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Power: Of 'ultra-mega' dreams! - Views on News from Equitymaster
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  • Dec 19, 2006

    Power: Of 'ultra-mega' dreams!

    The bids for the two ultra-mega power projects - Sasan (Madhya Pradesh) and Mundra (Gujarat) are finally out. While Lanco Infratech has emerged as the lowest bidder for the former (bidding at Rs 1.19 per unit), India's largest private sector power generator, Tata Power, has grabbed the latter (bidding at Rs 2.25 per unit). Lanco has, in fact, outbid 15 other bidders in its way of winning the Sasan project, which will involve an investment of Rs 180 to Rs 200 bn (Rs 45 m to Rs 50 m per MW). Among the major companies, whom Lanco has outbid for this project include NTPC, Tata Power, Reliance Energy and L&T.

    The government's ultra mega power projects (UMPPs) policy, as its core, shall involve development of large generation projects through competitive bidding. As put down by the Ministry of Power, these would involve:

    • Setting up of large projects of 4,000 MW at a single location, thus ensuring economies of scale

    • Utilisation of super critical technology, thus ensuring higher efficiency and lower CO2 emissions

    • Award of projects to developer through tariff based competitive bidding, thus ensuring cheaper power

    As reported, the Ministry was expecting the bids to be near Rs 1.70 per unit, a rate at which NTPC sells its pithead coal based power to the state electricity boards. It is estimated that by December 31, 2006, the awards for these two projects would be issued and these developers should be in a position to take their financing. While the Sasan plant is being constructed near a coal mine, the Mundra project, which will be located on the coast, will run on imported coal. Apart from these two projects, the government has two more UMPPs in the pipeline - one in Krishnapatnam (coastal Andhra Pradesh) and the other in Jharkhand. These will be awarded in mid-2007.

    While Lanco's bid for the Sasan project seems a lot aggressive, it couldn't be taken as improbable, considering that the second lowest bidder, Reliance Energy (who is also the runner-up for the Mundra project), had put in its bid just 10 paise higher at Rs 1.29 per unit. Against the expected rate of Rs 1.70 per unit, at which NTPC sells its pithead coal based power to the state electricity boards, there were 4 companies that had bid at a lower rate. This goes to show the kind of cost efficiency through scale advantage that can be earned from projects of this size. However, in all this, NTPC, which was expected to be among the most aggressive of the lot, put its bid at the (almost) highest level of Rs 2.12 per unit. The reasons for the same are unknown as yet!

    Proposed off-take from UMPPs
    State/Project Sasan (MP) Mundra (Guj.) Girye (Mah.) Karnataka
    Delhi 500 - - -
    Uttar Pradesh 500 300 - -
    Uttaranchal 100 - - -
    Punjab 600 500 - -
    Rajasthan 400 400 500 300
    Haryana 450 400 - -
    Madhya Pradesh 1,200 - 500 -
    Chhatisgarh 250 - 500 -
    Gujarat - 1,600 - -
    Maharashtra - 800 2,000 1,000
    Karnataka - - 500 1,500
    Tamil Nadu - - - 1,000
    Kerala - - - 200
    Andhra Pradesh - - - -
    Total 4,000 4,000 4,000 4,000

    So, what's in it for investors?
    Nothing, as yet! The financial closure of these projects will take another six months and the first unit of the Sasan project is expected to commence generation not before the beginning of the 12th five-year plan (2012-2017). Also, there are doubts raised on the ability of Lanco to generate the required funds for this project, considering that its aggressive bid might be understood as a lot risk by the financiers. As a matter of fact, the company will require debt funding to the tune of Rs 140 bn (70% of the estimated project size of Rs 200 bn). In case Lanco is not able to secure the funding in the desired timeframe, there might be another round of bidding for the project. However, not sounding too doubtful of the company's ability to execute such a large project, we believe that investors will have to wait for a long-long time to see any materialisation of returns from these projects. As far as the country is concerned, the step is definitely in the right direction. What is required now is successful execution.



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