GOVERNMENT OF INDIA
Subject: Policy regarding expansion of power projects in the private sector
Since the announcement of private power policy of the Government of India in 1991, a number of proposals for setting up power projects have been received. According to the guidelines issued by Government of India, only the Memoranda of Understanding/Letters of Intent (MoU/LoIs), etc., signed on or before 18.2.1995 by the State Governments/State Electricity Boards (SEBs) with independent power producers (IPPs) for implementation of projects by the latter, would be considered by Central Electricity Authority (CEA) for accord of their clearance. The State Governments were advised to follow the international competitive bidding route for setting up power projects beyond that date.
2. Subsequently, we advised CEA not to entertain any proposal of IPPs on the MoU/ LoI route for ‘in-principle’ clearance after March 31, 1996. In cases where this dead-line was not met, the project proposal would be frozen and reconsidered, if necessary, by the State Governments through the competitive bidding process only. Ministry of Power has prescribed another dead-line of 31st March, 1997 for all the MoU/LoI-based proposals that have obtained the ‘in-principle’ clearance of CEA, for submission of their Detailed Project Reports (DPRs) to CEA, along with firm cost estimates, for obtaining its techno-economic clearance, with a stipulation that the selection of the Engineering, Procurement and Construction (EPC) contract should be finalised through international competitive bidding in order to ensure transparency.
3. There are cases where, at the time of conceiving the project, development in more than one phase was envisaged. While initially only one phase is set up, land is acquired for the ultimate envisaged capacity and the layout of the initial phase is also done with a view to dovetail the plant and equipment of the expansion phase(s) at the ear-marked slots. There may also be cases where, subsequent to the conceptualisation of the initial project, the same IPP or the SEB decides to set up an extension plant appurtenant to the project and develops an adjoining site for the purpose.
4. Substantial cost savings are expected in expansion projects, as the installation of altogether new station facilities are not required, and the common facilities can be shared. There can be savings in the payment of income tax for the first phase, leading to lower tariff for the SEB. There is also optimal utilisation of land. Further, the development of extension projects is one of the means of being able to quickly setting up additional generating capacity on account of the advantages of existing infrastructure, ease in raising the requisite finances and, to a large extent, existing clearances and common source of fuel linkage. Therefore, the gestation period for such projects is likely to be shorter than that for setting up a new project, and this ought to also result in lower tariffs.
5. Such cost savings can be effected in expansion projects if the IPP is developing the extension to its initial project. If such extension project is required to come up through the competitive bidding route, the project may be awarded to an IPP other than the developer of the initial project and unless there is an understanding or accord between the two, the advantages would often be lost to the State and its power consumers. Therefore, for extension projects to projects being implemented by IPPs, regardless of the route through which the IPP was selected for setting up the initial phase, it is preferable to follow the MoU/LoI, etc., route, with selection of the EPC/turnkey contractor through the international competitive bidding route, as it would lead to substantial benefits in terms of lower project cost, reduced tariff and smooth operations and maintenance of the composite plant. In the case of an IPP for the initial phase having been selected through the competitive bidding route on the basis of tariff, the selection for the developer of the extension project would preferably be done through the MoU/LoI,etc., route based on a negotiated tariff.
6. In the case where the existing phase is owned by the SEB, the possibility exists for sharing common facilities with an extension, and the SEB has decided that the extension will be developed by an IPP, the selection of the IPP should be through the international competitive bidding route. This would also apply to cases where the facility of sharing exists but the private developer of the initial phase is not willing to undertake the expansion.
7. Extension projects, promoted through MoU/LoI, etc., route and having a projected cost of more than Rs 100 crores, would require to obtain CEA’s techno-economic clearance as per the existing policies of the Government of India in this regard. The tariff, however, would need to be negotiated between the developer and the State Government to ensure the ensure the availability of the benefits of extension projects to the SEB and the consumers. Allowing for the time gap between the development of two phases of the project and the global market for the power plant equipment, the tariff for the extension project should work out to be lower than the tariff as per the two-part tariff notification of the Government of India.
8. Kindly take up such cases where extensions to the initial projects have been envisaged, or are feasible, expeditiously for speedier augmentation of your State’s generating capacity.
With best wishes
All Chief Secretaries of the State Governments/ UTs