PPA BETWEEN BSES ANDHRA POWER Ltd' and APTRANSCO

1
PPA BETWEEN BSES ANDHRA POWER Ltd. andAPTRANSCO

• Presentation by
• K. Raghu
• Associate President
• APSEB Engineers Association
• Dt 16/01/2002

2
This presentation consists of

• Load forecast-Need for additional power.
• Availability of gas reserves in K-G basin.
• Trends in gas prices/implications.
• Alternatives.
• Issues involved in the present PPA.
• Prayer to the Commission.

3
Load forecast-Need for additional Power

• Load forecast plans are not brought to public
  scrutiny.
• State is landing in a surplus(?) situation.
• For Year 2001-02
• Available energy 45400MU
• Energy purchased by APTRANSCO 41500MU.
• Addition of NTPCs Simhadri power station (
  2x520MW) during 2002-03 would result in huge
  surplus situation.
• Surplus is not a welcome sign in the absence of
  potential buyers, as it involves huge fixed cost
  commitments for APTRANSCO

4
Load forecast-Need for additional Power

• Growth in consumption is not in keeping with the
  capacity additions.
• it is almost stagnant for the past three
  years.(between 40000MU and 42000 MU).
• With the reduction of TD losses there may be no
  need for any capacity addition for five more
  years.
• Fall in subsidising sections(HT) and increase of
  agriculture consumption.
• Capacity additions must be carefully planned.
• Load forecast plans must be brought to public
  scrutiny.

5
Load forecast-Need for additional Power

• While maintaining our reservation on addition of
  any new power projects without these Plans being
  brought under public scrutiny, in the present
  case, I.e the PPA between APTRANSCO and M/S BSES
  Andhra power Limited, we submit our
  objections/suggestions presuming that the
  APTRANSCO needs the power sought to be generated
  by M/S BSES Andhra Power Limited.

6
Availability of gas reserves in K-G basin

• For the BAPL project gas is supplied from
  Krishna-Godavari Basin- from the oil fields
  located at Tativaka, Parsarlapudi, Kesnapalli,
  Mori and other nearby fields and in and around
  fields and Ravva offshore as fuel for the plant.
• It is important to examine whether the gas
  reserves in K-G basin are sufficient to meet the
  requirement of existing and future projects,
  including the BAPL project.

7
Availability of gas reserves in K-G basin

• Gas reserves in the K-G basin -various estimates
  (In Billion Cubic Meters)
• As per CEA in the Fourth National Power Plan
  1997-2012...16.36BCM.
• FICCI Task Force Report 2000..37.35BCM.
• Hand book on Indian petroleum
  and Natural gas Industry and
  Investment scenario40.00BCM.

8
Requirement of gas

• A) Existing Plants
• APGPCL 12 (272MW)
• GVK (216MW)
• SPECTRUM (208MW)
• KONDAPALLY(355MW)
• TOTAL 1051 MW.
• Therefore, gas required for the existing plants _at_
  0.005 MCMD per MW
• 1051X 0.005 5.255.
• Gas required per year 5.255X3651918MCM.
• I.e 1.918 BCM.
• _at_ 85plf gas requirement will be
  0.85X1.9181630.36MCM 1.63BCM.

9
Requirement of gas

• B) Future Plants for which gas has already been
  allocated on firm basis
• GVK(220MW), KONASEEMA (445 MW), VEMAGIRI (520
  MW), GOUTAMI NCC (598MW), SPECTRUM (220
  MW)8.53MCMD
• Annual requirement 8.53X3653113MCMD 3.113BCM
• _at_ 85plf gas requirement will be 0.85X3.1132.64
  BCM.
• C)For BAPL project
• Daily requirement 1MCMD
• Annual requirement 365 MCM. 0.365 BCM.
• D) Other users of ONGC/GAIL per year 2.58 BCM

10
Life of gas reserves in K-G basin
11
Life of gas reserves in K-G basin

• Thus, it is very clear that
• Even if no future additions are made, life of gas
  reserves (for the existing and other obligations
  of GAIL) is 3.63years (as per fourth national
  power plan) and 8.30 years ( as per FICCI
  estimates).
• Where as the plant life for these projects varies
  from 15 to 18 years.
• In the absence of gas reserves these plants will
  depend on costly alternate fuels like Naphtha,
  whose variable cost is very high.
• It is not wise to go in for gas based projects,
  when such heavy risk is associated with these
  projects.

