Diluting equity to finance power unit buys in a depressed power market may be a risky strategy, says Neeraj Thakur JSW Energy has shown a tremendous risk appetite for buying distressed power assets in the market. With the announcement of an MoU to buy Jaiprakash Power’s (JP) Bina (500 MW) power plant, the group is now in official talks to buy three of JP’s assets with a total generation capacity of 1891 MW. Not just this, JSW Energy is also eyeing an under construction 1050 MW power asset of Monnet Ispat. Through the acquisition of these assets, JSW Energy wants to double its power portfolio to 6,081 MW from the current level of 3140 MW. If we leave Adani Power that managed to buy one power asset for Rs 6,300 crore from Lanco, other groups like Reliance Power and Tata Power have not shown the heart to take the risk in this market where infrastructure companies are ready to sell their power plants to pay off their debt. While JSW Energy has one of the best debt-to-equity ratio in the sector, its strategy to grow inorganically can make the balance sheet of the company similar to the players who want to sell their power plants in the market. With its debt of Rs 8,210 crore in March 2015, the purchase bill of the new assets - if all deals go through- would be around Rs 20,000 crore. JSW energy’s debt-to-equity ratio in March 2015 was just 0.47, a sign of a healthy company. The management of JSW Energy has said that it was ready to infuse equity into the company to fund acquisitions. However, to fund its acquisition spree, the promoters will have to dilute a significant amount of equity in the company. A brokerage analyst requesting anonymity said “no promoter wants to put in equity above 5,000 crore so easily. If Jindals do that, it would be a bold step to grow through brownfield projects in a depressed power market. Thermal power plants across the country are struggling with low plant load factor. NTPC reported a decline in its PLF at 77.6 per cent from 84.3 per cent in the first quarter of FY16. JSW energy’s own Ratnagiri power plant with a generation capacity of 1080 MW has reported decline in unit sales due to lack of demand from state discoms in the past. The company's plant load factor, a measure of the utilisation of a power plant, declined 75 per cent in the June quarter of FY16 as against 84 per cent a year ago. In such a scenario, even if the company is occupying operational assets, chances are that the company would not be able to realise margins required to retire the newly acquired debt on the company’s balance sheet. While the company management in its press conferences has said that it is looking at long term gains from these acquisitions, it would be important to note that in the long term, thermal power market will face pressure on margins from renewable energy players who are beginning to quote prices at Rs 5 per unit. Analysts expect the per unit realisation for JSW Energy power plants at Rs 4 per unit in FY16 and FY17, this guidance itself put a question mark over the valuation of the assets that the company is eyeing.
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JSW Energy Ltd has signed an accord to buy a power plant from Jaiprakash Power Ventures Ltd, the companies said on Tuesday (08 September), as India's indebted corporations sell assets to repair their balance sheets. JSW Energy and Jaiprakash Power have signed a binding memorandum of understanding for the latter's Bina power plant in Madhya Pradesh, the companies said in separate stock exchange filings, without specifying a deal value. The Economic Times newspaper earlier on Tuesday reported JSW could pay about Rs 3,500 crore ($525 million) for the 500 megawatt power plant. Under pressure from banks, Indian companies are trying to offload assets to pay back debts after an economic slowdown squeezed the cash flows needed to service their loans. High levels of corporate debt, particularly in the infrastructure and power industries, have stopped companies from investing in new projects, holding back a recovery in Asia's third-largest economy. Credit Suisse said in a research note in June that 37 per cent of the Indian corporate debt it tracked was owed by companies which earned insufficient cash to cover interest payments in the quarter ending in March. It estimated the debts of Jaiprakash Associates, the parent of Jaiprakash Power, at Rs 75,300 crore ($11.32 billion). Jaiprakash Power last November agreed to sell two hydropower projects to JSW Energy, the company's first purchase of hydropower assets. The companies closed that deal on Tuesday. JSW Energy will cross 5,000 megawatts in capacity when it concludes the Bina thermal power plant deal, Chairman Sajjan Jindal said in a statement. Shares in Jaiprakash Power had jumped 6.3 per cent by 2:30 pm, while those in JSW Energy rose 6.2 per cent.(Reuters)
