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Feature | April 2015

BoP the builder

A number of players in the balance of plant (BoP) sector, who had a phenomenal order intake in the past several years, are currently reeling under tremendous working capital stretch because of stuck inventory and huge receivables. However, with the government´s push towards more power generation, the market outlook for BoP systems is likely to make strides in the positive direction.

Now, for those who are looking out for an opportunity in this sector for a couple of years may breathe a sigh of relief. And the reason is, with two rounds of coal auction garnering around Rs 2 lakh crore, with a commitment of 350 million tonnes supply of coal means good days are ahead for BoP players. Let´s take a stock of some statistics which will back the claim. Since the thermal power contribution in the country is expected to reach about 1.4 lakh MW by 2017, the need of the hour in front of power generation companies is to set up power plants in least possible time. In this view, the power generation companies want to speed up the projects by floating it on BoP basis, thus having a single point supplier.

So undoubtedly the BOP market is developing at a fast pace.

Consider this: At present, around 38,400 MW of power projects executed by players like major private giants Reliance, Adani Power, Tata Power, Sterlite Energy Ltd, Athena Energy Essar Power Ltd etc., are under way, bringing a huge chunk of opportunities for BoP players.

And, with 8,400 MW of power projects executed by State-run PSUs underway, the demand for BoP seems to be never ending-at least for next couple of years. The key sub-systems of BoP for thermal power plants typically include coal handling plants (CHPs), ash handling plants (AHPs), water treatment facilities, cooling towers, chimneys, fuel oil systems, effluent treatment and switchyard. Each BoP activity comprises components like civil works, structural works, electro-mechanical equipment, and control and instrumentation.

Meanwhile, most of the players, those who offer complete solution of BoP and those who survive on the blessings of engineering, procurement and construction contractors, are optimistic about receiving of orders soon.

A Pune-based player, Deccan Mech & Chem, feels that the releasing of coal blocks is going to boost the stagnated market of power production and thus the coal and ash handling sector.

According to the company´s technical director, Deenar Apte, ´Some defined policy about power purchase agreement is required for private power producers to take forward their stalled projects, (and this) can give a boost to the power sector.´

The views were echoed by Indus Group India. Says Ashok Kumar Sinha, Partner, ´As far as coal handling system is concerned, we expect orders from government based projects more.´

That said, with the kind of opportunities that lie ahead, coal and ash handling equipment is expected to witness a demand of about 25 to 30 per cent on a year-on-year basis. However, apart from just evacuation from coal mining, there seems to be a great demand from operators of thermal power plants which require quality coal. Although Indian coal is available in abundant quantity, quality is a major concern.

BTG market
Now for the first half, tenders for nearly 5,000 MW have been finalised. And there are possibilities that for rest of the year, tenders of around 15,000 MW are in advanced stages of finalisation. In addition to the orders, according to BHEL, one of the biggest PSUs in BTG as well as EPC sector, it is likely to get on almost one-to-one basis from States like Telangana, Andhra Pradesh or Karnataka or some other States.

Meanwhile, BHEL, in some projects, is already placed as the lowest bidder, like the Pakaldul hydroelectric project for electromechanical equipment, with Patel Engineering being the main supplier. This is a 1,000 MW project.

The order is yet to be released. It is under clearance by the Environment Ministry and the J&K government has recently accorded tax exemption also for this project. So with all these things, ordering for the project is expected to happen at any time now and there are other projects like Udangudi in Tamil Nadu.

In addition, NTPC and MAHAGECNO too are likely to come up with tenders. In the next few months, NTPC to issue request for qualification of Khargone and Barethi power projects. Whereas, MAHAGENCO is likely to float tenders for their project in Bhusawal. Other than that, the State of Telangana will float tenders for a 6,000 MW project.

It is expected that BTG project awards will improve from just 6 GW in FY14 to 10-12 GW annually during FY15-17. This is driven by the possibility of improved order intake from average levels of Rs 20,000 crore in FY12-14 (gross intake, excluding order cancellations) to an average of Rs 28,000 crore in FY15-17E. During FY14, of the Rs 20,400 crore of power sector intake, excluding R&M (Rs 3,400 crore)/Hydro-Nuclear-Gas (Rs 2,000 crore), the thermal power share was Rs 15,000 crore. Experts in the BTG sector expect this number to increase to Rs 22,000 crore during FY15-17E, led by expectations of industry ordering at 10-12 GW annually (vs. 6 GW in FY14). Thus, the analysts in the power sector expect BTG to bounce back three times in FY15.

Single contract approach
Meanwhile, in terms of awarding contracts for BoP, most of the independent power producers (IPPs) and public sector are looking out for awarding contracts to single party EPC players. In an earlier conversation, Prayasvin Patel, Chairman & Managing Director of Elecon Engineering Co Ltd mentioned that IPPs and PSUs are either going for EPC contracts, awarding the contract to a single EPC player which on later stage of execution can break the total plant into boilers and turbine generator (BTG) package, water treatment package, coal handling plant, ash handling plant and chimney.

And since IPPs and PSUs are looking for awarding single contact award in BoP segment, leading equipment suppliers who have expertise in their own field generally do not want to carry the risk of whole of BoP scope, contradicting the entire approach of IPPs and PSUs. Therefore, no capable equipment supplier in the field of electrical, coal handling plant, chimney or water treatment is interested in taking the responsibility of BoP. Some who have taken BoP contracts have not been successful.

Meanwhile, there have been instances in the past where plant commissioning has been held up due to deficiencies in BoP systems. But for experts in this segment these issues were relating to system integration and selection, where many new developers in their endeavour to address their capex constraint could not optimally integrate the various packages of BoP.

