New orders in the BoP segment have reduced significantly as a result of market recession. Further, the players are dependent on orders from Central and State sector players where the slow pace of BoP progress is another issue.
The Indian power sector is standing at the crossroads. Never in the history of its development and growth, the road to the future looked so uncertain, which was plagued by the policy paralysis of the earlier government and is now in the midst of a coal block allocation imbroglio which has been a bumpy ride for it for quite some time now.
The Supreme Court declared in August that the coal block allocations, made both through the Screening Committee and the government dispensation routes, were illegal and arbitrary. As a consequence, in a historic judgement on September 24, 2014, it scrapped the allocation of 214 coal blocks allotted from 1993 to 2008. Of the total 218 blocks, only four coal blocks, which were State run non-joint ventures (JVs) were spared. Thus, the journey of captive coal blocks allocation, started in 1993, has come to an end by making a sort of crash landing after 21 years, placing the entire power sector at the crossroads. The ruling is likely to cause many far-reaching "consequences" for the Indian power sector in terms of slowdown in the planned capacity addition. One such victim of the recent developments is the Balance of Plant (BoP) equipment manufacturers where the short term outlook is very much perceived to be negative.
New orders in the BoP segment have reduced significantly as a result of market recession. Further the players are dependent on orders from Central and State sector players where the slow pace of BoP progress is another issue. The industry is looming under the threat of underutilisation of enhanced capacities. As the financiers for the generation projects are becoming more cautious of disbursement to existing and new projects, there is another challenge of creditworthiness of the client.
Plant systems and equipment can be classified into: 1) Main plant comprising steam generator, steam turbine and boiler along with their associated auxiliaries. 2) Balance of plant systems include all equipment other than those included in the main plant system. Major components of BoP system include coal-handling plant, ash-handling plant, cooling towers, water treatment, circulating water system, fuel oil handling and unloading system and fire protection, transformer substations, detection and alarm systems and commissioning of extra high voltage (EHV) systems. The BoP system comprises all the system and utilities which are required to run thermal power plants starting from raw material input to waste output apart from the power island which includes the generator, turbine and boiler with its auxiliaries. BoP systems account for 45-50 per cent of the total power project cost.
Demand driven by capacity addition
Power capacity addition is a key driver for the market for BoP. The total capacity addition requirement for the Twelfth Five-Year Plan is pegged at 88,000 MW, which includes 72,000 MW from thermal and 5,000 MW from nuclear sources. This presents a market opportunity of about 77,000 MW for the BoP segment. Most of the orders for the Twelfth Plan period have already been placed. However the potential opportunity lies in the orders for the Thirteenth Plan period (2017-2022) where the capacity addition target is yet to be finalised. However as per industry estimates, this is likely to be more than 1,00,000 MW. Of this the thermal capacity is going to be minimum 70,000 MW which will give an opportunity of minimum 15,000 MW per year.
Currently the suppliers are facing weak order inflows as only a few greenfield projects are being finalised. Also due to recent developments hampering the fuel supply and securing clearances in a number of thermal plants, there is a threat of cancellation of orders in the short term. If the current government becomes successful in bailing out the running projects of the current crisis by ensuring fuel supply, then there will be a huge gap in demand and supply to meet the future capacity addition targets. The government is considering auctioning of the cancelled coal blocks through a bidding process. To alleviate supply shortage of equipment, two measures are being adopted - enhancement of domestic equipment manufacturing capability by establishing JVs between Indian and foreign suppliers and a second measure is procuring equipment directly from international markets. In both cases equipment sourcing needs to be managed effectively throughout the procurement cycle. For instance, it may be a challenge for new project owners to select a reliable supplier, monitor its performance and ensure the quality of supply on a sustained basis. Also, the timelines for availability of additional domestic equipment supply has not been clearly defined.