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JSW Energy Ltd has signed an accord to buy a power plant from Jaiprakash Power Ventures Ltd, the companies said on Tuesday, as India's indebted corporations sell assets to repair their balance sheets. JSW Energy and Jaiprakash Power have signed a binding memorandum of understanding for the latter's Bina power plant in Madhya Pradesh, the companies said in separate stock exchange filings, without specifying a deal value. A business newspaper earlier on Tuesday reported JSW could pay about 35 billion rupees ($525 million) for the 500 megawatt power plant. Under pressure from banks, Indian companies are trying to offload assets to pay back debts after an economic slowdown squeezed the cash flows needed to service their loans. High levels of corporate debt, particularly in the infrastructure and power industries, have stopped companies from investing in new projects, holding back a recovery in Asia's third-largest economy. Credit Suisse said in a research note in June that 37 percent of the Indian corporate debt it tracked was owed by companies which earned insufficient cash to cover interest payments in the quarter ending in March. It estimated the debts of Jaiprakash Associates, the parent of Jaiprakash Power, at 753 billion rupees ($11.32 billion). Jaiprakash Power last November agreed to sell two hydropower projects to JSW Energy, the company's first purchase of hydropower assets. The companies closed that deal on Tuesday. JSW Energy will cross 5,000 megawatts in capacity when it concludes the Bina thermal power plant deal, Chairman Sajjan Jindal said in a statement. Shares in Jaiprakash Power had jumped 6.3 percent by 2:30 p.m., while those in JSW Energy rose 6.2 percent. (Reuters)
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Integrated power company Hindustan Powerprojects (HPP) on Wednesday (2 September) said it has commenced supply of 361 megawatt power to Uttar Pradesh from its flagship 2,520 MW Anuppur Thermal Power Project more than a year ahead of schedule.The power is being supplied through the recently-commissioned WR-NR Inter-Regional link (765 kV Gwalior-Jaipur Transmission Line). With this supply, HPP becomes the first Inter-Regional Independent Power Producer (IPP) to supply power to UP on long-term basis, among the Case-1 PPAs (power purchase agreements) signed by the State for an aggregate capacity of 2,175 MW.Ratul Puri, Chairman - Hindustan Powerprojects, said: "The UP Government has followed a well thought-out strategy to solve the State's challenging energy situation. Recognizing the limited availability of coal and, thereby, the inability to ramp up thermal production, the Government first moved earlier to buy conventional power by inviting bids and then promoted solar energy. We are delighted about being part of UP's Vision 2016 and our contribution to it."The total capacity of the flagship thermal plant is 2,520 MW - to be developed in two phases of 1,200 MW (2x600 MW) and 1,320 MW (2x660 MW). The Unit-1 of the first phase has been commissioned at a very competitive Cost.Ravi Arya, President (Commercial & Business Development) - Hindustan Powerprojects, revealed: "Commissioning of the Anuppur Power Plant and the 765 kV Gwalior-Jaipur Transmission Line proved to be most critical in our supplying power to UP. This was based upon the Case 1 Bid invited by the UP Government where we had participated."(BW Online Bureau)
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The Tamil Nadu government on Tuesday (1 September) announced a 4,000 MW thermal power project in Ramanthapuram at a cost of Rs 24,000 crore besides plans to augment the power transmission infrastructure in the state."I am happy to announce that a 4,000 MW mega thermal power project will come up in Ramanathapuram district at an estimated cost of Rs 24,000 crore and land has been identified for the project in Nallampatti village," Chief Minister Jayalalithaa said in the state assembly, adding that the project work would start after getting requisite approvals.She also detailed the progress of power generation projects in the past four years of her government. On transmission infrastructure, she said a 3x1500 MVA pooling sub-station would be set up in North Chennai at a cost of Rs 2,335 crore.Also, a 2x1500 MVA sub-station would be set up in Ariyalur at a cost of Rs 2,121.45 crore.These sub-stations would evacuate electricity from new thermal power plants that are being set up in North Chennai and Ennore.Also, a 2x1500 MVA sub-station would come up in Coimbatore district at a cost of Rs 2,335 crore, which would buttress electricity distribution network in the Western region.On the capacity addition since 2011 when she assumed office, she said so far 5,954.5 MW has been added to the grid through own projects of TANGEDCO, Joint Ventures, share from central projects and through power purchase.On the progress of projects, she said work is on for thermal projects (660 x 2 MW) in Ennore Special Economic Zone and 660 MW Ennore Thermal Power Expansion Project.Detailed Project Report is being prepared for the 2,000 MW Sillahalla Hydel Power Project.Preliminary works are on for the 800 MW North Chennai Thermal Power Project Stage-III, 800x2 MW Uppur Thermal Power Project, 660x2 MW Udangudi Thermal Power Project, and another 660 MW thermal project at Ennore, she added.(PTI)
