GOVERNMENT OF INDIA
The acute shortages in power supply in the country, both theenergy and peaking, is a matter of grave concern, as economicdevelopment of the country crucially depends on availability ofadequate and reliable power. The broad strategy of the Governmenthas been both supply side and demand side management to meetthese shortages. On the supply side, however, the emphasis hasprimarily been on addition of generation capacity. However, oneimportant area which could not receive desired attention was theupkeep of these plants. As a result, the efficiency of theseplants gradually deteriorated and PLF's plummeted to alarminglylow levels. The Government did successfully implement theRenovation & Modernisation Programmes in the Seventh Plan periodand spectacular results were obtained. But this thrust could notbe sustained primarily due to acute shortages of funds with ourutilities. There is no gainsaying the fact that Renovation &Modernisation (R&M) offers a much cheaper and quicker way to addcapacity and, therefore, deserves the highest priority. While thegreenfield projects would invariably involve long gestationperiods, R&M offers a quick remedy to the power shortages to aconsiderable extent.
2. With the announcement of the private power policy inOctober, 1991, private investment became possible in all areas ofthe power sector. It consequently opened up a new avenue offinancing of R&M of power plants. The Government had, therefore,few months back, framed draft guidelines for private sectorparticipation in R&M and circulated it to the States invitingtheir comments.
This was followed up by discussions with the States and, based on the feedback received, we have now finalised the policyguidelines for private sector participation in R&M of powerplants. A copy of the guidelines is enclosed.
3. The policy envisages three practical and feasible alternative options, viz.
(i) lease, rehabilitate, operate and transfer (LROT
(ii) sale of plant and
(iii) joint venture between SEB's and private companies.
These options are, however, only illustrative. The choice and initiative would clearly lie with the States and I am sure thatother innovative solutions would definitely be worked out by theSEBs/State Governments. The degree of privatisation would varywith each option; these may involve temporary or permanenttransfer of plant management to the private agencies. Needless tosay it might also involve some reallocation of existing staff.But I am sure that the SEBs and the State Governments would beable to negotiate mutually agreeable options.
4. The success or failure of the initiative for privatesector involvement in the R&M of power plants would dependtotally on the States' initiative and these guidelines are onlyin the nature of suggestions which have been formulated based onexperiences elsewhere. It is my request that this be accorded thehighest priority in your private sector policy. I am sure, wewould be able to make quick progress in attracting investmentfrom the private sector for R&M for the existing power plants. Ihope to hear the measures proposed to be taken by you in thisconnection.
With best wishes,
All Chief Secretaries of the State Govts/UTs Secretary (Energy), State Governments Chairmen, State Electricity Boards
PRIVATIZED RENOVATION & MODERNISATION OF POWER PLANTS: POLICY GUIDELINES
1.1 With the announcement, in 1991 of the liberalised economic policy of Government of India, private investments, including foreign investments, are now allowed into all areas of the power sector. However, current attention seems to be focussed almost exclusively on greenfield' projects. One area which offers a tremendous potential for exploitation through this new avenue of private investment is the Renovation and Modernisation (R&M) of thermal plants and Renovation, Modernisation and Uprating (RM&U) of hydro power plants because they provide low cost options to raise much needed generation in a relatively short time. However, barring stray efforts that are yet to take concrete shape, this area of activity has not received adequate focus. On the contrary R&M is a priority area and should not suffer neglect, especially so when a well drawn up technical programme exists.
1.2 Apparent inhibitions in taking up R&M through privatisation route are partly the lack of detailed policy guidelines as also feared complexities of implementation involving contract-related and other issues.
1.3 This document aims at clarifying the Central Government policy with respect to privatised R&M of thermal plants and RM&U of hydel power plants, (hereinafter referred to as R&M for ease) and at addressing the main concerns regarding its implementation.
2.1 It is Government policy that where R&M of a generating station is considered to be beneficial, efforts should be directed at securing those benefits at the earliest by tapping feasible sources of investment, whether public or private.