12
Trends in natural gas prices-implications

• The pricing of indigenous natural gas is under an
  administered price regime wherein the price is
  decided by the GOI from time to time.
• The pricing today is done with considerable
  amount of subsidy.
• It is govt. policy to avoid and eliminate
  subsidies in the pricing of natural gas and bring
  it on par with international LS/HS fuel oil
  price.
• Recently, the Petroleum ministry has proposed to
  the cabinet a hefty 81 increase at the floor
  level and 107 increase at the ceiling level
  prices of natural gas.

13
Trends in natural gas prices-implications

• Implications of proposed changes on the power
  projects
• The variable cost of generation may increase
  steeply. Considering Fuel Oil price prevalent
  during Sept. 2001 the price of gas is likely to
  become double from its existing level.
• Increase in cost of fuel per unit generation will
  reduce in scheduling given for generation under
  merit order operation. This inter-alia will cause
  reduction in PLF and consumer will land up paying
  higher costs without drawing the power.
• Since PLF shall go down, Power Sector will have
  to pay for the gas as committed even without
  consumption thereby incurring huge losses.

14
Trends in natural gas prices-implications

• Even fixed charges per kwh will also increase due
  to lower off-take of power thus increasing the
  power cost both on account of fuel price as well
  as fixed charges per kwh.
• Operating the gas based plants as peaking load
  stations has its own problems
• Since the pipeline network for supply of gas can
  not take wide fluctuations in its rate of gas
  delivery, therefore, such a situation will affect
  the overall gas availability to the Power sector
  at a pointed time.
• For the all above reasons, even if sufficient gas
  reserves are available, addition of gas- based
  stations is not in the interest of consumers.

15
Alternatives

• SNC Lavalin commented in its document of Long
  term indicative Generation Plan for Andhra
  Pradesh, availability of gas will be a major
  concern.
• The T.L. Shanker Committee observed that
  indigenous coal would be natural choice for power
  projects in India on both economic and other
  grounds.

16
Alternatives

• NTPC, in a detailed paper on the choice of fuels
  for future projects in India, had concluded that
  preference should be given to coal based
  generation capacity as the cost of generation
  with domestic coal is cheaper than power
  generation with other fuels and the country has
  good reserves of coal.
• We request the commission to encourage only coal
  based plants for any future capacity additions.

17
Issues involved in the present PPA

• What is the subject matter before the Commission?
• Is it giving consent to the
• Amendment Agreement to the modified PPA
• or simply
• PPA between BAPL and APTRANSCO?
• Since various covenants, such as achieving
  financial closure within 12 months from the date
  of signing of modified agreement(Art.7.1.(e)),sche
  duled date of completion - have not been
  achieved, there is no obligation on the part of
  APTRANSCO to adhere to the provisions of PPA .

18
Issues involved in the present PPA

• Thus, there is no binding agreement between
  APTRANSCO and BAPL.
• Any proposal for power purchase shall be treated
  as a new PPA between APTRANSCO and BAPL.
• Hence, the proposal of APTRANSCO can not be
  treated as amendment agreement to the modified
  PPA, but only as a new PPA.
• It is also not clear from the documents as to how
  both original and modified PPAs were signed on
  the same date, I.e on 31.03.1997, when proposal
  for merger came at a much later date.

19
Issues involved in the present PPA

• Who should bear the risk?
• It is also not clear how the BAPL went ahead with
  the project, without having a legally binding
  agreement with APTRANSCO.
• By proceeding with the Project, without having
  the consent of the Commission, the developer has
  taken the riskand the Commission should ensure
  that any consent to the PPA will not put
  APTRANSCO and the consumers of the State in Risk.
• As already stated there are so many risks
  associated with the gas-based plants viz,
• .availability of gas, deregulation of gas prices
  etc,.
• Also need for capacity additions at this point of
  time should be looked in to.

20
Issues involved in the present PPA

• Need for fresh bidding
• These projects are planned by the GOAP as short
  gestation projects(SGPs).
• However they could not come up in time and lost
  their relevance now.
• Originally these projects were awarded to various
  developers through ICB route.
• Since these projects could not be completed in
  time , there is need for calling fresh bids and
  awarding the contracts to the lowest bidders.