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The Adani Group said on Monday (24 August) it would invest Rs 25,000 crore ($3.75 billion) in a coal gasification project. Adani said in a statement the project would be launched in Chhattisgarh, one of India's poorest, where there is an abundant supply of poorer quality coal containing high ash. It said it would also invest Rs 200 crore in a rice bran solvent extraction plant and a physical refinery packing plant in Chhattisgarh.Headed by billionaire Gautam Adani, the Adani Group's operations include coal mining, power plants, ports and logistics.Adani Group, a global integrated player, signed a MoU with the government of Chhattisgarh to develop two critical projects which are estimated to be around Rs 25, 200 crore.Gautam Adani, Chairman, Adani Group, said, “These projects will help the state of Chhattisgarh strengthen its overall socio economic status. We also feel these two projects will play an instrumental role in assisting the larger national agenda of inclusive growth for all and is demonstrative of our continuous efforts of nation building”.The two projects comprise of a Coal to Poly-generation (CTP) Project and a Rice Bran Solvent Extraction Plant & Refinery. The MOU was signed by Subodh Kumar Singh, Secretary-Industries of the State and Rajesh Jha and K.S. Varshney from the Adani Group.Dr Raman Singh, Chief Minister, Chhattisgarh said, “Both these projects will not only enhance the economic growth of the state but will also create substantial employment opportunities for the people of Chhattisgarh”.The CTP project has the potential to generate 5000 jobs as well as substantial revenue to the state of Chhattisgarh. In addition to this, the project will strengthen the overall socio- economic status of Chhattisgarh State.The second project cost is estimated to be around Rs 200 crore and has the potential to generate more than 600 jobs in the state of Chhattisgarh. The proposed project will not only help in increasing the potential of rice bran oil production in the state but will also help in generating employment and economic growth in the region of operation.
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The power ministry’s proposed changes to the bidding guidelines could increase developer interest in ultra mega power plants (UMPPs) as they try to address the concerns of investors and lenders raised on the previous guidelines, says India Ratings and Research (Ind-Ra). The proposed guidelines cover key investor/developer risks including fuel price variation, fixed charge quote, ownership of asset, incentive/disincentive for performance, land acquisition and termination of contract. The key reason for the failure of the previous bidding guidelines was the unwillingness of lenders to fund a 4GW power project with an estimated investment outlay of Rs 20,000 crore on a design, build, finance, operate and transfer model where the asset ownership did not vest with the developer. The current guidelines propose a build, own and operate model which, Ind-Ra believes, will result in greater acceptance from lenders for financing. The guidelines provide for a better fuel cost pass-through as they envisage a full escalation on the base tariff based on the Central Electricity Regulatory Commission (CERC) norms. Earlier, a fuel cost bid was divided into two parts which required the developer to project the non-escalable part of the fuel cost over the life of the project, leading to viability issues. Escalations based on the CERC norms should provide sufficient cushion to developers to manage the inflation associated with mining costs. However, Ind-Ra believes developers will be cautious while quoting fuel costs as operational UMPPs have seen challenges on account of aggressive bidding. The fuel cost variation over the life of a power purchase agreement is unlikely to be high, given that the proposed guidelines speak about UMPPs based on captive domestic coal. Additionally, the current guidelines do not provide for any open capacity which could be sold as merchant power as against the earlier guidelines which had a 15% open capacity. Ind-Ra considers this to be more prudent as the 15% open capacity added an additional uncontrolled variable (per unit price of merchant tariffs) in the bidding, and developer’s assumption on merchant tariffs alone could have altered the project viability. The current guidelines propose the bidding of a separate fixed charge for each year over the life of a power purchase agreement which is favourable from a project risk perspective compared with the earlier guideline of a single fixed charge quote with annual escalation. The incentive structure has also been made more stringent with incentives proposed above the normative availability of 90% and has been aligned to the plant load factor instead of availability. However, in contrast with the CERC guidelines where the incentive rate was fixed at INR0.5/kwh, the draft UMPP guidelines propose linking the incentive rate to 0.5x of the fixed cost per unit of the respective year. The incentive payments could be higher than the current CERC norms as Ind-Ra estimates the fixed cost per kWh to be higher than INR1/kwh. The disincentives curve has been lowered by 75% compared with the CERC guidelines, which though favourable to developers does not provide sufficient disincentives to generators for reducing availability. The draft norms also propose a segregation of operating and infrastructure assets into two separate special purpose vehicles (SPVs). The land for coal block as well as power plant would be