Project
Appraisal in
Power Sector
Varun Goel
Indian Institute Of
Te c h n o l o g y, R o o r k e e
Uttaranchal,
India
varungoelmzn@gmail.co
m
24/07/2010
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LETTER OF TRANSMITTAL
I, Varun Goel, acknowledge the submission of my project on Conducting Project Appraisal in Power
Sector to my project head and thanks IMaCS for giving this opportunity to work with them on this
project. I trust that I have tried to incorporate most of the relevant issues in the study.
The exercise was done to study the appraisal of the project with respect to the statutory clearances,
funding arrangements, risk analysis and mitigation mechanism, financial analysis and computation of key
financial parameters like Project IRR and Equity IRR. The scope of work included preparing of a
standard financial model that could be used for financial appraisal of projects and preparation of template
used for financial appraisal report. The client for which financial appraisal was conducted involved one of
the largest transmission utilities in the world, a Navratna Public Sector Enterprise.
However, a further research on the above topic by a specialized committee is warranted to suggest
improvements thereof.
VARUN GOEL
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ACKNOWLEDGEMENT
I would like to express my gratitude to Mr. Ramandeep Singh, Project Manager, Energy Practice,
IMaCS Noida for providing me an opportunity to work in ICRA Management Consultancy Services,
Noida and make it a very memorable experience.
I would like to express my heartfelt appreciation and gratitude to my project head Mr. Kashif Nisar
Khan, Senior Analyst, Energy Practice, IMaCS Noida. This project is a result of his teaching,
encouragement and inputs in the numerous meetings he had with me, despite his busy schedule.
I would also like to thank all the other departmental members for their constant support, continued
encouragement and guidance throughout my training period.
Finally, I would like to thank my Institute, IIT Roorkee for making this experience of summer training in
an esteemed organization like RBI possible. The learning from this experience has been immense and
would be cherished throughout life.
VARUN GOEL
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Table of Contents
EXECUTIVE SUMMARY...........................................................................................................................................8
ABOUT THE COMPANY...........................................................................................................................................9
ABOUT THE CLIENT...............................................................................................................................................14
Operational Performance OF XYZ...........................................................................................................................14
Financial Performance OF XYZ...............................................................................................................................16
BACKGROUND OF PROJECT...............................................................................................................................18
Scope of Work...........................................................................................................................................................18
Information source....................................................................................................................................................18
CURRENT CHANGES IN POLICY/REGULATORY SCENARIO IN THE TRANSMISSION SECTOR.....19
General......................................................................................................................................................................19
Recent Changes in the Regulations in the Transmission sector................................................................................19
Existing Contractual Arrangement............................................................................................................................20
The proposed Contractual Arrangement...................................................................................................................21
PROJECT DETAILS..................................................................................................................................................26
Status of Project Clearances......................................................................................................................................28
IMPLEMENTATION AND FINANCING PLAN...................................................................................................31
Project Cost...............................................................................................................................................................31
Analysis of the cost estimates...................................................................................................................................34
Issues in the current methodology........................................................................................................................35
Financing Plan..........................................................................................................................................................36
FINANCIAL ANALYSIS...........................................................................................................................................37
Sources of Revenue...................................................................................................................................................37
Base Case Assumptions............................................................................................................................................37
Sensitivity Analysis...................................................................................................................................................39
KEY CHALLENGES & MITIGATION STRATEGIES........................................................................................43
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List of Tables
Table 1: Operational Performance of XYZ over the years..................................................................16
Table 2: Financial Performance of XYZ over the years.....................................................................17
Table 3: Comparison of Contractual Provisions...............................................................................23
Table 4: List of Generation Plants seeking Long Term Open Access in Orissa........................................26
Table 5: Details of the Proposed Transmission System......................................................................27
Table 6: Status of project clearances.............................................................................................28
Table 7: Status of key agreements.................................................................................................29
Table 8: Project Completion Milestones......................................................................................... 31
Table 9: Detailed Project cost....................................................................................................... 31
Table 10: Category Wise Project cost............................................................................................. 33
Table 11: Phasing of capital expenditure........................................................................................33
Table 12: Capital structure.......................................................................................................... 36
Table 13: Assumptions for calculating returns.................................................................................37
Table 14: Sensitivity Analysis....................................................................................................... 39
Table 15: Key Challenges in Project Execution................................................................................43
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List of abbreviations
BPTA
CERC
:
:
CPI
CST
CUSA
D/C
Double Circuit
DFR
ER
Eastern Region
F&I
GoI
Government of India
IA
Indemnity Agreement
IDC
IMaCS
IT
Income Tax
kV
Kilo Volt
LILO
LOA
Letter of Award
MAT
MoEF
MVA
MVAR
NR
Northern Region
PAT
PBIT
PBITDA
POWERGRID
RBI
ROCE
ROE
Return on Equity
RONW
Return on Networth
S/C
Single Circuit
S/S
Substation
SLM
WDV
WPI
WR
Western Region
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EXECUTIVE SUMMARY
APPROACH:
First requirement gathering was done from the client. Then, Detailed Feasibility
Report of the project prepared by client was studied. Many queries were raised
and information was obtained from the client verbally and via written
submissions. IMaCS also examined the data available in public domain and the
sources considered reliable by it.
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IMaCS - An Introduction
ICRA Management Consulting Services Limited (IMaCS) is a multi-line
management/development consulting firm headquartered in India. IMaCS has an
established track record of 15 years in consulting and a diversified client base
across various sectors and countries. IMaCS has completed over 1000 consulting
assignments and has worked in over 35 countries across the globe.
