UMPPs for Orissa's power generation?
March 2011
In the concluding portion of a two-part series, a paper by students of IIM (Bangalore) speaks of how ultra-mega power projects (UMPPs) can turn Orissa—a power deficit state—into a power supplier.
To meet the growing needs of the Indian economy, it is estimated that generation capacity is to double itself in every 10 years for the next three decades at least. As such there is need to develop large capacity projects at the national level to meet the requirements of states and nation as a whole. Development of ultra mega power projects (UMPPs) is one step in that direction. The Government of India has taken an initiative to facilitate development of a few UMPPs of about 4,000 MW capacities using supercritical technology, under a tariff-based competitive bidding route. Power Finance Corporation (PFC), a Government of India undertaking, has been designated as the nodal agency by the government to conduct the bid process of UMPPs. For this, PFC incorporates a special purpose vehicle (SPV) for each project and power from the project is allocated by the Ministry of Power (MoP) in consultation with state representatives. The SPV is authorised by the procurers to undertake the bid process on their behalf.
Of the nine UMPPs initially identified, one was proposed to be setup at Bedabahal (See map) in Sundergarh district. Since this project falls into the build own operate (BOO) category, the state is not required to pay for this project. The proposed 4,000 MW UMPP that is being set up may be commissioned by 2013. Orissa will get about 1,300 MW (32.5 per cent of the total generation) power from this project. The rest of the power will be sold to other states which will help to earn revenue for the state. About Rs 16,000 crore is proposed to be invested in this UMPP which includes installation of the generating station and infrastructure to evacuate power from the project. A special purpose vehicle (SPV) called Orissa Integrated Power (OIPL), a wholly-owned subsidiary of PFC, was incorporated for this purpose in August 2006.
This UMPP project is a pit-head power project that will use indigenous coal as fuel. Ib valley coalfields, located about 30-40 km from the project site, has been allocated to meet the captive needs of the UMPP. These include three coal mines namely: Minakshi, Minakshi -B and dipside Minakshi with a reserve of 880 million tonne. A request has also been made to the coal ministry for allocation of Chaturdhara coal block. About 3,399.91 acres of land in eight revenue villages of the Sadar block under Sundergarh Assembly segment have been demarcated for this project. While 2,450.33 acres of land is required for the plant and colony, 949.58 acre is meant for the ash-pond. Out of the surveyed 3,399.91 acres of land, while 2,107.470 acre comes under the privately-owned category, 321.423 acre is government land. Allocation of 150 cusecs from Hirakud has been proposed to meet the project requirements.
The SPV in co-ordination with the MoP and Central Electricity Authority (CEA) will undertake all activities necessary to obtain the appropriate clearances, for example, environmental clearances for coal mines and water resources followed by selection of a project developer through a tariff-based international competitive bidding process. The SPV will then be transferred to the successful bidder who will then be responsible for implementation of the project. A draft for the long-term power purchase agreement (PPA) between the project developer and distributor will be proposed by OIPL that stipulates rules and guidelines for smooth transmission and distribution of power generated through this UMPP.
Of late, the project has got into trouble over environmental issues. The proposed ash-pond will affect 329.20 acres of forest land. The survey reports further reveals that the proposed project will affect 59.38 acres of forest land and 24.96 acres of public roads. Further, the environment ministry said that two of the three coal blocks associated with Bedabahal UMPP are in 'No go' areas where mining activity is not permitted. Of the three coal blocks allocated for this UMPP, Minakshi B and dipside of Minakshi, fall in the prohibited region, which is considered too green by the environment ministry to permit mining. Coal is crucial for the UMPP and valuation of the project and bids will greatly depend on availability of fuel sources. To mitigate this problem, an inter-ministerial group has already come out with a temporary arrangement that is expected to bring out several captive coal blocks from the assigned 'No go' areas. But this has to be evaluated further by the environment ministry before operationalising it.