1. BoP is not perceived at par with Main Plant Equipment: There has been due emphasis on growing the availability of main plant equipment in the country, however BoP has never been perceived at par with the main plant due to the following reasons:
- Main Plant equipment controls plant performance
- Engineering for BoP has never been thought as a bottleneck in completion
- There is always shorter lead time for BoP
- There is a tendency to save on IDC on account of delayed ordering
As mentioned earlier, normally BoP is not given proper attention as the BTG package and all the activities related to design, engineering, award, etc., start very late in the development work. Often it takes the engineering inputs from the main plant sizing etc., and it is required that the BoP match the schedules of the main plant equipment.
2. That way BoP suppliers/integrators are often left with difficult opportunities commercially and focus shifts from optimisation to cost control. Sometimes exclusions by BTG become invariably the BoP.
3. Lack of uniformity in qualification criteria: CEA guidelines have wide variation in the period of commercial operation of qualifying plant and also the net worth requirement of bidders has wide variation because of its linkage with the paid up equity capital.
4. There is increased cost of project implementation as too much time is taken for engineering approval of major equipment in absence of standard specifications for a range of power plants and there are a limited number of BOP equipment manufacturers.
5. There are few foreign Design & Engineering consultants who meet the legalities of QR as too much weightage is given to contracts executed in India and completion certificates issued in the name of parent/holding firm. Mitigation
1. Integrating the entire BoP as a single package - Moving towards EPC: There is a need to integrate the entire BoP as a single package to have the ease of execution, design and engineering etc. There is an imminent need to minimise the gap between ordering the BTG and BoP packages and there should be proper rationalisation of the scope between BTG and BoP; the packages may be made large enough to attract experienced EPC contractors.
2. Offering the BoP supplier/integrator fair and practical terms for execution: BoP contractors and integrators shall be given practical terms for effective execution of the work.
3. Encouraging BoP vendors who have knowledge of Main Plant Equipment will be better for effective implementation and support shall be given to develop a wide network of BoP integrators. Strong vendor base is indispensable to cater to the huge requirement that is likely to come in the coming years.
4. Uniform qualification criteria for participation in BoP tenders to be adopted by all project owners as per CEA guidelines and CEA shall ensure compliance. Also the qualification criteria for appointment of bidder's Design & Engineering consultant need to be streamlined and included in CEA guidelines. The threshold parameters for sub-vendor selection need suitable designing for wider participation of manufacturers. Pre-qualification criteria may be made stringent. Small contractors can get jobs from the big EPC contractors, gain experience and then work independently.
The BoP segment presents a huge opportunity due to the huge capacity addition plans. The market is consolidated and characterised by a few players dominating each sub-segment. Capacity addition in BoP has not matched up with the demand, leading to project delays. There is a trend toward turnkey contracts for BoP systems due to the various advantages offered by them. Contracting processes need to be made more robust so as to make the segment more attractive. Turnkey capabilities, in-house manufacturing, and technical tie- ups are the key success factors. The BoP integrator needs to have the core capability and competency as a preferred, trusted and reliable partner to the client in the construction of large power plants in the domains of civil, mechanical and electrical works. Also the preferred experience is start-to-end balance-of-plant equipments, materials and solutions such as coal and ash handling systems, intake water, water treatment plants, cooling water systems, air-conditioning and ventilation systems, fire protection systems, cooling towers and civil works and services. They should have strong demonstrated capabilities in engineering spanning from conceptualisation stage, to feasibility studies, front-end design and complete detail design, ably supported by in-house capabilities to provide engineering services in master planning, development, marketing and management. Their strict adherence to quality standards and timely supply of equipments and materials has to be a consistent feature.
They shall be capable of delivering value added services to the power plant customers in terms of:
- Better price realisation for client
- Simpler co-ordination requirement - One point contact. Minimum staffing required from end user organisation
- Minimum finance risk and firm cash flow for end user
- Least interfacing related issues between sub systems, thereby faster commissioning
- Better control over equipment specification
- Single point solution to the generation companies for Balance of Plant
- Better control over the project for client or developer.
The author is Purnendu Kumar Chaubey, a graduate of IIT Kanpur and an MBA from AIM Manila. He works for Isolux Corsan India. Views are personal.