housed under an infra SPV while the plant would be developed under an operating SPV. The move will lead to the mortgage of land and power asset separately to raise finances, however, this could pose challenges in the sale of asset. Prior to the request for qualification, an infrastrucure SPV will have to acquire partial land and the remaining land will need to be acquired by developers with assistance from state power utilities. In the past, concerns were raised regarding land cost going up while their fixed cost quotes were provided pre acquisition of the land. Therefore, the proposal is to pass through changes in price greater than 10% of the declared price. Though on the face of it, the guideline is again favourable to developers and a risk mitigant, it may expose discoms to the risk of developers using land cost as a tool to increase tariffs. Therefore, a transparent method of evaluation of such costs will be necessary. The introduction of a termination clause also provides relief to developers. Under the current bidding model, there are few options for a developer to exit a project and this has restricted private power generation companies’ interest in UMPPs. The proposed guidelines also provide for a termination option to lenders/procurers who can look for a new developer to take over the asset. The government in the Union Budget 2015-2016 has proposed to set up five new UMPPs, each of 4,000 MW in the plug-and-play mode. The changes in bidding norms are in line with the government’s intentions to meet this objective. Ind-Ra expects higher interest from private developers in the next rounds of UMPP bidding, whereas private sector developers had withdrawn from the bidding process in the last auction which was finally cancelled due to lack of takers.
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To clip the wings of the private sector, it is important to have companies compete with each other, writes Neeraj ThakurThe Comptroller and Auditor General of India (CAG) audit report of the electricity distribution companies or discoms has upheld the allegations of Delhi chief minister Arvind Kejriwal that these companies have overcharged the Delhi consumers for over a decade. While the report vindicates Kejriwal and his party’s stand against Sheila Dixit led Congress and the BJP who mocked the current CM for questioning the accounts of the discoms, it would be important to see how the Kejriwal government punishes the guilty companies. Kejriwal in the past has said that if he comes to power he will take away the contracts from the companies that are found guilty, but, such an action is not practical because claims of a CAG report can be challenged in the court. However, If Kejriwal really wants to solve the problem of the electricity distribution sector for once and for all, then he must use the system to weed out corrupt practices rather than expecting the discoms to be honest. In a monopoly, the government sector becomes inefficient and lethargic while the private sector unleashes its profiteering tendencies. So, when the electricity distribution sector of Delhi was handed over from the government run DESU or Delhi Electricity Supply Undertaking to the private sector players like Reliance Infra owned BRPL and BYPL and Tata Power owned TPDDL, these companies used all the means to make profits. The CAG audit report on power discoms says, “RA (Regulatory Assets) of three discoms which stood approved as on March 31, 2013, were Rs 13,657.87 crore. However, audit findings contained in various chapters of this report indicate that the RA of the three discoms were inflated by at least Rs 7956.91 crore”. To clip the wings of the private sector, it is important to have companies compete with each other. This keeps the price of services delivered by them down. In this regard, a path-breaking idea is buried in the files of the union power ministry that seeks to segregate the business of providing electricity wires from the business of supplying electricity to consumers. In such a scenario, there could be more than two companies that would compete to install their meters at the customers’ home to supply electricity. This would force them to be competitive in sourcing electricity from power producers. Currently, the same company is responsible for providing electricity as well as wires that carry the electricity to the doors of a consumer. While this idea was proposed ahead of the Delhi state assembly elections in 2015 by the BJP-led front, Kejriwal should not shy away from implementing it in his state if he wants to bring the price of power down through competition, because that is the only full proof way to achieve that end. Kejriwal has been pressurising the discoms to re-negotiate their power purchase agreements with the power producers, but he wields no real power to actually force the private companies. But as the head of the state he can introduces the segregation of the wire and the electricity supply business by inviting bids for both the segments. While the CAG report can lead to punishment of the power discoms, but the only way to bell the private sector cat is by creating cut throat competition so that only the most efficient and competitive survives.
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