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Cover Story | October 2017

IPPs without any long term PPAs unviable in present scenario

<span style="font-weight: bold;">Girishkumar Kadam, Vice President and Sector Head, Corporate Sector Ratings, ICRA Limited</span> <p></p> <p> <span style="font-weight: bold;">How lower plant load factor (PLF) will affect the viability of the existing private power plants in operation?</span><br /> There are three categories in this - IPPs with long term PPAs, IPPs with a mix of long term PPAs and short term sale, and IPPs without any long term PPAs and completely relying on short term sale. So the impact varies on a case-to-case basis. For the first category, the impact of PLF is irrelevant because the PPA gives an option for an IPP to claim an entire fixed capacity charges based on the normative declared availability, and it should not impact from the debt servicing perspective. More importantly PLF decline will have adverse and direct impact on the IPPs which do not have any long term PPAs, because their operations remain exposed to both - volatility in tariff as well as volume. Overall demand growth has been sluggish in the Indian market over the last two years, bringing down thermal PLF below 60 per cent. Definitely for IPPs and for the capacities, where the long term PPAs are not tied-up, the impact is quite severe and more adverse.</p> <p> <span style="font-weight: bold;">What is the admissible/usual debt-equity ratio for TPPs?</span><br /> Typical debt-equity ratios are 70-30, 75-25 or 80-20, depending upon the project profile and stipulations set by the lenders. Largely 75-25 and 70-30 are in use for thermal. And 80-20 may be there for RE projects. </p> <p><span style="font-weight: bold;">It is said, consolidation is in the air in thermal power generation segment. What are the signals that are pointing to this emerging trend?</span><br /> One has to look at it on a case to case basis. Because today thermal power sector in terms of its overall capacity is actually in surplus. That is, what is required is the demand. In fact, almost about 25GW to 28GW of thermal capacity in private domain is without any long term power purchase agreements (PPAs). In the context of consolidation in thermal space, one has to look at very closely in terms of the fundamentals like the viability of such asset. </p> <p> That will be dependent upon: <br /> a.Capital cost<br /> b. Availability of PPA, <br /> c. If PPA is tied-up, whether it is cost reflective, and <br /> d. Fuel linkage. <br /> </p> <p>So, these are the parameters that have to be analysed more closely. in thermal space, many projects have witnessed significant cost overruns, estimated in the range of 35-45 per cent for many projects. Certainly that is a negative, this is part of the project economics. Ultimately, the consolidation opportunity depends on these factors and they will be evaluated on a case to case basis. </p> <p> <span style="font-weight: bold;">In what way the falling renewable energy prices will impact TPP profitability and ultimately, their viability? How feasible Rs 3/kWh is for TPPs?</span><br /> According to new normal (as mentioned by the previous Minister of Power Piyush Goyal, recently) of Rs 3/unit again viability has to be seen on a case-to-case basis. For wind, post reverse auction bid of February 2017, where the price of Rs 3.46 was discovered, the rules of the game for the wind sector have changed. The wind fit-in tariff design is no longer preferred by utilities for new PPAs. Whether Rs 3.46/unit is viable, it has to be analysed based on what is the capital cost, what is going to be the PLF, what is going to be the cost of debt and the tenure of the debt. </p> <p>For solar, yes, solar tariffs have fallen quite sharply particularly in this calendar year, which is below Rs 2.44. Their viability has to be looked into in the similar fashion. Over the last three months, PV module prices rose marginally by 6-7 cents. </p> <p>Definitely the bidder expectations of PV module prices to be below 30 cents (100 cents makes a US dollar) per watt is not a reality today. Now the prices are at 35-36 cents per watt. Certainly the projects that have been recently bid out and where the tariff is below the Rs 3/unit they are going to be adversely impacted. On the other hand, the fundamental competitiveness of wind and solar has improved against conventional sources, and the gap has reduced quite substantially. In September, in wind auction conducted in Tamil Nadu the selected bid was at Rs 3.42/unit. </p> <p> <span style="font-weight: bold;">Is consolidation the remedy or are there any policy changes that may be of help in resolving the sector's debt woes?</span><br /> In terms of policy changes, yes. Coal availability is no longer an issue for the power sector over the last two years. Secondly, under UDAY framework, at least in terms of debt refinancing and takeout financing, is satisfactory. And overall discipline in tariff petition filing and tariff order issuing by and large there is progress in most of the states. But, in some large states like UP Rajasthan and Tamil Nadu, the progress has been very slow. Overall trend at least in terms of filing is satisfactory. But the quantum of tariff hike is moderate - 4-5 per cent for the last 2-3 years. More importantly, energy demand growth has been quite moderate and it requires an uptick. And that is a function of how fast the pick-up in the industrial demand happens, and a factor of overall capital expenditure recovery and overall macro environmental factors. And how the uptake capacity of the distribution utilities will pan out going forward will also impact this. Industrial demand constitutes about 30-35 per cent of the overall demand. So, that needs to grow. </p> <p> <span style="font-weight: bold;">A lot of power projects are awaiting PPAs. To what extent these projects are in a position to service their debt, if the wait is prolonged? How the low merchant power prices are impacting them?</span><br /> Assuming a capital cost of Rs 7 crore per MW and based on the normative benchmark, if one were to assume a levelised fixed cost it will be at Rs 1.6 to 1.7/kWh or unit. And assuming that fuel cost is a pass through, the Debt Service Coverage Ratio (DSCR) is just above 1 (one), that is the benchmark. The fixed cost of Rs 1.60 in the first year will see a normative decline over the years during the PPA period, assuming a debt-equity ratio of 70:30. </p> <p>The fuel cost, now that depends on whether the source of coal is domestic or imported. If it is imported coal linkage based, then the cost of coal is roughly about Rs 2.20-2.30/unit based on the prevailing rupee/USD and prevailing international coal prices (in mid-September 2017). For a domestic coal-based power plant, based on the distance between the mine and the power plant, it would work out to as low as Rs 1/unit to 2.00 per unit. So, let's have a median number at Rs 1.5/unit. The fixed and fuel cost together make it Rs 3.10/unit on an average for a domestic coal linkage based project. For Imported coal based project it will be Rs 3.80/unit. From the viability perspective, the tariff required is in the range of Rs 3.50 and Rs 3.80/unit on an average. On the contrary, bilateral short term power traded tariffs remained close to Rs 3.50. That is also because of the reverse auction which is there since April 2016 onwards. At the same time, the spot tariffs on the energy exchange remained anywhere between Rs 2.5 and Rs 3/unit. Having said that there is some uptick in the tariff in the last one or two months, that again is temporary and not likely to sustain. Even if one were to assume a spot tariff of Rs 3 and bilateral tariff of Rs 3.50, it is still below what is required from a TPP viability perspective. So, there is a gap. </p> <p>Certainly under the prevailing short term and spot tariffs, the long term projects completely without any PPAs are not viable. Ultimately, they are partly selling in the short term market. So they are exposed to volatility in the short term power tariff and short term volumes. And the price levels have remained subdued and that is because of the demand and supply imbalance. </p> <p> <span style="font-weight: bold;">What is the generation capacity, particularly of TPPs, that are weighed down by debt and is ready to be put on sale? </span><br /> Those details we may not have. </p> <p> <span style="font-weight: bold;">What is the kind of interest in buying these stranded capacities and what strategic abilities buyer should have to bring them back into operation?</span><br /> Viability criteria as I have already mentioned is one. On specific abilities of buyer, it is difficult to comment upon based on publicly available information. </p>
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