2.2 The choice and initiative rests quite clearly with the State Electricity Boards (SEBs) and the State Governments. In some instances, raising needed funds through traditional means like loans from financing institutions, external aid agencies, suppliers' credit or a combination of these could still be an option and ownership of renovated plant could remain with the SEB. However, an attractive alternative option would be some form of privatisation and transfer of ownership for implementing the R&M programme without delay.
2.3 In the first type of cases also, i.e. where taking up R&M under continued SEB ownership is a viable option, it is expected that this option and the alternative of privatised R&M would be compared to one another with reference to factors like relative economics, risks, financing of other priority areas, resulting price of energy etc. In this preliminary choice of options, the financial data/inputs cannot obviously be too precise. A balanced selection of R&M route should among others, take note of the following:
2.4 For most SEBs, the alternative of traditional financing no longer exists; the choice for them is to postpone R&M for some - perhaps for all - times (foregoing the benefits correspondingly) or to draft private investment from among the different forms available. Issues relevant to the latter selection are addressed in some detail in the following paragraphs.
3.0 FORMS OF PRIVATE INVESTMENT IN R&M
3.1 Three alternative options appear practical and feasible for private investments in R&M schemes. The degree of privatisation would vary with each option; all would involve temporary or permanent transfer of plant management to the private agency. Features specific to each are briefly discussed in the following section. It is, however, recognised that the States/State Electricity Boards may have other innovative options which could also be considered. (Certain common issues like staff redeployment and selection process are dealt with in Section 5).
3.2 Option 1. Lease, rehabilitate, operate and transfer (LROT)
3.2.1 Under this option, the private promoter (PP) would take over the power station of the SEB on a long-term lease. PP would invest and carry out the R&M of the power station and would take over its operation and maintenance. Normally, the station would revert to the SEB on completion of contracted years of lease; the arrangement could also be renewable on terms to be specified.
3.2.2 Special features of leasing arrangements are that:
3.3 Option 2. Sale of Plant
3.3.1 SEBs could offer power stations, which were uneconomical for them to run and difficult to maintain due to overage, for outright sale to private parties. The present worth of the plant would have to be assessed which would be the reserve price' for the sale.
3.3.2 Private Promoter(PP) could have two options, viz. (a) to sell the electricity generated at the renovated plant to other consumers on captive basis by utilising the transmission and distribution network of the SEB for wheeling electricity on payment of wheeling charges; and / or (b) to sell the electricity generated at the plant back to the SEB.
3.3.3 The special advantage of the option of sale of plant' is that it generates sizeable income up front' to the owners of the plant (SEB or State Government). The normal practice is for the purchaser to pay for the value of the assets in instalments over a period of two to five years. (PP would bear the interest liability over this period).
3.3.4 Depending on the market value of the assets, this could generate resources for the sector currently starved of funds for investments. It is expected that the funds generated will be put to use for the power sector in one of the following ways:
3.3.5 Its attractiveness to private investors would be greatly enhanced if the sale formed part of a broader scheme of restructuring of SEB, and permitted direct sale of power to bulk consumers and/or to private distributors. On the adverse side, this route would involve large scale redeployment of existing SEB staff.
3.4 Option 3. Joint venture between SEBs and private companies.
venture (JV) of the SEB/State Government and selected private collaborator. The JV company would undertake the R&M and own, operate and maintain the power station in question. The private collaborator would normally be a PP who would assume responsibility for the management of the JV.
3.4.2 The participation by SEB (and/or the State Government) in the JV would be by transferring the existing plant at an agreed value to the fixed assets of the JV. PP will finance the full required investment for R&M, partly through equity and balance by arranging required loan finance.
