Contracting for Power Purchase

8/8/2019 Contracting for Power Purchase

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Contracting for power purchase-Ensuring a fair

deal for the private investor as well as the power

purchaser

Lata Chakravarthy

Faculty Member

ICFAI Business School

Bangalore


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Objective of study

To identify best practices in power contracting to

encourage more private sector participation in

power generation.

To identify scope for reduction in cost of power

purchased from existing IPPs, by analyzing the

various fixed and variable components of purchase

cost and their impact on total tariff.


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Scope of study

Study covers the following IPPs whose PPAs

were available in public domain and which are

operating in South India:

1. GVK Power Corporation Ltd.

2. Spectrum Power Generation Ltd.

3. Kondapalli Power Corporation Ltd.

4. Madurai (Balaji) Power Corporation Ltd.

5. Tanir Bavi Power Corporation Ltd.


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Methodology

The basis for computing the fixed costs, variable

costs and incentives as laid out in the Power

Purchase Agreements (PPAs) were compared

and analyzed.

Terms of PPA which were amended/renegotiated

were studied to see the impact on tariff.


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Particulars GVK Spectrum Kondapalli Balaji Tanir

bavi

Project

awarded

through

MoU route MoU route Bid route MoU route Bid route

CompletedCapital cost

Rs.1025cr.

Rs.972.60cr.

Rs.1112 cr. Rs.429.03 cr. Rs.880 cr.

Installed

Capacity in

MW

216.824 208 368.144 106 220

Capital cost per

MW

Rs.4.73 cr. Rs.4.68 cr. Rs.3.02 cr. Rs.4.05 cr Rs.4 cr.

Term of PPA 18 years 18 years 15 years 15 years 7 years

Primary Fuel Gas Gas Gas (switched

over from

naphtha

In Sep 2002).

LSFO Naphtha

Commercial

Operation Date

June 1997 April 1998 October 2000 September

2001

July

2001


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Components of fixed charge in MOU projects

Interest on term loans

Interest on working capital

Depreciation

Return on Equity

Insurance 1% of capital cost

O&M expenses of 2% of capital cost

Foreign exchange variation on interest, debtrepayment and Return on Equity


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Components of fixed charge in bid route projects

Foreign Debt Service Charge (typicallyquoted in $ per kwh) towards,

Payment of interest on foreign currency loans

Repayment of foreign currency loans

Return on foreign equity Other Fixed Charge (typically quoted in Rs.

per kwh) towards,

Payment of interest on rupee loans

Repayment of rupee loans Return on rupee equity

O&M and insurance charges


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Comparison of price risk to utility in the two methods of

calculating fixed cost

MoU cases Risk of increase in capital cost after signing of PPA (Tariff can be

based on actual higher capital cost subject to approval)

This has impact on

Interest on debt

Return on Equity Incentive payment

Depreciation

O & M expenses

Insurance expenses

Foreign exchange variation in interest, debt repayment and ROE

Bid route cases No such risk as a fixed amount is paid per unit of energy generated,

no matter what was the actual cost of completion of the project.


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Comparison of price risk to utility in the two methods of

calculating fixed cost

MoU cases-other issues

Increased burden on utility to constantly verify

the current sources of debt- IPPs keep swapping

high cost debt with low cost debt as a cost

reduction measure.

Utility has to track the interest charged by banks

from time to time on working capital loans

each bank in the consortium may lend atdifferent rates.


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How fixed costs were reduced for GVKby renegotiating

PPA terms

Project cost of Rs.816 crores as per TEC wasfixed as ceiling though actual completed cost was

Rs.1025 crores.

This saving of Rs.209 crores has positive impact

on all the fixed charge components interest,

depreciation, ROE, O & M and insurance

charges.

The levelized tariff with Rs.1025 cr. of projectcost is Rs.2.6904 per Kwh vis--vis Rs. 2.6275

per Kwh with Rs.816 cr. of project cost.


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How fixed costs were reduced for GVKby renegotiating

PPA terms

Reduction in O & M charges from 2.5% to 2% -this reduces the payment to IPP by Rs.40.8 cr

p.a.

The effect on levelized tariff is a reduction by

2.54 paise per kwh.

The term of PPA was reduced from 30 years to

18 years by an amendment to PPA.

Amendment provided for a rebate of 2.5% to beallowed to the utility if it settles a bill within 5

days reduces levelized tariff by 0.27 paise.


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Actual Fixed Costs for 2001-02

Name of IPP Fixed cost

In Rs. Per kwh

GVK 1.52

Spectrum 1.61

Kondapalli 1.22

Balaji 1.52

Tannirbavi 1.98


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Incentive payment

Basis of payment

GVK

For every 1% increase in PLF from 68.5% to 85%, .0525% of

additional ROE.

Incentive payable on notional generation also.

PPA was amended to reduce rate of incentive from .6% to

.525% and also to cap incentive payment at 85% PLF.

Effect is to reduce maximum ROE payment including

incentives to 25% from 35%. Applied to equity of

Rs.243.23 crores, this amounts to a saving of Rs.24.32 cr

p.a.


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Incentives

Spectrum Power

Basis of payment

68.5% to 80.5% .4% for every 1% increase in PLF

80.5% to 85.5% .5% for every 1% increase in PLF

above 68.5%

> 85.5% .6% for every 1% increase in PLF

above 68.5%

Kondapalli Power

80% to 85% PLF 2% of Other Fixed Charges (OFC)

85% to 90% PLF 10% + 3% for every 1% increase inROE above 85%

> 90% Same as for 90% i.e 25% of OFC


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Comparison ofIncentives

GVK Spectrum Kondapalli

Maximumpossible ROE

including

incentives

25% 34.9% 26.7%


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Scope for further reduction in fixed cost

Floor for incentives should be at around 80% and

not at 68.5%

No incentive on deemed/notional generation

Term loans which are in strong currencies likeEuro should be swapped.

Repayment of debt should be reimbursed rather

than depreciation.


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Repayment of debt instead of depreciation

PPAs of MoU projects provide for recovery of

capital by way of reimbursement of depreciation

Entire project cost (including land cost in some

cases) is taken as comprising of depreciable fixedassets

Assets are depreciated on straight line basis over a

12 year period up to 90% of original value.


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Why not depreciation?

Depreciation is recovery of capital

Reimbursing depreciation as part of fixed charges

amounts to recovery of not only debt but also

equity Power price is meant to include only return on

equity and not return of equity,

Major portion of equity is also returned to investor

in the process.


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Conclusion

It is possible to bring down cost of power generated evenby existing IPPs.

IPP not a bad word!

Negotiate-benchmark against the most competitive bid

received. Utility should set payment track record to generate

confidence among IPPs, rather than setting up payment

security mechanisms.

Set up infrastructure on priority basis to distribute gas andconvert liquid fuel based projects to gas.

Key role for regulator and utility in the entire process.


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Contracting for Power Purchase

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