21
Issues involved in the present PPA

• Reasons stated for giving extensions to the same
  developers
• It is claimed that going for fresh bids will
  cause enormous delay.
• It is also claimed that the fixed charges per
  unit of all these projects have been brought on
  par with the lowest bidder of all the Short
  Gestation Projects, I.e.Goutami Power project,
  and thus there is no need for going for fresh
  bids.

22
Issues involved in the present PPA

• The above reasons are not justified for the
  following reasons
• there is no need for any urgency for setting
  upshort gestation projects at this point of
  time, since we are already having surplus power.
• Important parameter for evaluating these projects
  at the time of awarding contracts was short
  gestation I.e. some weightage was given for
  completing the project in short duration,(
  including Goutami Power Project) at the expense
  of unit cost.
• Now that these projects could not come up in
  time, calling for fresh bids may result in
  lowering of unit cost.

23
Issues involved in the present PPA

• The claim that unit cost has been brought down to
  the level of Goutami Project, is also not totally
  true.
• In the original PPA with Goutami the PLF for
  fixed cost recovery was pegged at 80.
• In the revised PPA with Goutami(Now placed before
  the Commission for consent), PLF for fixed cost
  recovery has been raised to 85.
• I.e. net increase of Fixed Cost payment by
  (85/80)x1006.25.
• In real terms the increase in fixed cost
  597x0.876x6.25x0.99/100Rs 32.35 Crore/year.

24
Issues involved in the present PPA

• For other projects also the claim of substantial
  reduction of fixed cost is not true.
• For Ex it is claimed that for BAPL, the fixed
  cost has been brought down from Rs 1.30/Unit to
  Rs 0.99/ Unit(at present dollar exchange rate).

25
Issues involved in the present PPA

• However, it can be seen that following factors
  have the effect of increasing the fixed cost.
• 1. Effect of increasing PLF for fixed cost
  recovery
• 99x 85/80-996.187 paise.
• 2. Effect of increasing the debt repayment period
  from
• 9 to 11 years 0.006x48x100x2/96.40
  Paise.
• 3. Effect of increasing the capacity from 200MW
  to
• 220MW(220/200)x99-99108.9-999.9 paise.
• 4. Effect of provision for increase in capacity
  by 51.05x108.9-108.95.44 paise.
• Total increase 6.1876.409.95.4427.92 paise.

26
Issues involved in the present PPA

• Hence the fixed cost recovery per unit in real
  terms is not 99 paise but 99 27.92 126.92
  Paise.
• I.e. 220x0.876x0.85x0.2792x1.05 Rs 48.01 crore
  more than what is stated.
• The total additional burden on APTRANSCO and
  consumers of the state during the life of project
  is Rs 720 crore.
• Thus it is not true that substantial savings have
  been achieved through negotiations with the
  reduction of fixed cost per unit.
• Hence, there is a need for calling fresh bids,
  keeping revised capacity additions in view, which
  may result in substantial savings to the
  APTRANSCO.

27
Fixed cost for similar project-Is 0.6990.006
cheaper?
28
Fixed cost for similar project-Is 0.6990.006
cheaper?
29
Fixed cost for similar project-Is 0.6990.006
cheaper?

• Average fixed cost for the identical project
• 1662.66/15 Rs 110.844 Crore
• Fixed cost per unit _at_ 85 PLF
• 110.844/(2200.8760.85)Rs 0.676 per unit
• i.e. 67.6 paise/ unit
• Therefore, for similar capital cost the fixed
  cost obligation for APTRANSCO is 31.71 less than
  the BAPL project.

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What should be the Fixed cost for BAPL?

• Average fixed cost to be
• allowed Rs 110.844Crore.
• _at_ 85 plf fixed cost per unit
• 110.844/(2200.8760.85) 67.66 Paise.
• Since the OM contract provides for 92 PLF, the
  fixed cost per unit shall be
• 67.6685/92 62.51paise.
• If 5 increase in installed capacity is allowed,
  fixed cost recovery per unit shall be
  62.51/1.0559.53 Paise
• However, the old practice for payment of fixed
  charges may be followed, for more clarity and to
  avoid complications.

