May 19, 2015 CARE Ratings - update Interim relief for stranded gas based plants though long term viability hinges on improved domestic gas avaliability:care Ratings Ministry of Power (MoP) has devised the scheme for utilization of stranded gas based power plants by providing the subsidized fuel and tariff subsidy to improve availability of power and arrest deterioration in the credit quality for banks/financial institutions. Accordingly on May 12 and May 13, 2015 the e-auction was conducted and power plants with aggregate capacity of 10.2 Giga Watts (GW) have been selected based on the lowest quantum of subsidy per unit quoted. However, in CARE Ratings opinion the success of entire scheme is critically dependent on softer prices of regasified liquefied natural gas (R-LNG) and favourable USD/INR exchange rate. Based on CARE ratings assessment at current subsidy per unit and fuel prices (net of necessary deductions as per the scheme) the project companies would be able to meet the O&M expenses and service the interest on term loans and would require moratorium on principal repayments. While the scheme is intended for interim relief the long term viability of the gas based projects would depend on improvement in domestic gas availability. In March 2015, the Ministry of Power (MoP) announced e-auction based allocation of imported R-LNG to underperforming gas based capacity of 27.1GW (22.9 GW commissioned + 4.2 GW ready for commissioning as on Jan-15). The scheme has considered separate e-auction for Stranded power plants (SGP) and Plants Receiving Limited Domestic Gas Supply (DGP). Thus, the Scheme has identified Stranded Power plants of ~14.3 GW and ~9.8GW of plants with limited domestic gas availability (operating at <35% PLF). The Scheme provides for a per-unit tariff subsidy from the Power System Development Fund (PSDF). Further the tariff paid by power distribution company (maximum of Rs.5.5 per unit) and PLF levels (maximum 35%) of individual plant is also fixed as per the bidding criteria. The subsidy would be disbursed based on a reverse auction mechanism - to the stranded gas-based power plants first and then to plants already receiving domestic gas. According to the scheme the subsidy would be provided for two financial years i.e. 2015-16 and 2016-17 and maximum support is capped at Rs.3,500 crore for FY16 (Rs. 3,000 crore for SGP and Rs. 500 crore for DGP) and Rs.4,000 crore (Rs. 3,500 crore for SGP and Rs. 500 crore for DGP) for FY17. Accordingly in the auction conducted on May 12 and May 13 2015, the scheme has allotted support equivalent to Rs.843.99 (Rs.723.99 crores for SGP + Rs120 crores for DGP) for plants to operational between 1 st June 2015 to 30 th September 2015 (refer to Annexure-II for details). The bids would be conducted for eligible plants till the gas availability or PSDF support would be fully exhausted. 1
The success of this scheme will hinge upon 1) ability of power generators to find buyers for electricity generated as net sale price of electricity sale to DISCOMs has been fixed at Rs.4.7-5.5/kWh for SGP and Rs3.39/KWh for DGP, 2) ability of power IPP to get a moratorium on principal repayments of two years from the lenders 3) R-LNG availability at reasonable rates and support from respective state governments. Impact and Sensitivity Analysis Our calculations suggest that the scheme offers a pass-through fuel charges (made available by R-LNG sourcing player) and a cap on fixed charges to the extent of O&M expenses and interest cost for the project. Illustration below explains the tariffs bidded for SGP scheme would only suffice to cover the above two costs and left over funds of about Rs.0.13/KWh would not be sufficient to cover the depreciation for the plant. This would necessitate moratorium on principal payments for two years. Particulars of 1000 MW plant to be operated under SGP scheme Capital cost (Rs.mn per MW) 45 Debt: Equity Ratio (x) 70:30 Plant size (MW) 1000 Fuel Type Gas PLF (%) 35 Units generated (mn KWh) 2772 Net tariff offered ( by discom) 4.70 Subsidy cap 1.42 Gross tariff offered 6.12 Less: Variable costs/kwh 4.23 Less: O&M costs/kwh 0.45 Interest coverage/kwh 1.31 Left over Funds available/kwh 0.13 Source: CARE Ratings estimates Key assumptions for 1000 MW plant R-LNG price USD $/mmbtu (landed) 9.00 INR/USD exchange rate 64.00 Station Heat Rate (Kcal per unit) 1850 Net calorific value of fuel (Kcal per SCM) 8700 Interest rate on term loan 11.5% Source: CARE Ratings 2