In addition, PFC has set up two special purpose vehicles—Sakhigopal Integrated Power Company and Ghogarpalli Integrated Power Company—to facilitate the development of two additional UMPPs, which are proposed to come up closer to the sea and will have a generating capacity of 4,000 MW each. The state will get 50 per cent of the power generated from the two new UMPPs. Five possible locations have been shortlisted for the purpose. It includes Kirtania in Balasore district, Dhamara in Bhadrakh, Paradip in Jagatsinghpur, Astharanga in Puri and Ganja in Ganjam district. These are also going to be indigenous coal-based projects. Ghogarpalli, dipside of Ghogarpalli, Sakhigopal-B, Alaknanda and Bankhui are coal blocks that have been earmarked for the projects and are expected to produce a total of 2,240 mtpa of coal. The units will make use of sea water to meet their requirements.
There is a proposal to set up two transmission corridors to evacuate power from these projects. This includes a 765 kV line connecting Jharsuguda with Dharamjaygarh (near Raipur in Chhattisgarh) and an 800 kV DC line connecting Angul with Barnala in Punjab. While the project cost of the 765 kV Jharsuguda-Dharamjaygarh power corridor is estimated at Rs 5,000 crore, the cost of the 800 kV DC line from Angul to Barnala will cost about Rs 10,500 crore. These power corridors are proposed to be set up in joint venture between the PowerGrid Corporation of India (PGCIL) and CEA. PGCIL will mobilise the required funds for the project and it will be recovered through transmission tariffs and from power sold outside the state.
Possible flaws in PPAs for UMPPs
The PPA draft for Sundergarh UMPP project has several issues. Followings are a few of them along with suggestions on how to rectify the articles.
Article 1.1A: Any additional cost arising out of the changed unit configuration will be to the account of the seller and no adjustment in the tariff will be permitted. The seller can change the unit configurations. This article can be exploited by the contractor, ie, it may revise its contracted capacity or quality parameters to a lower value, ie, it will win the bid for 4,000 MW UMPP but may revise the configuration to 3,500 MW if the cost of power plant equipment suddenly surges or it may degrade the quality parameters while keeping the contracted capacity same. If the seller is permitted to change configuration without penalty clauses, it may exploit the situation.
Suggestion: The seller ought to put all these parameters (likely revision, etc) in the bidding process itself, but once the seller wins the bid, he should stick to it or pay penalties for deviation.
Article 4.4.3: If a procurer does not avail of power up to the available capacity provided by the seller corresponding to such a procurer's allocated capacity, the seller can sell to others and the amount realised in excess of energy charges will be equally shared by the seller with the concerned procurer. During this period, the seller will continue to receive the capacity charges from such procurers. If the seller sells such available capacity to shareholders of the seller or any direct or indirect affiliate of seller or shareholders of the seller without obtaining the prior written consent of the procurer, the seller will be liable to sell such available capacity to such entity at tariffs that are not less than the tariff payable by the procurer whose capacity is being sold pursuant to this article. In this period, the seller will continue to receive the capacity charges from such procurers. But this article has a serious flaw. The seller sells power to the government at a cheaper rate because the government provides subsidised coal to UMPP projects. While selling power outside, the seller should recover the true economic cost of coal from the third party and pass on the same to the government or it may degenerate into a scam. The seller generates power using subsidised coal and sells it to its affiliate at the contracted price—so the government ends up subsidising the power cost for private players.
Suggestion: The collect 'ad-valorem based coal royalty' should be collected if the seller sells electricity to a third party.
Article 4.6: The liquidated damages clause (maximum possible claim) in case of delay hardly serves as a deterrent. The clause is as follows:
Liquidated damage = A x (1+0.5n); Where, A = (CCum x dm x DR) 'n' – number of bidders, 'CCum' – contracted capacity in MW, 'dm' – delay in days and 'DR' – Rs 10,000/MW/day