31
Issues involved in the present PPA

• Other important issues
• It is not clear from the Agreement whether there
  is any provision for disincentive when the PLF
  falls below 85 and is above 68.5.
• Clause 3.6 deals with the disincentives for PLFs
  below 68.5 only.
• Section 5.2.(c) which deals with the Monthly
  tariff bills, only specifies the recovery to be
  made if PLF falls below 80, and not for PLFs
  below 85.

32
Issues involved in the present PPA

• It is also not clear from 5.2.(c), whether the
  recovery proposed is for all the PLFs below 80
  or Only upto 68.5.
• Also it is to be made clear whether the recovery
  is in addition to the penalties that are proposed
  to be levied.
• Section 5.2.(c) states that in case PLF is less
  than 80 for any tariff year, the company shall
  refund to the Board as a credit against the
  amounts due in the next monthly tariff bills.

33
Issues involved in the present PPA

• this is totally unjust, as APTRANSCO will lose
  the interest during this period for the payments
  already made.
• Even for the adjustments of disincentives, there
  is no mention of any interest being added to the
  disincentive paid by the Company to APTRANSCO,
  before it is adjusted in the next tariff bills.
• Also, there is no additional disincentive if the
  project achieves the PLF below 50.5

34
Issues involved in the present PPA

• it means that, even if the plant does not operate
  APTRANSCO is bound to pay an amount equal
  to220x0.876x0.85x(0.99-.46x0.699)x1.05
• Rs 114.97 Crore.
• This is equal to 115/700x10016.42 Return on
  investments made.

35
Issues of concern in Gas Supply Agreement(GSA)

• Allocation of gas is on fall back basis. As per
  the definition in Section 1.16 of GSAFALL BACK
  BASIS shall mean Second alternative I.e. supply
  of GAS on As And When Available Basis without
  any commitment on the part of the SELLER and
  depending upon surplus GAS available after
  meeting the demand of other firm consumers and
  fall back consumer use alternate fuel when GAS is
  not available for supply.
• Also, according to Article 5, SELLER agrees to
  sell and deliver GAS, on as and when available
  basis,for supply to the BUYER, subject to the
  maximum of 1.0 MSCMD.

36
Issues of concern in Gas Supply Agreement(GSA)

• Period of contranct Article 2.01 states that
  this CONTRACT shall come in to force from the
  date it is signed and shall remain valid for a
  period upto 31.12.2010. Subject to Article 5.01
  hereinafter the supply of GAS under this CONTRACT
  would commence from 1.10.2001 or from any earlier
  date that may be mutually accepted by the SELLER
  and the BUYER and shall continue for a period
  ending 31.12.2010.
• Whereas the plant life is 15 years, the GSA is
  valid only for only 8 1/2 years from now, subject
  to the conditions of fall back basis and maximum
  availability of 1.0MCMD.

37
Issues of concern in Gas Supply Agreement(GSA)

• It is important to note that existing plants
  viz,.GVK, SPECTRUM and APGPCL, which have gas
  allocation on Fall back firm Basis, are being
  supplied gas only to the extent of Firm allotment
  made to these projects.
• Even if there is slight short fall in supply of
  GAS, it should be mixed with certain minimum
  quantity of NAPHTHA on technical considerations.
• At present for APGPCL a ratio of 8020 between
  gas and naphtha is used for power generation.
  This is increasing the variable cost by 5
  paise/unit.

38
Issues of concern in Gas Supply Agreement(GSA)

• Quality of GAS
• Even though certain specifications are laid down
  in Annexure-I of GSA, there is no mention of
  Gross Calorific Value of gas that is supplied by
  the GAIL.
• Without Gross Calorific Value specifically
  mentioned in the GSA, it is difficult to estimate
  the actual gas that is consumed and variable
  cost per unit of energy generated.
• If there is any savings in GAS consumption it
  must be passed on to the consumer.

