With supply-constrained power sector offering good prospect to sell power in high short term rates, Merchant Power Pants (MPPs) is going to be the next big thing in India. According to Ernst & Young report, bulk of private sector interest in power is currently in generation due to the possibility of selling power at high prices.
The report enlists number factors responsible for encouraging MPPs in India. The biggest one is the huge demand-supply gap in power sector. “As per CEA, Ministry of Power, India's peak demand as on March 2009 was 109.8GW whereas the supply was 96.6GW. This resulted in peak demand shortage of around 12% in FY09. The peak deficit has almost increased by 40% from 9.5GW in FY04 to 13.1GW in FY09,” the report said.
Another attracting factor is the merchant price which is far higher than the price charged in the case of long term PPA.
“Short term or merchant prices are almost 2.4-2.5 times the long term prices,” it said. However, to ensure reasonable prices of electricity in the period of present shortages for inter-state day head transactions, CERC had recently put in a price cap mechanism on short term power sale for a period of 45 days. The minimum tariff or bidding price, as the case may be, had been specified at Rs0.10/kWh and the maximum ceiling of tariff or bidding price, as the case may be, had been specified at Rs8/kWh.
Also, MPPs are not liable to meet any performance related milestones. Long term PPAs with distribution companies are usually subject to meeting of certain performance related milestones which is not applicable in case of MPPs.
The report said the Eleventh plan envisages an investment of Rs1,400 billion in the transmission sector in India.
However, there are also some risk factors involved in MPPs as it required to absorb the full market risk and compete for customers on an on- going basis. “Regulatory interventions by way of capping power prices or by restricting power projects from freely supplying power to the entity of their choice are another risk to which MPPs are exposed to,” it added.
The report said the MPPs being financed in India have around 60-70% of the power tied up through long term sale arrangements to distributing companies or trading companies or industrial consumers so as to ensure cash flows sufficient enough to cover the debt servicing requirements. “This is specified by lenders through Debt Service Coverage Ratio covenant which requires developers to tie-up through a PPA such proportion of capacity, which is sufficient to service 1.1 to 1.3 times the annual repayment and interest obligations,” it added.
The report concludes by saying that development of MPPs is essential for overall capacity additions required by India to bridge the demand-supply gap. The possibilities of high returns have attracted several private developers. However, the reluctance of lenders to finance a pure MPP and the high risk attached to it presents several challenges.
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