Going forward experts see that credible players who can provide systems through latest technology that brings the life-cycle value to the developers with greater operational efficiency will lead the pack as partners to the BTG suppliers.

´We see a lot of BTG suppliers also getting into this segment as end-to-end solution providers for developers,´ a senior official from KEC told POWER TODAY in an earlier reply.

BoP execution
Diligent and efficient project management plays a key role in execution of a BoP project. Along with that, effective communication with various package vendors with a clear cut scope division is important for effective and timely completion of a BoP project. This in turn helps to bring down the delays and costs. On top of it, time is the most important factor while executing the BoP project too. Delivering the project on schedule is the utmost priority. Thus, generating, managing and networking the resources are the most critical factors while executing a BoP package. This requires a strong and sustainable management policy. Hence, the most important contractual issue in the BoP project could be formation of the consortium.

´Stricter qualification norms for selecting a BoP bidder need to be employed so that only companies with long term interests are able to qualify,´ suggests Dara Damania, Vice Chairman & CEO, ThyssenKrupp Industries India Pvt Ltd. He adds: ´This needs to be addressed by the public and the private sectors alike in the larger interest of the power sector.´

Challenges
The current challenge faced by almost all players in this field is predominantly the uncertainty around the developer´s ability to realise the projects and meet the financial commitments. A lot of them are under huge financial stress because a number of stalled projects that for one reason or other are not able to see the light of day.

On the contrary, recently
a number of EPC players, who were erstwhile large construction companies, got into this ´avatar´ of a BoP provider of one package or the other.

However, in the absence of a robust technology partnership; very few have been able to move successfully up the value chain. That is the reason this experiment has failed and quality equipment suppliers have also suffered.

Conclusion
BoP systems are critical to the timely commissioning of power plants. In the past, delays in the supply and erection of these systems have contributed to slippages in generation capacity addition. The Central Electricity Authority (CEA) and the Ministry of Power have been working with industry bodies to increase capacity in this segment, particularly for conventional plants. Measures taken by them include the provision of guidelines on qualifying requirements for BoP bidders, which has allowed the entry of new players in the segment.

Though the BoP market has expanded in the past few years, it needs to develop further to meet the growing power demand. This is particularly relevant for new and emerging areas, like renewable energy, where these systems have an impact on generation costs.

While developers consider a limited and concentrated BoP market a major challenge, suppliers face the issue of bunching of orders and high customization.

As such, utilities are opting for multiple packages or single EPC contracts for sourcing BoP systems. Once orders are placed, better coordination among project developers, main plant suppliers and BoP vendors would be crucial for meeting the plants´ commissioning schedules.

´Suppliers are capable to offer and execute BOP systems on a turnkey basis´
Dara Damania, Vice Chairman & CEO, ThyssenKrupp Industries India Pvt. Ltd.
What kind of opportunities do you see for electrical Balance of Plant (BoP) systems? And are these opportunities enough to sail through?
We see tremendous opportunity for the BoP systems in the near future. In fact, most of the major power generation companies in India are now adopting the EPC/BTG-BOP mode to execute their power projects. We, as an EPC company, are very positive about our capacity to execute the large sized BOP projects and we see great opportunities ahead for us.

Technically, BoP works account for approximately 45-50 per cent of the total project costs. Within this which segments dominate the sector?
Within the BOP systems the coal handling plant (CHP), the ash handling plant (AHP), the cooling tower and the water treatment systems are the major contributors. The CHP package dominates the BOP system value.

Meanwhile, what are the chances of consolidation and M&A opportunities in the BoP segment? Is your company involved in such activities? How positive you are as do you feel the current scenario can support this?
From a BOP supplier´s perspective it is very advantageous if a BOP supplier can control multiple packages by themselves. This gives an edge to optimise the project cost. Thus, acquiring a major package vendor would surely be an added advantage. We ourselves haven´t acquired any major package vendor as of now, but acquiring a major package vendor or having strategic alliance cannot be ruled out.

What is the potential for imported equipment in BoP segments? Why are Indian IPPs often attracted towards Chinese suppliers?
We have executed numerous small capacity EPC power plant projects on our own. Most of the BOP systems are supplied by Indian manufacturers who are very capable to supply to large sized power plants also (500 MW and above). The import content in the various systems is restricted to specific equipments which may be insisted by the client. Still, the overall import contribution in a BOP system is very less. Initially many corporates were attracted to Chinese plants considering lower capital investment. However consideration of reliability and sustainability is reversing the trend.

In contrast what are the export opportunities for Indian players across the globe? Which are the developed markets as of now and how has that helped companies to meet with their capacity utilization as well as share in revenue?
As far as the BOP is concerned, the international power generation companies are still to adopt the BOP way. International projects are more commonly floated on complete EPC basis. The EPC player in turn floats the tenders for individual sub packages.

Most of the export projects that we address are still on the individual sub-package basis through EPC contractors. However it is to the sole discretion of the power generation companies whether to float the project on EPC - BOP / individual package basis.

In that case will you be expanding your business plans for domestic and export market and in terms of capacity?
With regard to the domestic market we have executed several medium sized power plants on complete EPC basis. As far as exports are concerned, at present we are engaging in individual packages as per the requirement of the customers. However, we are gearing up to establish our BOP presence outside India on EPC basis.

Have leading equipment suppliers been able to offer turnkey BoP solutions as against being restricted to standalone orders?
Yes. A lot of suppliers are capable to offer and execute BOP systems on a turnkey basis. A large majority are Indian companies. However, the choice of whether the BOP mode or the individual package mode is to be adopted rests with the client/owner.

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