39
Issues of concern in Gas Supply Agreement(GSA)

• Delivery of GAS
• According to Article 4.03, in addition to the
  price of GAS, the BUYER shall pay to the SELLER
  monthly transmission charges of Rs
  1,93,15,175 per month for facilities provided by
  the SELLER for supply of GAS. (I.e. total fixed
  cost commitment to APTRANSCO is (16323.16)Rs
  186.16 crore.)
• Also, during the currency of the CONTRACT
  irrespective of total/partial/non-supply of
  quantity of gas as per Article 5.01, the buyer
  shall pay the above monthly fixed transmission
  charges
• the above monthly Transmission charges shall be
  increased by 3 on yearly basis with effect from
  1.4.2001.

40
Issues of concern in Gas Supply Agreement(GSA)

• Thus the entire Gas Supply Agreement is heavily
  biased in favour of supplier, full of
  uncertainties and does not meet the requirement
  of APTRANSCO.

41
Equipment Supply OM contracts.

• Various technical parameters specified in the
  Equipment Supply and OM contracts viz,.
• Guaranteed output
• gross heat rate
• auxiliary consumption
• sheduled date of completion
• liquidated damages for delays, short fall, heat
  rate,shortfall in auxiliary consumption,
  guaranteed availability etc,.
• PLF below which penalties are levied
• are found to be far superior than those provided
  in the PPA.

42
Equipment Supply OM contracts.

• This will unduly benefit the IPP, as all the
  benefits from EPC and OM contract are to be
  passed on to the consumer.
• For ex it is stated in the Equipment Supply
  contract that minimum availability shall be 93
  and in OM contract minimum PLF to be maintained
  as 92. IPP will levy penalties for any shortfall
  from the stated PLF during the operation.
• However, in the PPA it is stated that IPP will
  get incentive for generation above 85 and
  disincentive for PLFs below 68.5.
• If the plant is operated at 90PLF, the IPP will
  not only collect incentive from APTRANSCO but
  also gets benefited from the penalty levied on
  OM contractor.

43
Issues involved in the present PPA

• Plant Life Plant life is stated as only 15
  years. Where as for other IPP projects like GVK
  and SPECTRUM the plant life is 18 years.
• Escrow facility in addition to the irrevocable
  revolving letter of credit in favour of the
  company, as an additional security to the
  company, APTRANSCO has to open escrow account
  with any of the Boards scheduled Bank. This is
  totally unjustified and not in the interest of
  APTRANSCO.
• Buy out procedure The buy out procedure adopted
  in the PPA will result in the higher buy out
  price for the project at the end of 15 years.
  Since most of the capital cost (more than 90) is
  recovered by the IPP by way of fixed charges, the
  actual cost of plant shall only be 10 of the
  total capital cost

44
Prayer to the Commission

• Not to give consent to the PPA in view of the
  following
• Inadequate demand for power and consequent burden
  of huge fixed costs.
• Inadequate gas reserves available in
  Krishna-Godavari Basin.
• Lack of firm allocation of gas from GAIL.
• Uncertainties associated with the Gas prices, in
  view of GOI policy to bring prices of natural gas
  on par with the international LS/HS fuel oil
  prices.

45
Prayer to the Commission

• To recommend to the GOAP to call for fresh bids
  for gas based projects, in case capacity
  additions are necessary.
• To give serious consideration to the
  ramifications of planning for gas based power
  projects in view of scarce natural gas resources,
  high cost of alternate fuels, high forex
  outflows, etc,.

46
Prayer to the Commission

• 4. In case Commission decides to give Consent to
  the proposed PPA, to consider the following
  issues
• To reduce the fixed cost burden as per the
  calculations suggested in this petition.
• Plant life shall be increased to 18 years from
  existing 15 years on par with other Gas based
  IPPs.
• Recovery for full fixed costs shall be at 92PLF
  as per OM contract, and in case unit cost method
  for fixed charge recovery is used, the total
  fixed cost shall be limited to the levels
  suggested in this petition.

47
Prayer to the Commission

• Disincentives shall be applied for PLFs below
  50.5.
• Gas supply shall be on firm basis, for full life
  of the plant.Also Gross calorific value of Gas
  shall be clearly stated.
• Provisions relating to technical parameters of
  Equipment Supply Contract and OM contract shall
  be incorporated in the PPA.
• Escrow facility shall not be given.
• Buy out procedure shall be modified to reflect
  the actual cost at the end of plant life.

48

• THANK YOU
• APSEB ENGINEERS ASSOCIATION