India Ratings & Research (Ind-Ra) believes tariffs for the Tamil Nadu and Odisha ultra mega power projects (UMPPs) under bidding currently will be substantially higher than the previous round of UMPP bidding. The agency expects an imported coal-based UMPP to cover major risks with tariff in the range of Rs 3.25/kwh-Rs 3.65/kwh. For domestic coal-based UMPP in Odisha, Ind-Ra expects bids to be in the range of Rs 2/kwh-Rs 2.4/kwh. However, bids can vary on capital cost assumptions, fuel prices, inflation and return expectation, loan terms, etc.
The current UMPPs are being bid on the revised standard bidding document formulated by the ministry of power and would determine if the waned investor interest in the sector would be revived. The key changes in the new guidelines are with respect to the fuel risk and capacity charge.
The risk matrix in the new guidelines has shifted from fuel risk to capacity charge risk. The risk on fuel charge has reduced by fuel cost pass-through. However, the risk on capacity charge has increased by a possibility of cash-flow mismatches as developers would now have to quote a single base year tariff only.
The new guidelines allow a complete pass-through of fuel risk to off-takers, thus preventing developers from facing significant risks. The key risks now vested with developers are i) the escalation index for coal and ii) quantum of domestic fuel charge pre-specified at the time of bid. Earlier, UMPP bidding guidelines required bidders to quote escalable and non-escalable fuel charges, thus retaining fuel price risk with developers. Aggressive bids through higher non-escalable fuel charges coupled with rising fuel costs and the falling rupee led to operating losses especially for UMPPs based on imported coal.
Developers now need to quote a single capacity charge bid for the first year, which would be escalated at a suitable index. The break-down of capacity charge into escalable and non-escalable components has been removed in the new guidelines. According to the new guidelines, there is a strong likelihood of a cash flow mismatch for developers leading to lower returns initially and higher returns thereafter. Ind-Ra believes this move to be retrogressive as the earlier guidelines were more scientific in nature and allowed developers to think through the entire project life as capacity charge bids mirrored project cash flow requirements.
The escalation of the entire capacity charge would keep tariffs high for the entire project life instead of a typical reduction in later years of a project. This is because escalation is now applicable on the entire capacity charge. The impact of escalation index on tariffs could be magnified in an inflationary scenario during later years. In the earlier guidelines, escalation was only applicable on escalable component of the capacity charge which allowed for a reduction in capacity charge.