ICRA Management Consulting Services Limited (IMaCS) is a fully-owned
subsidiary of ICRA Limited (ICRA), one of Indias leading credit rating
agencies. IMaCS operated as a division of ICRA till March 2005, when it was demerged from ICRA and became a standalone company. IMaCS clientele includes
multilateral and bilateral agencies, banks & financial institutions, manufacturing
and service organizations, Governments, Government-owned organizations,
investors, and regulators.
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organisations,
regulatory
authorities,
and
multilateral/bilateral agencies.
IMaCS objective is to help its clients become more competitive, effective, and
successful in their lines of activity. IMaCS is committed to working in close
partnership with its clients to achieve the agreed goals and to deliver quality in its
work. To achieve this objective, IMaCS rely on the abilities of our consultants,
selected for their extensive technical skills and depth of practical experience.
IMaCS consultants are an outstanding group of professionals with experience in
business, economics, finance, statistics and engineering. The diversity of
academic background and practical experience that they bring to each assignment
helps them adopt a creative and cross-functional approach to problem solving an approach that not has an excellent track record of success but also of client
appreciation. All IMaCS consultants are trained to deliver high-quality practical
solutions to clients.
IMaCS offers its services in the power sector along four functional areas as
shown below.
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For optimum utilization of the available natural resources in the country, the
National Grid is being established by XYZ in a phased manner as a part of which
a number of inter-regional links have already been implemented/ planned. The
inter-regional power transfer capacity of National Grid has been enhanced to
about 20,800 MW from 17,000 MW in FY 2007-08. XYZ has further plans to
enhance the capacity to more than 32,500 MW by 2012.
XYZ has envisaged an investment program of Rs. 55,000 Crore towards
investment in transmission projects during the Government of Indias Eleventh
Five Year Plan beginning April 1, 2007 and ending on March 31, 2012. During
first 3 years of XI plan, Rs. 25,409 Crore (46% of planned investment) has
already been made. About Rs. 28,000 Crore of Capital Expenditure is planned to
be made in the next two years.
In FY 2009-10, XYZ has commissioned/ made ready for commissioning of about
5,515 ckms of transmission lines. This year 11 new sub-stations have been
completed. XYZ has installed 22 nos. transformers and added transformation
capacity of 10290 MVA.
The major projects commissioned during 2009-10 include, Barh transmission
system (Part), Supplementary transmission system associated with Sipat-II (Part),
transmission system associated with Koldam HEP (Part), transmission system
associated with Nayveli-II Exp, Kudankulam APP, (Part), Northern Region
System Strengthening Scheme-V, etc
In the eighth, ninth and tenth five year plans, it had added
9,724 circuit
years. About 45-50 Sub-stations are planned to be added. During the first three
years of XI Plan, 29 substations (64.4%) have already been added while further
15 Sub-stations are planned to be added in the next two years.
In 2009-10, investment approval has been accorded by Board of Directors of
XYZ for 14 new transmission projects with an estimated cost of about Rs. 13450
Crore comprising of 6504 ckms of transmission lines and 20 no. sub-stations
with transformation capacity of about 27,825 MVA and implementation of
these projects has also commenced. Major projects include 765 KV System for
Central Part of Northern Grid - Part-II & Part-III, Transmission System of
VindhyachalIV (1000MW) and RihandIII (1000MW) Generation Projects,
Mauda Transmission System, Immediate evacuation system for Nabinagar TPS
(1000 MW), System Strengthening in Northern Region for Sasan & Mundra
Ultra Mega Power Projects, Northern Regional Transmission Strengthening
Scheme amongst others.
A snapshot of the various operational parameters of XYZ over the last 5 years is
given below:
Table 1: Operational Performance of XYZ over the years
Year
2005
2006
2007
2008
2009
50,745
55,120
59,461
67,000
71,500
Substations (number)
85
93
104
111
120
49,442
54,377
59,417
73100
79,500
99.74
99.64
99.20
99.52
99.55
2004-05
2005-06
2006-07
2007-08
2008-09
Paid-up Equity
3204.06
3623.44
3826.22
4208.84
4208.84
Networth
8617.02
9708.30
10687.57
13500.18
14618.09
Capital Employed
15482.07
16467.12
18870.13
25516.15
28430.04
Gross Block
21930.56
24888.25
29014.63
35417.14
40319.33
Total turnover
2831.28
3554.31
4097.15
5081.53
7028.54
PAT
785.52
1008.93
1229.37
1448.47
1690.61
ROCE (%)
5.07
6.13
6.51
5.68
5.95
RONW (%)
9.12
10.39
11.50
10.73
11.57
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Source:
XYZ
BACKGROUND OF PROJECT
The Central Indian Region, especially the States of Orissa, Jharkhand and
Chhattisgarh are endowed with large coal reserves as a result of which a number
of coal based generation projects are being set up in these States. As the major
demand centres of electricity are located in the Northern and Western Regions of
the country, hence the surplus power from these regions needs to be transmitted
to the power deficit states in Northern and Western regions. In order to take care
of the needs of power evacuation from the generating stations being set up in the
state of Chhattisgarh, XYZ has prepared a comprehensive transmission system
scheme for transfer of power from Chattisgarh to Northern /Western Regions.
XYZ has appointed ICRA Management Consulting Services Limited (IMaCS) to
carry out financial appraisal of the Project in order to assist it in taking the
investment decision.
SCOPE OF WORK
The Scope of the works encompasses appraisal of the project with respect to the
statutory clearances, funding arrangements, risk analysis and mitigation
mechanism, financial analysis and computation of key financial parameters like
Project IRR and Equity IRR.
INFORMATION SOURCE
IMaCS has examined following documents provided by XYZ for appraising the
project:
a)
b)
c)
IMaCS; and
d)
Verbal and written submissions by XYZ officials in response to the
queries raised by IMaCS.