3.4.3 Following special features require note:
4. SECURITY OF SEB PERFORMANCE
4.1 A key factor for the success of privatised R&M is the degree of security that can be given to PP regarding expected returns on the investment and receipt of dues for the power supplied. If the power is to be purchased by the SEB, the required degree of security can best be provided through:
4.2 If PP has the option to sell power direct to bulk consumers or private distributors, the security to be provided by SEB would relate to the reliability of power evacuation and wheeling arrangements.
4.3 Privatized R&M would be workable only if the SEBs were able to realize additional revenue from the increased power generation. Private promoter would also need assurance in this regard that would be acceptable to lenders. Therefore, linking of privatized R&M with a distribution license permitting sale to a territorial area or to bulk consumers is one of the options that could be considered.
4.4 The sustenance of achieved objectives to be derived out of private sector participation and successful implementation of all options of private sector participation would mainly be dependent on proper and adequate collection of revenue so that the SEB could maintain and operate the plant at the achieved level of performance established by the private sector for a long time to come.
5. CONTRACTS AND AGREEMENTS
5.1 Privatized R&M would involve a set of contracts and agreements, including :
(a) Power Purchase Agreements (PPAs) if the generated power is to be sold to SEB.
(b) A Lease Agreement if the privatisation follows the LROT route.
(c) Agreement to cover the sale of assets if privatisation involves outright sale of plant and facilities.
(d) A Joint Venture Agreement in cases following the JV option.
(e) An Implementation Agreement if the PPA stipulates specific obligations to be fulfilled by SEB/ State Government (e.g.- strengthening of evacuation arrangements, obligations relating to water supply, exemptions from certain types of taxation or regulations, etc.,)
(f) An O&M Agreement if the operation of the plant remains with the SEB in one of theprivatisation options.
(g) A License Agreement if the power is to be supplied by the private party directly to consumers.
(h) From the private promoter's side, a Fuel Supply Agreement (FSA) would also be involved in most cases, and SEB would need to satisfy itself, that the FSA provisions are adequate. The option oif SEB retaining the responsibility for fuel supply could also be considered.
(i) A performance Improvement Guarantee Agreement identifying incentives/disincentives for performance above/below the guaranteed performance limits.
5.2 In addition to SEB's own in-house' technical expertise in evaluating technical proposals, negotiation of the type of agreements mentioned above would call for expertise in Financial Anaylsis, Taxation, Contract Management, and drafting of legal documents.
6. PROCEDURE FOR IMPLEMENTATION
6.1 The recommended processing sequence for privatized R&M projects is as follows:
(a) On the basis of the list of schemes already identified under Government of India R&M Phase II programme, the SEB should determine if the power plant may be got renovated and operated by the private sector under one of the identified forms.
(b) The selection process will need to be designed with reference to the privatisation option that is under consideration for the specific plant. As a general rule, choice of private promoter should be made through the well established process of competitive bidding. The main criteria in the selection would be the level of investment proposed, the corresponding level of performance of the renovated power station and reasonableness of price of energy.
(c) For securing best benefits through competitive selection, it is important to have fully developed technical schemes for R&M, complete with provisional cost estimates. SEBs will identify and formulate detailed proposal in respect of such power stations, with mode of private participation.
(d) Necessary preliminary clearances are obtained.
(e) On obtaining the necessary clearances the two-stage bidding process is initiated. The first stage will be for prequalifying the short-list of bidders. At this stage, full technical details available with the SEB will be furnished to the parties through the pre- qualification documents and the preferred form of privatisation will also be indicated.
(f) In the next stage, the applications for pre- qualification are scrutinised and the short-list drawn up. The technical and price bid documents are provided to the short-listed firms and time allowed for due diligence'. This is essential for the PP to make his own assessment regarding economics of plant renovation, further feasible technical improvements, availability of raw materials (including water and fuel) to the required increased levels, adequacy of power evacuation arrangements, and environmental regulations currently applicable.
(g) From the technical /financial bids received, one or more parties are selected for final round of negotiations. Before commencing this stage, the form of preferred privatisation is firmed up.
