Cap on the number of Ultra Mega Power Plant (UMPP) licences: Defies the logic of the market
The development of Ultra Mega Power Projects (UMPPs) has been identified as a major thrust area to meet the capacity addition target in the Indian Power sector. 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. 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’.
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. With the UMPP programme India has 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.
Till now four projects have been awarded and all have gone to the private sector. With Reliance Power winning three of the four projects and one project being won by Tata Power
The government may revive a proposal limiting the number of Ultra Mega Power Projects (UMPPs) awarded per developer. Given that the projects are awarded through a transparent mechanism of competitive bidding rather than through negotiations and the “old fashioned” MoU route, this will be a step in the wrong direction. What motivates the government to adopt this stand? If it is the issue of competition then it is unfounded, as currently only 12 percent of the installed capacity is in the private sector. Why did this issue not concern the government when the Central power utility NTPC and NHPC together have 35 percent of the installed capacity? Moreover, a proposal to impose a limit was made about a year back but was turned down by an Empowered Group of Ministers (EGoM) in November 2007 in the interests of increasing competition. Instead, the EGoM recommended putting stringent performance guarantee mechanisms in place to ensure companies do not overstretch themselves to bag UMPPs. This move defies the logic of the market as the competition for the market is as important as competition in the market. As competition in the market may not be affected if a single company wins many bid given that there are several state sector players as well as the Central Sector is quite an important player, limiting the number of players in the bidding through this cap will certainly restrict competition for the market. The tariff of Rs. 1.77 per Kwh of the last bid for the Jharkhand plant is a consequence of free entry, do not kill it!!
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February 17th, 2009 at 10:23 am
It is right the government would not be doing any good to competition environment by putting cap of number of UMPP projects a player can get, especially when selection process is competitive bidding, in which the best fitting player gets the contract.
However, BOO projects are complicated to monitor and manage. The problem of renegotiation under such projects is quite well known , where bidders quote lowest tariffs at the time of bidding and later on, on the basis of viability of projects they tend to renegotiate the tariffs. While it is important to put stringent performance guarantee mechanisms in place to ensure companies do not overstretch themselves to bag UMPPs, but the provision in BOO contracts does allow the incumbent to go for renegotiation later in the contract period under fair conditions. However, experience in Latin America and other countries showed that preventing unfair renegotiation under concession contracts is one of the main challenges every government face. Given the fact that concession contracts such as BOO and BOT are still at nascent stage in India, the government agencies hardly have any experience in this regard. Therefore, there is a lot more to learn about government’s ability to deal with renegotiation problem under concession contracts in India.