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GENERAL
At present XYZ is the largest transmission utility and the owner of the inter-state
transmission system in India and is likely to remain so in the foreseeable future.
Going ahead, the Government has announced ambitious plan to add around
78,700 MW of additional generation capacity by the year 2012 in order to realize
the vision of Power to All by 2012. It is proposed to add this capacity through
Central Power Utilities, State Power Utilities and private investors. The
transmission system to evacuate the above quantum of power shall be taken up
by XYZ, the State Power/Transmission Utilities and private investors, with the
bulk of this quantum being undertaken by XYZ. The requirement for
transmission system, at 220kV, 400kV, 765kV and HVDC, has been estimated to
be of the order of Rs 140,000 crore. Out of Rs 140,000 crore of total investment,
Rs 75,000 crore is estimated in Central Sector for development of Regional Grids
and National Grid, and Rs 65,000 crore is estimated in State Sector for
development of State Grids.
Out of the investment of about Rs. 75,000 crores is envisaged in transmission
under central sector, XYZ has planned to invest about Rs. 55,000 crores on its
own and the remaining Rs. 20,000 crores is expected to be brought in by the
private investors.
RECENT CHANGES IN THE REGULATIONS IN THE
TRANSMISSION SECTOR
Given the critical role of XYZ and the investments to be made into the Sector, it
is critical to evaluate the impact of changes in the regulatory regime and its
impact on the risk portfolio of the company. The key changes in the sector have
been marked with the notification of new Regulations for sharing of interstate
transmission charges by the beneficiaries by the Central Electricity Regulatory
Commission (CERC). Previously, the mechanism of transmission pricing
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followed a regional postage stamp basis which did not fulfil the objectives of the
Tariff Policy in terms of sensitivity towards distance and direction of flow. The
new approach of Point of Connection method has therefore been proposed by
the Commission for ensuring that the sharing of transmission charges and losses
appropriately captures the distance, direction and quantum of the power-flow.
The new Regulations propose a change in the overall mechanism for making
investments in to the sector and envisage new contractual arrangements to be
entered into by the Transmission licensees and the beneficiaries. A critical review
of such proposed changes in the contractual agreements is provided in the
following paragraphs:
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Besides the above structural clarifications provided in the approach paper, mapping
of the proposed framework with the existing BPTA/Indemnification Agreement is
provided in the table below:
Signatories
Determination of
Transmission
Charges
Responsibility of
Raising Bills
Payment Security
Mechanism
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Key Parameters
grid
Delay in Payment
by beneficiaries
Sharing of
Transmission
Losses
Dispute Resolution
Mechanism
BPTA: Arbitration
mechanism defined
Delay in
synchronisation of
new generators
Indemnification Agreement
Provision of
ancillary services
viz. Voltage control
, reactive power
etc.
Change in ARR of
lines on account of
FERV, additional
capitalisation etc.
(True-up of
Charges)
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Key Parameters
Treatment of
short/medium term
open access charges
Connection charges
and Joint assets
Congestion
Management
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PROJECT DETAILS
The transmission plan was developed keeping in mind the likely evaluation needs
of all future generation projects in Orissa, with the first phase to be taken up
initially. It is estimated that huge generation capacity would be added in the
private sector alone in the State of Orissa in the next 5 years. Based on overall
plan of proposed generation capacity addition in Orissa and after detailed
discussion with generation developers & Central Electricity Authority (CEA), a
comprehensive high capacity transmission system has been evolved by XYZ
which is to be implemented matching with the programme of generation capacity
addition. The following generation projects are scheduled to be commissioned in
Orissa during the XI/early XII plan for which the evacuation scheme has been
developed by XYZ:
Table 4: List of Generation Plants seeking Long Term Open Access in Orissa
Sl. No.
Projects
Sterlite
GMR
Navbharat
Monnet
Jindal
Lanco Babandh
Ind Barath
Subtotal
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Generation
Developer/ Open
Access Applicant
Sterlite Energy
Ltd.
GMR Kamalanga
Energy Ltd.
Navbharat Power
Pvt. Ltd.
Monnet Power
Company Ltd.
Jindal India
Thermal Power
Ltd.
Lanco Babandh
Power Pvt. Ltd.
Ind Barath Energy
(Utkal) Ltd.
Date of
Commissioning
LTA Quantum
(MW)
June 2010
400
November 2011
800
March 2012
720
June 2012
900
March 2012
1044
December 2013
1600
December 2011
616
6080
Technical Details
Length (Km)
245
1.
Project Component
Transmission Line
765 KV S/C Angul Pooling Station-Jharsuguda
Pooling Station Transmission Line (Line-1)
765 KV S/C Angul Pooling Station-Jharsuguda
Pooling Station Transmission Line (Line-2)
245
2.
40
3.
4.
16
5.
B.
1.
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No of bays
765 kV Line Bays : 4 Nos Transformer
Bays : 2 Nos Bus Reactor Bays : 2 Nos
400 kV Line Bays : 4 Nos Transformer
Bays : 2 Nos
Bus Reactor Bays : 2 Nos
2.