(h) The selected partly is awarded the project and detailed contracts executed after obtaining necessary final clearances.
6.2 Although competitive selection of PP is the preferred mode with overwhelming advantages, some instances involving privatized R&M by negotiation with a single party cannot be ruled out. Certain SEBs are also considering proposals from private promoters, involving setting up of power plants with renovated equipment brought from old plants located elsewhere. There is no objection in principle to this type of privatized R&M involving relocation of plant, subject to the SEB fully satisfying itself of the technical and cost parameters.
6.3 Reasonableness of prices can be best established through a combined process of competitive selection and negotiations. Competitive selection for undertaking the equipment supply and plant renovation could be based on three criteria, namely,
-Total cost of renovation,
-Cost and terms of financing, and
-Broad performance parameters of renovated plant.
In the case of sale of plant, the basic criterion could be either a price bid for the asset or the price of power purchase.
6.4 The bid documents should cover, among others, the following:
i) Period of agreement and other general terms and conditions.
ii) Procedure for valuation of assets.
iii) Procedures for handing over and taking over of assets.
iv) The nature and extent of performance guarantees required.
v) Supervision of the implementation of R&M activities.
vi) Implementation schedules.
vii) Training of personnel.
viii)Utilisation of existing personnel of the SEB.
ix) Arbitration clause.
x) Force Majeure Clause.
6.5 Based on the bids received, the detailed operational parameters could be finalised through negotiations either with a single selected agency or a short - list of bids. For the purpose of these negotiations, three areas could be taken up, namely,
i) Operation & Maintenance (O&M),
ii) Fuel and
These are explained below
i) O&M: could have two components, namely, a fixed component' and a variable component'. The fixed component can be given suitable weightage depending on whether and to what extent the renovated plant would be utilising existing SEB staff.
ii) Fuel: Plant specific heat rate could be one of the technical criteria for short listing bids. The rate as finalised should permit operator to retain benefits for improved performance and should also allow for compensation for reduced energy off-take for lack of demand or other SEB related factors.
iii) Incentives/Disincentives: Operational incentives could be related either to achievable PLF or to guaranteed availability. A further area for incentives in the case of R&M is with reference to completing R&M and commissioning by schedule or ahead of schedule. This is generally in the form of a percentage extra over basic tariff for a limited period (say, first five years). The incentives scheme may be linked to the percentage of additional revenue generated on account of early completion of work. Similarly, a scheme for penalty should be introduced.
7.1 Privatized R&M does not lend itself to standardised tariff norms, either with regard to technical or with regard to financial parameters. (It may be noted that even in case of new thermal generation projects, the notified norms are applicable only to plants of certain type and sizes).
7.2 Technical Norms: In regard to technical parameters, the following would need to be determined with reference to each specific case:
i) Useful life to renovated plant.
ii) Rated capacity after renovation and achievable performance level.
iii) Agreed terms between SEB and private promoter regarding development of existing staff (for purpose of O&M).
iv) Plant specific standards of coal consumption, oil consumption, auxiliary consumption etc.
7.3 Financial Parameters:
7.3.1 Private sector participation would call for full flexibility as to mode of financing and consequently on the price structure. Private funding can be in the form of equity or loan finance. The guidelines for setting up new generating units in the private sector allow a liberal debt: equity mix of 4:1 but carry certain stipulations on minimum contributions of promoters. There are also limits on access to Indian public financial institutions. Bulk of R&M expenditure will be on cost of equipment and other bought out items which can be funded in a variety of ways including leasing and suppliers' credit. In the case of imported equipment, export credit agencies like ODA, US EXIM etc. can be tapped.
7.3.2 Apart from the variability in cost of finance, factors affecting the justified rate of return requiring note are :-
i) Lesser project related risks; and
ii) Shorter gestation period which will generate a better Internal Rate of Return' (IRR) as compared to green field' projects.
