The key reason for the failure of the previous bidding guidelines was the unwillingness of lenders to fund a 4GW power project with an estimated investment outlay of INR200bn on a design, build, finance, operate and transfer model where the asset ownership did not vest with the developer. The current guidelines propose a build, own and operate model which, Ind-Ra believes, will result in greater acceptance from lenders for financing.
The guidelines provide for a better fuel cost pass-through as they envisage a full escalation on the base tariff based on the Central Electricity Regulatory Commission (CERC) norms. Earlier, a fuel cost bid was divided into two parts which required the developer to project the non-escalable part of the fuel cost over the life of the project, leading to viability issues. Escalations based on the CERC norms should provide sufficient cushion to developers to manage the inflation associated with mining costs. However, Ind-Ra believes developers will be cautious while quoting fuel costs as operational UMPPs have seen challenges on account of aggressive bidding. The fuel cost variation over the life of a power purchase agreement is unlikely to be high, given that the proposed guidelines speak about UMPPs based on captive domestic coal.
Additionally, the current guidelines do not provide for any open capacity which could be sold as merchant power as against the earlier guidelines which had a 15% open capacity. Ind-Ra considers this to be more prudent as the 15% open capacity added an additional uncontrolled variable (per unit price of merchant tariffs) in the bidding, and developer's assumption on merchant tariffs alone could have altered the project viability.
The current guidelines propose the bidding of a separate fixed charge for each year over the life of a power purchase agreement which is favourable from a project risk perspective compared with the earlier guideline of a single fixed charge quote with annual escalation. The incentive structure has also been made more stringent with incentives proposed above the normative availability of 90% and has been aligned to the plant load factor instead of availability. However, in contrast with the CERC guidelines where the incentive rate was fixed at INR0.5/kwh, the draft UMPP guidelines propose linking the incentive rate to 0.5x of the fixed cost per unit of the respective year. The incentive payments could be higher than the current CERC norms as Ind-Ra estimates the fixed cost per kWh to be higher than INR1/kwh. The disincentives curve has been lowered by 75% compared with the CERC guidelines, which though favourable to developers does not provide sufficient disincentives to generators for reducing availability.
The draft norms also propose a segregation of operating and infrastructure assets into two separate special purpose vehicles (SPVs). The land for coal block as well as power plant would be housed under an infra SPV while the plant would be developed under an operating SPV. The move will lead to the mortgage of land and power asset separately to raise finances, however, this could pose challenges in the sale of asset.
Prior to the request for qualification, an infrastrucure SPV will have to acquire partial land and the remaining land will need to be acquired by developers with assistance from state power utilities. In the past, concerns were raised regarding land cost going up while their fixed cost quotes were provided pre acquisition of the land. Therefore, the proposal is to pass through changes in price greater than 10% of the declared price. Though on the face of it, the guideline is again favourable to developers and a risk mitigant, it may expose discoms to the risk of developers using land cost as a tool to increase tariffs. Therefore, a transparent method of evaluation of such costs will be necessary.
The introduction of a termination clause also provides relief to developers. Under the current bidding model, there are few options for a developer to exit a project and this has restricted private power generation companies' interest in UMPPs. The proposed guidelines also provide for a termination option to lenders/procurers who can look for a new developer to take over the asset.
The government in the Union Budget 2015-2016 has proposed to set up five new UMPPs, each of 4,000 MW in the plug-and-play mode. The changes in bidding norms are in line with the government's intentions to meet this objective. Ind-Ra expects higher interest from private developers in the next rounds of UMPP bidding, whereas private sector developers had withdrawn from the bidding process in the last auction which was finally cancelled due to lack of takers.
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