Item
Agency
Status
Statutory clearances
Right
of
transmission line
Way
for GoI/Respective
state government
Section 164 of the Electricity Act, 2003, states: The Appropriate Government may, by order in writing, for the
placing of electric lines or electrical plant for the transmission of electricity or for the purpose of telephonic or
telegraphic communications necessary for the proper co-ordination of works, confer upon any public officer,
licensee or any other person engaged in the business of supplying electricity under this Act, subject to such
conditions and restrictions, if any, as the Appropriate Government may think fit to impose and to the provisions of
the Indian Telegraph Act, 1885, any of the powers which the telegraph authority possesses under that Act with
respect to the placing of telegraph authority possesses under that Act with respect to
the placing of telegraph lines and posts for the purposes of a telegraph established or
maintained, by the Government or to be so established or maintained
Part III, Section 10 of the Indian Telegraph Act 1885, states The telegraph authority
may, from time to time, place and maintain a telegraph line under, over, along or
across, and posts in or upon, any immoveable property: Provided that- (a) the telegraph
authority shall not exercise the powers conferred by this section except for the
purposes of a tele- graph established or maintained by the 1[Central Government], or to
be so established or maintained; (b) the 1*[Central Government] shall not acquire any
right other than that of user only in the property under, over, along, across, in or upon
which the telegraph authority places any telegraph line or post ; and (c) except as
hereinafter provided, the telegraph authority shall not exercise those powers in respect
of any property vested in or under the control or management of any local authority,
2
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2009.
Forest
clearance
for MoEF/Forest
transmission line/substations
department
state government
involved.
Forest
clearance
from
forest
S.No
Item
Agency
Bulk
Power To be signed
Transmission
Agreement (BPTA)
Status
without the permission of that authority; and (d) in the exercise of the powers conferred
by this section, the telegraph authority shall do as little damage as possible, and, when
it has exercised those powers in respect of any property other than that referred to in
clause (c), shall pay full compensation to all persons interested for any damage
sustained by them by reason of the exercise of those powers
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Indemnification
Agreement (IA)
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With
generating
companies
Milestone
Project Formulation
Project Approval
Environment Clearance
Establishment of substations
Laying of Transmission Lines
Project Completion
Zero Date
Nov, 2008
Jul, 2009
May, 2010
Aug, 2009
Sep, 2009
To be completed by
Jul, 2009
June, 2010
Apr, 2011
Sep, 2012
Sep, 2012
Sep, 2012
PROJECT COST
The total cost of the project is worked out at Rs. 2060.45 crore, consisting of Rs.
1928.04 crore as hard costs and Rs 132.42 as IDC. As per the estimates of XYZ,
the total project cost works out to Rs 2055.01 crore, including IDC of Rs 126.97
crore. Detailed components wise break of the Project cost is tabulated below:
Table 9: Detailed Project cost
Description
Transmission Lines
765 KV S/C Angul Pooling
Station-Jharsuguda Pooling Station
Transmission Line (Line-1)
765 KV S/C Angul Pooling
Station-Jharsuguda Pooling Station
Transmission Line (Line-2)
LILO of 400 KV D/C RourkelaRaigarh Transmission Line at
Jharsuguda Pooling Station
LILO of 400 KV S/C
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Description
402.90
XYZs Estimates
402.90
XYZs Estimates
52.71
XYZs Estimates
6.67
XYZs Estimates
Meramundali-Jeypore
Transmission Line at Angul
Pooling Station
LILO of one circuit of 400 KV D/C
Talchar-Meramundali Transmission
Line at Angul Pooling Station
Sub Total
Substations
Jharsuguda new S/S
Angul new S/S
Sub Total
Other Expenses
Communications Equipment
Maintenance during construction
Engg. & Administration
Losses on Stock
Contingencies
Sub Total
Interest During Construction
Interest During Construction (IDC)
Sub Total
GRAND TOTAL
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19.97
XYZs Estimates
885.15
401.45
500.15
XYZs Estimates
XYZs Estimates
901.60
7.72
83.33
XYZs Estimates
XYZs Estimates
50.24
XYZs Estimates
141.29
132.42
IMaCS Estimate
132.42
2060.45
The IDC has been computed based on interest rate of 10.50% provided by XYZ
and considered justifiable by IMaCS. The phasing of capital expenditure as
provided by XYZ has been considered by IMaCS. The same is provided below:
Table 11: Phasing of capital expenditure
Year
2010 - 2011 (Jun 2010-Mar 2011)
2011 2012
2012-2013 (Apr 2012-Nov 2012)
2012-2013 (Dec 2012-Mar 2013)
2013 - 2014
Total
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For the purpose of calculation, XYZ has assumed June 2010 as the month of
investment approval.
XYZ has estimated project cost based on price level at 1st quarter of year 2010.
In the analysis, XYZ has assumed the following basis:
a) Debt component is envisaged to be covered under Domestic sources.
b) Equity component is made through internal accruals.
c) Interest rate has been considered @ 10.5% for Domestic loan
d) Debt : Equity ratio has been considered as 70:30.
e) The project is scheduled to be commissioned within 30 months from the
date of investment approval.
Further, XYZ has estimated the Project cost based on the average of last three
Letter of Awards (LoA) after escalating the cost to Q1-2010 level by relevant
escalation indices. This has been done to average out any abnormal price
discovery during latest award and is in line with the methodology followed by
XYZ while submitting the cost estimates to Government of India (GoI) before
granting of Navaratna status. The capital cost is inclusive of Excise duty @
10.30% and CST @2% and F&I @4%. For imported components customs duty
@20.94% and handling charges of 2% have been considered.
ANALYSIS OF THE COST ESTIMATES
IMaCS has analyzed the methodology adopted by XYZ for the purpose of
arriving at the capital cost of the proposed project. It has been observed that XYZ
considers the last three orders placed for similar projects and takes their ordering
cost as the base prices. Such prices are then escalated using the relevant indices
for such material, labour to arrive at the cost of the project for the month in
which the current financial appraisal is to be performed. After escalation of the
prices to the relevant month, an average of the prices for such previous orders is
taken as the base price for calculating the project cost.