7.3.3 Other variable factors in R&M schemes include the followin
i) Weightage of original plant cost in the total value of assets deployed.
ii) Residual plant depreciation.
8. STAFF RELATED ISSUES
8.1 Privatised R&M would in varying degrees envisage temporary or permanent transfer of plant management which has implications of staff redeployment. PP would need to bring in key management personnel. It requires to be noted, however, that there is considerable room negotiation and adjustment between SEB and the privatized entity in this regard.
In view of the sensitive nature of the issue the SEB and the State government are in the best position to take a view in this matter.
CEILING FOR RENOVATION & MODERNISATION
GOVERNMENT OF INDIA
Dated the July 16, 1996.
Kindly refer to my D.O. letter of even number dated 28.10.95, regarding the policy guidelines for private sector participation in the renovation & modernisation of power plants.
2. Even though it was envisaged that the guidelin concerning this important area, through which efficiency of the on-going power plants could be improved, would yield several proposals, not much initiative appears to have been taken by the State Governments and the State Electricity Boards.
3. It is understandable that the implementation is retarded, inter-alia, on account of the acute shortage of funds, but it is equally undeniable that only renovation and modernisation of the existing power plants, which are functioning below their capacity, offers a much cheaper and quicker alternative to capacity addition. It is further clarified that all the renovation and modernisation schemes with an estimated cost below Rs.100 crores need not be referred to the Central Electricity Authority for their clearance. Power Finance Corporation have been issued instructions to give high priority for funding R&M programmes.
4. I once again request you to accord the highest priority to attract investment either from PFC or from the private sector for renovation and modernising the existing power plants and augmenting their generating capacity.
With best wishes,
( P. ABRAHAM )
All Chief Secretaries, Secretary (Power) of State
Copy to Shri M.I. Beg, Chairman, CEA, New Delhi.
List of CHAIRMEN, State Electricity Boards in various States of
CHANGE IN CEILING LIMITS FOR R&M SCHEMES
January 9, 1997
In line with the decision to delegate powers to the States forclearance of R&M schemes, Government have now decided toraise the ceiling cost for R&M schemes from the earlier Rs. 100crores to Rs. 500 crores. A copy of the relevant notification dated9-1-1997 is enclosed. The Notification, provide that R&Mschemes involving a capital expenditure upto Rs. 500 crores,shall, henceforth, be cleared at the state level and not requireclearance from Central Electricity Authority. This delegation tothe States is expected, to ensure faster clearance of R&Mschemes, which in turn should give a big boost to the efforts beingmade by the Government to bridge the short term needs of power.
All Power Secretaries of State/UTs Chairmen of All SEBsCMDs of all CPSUs under Ministry of PowerJSs of Ministry of PowerChairman and Memebers of CEAPS to MOP/PS to Secretary (P)/PS to AS(P)
(To be published in Part II, Section 3, Sub Section (ii) of the Gazette of India)
Government of India
New Delhi, dated the January 9 , 1997
S.O.....,. .- In exercise of the powers conferred by sub-section (1),of section 29 of the Electricity (Supply) Act, 1948 (54 of 1948) andin supersession of the notifications of the Government of India inthe Ministry of Power No. S.O.1095 dated the 28th December, 1995, the Central Government here fixes,____
I) in relation to a scheme for generating station prepared bya Generating Company and selected through a process of competitive bidding by the competent Government or Governments, rupees one thousand crores;
(ii) in relation to a scheme for renovation and modernisationof existing power generating stations, rupees five hundred crores; and
(iii) in relation to all other schemes, rupees one hundredcrores.
as the sum of capital expenditure exceeding which the schemeshall be submitted to the Authority for its concurrence.
Additional Secretary to the Government of India
EXPANSION OF POWER PROJECTS IN PRIVATE SECTOR
D.O. No. 2/5/96.IPC-II
Subject: Policy regarding expansion of power projectsin 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 Secretary (Energy), State Governments Chairmen, State Electricity Boards Chairman, CEA