capital cost assumptions, fuel prices,
inflation and return expectation, loan terms among others.
Litmus
test for new guidelines
The
Indian government has revised the standard bidding document (SBD)
post consultation with stakeholders for Case II bids. The current
round of UMPP bidding based on the new SBD would be a litmus test to
gauge the revival of considerably waned investor interest in the
sector. Ind-Ra believes the new SBD primarily seeks to assign
capacity risk to developers and fuel risk to consumers.
Fuel
risk a major deterrent:
The
new guidelines allow a complete pass-through of fuel risk to
off-takers thus preventing developers from significant risk. The key
risks now vested with developers are i) the escalation index for coal
and ii) quantum of domestic fuel charge specified at the time of bid.
Earlier, UMPP bidding guidelines required bidders to quote escalable
and non-escalable fuel charges, thus retaining fuel price risk with
developers. Bidders bid aggressively resulting in low tariffs for
earlier UMPPs as developers quoted higher non-escalable fuel charges.
Rising fuel costs and falling rupee led to operating losses
especially for UMPPs based on imported coal.
Cash
flow mismatches in capacity charge:
Developers
now need to quote a single capacity charge bid for the first year,
which would be escalated at a suitable index. The break-down of
capacity charge into escalable and non-escalable components has been
removed in the new guidelines. According to the new guidelines, there
is a strong likelihood of a cash flow mismatch for developers leading
to lower returns initially and higher returns thereafter. Ind-Ra
believes this move to be retrogressive as the earlier guidelines were
more scientific in nature and allowed developers to think through the
entire project life as capacity charge bids mirrored project cash
flow requirements.
High
Tariffs through Project Life:
The
escalation of the entire capacity charge would keep tariffs high for
the entire project life instead of a typical reduction in later years
of a project. This is because escalation is now applicable on the
entire capacity charge. The impact of escalation index on tariffs
could be magnified in an inflationary scenario during later years. In
the earlier guidelines, escalation was only applicable on escalable
component of the capacity charge which allowed for a reduction in
capacity charge.
Risk
matrix shifts:
There
has been a shift in UMPP risk matrix from fuel cost to capacity
charge. The risk on fuel charge has reduced by fuel cost
pass-through. However, the risk on capacity charge has increased by a
possibility of cash-flow mismatches. Ind-Ra believes developers will
price in risks into tariffs benefitting from past exper
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