Based on the information provided in the feasibility report and keeping the
standardization of transmission line, substation designs, switchyard layouts,
technical parameters of equipment etc. in perspective, the capital cost for the
project was compared with similar projects like the Transmission Scheme of 765
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kV system for Central Part of Northern Grid for ascertaining costs for
transmission line, substation and other components. Based on the findings, it may
be commented that the estimated overall capital cost of this project appears to be
reasonable. However, it would be difficult to exactly comment on the adequacy
of the cost for land acquisition, compensation for crops etc. as it may vary widely
from project to project. On the other hand, the cost estimates for steel tower,
conductors, earth wire, substation etc. appear to be reasonable.
ISSUES IN THE CURRENT METHODOLOGY
IMaCS is made to understand that as per the contracts entered into by XYZ, the
finalized costs are indexed to inflation indices. Any abnormal variation in the
same is passed on to XYZ as per the contractual obligations. IMaCS understands
that such a provision in the contract gives a comfort level to the bidders regarding
inflation in prices. At the same time, it helps XYZ to get competitive quotes as
the risk of the Bidders in such a case is relatively balanced (in comparison to a
firm price contract). Absence of such provision will prompt the bidders to
consider certain margin of safety while quoting the prices which will inflate the
capital cost. However, it increases the chances of cost over-runs in projects.
In this regard, we understand that CERC has also framed the norms for
establishing the benchmark capital cost of 765 kV and 400 kV projects and the
same are based on the data submitted by XYZ for the projects implemented in the
recent past. However, since XYZ is not in the process of manufacturing of
equipments, it has to source the same from other vendors who in turn submit
their price quotes depending on the competitive forces operating in the market at
the time of such bid process. Therefore, it may be appreciated that such
benchmarking cost established by the CERC may be used as a reference for
comparison of the actual capital cost projected by XYZ. We understand that
CERC has indicated it is open to consider such merits of actual cost of the project
and the submissions of XYZ will be given due cognizance at the time of approval
of capital cost for the purpose of approval of Tariff.
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FINANCING PLAN
Proposed financing plan for the project is as tabulated below.
Table 12: Capital structure
Source
Investments
Percentage
Promoter's Contribution
618.14
30%
1442.32
70%
Total
2060.45
100.00 %
XYZ proposes to fund equity through its internal accruals and debt has been
envisaged from domestic sources.
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FINANCIAL ANALYSIS
SOURCES OF REVENUE
The transmission charges for the Project will be determined by CERC and will be
payable by the beneficiaries (private project developers in Orissa) according to
the terms and conditions of the BPTA. Currently, 5 generation developers viz.
GMR Kamalanga Energy Ltd., Monnet Power Company Ltd., Jindal India
Thermal Power Ltd, Lanco Babandh Power Pvt. Ltd. and Ind Barath Energy
(Utkal) Ltd. have signed BPTA and furnished requisite Bank Guarantee. It has
been stipulated in the BPTA that in the eventuality of non-commissioning of any
of the generation project, the transmission charges would be shared by the
balance project developers. However, the amount received from the defaulting
developers in the form of Bank Guarantee and penalty, if any, imposed by CERC
shall be offset in the cost of the project giving some benefits to the balance
developers.
BASE CASE ASSUMPTIONS
The assumptions forming the base case of our financial analysis are given below:
Table 13: Assumptions for calculating returns
Description
Assumption
1 June , 2010
1 Dec, 2012
Project Life-Span
35 years
70:30
CERC norms refer to various norms specified in CERC ( Terms and Conditions of Tariff) Regulations 2009 for
determination of tariff for transmission assets
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Description
Assumption
Return on Equity
15.5% (post-tax)
Interest Rate
Repayment term
12 years
Moratorium Period
Frequency of Installments
Annual
10.19%
25%
2 months
1 month
15% of O&M expenses
for 12 years
Salvage value
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Description
Assumption
Civil work-3.34%
Maximum Depreciation-95%
Method: SLM
SENSITIVITY ANALYSIS
An analysis of the impact of various parameters on the projected profitability of
the projected has been calculated and tabulated in a matrix form which is given
below:
Table 14: Sensitivity Analysis
Cas
e
No.
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Description
Equity
IRR
(Post Tax)
(%)
Project
IRR
(Post Tax)
(%)
DSCR
Minimum
Average
Levelized
Transmission
charge
( Rs. Crore)
Base Case
14.73%
11.38%
1.05
1.65
324.45
12.93%
10.67%
1.00
1.57
310.30
15.17%
11.56%
1.07
1.68
328.01
13.84%
11.02%
1.00
1.61
317.33
14.09%
10.61%
0.84
1.37
311.60
14.32%
11.15%
1.02
1.63
324.51
14.79%
11.40%
1.05
1.66
324.45
14.71%
11.43%
0.38
1.38
324.45
15.00%
11.41%
1.01
1.56
324.45
14.92%
11.40%
1.03
1.60
320.87
10
13.22%
10.20%
1.10
1.76
331.92
11
13.19%
10.29%
1.31
1.88
339.53
12
12.46%
9.88%
1.07
1.72
324.27
11.76%
9.66%
1.25
1.79
324.09
13
43 | P a g e
be Rs.324.45 crore. Movement of DSCR, equity cash flows and tariff have been
shown in the graphs given above.
The other key parameters affecting the financials as per the sensitivity analysis
are as follows:
Disallowance of capital cost by CERC: Even a 5% disallowance of capital cost
by CERC has a significant impact on the project profitability. In such a scenario,
the equity IRR drops by 1.80% to 12.93% whereas the project IRR drops to
10.67% and the average DSCR drops to 1.57. For a regulated entity like XYZ,
there is always a chance that some of the expenditure incurred does not pass the
regulators scrutiny, and this presents a significant risk to the future profitability
of the project as well as the company.
