UMPP - Bane for power producers

Tue, 8 Sep Pre-Open

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Ultra Mega Power Projects (UMPP) is a series of ambitious power stations planned by the Government of India. The projects are awarded to developers on the basis of competitive bidding. Under the competitive bidding process, the developer who bids to sell the electricity at the lowest rate is awarded the project. However, the projects awarded under competitive bidding have run into financial troubles. Here are the reasons for the same…
A successful bidder, who bids the project at the lowest rate, becomes bound to sell the electricity at that price for the lifetime of the project. However there is an escalation basket available, which allows the company to keep certain expenditure under the escalation clause. It allows the developer to increase the electricity tariff, provided the item in the escalation clause inflates in the future.
A lot of assumptions are made when a company makes a competitive bid. Some bidders assumed arms-length coal procurements from international market and kept the fuel charges i.e. coal in the escalation basket. Some kept a larger proportion of these charges in a non-escalation basket in view of their existing or prospective acquisitions of mines, and several in between, depending upon their risk appetite and tolerance. 
A key twist in the story was the Indonesian Law number 4 of 2009 that became effective in 2010 that put restrictions on the pricing of coal exported from the country. The new mining law provided for global benchmarking for coal exports from Indonesia. Earlier the mines owned by Indian developers in Indonesia, transferred coal on a cost-plus basis. The developers worked out their price bid for competitive bidding on the basis of cost-plus basis. However, after the change in law, coal needed to be exported from Indonesia at a rate which is prevailing in the global market, which made the entire project financially unviable.
In the recent auctions conducted for UMPPs in Tamil Nadu and Odisha, government cancelled the bidding process as all the private companies pulled out of it. Owing to this, the government has decided to come out with a fresh draft for bidding. These guidelines cover risk areas including fuel price variation, fixed charge quote, incentives for performance, land acquisition and termination of contract.
Though the government is trying to address key issues, questions remain as to whether it is prudent enough to set up large UMPP projects when the existing capacities are running low.