Power tariff for TN, Odisha UMPPs to be substantially higher: Ind-Ra

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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