Change in timelines if the project: Even a slight change in the timelines has a
significant impact on the project financial results. A 6 month delay leads to a
1.51% drop in the equity returns of the project to 13.87% while a 12 month delay
further drops the equity IRR to 13.19%. This is because of the fact that firstly,
delays lead to postponement of revenue while at the same time, the expenses in
the form of interest etc continue to mount up. Another important factor that will
result due to project delays is that the stipulated 0.5% extra returns allowed as per
CERC norms in case of timely completion of projects would not be given for the
project, leading to a higher potential loss of revenue. Further, there is always a
chance that CERC might not allow the extra cost incurred due to time overrun. In
such a scenario, for a 6 month delay the equity returns reduce further to just
12.46%
Changes in financial structuring and terms: Any change in financial
structuring also has a significant impact on the project profitability. A shift from
debt equity ratio of 70:30 to 80:20 reduces the equity returns by 0.64% and
decreases the average DSCR to 1.37. This happens as the CERC allows returns to
be paid only on actual equity involved in the project, subject to a maximum of
30% of the project value. Thus lower equity levels would lead to lesser returns
for the project. Similarly, a shift to more favourable debt terms, such as an
increase in repayment period from 12 years to 15 years or an additional
45 | P a g e
moratorium period of 1 year (beyond the 4 years moratorium assumed under base
case) for repayment of loan after commissioning of the project increases the
returns of the project to 14.71% and 15.00% respectively.
46 | P a g e
Sl.N
Risk Head
Risk Description
Risk
Likely
to
Grade
Allocated to
Beneficiarys
Beneficiaries
consent risk
agreeing
the
to
transmission
charges
disputing
or
project developers, who would then bear the transmission charges. This is a
their
departure from the common practice of signing the BPTA with the State
share of allocation
Utilities and may present some risk due to beneficiary default. However,
IMaCS understands that XYZ has signed the BPTA with 5 developers which
has provisions wherein the developers have agreed to bear the higher
transmission charges in case of non-commissioning of any of the generation
project, the transmission charges would be shared by the balance project
developers.
Moreover, recently CERC has floated an Approach Paper on Formulating
Sl.N
Risk Head
Risk Description
Risk
Likely
to
Grade
Allocated to
One of the major reasons for the delay in project execution in the transmission
sector in the past has been due to time taken in obtaining the Right of Way
clearances
availability of the
risk
clearances in time
legislature to get the ROW, however, transmission lines often pass through
inhabited areas which may lead to delays in acquiring ROW. Further,
compensation needs to be paid in case private land is acquired for
constructing substations and this also results in loss of time in negotiating and
settlement.
Sl.N
o
Risk Head
Risk Description
Risk
Likely
to
Grade
Allocated to
Sl.N
Risk Head
Risk Description
Risk
Likely
to
Grade
Allocated to
time over-runs
Construction Risks
3
escalation Low
XYZ
It has been noted that XYZs contracts normally has price adjustment clauses
Escalation
linked to various consumer and metal indices. 4 This exposes the Project to the
Risk
escalation
Considering that: (a) the world economy is under recovery after an overall
recession across the world economy, (b) commodity prices have substantially
come down during last six months and are almost at the same level as they
were one year before, and (c) the Project is likely to completed in 30 months,
we believe there is only low risk for any substantial price movement in the
commodities. Further, any uncontrollable increase in expenses is likely to be
passed through in tariff and hence may not adversely affect XYZ.
we
increase in interest
believe
there
Key commodities used in the transmission lines and substations are aluminum, steel, copper and cement.
is
probability
of
increase
in
long
term
debt
Sl.N
Risk Head
Risk Description
Risk
Likely
Grade
Allocated to
rate
5
to
XYZ
adverse movement
steady with respect to US dollar. So, we envisage low risk on cost escalation
of
the
foreign
currency
component
6
Project
Delay
in Low
completion
commissioning
XYZ
risk
s
Delay
due
to Medium XYZ
Manufacturer
delays owing to the fact that the manufacturers of high voltage equipment at
delays
the domestic level are few in number with substantial order books. Further,
purchasing the equipment from foreign manufacturers could expose XYZ to
other kinds of risks, with increase in costs and quality control being the most
significant. Further, It may also be critical for XYZ to identify beforehand
international vendors for supply of such equipments. As a result of this, we
Sl.N
Risk Head
Risk Description
Risk
Likely
to
Grade
Allocated to
perceive that the risk on this account is medium. A detailed note on the
demand and supply of 765 kV equipment as well as the future outlook has
been provided as Annexure D.
8
Delays
due
to Low
XYZ
Technology Issues
Since XYZ has successfully implemented projects at this voltage level in the
past, hence we feel that they possess significant expertise to handle the unique
challenges posed by 765 kV technology line implementation. As such, we
perceive the threat on this account as low.
Delay
in Low
XYZ / Contractors
commissioning due
deter them for any delay in the commissioning. Hence, we perceive less risk
to delinquency by
on this count.
the contractors
10
As the transmission line will pass through certain areas which may be affected
by the naxalite problem, as such low and order issues might cause some delay
Medium
Ref. LoA to Associated Transrail Structures Limited, ref. C-4703-L195A-3/LOA-I/2701, dated 22/10/2008- Liquidated damages for delay in construction: 0.5%
of the contract price for each week of delay with ceiling of 5% of the contract price, Performance bank guarantee: 10% of the contract price valid upto 90 days
from the end of warranty period, Advance payment: Interest bearing advance of 15% of the contract price against bank guarantee, was also to be released
against bank guarantee of the equivalent amount.
Sl.N
Risk Head
Risk Description
o
11
Timelines
Mismatch
matching
commissioning
risk
the
projects
in
Risk
Likely
Grade
Allocated to
to
of
the upcoming private power projects in Orissa, hence it is essential that the
generation
and
transmission lines
interests of XYZ in case the generation projects get delayed. Since any delay
would lead to stranded assets for XYZ with no or little revenues and rising
interest expenses, hence we perceive this risk as medium.
