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Investment Opportunity and Challenges Ultra Mega Power Projects Navin Wadhwani AFG May 2006 “If you are a global company and India is not part of your plan, then you have missed the bus” Dr. Manmohan Singh, Indian Prime Minister “We need to show the world the changes in the power sector” Mr. R. V. Shahi, Power Secretary Ultra Mega Investment for Ultra Mega Power Projects Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects Significant interest generated in 1990s Domestic Players Foreign Players NTPC NHPC Tata Power CESC BSES Essar Videocon Lanco CMS Energy Enron Cogentri x CLP Bayerwerk United Utilities Ogden Eastern Generatio n VEWEnergie Marubeni J Power View PSEG Nationa l Grid Pacgen Torrent GMR Nagarjun a GVK Jindal Ispat Appoll o Hinduja’ s Aditya Birla JP Group PowerGen Tracteb el EDF Mirant Corp AE S RWE Mission BPL Nationa l Power NRG Daewoo Energy Clutch of Foreign and Indian players were vying to get a slice of the power play in 1990s Though interest could not be sustained Delays in decision making and project implementation Poor financial health of the State Electricity Boards – High T&D losses – Retail tariffs not cost reflective No independent regulatory structure/ framework in place – PPA renegotiation Problems with project configurations – Focus more on contracts rather than tariff competitiveness – Sub-optimal plant operating normative parameters – Focus on liquid fuel/ gas based projects rather than coal based projects Acquisition of “Mega Watts” as a driver to increase global presence proved to be an unsustainable strategy for MNCs – Change in strategy to focus on domestic/ concentrated geography – Global consolidation Only few focused players remain Domestic Players Foreign Players NTPC Some domestic players have displayed strong development skills Tata Power CESC Relianc e Energy NHPC Entry through acquisition route Essar Torrent CLP Lanco GMR GVK AES Jindal Bhilwara Gentin g Appoll o Ispat Limited presence of foreign investors in the sector Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects Winds of change: In recent years Power sector Introduction of Electricity Act 2003 and establishment of regulatory framework Dabhol restructured and resolved – demonstrating Government’s ability to take tough decisions Evolution of Indian promoters and emergence of focused power and infrastructure players A high volume and low margin play recognized in the power sector Relative improvement in financial position of SEBs Competitive tariff based power projects Winds of change: In recent years Other areas GDP growth rate of 8% p.a. – Infrastructure development identified as core to achieving sustainable high GDP growth rate Buoyant capital markets with the BSE Sensex crossing the landmark 10,000 mark – Significant increase in market capitalisation and successful IPOs of of power companies Airports privatized (Mumbai, Delhi) in spite of serious resistance – demonstrating Government’s ability to take tough decisions Impetus on improving fuel supply/ sufficiency (e.g. NELP VI, CBM III, Budget proposal to de-block coal reserves) India’s economy is projected to be the fastest growing economy in the period to 2050 Other sectors have attracted investments Foreign players have created wealth across sectors… Capital market support to power sector Market has rewarded domestic players 109,211 Market Capitalization Rs crore 12,448 11,125 3,935 625 3,010 2,591 370 185 May 2000 2,728 1,883 1,793 739 351 155 May 2003 Tata Power Reliance Energy GVK Jaiprakash May 2006 Torrent CESC NTPC Source: Bloomberg (Chart not to scale) Capital market support to power sector Successful listing of power companies Positive response from the capital markets to public issues in the power sector Rs. crore Recent Power Issues NTPC Mkt Cap on Listing Current Mkt No. of times Cap oversubscribed 59,024 109,211 13.4 times GVK Power 746 739 25.8 times JaiPrakash 1,529 1,883 2 times Suzlon Energy 14,664 38,219 40 times More IPOs on the anvil – PFC, NHPC, GMR Successful raising of funds through FCCBs/GDR route – CESC GDR issue (Rs.180 crore) – Tata Power FCCB issue (Rs.900 crore) Source: Bloomberg, News reports Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects Overview of UMPP Ultra Mega Power Projects MoP, CEA and Power Finance Corporation are working together on developing seven ultra mega power projects under tariff based competitive bidding route Projects will be awarded on Build, Own and Operate (BOO) basis Each with a capacity of 4000MW with scope of further expansion Role of Ministry of Power MoP is playing an important role as a facilitator to coordinate with concerned Ministries/ agencies and State Governments for ensuring: – Coal block allotment/ coal linkage – Environment/ forest clearance – Required support from State Government and its agencies – Financial closures by Financial Institutions – To facilitate PPA and proper payment security mechanism with State Govt./ State Utilities – Monitoring the progress of Shell Companies w.r.t. predetermined timelines Potential financing avenues Domestic Developer Focused power & infrastructure companies with proven track record Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment Strategic Foreign Investor Providing capital & technical know-how Debt Financing Extended tenures Financial Investors Target large Infrastructure focused PEH for last mile financing Equity Capital Markets Fund raising through booming capital markets Leveraged Structures Mezzanine debt / structured financing Given the large quantum of financing required an optimal mix of multiple sources of financing is quite essential Global interest being generated UMPP road shows generating interest – Key players Domestic Players AES NTPC CLP Tata Power Videocon Siemen s Relianc e Energy Aditya Birla Power Energy Infra. GVK Suez Energy GMR Torrent Includes equipment suppliers Foreign Players Duncan Machneil Sumitomo Corp. Mitsui and Company Korea Electric Essar Itochu EDF ABB Jindal Steel and Power Jai Prakas h Tronoh Alco Combine Alstom Caterpilla r Positive interest from Domestic Players though limited/ cautious interest from foreign players Key investor concerns/ issues Key issues raised based on past experience Key issues in context of UMPP Initiative – Delays in project implementation Transmission capabilities to evacuate and transmit power across States Timely availability of captive mine Poor financial health of the SEBs – Availability adequate payment security mechanism Fuel supply arrangement for imported coal projects Poor financial health of the SEBs Will the Government deliver this time Regulatory Risk – Reopening of PPA’s – Availability adequate payment security mechanism Partnership with domestic players involving huge financial commitment – Control/ ownership issues Risk/ return profile Government initiatives Some past concerns proposed to be mitigated Past concerns Delays in project implementation Mitigants SPVs created to ensure initial requirements of sanctions and securing clearances Ministry of Power coordinating with concerned ministries/agencies Poor financial health of the SEBs Adequate payment security mechanisms being proposed Regulatory Risk – Reopening of PPA’s Electricity Act 2003 Open access in transmission Tariff based bidding Competitive tariff structures Focus on coal based projects Problems in project configurations Key pre-requisites for successful delivery Timely delivery of project development milestones committed by Government (e.g. consents, approvals, land acquisition etc) Bankable payment security mechanisms Reliable and effective power evacuation systems to enable transmission across states Delivery of captive coal mines Fuel price risk mitigation for the Coastal imported coal based power projects Regulatory clarity – mitigate regulatory risk Suggested Approach 4 3 2 1 One on one investor interaction – Key prerequisites to be Would lead to higher investor put in place (e.g. Bankable payment security mechanism, Fuel supply etc) confidence 2 staged approach for implementing UMPPs – Phased manner of project development - Will reduce stress Successfully award on financing 2-3 projects and then garner greater interest for the balance projects Opportunity and Challenge Ultra Mega Investment for Ultra Mega Power Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment Limited window of opportunity to attract long-term equity participation in the growth of Indian power sector Repeat/ replicate the success achieved in other sectors