To mitigate this risk, XYZ should continuously and closely monitor the
progress of the various generation projects associated with this transmission
scheme so that in case of any delays in their commissioning schedule, the
investment schedule of the transmission project can be suitably adjusted.
Further IMaCS understands that the CERC as part of the draft regulations for
sharing of Interstate charges has directed XYZ to publish draft CUSA for
discussion. Such agreement shall govern the provision of transmission
services and charging for the same. The proposed CUSA framework to be
designed by XYZ is envisaged to save the current clauses of the
Indemnification Agreement. Therefore, the risk of increase in capital cost on
account of IDC will get mitigated appropriately. Further, the proposed CUSA
framework also needs to address the issue of recovery of associated
transmission ARR for open access lines. Hence, XYZ should take appropriate
Sl.N
Risk Head
Risk Description
Risk
Likely
to
Grade
Allocated to
steps while drafting the CUSA to include provisions which cover all the
aspects of loss of revenue on account of delay in generation projects.
12
Foreign
Adverse movement
Exchange
in
Risk
currency in which
the
Nil
XYZ
foreign
The Project will be financed through 70% debt (from domestic resources) and
30% equity (from internal accruals). XYZ has envisaged 100% debt financing
of the Project from the domestic sources. Hence, this risk is not envisaged.
Force
Reduced
Low
XYZ
Majeure
availability of the
Risk
transmission
natural/non natural force majeure events that may reduce the availability. We
majeure events or
XYZ in such events and would not resort to transmission charges reduction in
change in law
case the reason is found justifiable and beyond the reasonable control of XYZ.
Hence, we grade this risk to the Low category.
Post-construction Risks
14
Regulatory
Risk
less
than
CERC determines the norms for tariff determination for five years. Last tariff
anticipated due to
determination norms were notified in year 2009 and will expire on March 31,
Sl.N
Risk Head
Risk Description
o
change
in
Risk
Likely
Grade
Allocated to
tariff
to
determination
methodology/norms
by CERC
15
Payment
Since the signatories of the BPTA will be the private project developers,
Default Risk
charges
developers
by
the Medium
Sl.N
Risk Head
Risk Description
Risk
Likely
to
Grade
Allocated to
Technology
XYZ
and
the
Contractors/Supplier
and the technology for such systems is well established. XYZ has adequate
Equipment
system
Performance
technical reasons
transmission
due
to
and
its Transmission lines and associated systems are essential part of power system
Risk
17
Change
in Reduced
income
law Risk
due
adverse
to
Low
XYZ
There is huge investment requirement at least for next decade, and regulators
strive to balance interests of all the stakeholders, we do expect moderate risk
on account of adverse regulatory stance., we anticipate less risk to XYZ on
this account.
allocation mechanism and absence of prior approval from the beneficiaries for undertaking the project- may give rise to disputes in recovery
of the required transmission charges from the beneficiaries. Hence, it would be desirable if XYZ do policy advocacy with the regulator on: (a)
dispute free and implementable transmission charges allocation mechanism, (b) some kind of alternative payment security mechanism for
undertaking any project without prior consent from the beneficiaries, and (c) the risk related returns and need for reasonable returns for
expansion of the transmission network in future.
RECOMMENDATIONS
XYZ has proposed the development of a transmission plan to evacuate power from the upcoming generation projects in Orissa, transfer of the
power to NR/WR. In its first phase, the project would consist of two major 765/400 kV pooling stations in Orissa at Angul and Jharsuguda. The
pooling stations would be interconnected in ring form with 765 2xS/c lines. Further, these substations would have a 400 kV interconnection with
the Eastern Region Grid for initial evacuation of power.
The total cost of the project is worked out to be Rs. 2060.45 crore (based on 1st quarter 2010 cost level) including IDC of Rs. 132.42 crore.
According to XYZs estimates, the total Project cost works out to be Rs.2055.01 crore including IDC of Rs. 126.97 crore. As per our analysis, the
project under standard assumptions gives an EIRR of 14.73% and a corresponding Project IRR of 11.38% over its lifetime. We understand that the
same may be considered as moderate returns for the equity investors. However, considering the strong debt servicing capability of the Project
(with average DSCR of 1.65), the project IRR may be considered as fairly reasonable under the Regulatory regime. Accordingly, we recommend
that, subject to suitable redressal of key project risks and internal risk appetite, XYZ may consider investment in the Project.
ANNEXURES
ANNEXURE A: DETAILED FINANCIAL STATEMENTS (BASE CASE)
1.
Tariff computation
All values in Rs. crore until specified
2.
3.
Balance Sheet
All values in Rs. crore until specified
4.
Key Outputs
Equity IRR
Project IRR
Min. DSCR
Avg. DSCR
Trans. Charge
14.73%
11.38%
1.05
1.65
324.45
Description
Useful Life of Transmission
Regulation
35 years
Line
Initial Spares
: 0.75 %
: 2.5%
70 : 30
Return on Equity
Depreciation
Salvage Value
Depreciation Allowed
: 10%
: 90%
Receivables
Maintenance spares
O&M expenses
Description
Rate of Interest on Working
Regulation
Short Term Prime Lending Rate of State Bank of India;
Capital
O&M Expenses
2009-10
2010-11
2011-12
2012-13
2013-14
73.36
77.56
81.99
86.68
91.64
400 kV
52.40
55.40
58.57
61.92
65.46
220 kV
36.68
38.78
41.00
43.34
45.82
26.20
27.70
29.28
30.96
32.73
0.537
0.568
0.600
0.635
0.671
0.358
0.378
0.400
0.423
0.447
0.179
0.189
0.200
0.212
0.224
0.940
0.994
1.051
1.111
1.174
0.627
0.663
0.701
0.741
0.783
0.269
0.284
0.301
0.318
0.336
443.00
468.00
495.00
523.00
553.00
Description
Regulation
1450.00
1533.00
1621.00
1713.00
1811.00
1699.00
1796.00
1899.00
2008.00
2122.00
Source: CEA
Besides the above, the authority has further estimated the quantum of key transmission components for
the proposed transmission network in the 12 th plan. The relevant excerpts of the same are provided it the
graphics below:
68 | P a g e
Source: CEA
As can be seen from the figure, there is a significant amount of demand for the transmission system
equipments for 765 kV and 400 kV. It is therefore desirable that a critical examination of the supplying
capacity of such suppliers be examined to analyze the inherent risks in planning for transmission systems
which are likely to deploy such equipments. In the following paragraphs, IMaCS has analyzed the profile
of such potential suppliers and the likelihood for such matching supply of equipments for the huge
transmission power sector requirement in India.
69 | P a g e
Source: AREVA
However, in the specific segment for 765 kV transmission equipments, the market is largely dominated by
Crompton Greaves Limited with a share of 35%. However, from the year 2008-09 to 2009-10, the market
share has shown a declining trend for the local market players. The market saw the dominance of Chinese
and Korean players entering into the segment. The break-up of orders awarded by XYZ for the 765 kV
transmission equipments is provided in the graphics below:
70 | P a g e
Figure 7: Market Share of Players in 765 kV equipments for projects awarded by XYZ
Similarly in the Tower supply segment, the year 2009-10 marked the entrance of several new players in
the market. A summary of the market share of players in the Tower supply segment is provided below:
Figure 8: Market share of players in the Tower Supply segment for projects awarded by XYZ
As can be seen from the graphics above, several new players have entered into the transmission
equipment space and given the increase in demand for such equipments in the Asian region (specifically
China and India), the trend is likely to continue for the years ahead.
Entry of new players and cut throat competition will force the market players to enhance their delivery
capabilities in the future, however timely placement of orders will hold the key for such players to deliver
effectively.
IMaCS has analyzed the observations made by CEA and IEEMA regarding the envisaged capacity
additions in the Transmission sector in the country and the availability and preparedness of the market
players to match with the significant demand expected in the 11th plan.
As far as supply of insulators is concerned, IEEMA is it journal (Oct 2009) has stated that
It can be seen that the total capacity for Insulators presently available is very much more than what are
required for the 11th as well as 12th five year plans. The industry therefore is suffering as of today from
overcapacity and looks forward to speedier implementation of the announced programmes.
The industry has invested large amount of money for expanding capacities and infusion of latest
technology. It is well prepared to meet the requirement of Indian power sector needs. The industry is also
ready for further timely augmentation in the event the requirement goes up further too.
CEA has made an in-depth study to understand the requirement of critical input materials required to
support the capacity addition plan involving generation, transmission and distribution sectors for which
CEA has estimated the requirements of steel, cement and other inputs for thermal, hydro plants and also
for transmission and distribution works.
The details of the study and the material requirement are provided in the figure below.
CEA has further analyzed the data compiled by Centre for Monitoring of Indian Economy (CMIE) for the
year 2005-06. The data suggests that the Production of Cement, Aluminium, Copper and Zinc in the
country was 141.8 Million Tonnes, 1 Million Tonnes, .52 Million Tonnes and .29 Million Tonnes
respectively. Further, as per data from Ministry of Steel the availability (including imports) of Structural
Steel, Reinforcement Steel, CRGO Steel and Other Steel is 4.2 Million Tonnes, 12.5 Million Tonnes, 0.6
Million Tonnes and 24.8 Million Tonnes respectively.
CEA has accordingly cautioned that CRGO is a critical input for power transformers. In the past, nonavailability of the same has led to delays in Project implementation. Hence, it is necessary to encourage
domestic steel producers to go for indigenous production of CRGO. While on the other hand transformer
manufacturers have to do advance planning for their material requirement and place orders sufficiently in
advance.
Figure 9: Total Requirement of Various Materials for capacity addition planned during 11TH & 12TH Plan
73 | P a g e
Source: CEA
With respect to the supply of High Voltage Transformers i.e., 765 kV Class all the manufacturers
available in the field globally have evinced interest in Indian market to CEA which is also being
reflected by the entry of many new players being appointed by XYZ to supply the 765 kV
equipments.
4. Conclusion
From the above analysis, it may be deciphered that the there may actually be constraints in the
supply of transmission equipments by the local manufacturers on account of non-availability of raw
materials.
However, the supply from the domestic sources can be ensured subject to timely completion of
certain prerequisite activities by the Project Developers such as Standardization of Designs,
Standardization of Qualifying requirements for Vendors/Bidders, Route Alignment, Detailed Survey &
Soil Investigations based on new technology/techniques such as use of satellite imagery, GPS, total
stations, computer-aided tower spotting etc and Advance action for Environment & Forest Clearance and
Rehabilitation & Resettlement (R&R)
74 | P a g e
It may also be critical for XYZ to identify international vendors for supply of such equipments. At
the same time, there may also be a requirement for ensuring the quality of equipments supplied by
such new vendors.
Apart from the above, XYZ would also require addressing the following key concerns of the vendors
which have a direct bearing on the delivery capability of the vendors:
Non - Standardization of Specification among Utilities in many cases which is not updated for
many years.
Commercial conditions such as terms of payment, Price Variation clauses are often not rational
and lead to unrealistic price levels.
The thrust has to be placed on adequate planning of project activities in a timely manner so that the
bottlenecks in supply of input materials could be mitigated across the value chain by the suppliers.
75 | P a g e