The plant s profitability would be sensitive upon the R-LNG prices and exchange rate as the maximum support as per the scheme is capped for each financial year. As per the sensitivity below any increase in R- LNG prices above 9 US $ per MMBTU (landed) or exchange rate above INR/USD of 64 would adversely impact the cash flows. Sensitivity of Average cost of sale over FY16 & FY17 to R-LNG spot price & exchange rate Exchange rate (INR/USD) 62 63 64 65 66 7.0 4.94 4.99 5.04 5.10 5.15 Imported R-LNG spot price in USD/mmBtu 8.0 5.40 5.46 5.52 5.17 5.63 9.0 5.85 5.92 5.99 6.05 6.12 10.0 6.13 6.38 6.46 6.53 6.60 11.0 6.76 6.84 6.93 7.00 7.09 Impact on the Sector and banks/financial institutions (FI): In both these auctions, the gas based capacity of 10.27 GW is likely to be revived. Consequently, these power plants would add ~31.49 BUs power in primarily three states of Andhra Pradesh, Gujarat and Maharashtra. CARE Ratings believes that the scheme would help increasing availability of power in above mentioned states. However, considering the persistent high levels of energy deficits witnessed in the Southern region the power projects located in AP would find it relatively easier to secure PPA at the rate prescribed in the scheme. This scheme is also likely to help easing power deficit scenario in the Southern region. Further, if the lenders offer two year of moratorium, CARE estimates asset quality slippages of about Rs.25,000 crore can be restricted for banks/fi. Gas based capacity 1 and scheme coverage (SGP+DGP) PLF trend for gas based capacity (%) 2973; 11% 9845; 36% 14305; 53% 80% 60% 40% 20% 66.15% 59.94% 40.33% 24.85% 20.79% 0% 2011 2012 2013 2014 2015 SGPs DGPs Other Plants (not included in scheme) Overall Central State Private Source: CEA, CARE Ratings 1 Gas based capacity includes commissioned as well as plants ready for commissioning 3
Impact on DISCOMs The capacity of projects under the scheme is primarily restricted to three states Andhra Pradesh, Gujarat and Maharashtra with share of 38.8%, 37.6% and 19.2% respectively. The discovered price bids in the auctions are Rs.4.70/KWh in SGP and Rs3.39/KWh in DGP. Electricity supply available after scheme implementation 100% 80% 60% 40% 20% 0% 10.62% 11.17% 4.66% Gujarat Andhra Maharashtra FY15E -Total power supply additional power supply under the scheme 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 Trend of average power purchase cost 4.50 3.93 3.68 3.97 3.97 3.92 3.45 3.29 3.55 FY12 FY13 FY14 Maharashtra Gujarat Andhra Pradesh Source: CEA, Various state DISCOMs, CARE Rating estimates CARE Ratings notes that the average cost of power purchase for the DISCOMs in these states are likely to increase between 35-40 paisa per unit in FY16 after implementation of the scheme. As the tariff as per the scheme is higher than the average power purchase cost for distribution entities in these states and states like Gujarat and Maharashtra where power deficit levels are negligible the ability to tie up PPAs would be crucial. 4
Annexure-I Salient features of Scheme of importing RLNG for stranded power projects The Government of India (GoI) has come out with a bailout package for unutilized and under-utilized gasbased power generation companies on March 27, 2015. The scheme is applicable for FY16 and FY17 and will be reviewed after that seeing its feasibility then. An Empowered Pool Management Committee (EPMC) has been constituted under the chairmanship of special secretary in the power ministry. The committee would draw up the list of eligible gas-based plants, based on target plant load factor, for taking part in the bidding. The committee would also fix the target PLF and price for power. It has differential subsidy mechanism and separate bidding for plants receiving limited domestic gas supply and plants not receiving domestic gas supply. All the stakeholders are expected to share the burden of this subsidy in various forms like taking a cut in margins, tax exemptions and waivers, etc. Salient features: Only two e-bid R-LNG operators have been appointed i.e. Gujarat State Petronet Limited (GSPL) for plants in Gujarat and GAIL for plants in Rest of India. Of the two e-bid R-LNG operators, GAIL will be the only agency for the procurement of e-bid R-LNG under the proposed mechanism. The eligible bidders while participating in the reverse e-auction will be required to indicate during the online bidding process, the total incremental electricity they would generate using the e-bid RLNG. They would also need to quote the support or subsidy they require in order to ensure the net purchase price for the distribution companies is not more than the target price decided by EPMC, without exceeding the target PLF. Stakeholders to share the subsidy burden along with the central government by providing concession or foregoing revenue by means of: Customs duty, VAT, CST, and service Tax wavier. Reduction in Pipeline charges (50%), Re-gasification charges (50%) and marketing margin (75%) too. Fixed cost recovery limited to obligation towards O&M and debt servicing. EPMC will fix the upper ceiling of per unit support required from PSDF. PSDF Support Ceiling Price (Rs. per unit) Scheme/Year FY2015-16 FY2016-17 SGPs 0.94 0.95 DGPs 1.26 1.28 The EPMC is empowered to modify this ceiling price for successful conduct of reverse e-bidding. If there is surplus at cut-off level, EPMC will have the flexibility to either reduce further target price of power and/or to increase the target PLF without exceeding the total amount of PSDF support and the entire bidding process will be repeated again. It will also have freedom to decide the period covered under the bidding. 5
EPMC is authorized to appropriately design and finalize the bidding process Once the bidding process is complete, the winning gas based plants will be allowed a limited time frame, as decided by EPMC, during which various stakeholders will have to fulfil the conditions/formalities including entering into Take or Pay contractual agreement for the e-bid R-LNG with the e-bid R-LNG operator. The power producers, who are allotted R-LNG, are supposed to open a Trust Retention account which shall work as follows: Revenue from sale of electricity to be deposited in TRA SGP DGP Money to be utilized only for payments towards variable cost, O&M and debt servicing after capping fixed cost Money to be utilized only for payments towards the variable cost of generation EPMC to ensure no payments are made towards Return on Equity The individual gas based plants will have to improve their efficiency i.e. perform at better PLF in order to compete with CCP (combined Cycle Plant) who has both gas turbine and steam turbine in operation to produce electricity. Gas based plants will be free to produce additional power by acquiring additional R-LNG separately from the market on their own and sell such additional power so generated in the market. 6
Annexure-II Bidding outcome On 12 th May reverse auction bidding for SGP and on 13 th May, 2015 DGP was completed. Of the total capacity 10.2 GW under SGP, 10 bidders comprising of 6.8GW have been technically and subsequently financially qualified under SGP scheme and 5 bidders consisting of ~3.4GW under DGP scheme. List of winning bidders for Stranded Gas based Power Producers (SGP) Power IPPs State Capacity installed (MW) Torrent Energy (DGEN Mega CCPP) Gujarat 1200.0 Torrent Power UNOSUGEN CCPP) Gujarat 382.5 Gujarat State Electricity Corp (UTRAN) Gujarat 374.0 Lanco-Kondapalli (Kondapalli Extn CCPP (366) & Kondapalli Ext. St-III (742) Andhra Pradesh 1108.0 RVK energy Andhra Pradesh 28.0 GMR Rajahmundry Energy (GMR Vemagiri Ext) Andhra Pradesh 768.0 GVK industries (JEGURUPADU CCP) Andhra Pradesh 220.5 GMR Vemagiri Power (Vemagiri CCPP) Andhra Pradesh 370 Sravanthi Energy (Kashipur Sravanthi ST-I &II) Uttarakhand 450 Ratnagiri Gas and power (DHABHOL) Maharashtra 1967 Total 6,868 List of winners for Gas based power producers receiving limited domestic gas supply (DGP) Power IPPs State Capacity installed (MW) Torrent Power ( SUGEN CCPP) Gujarat 1147.5 Gujarat State Electricity Corp (DHUVARAN CCPP) Gujarat 106.4 CLP India (PEGUTHAN CCPP) Gujarat 655 NTPC Auraiya CCPP Andhra Pradesh 663.4 NTPC Dadri CCPP Andhra Pradesh 829.8 Total 3402.1 Source: Ministry of Power, Press Information Bureau, CARE Ratings N.B. CCCP Combined Cycle Power Plant 7
Contact: Revati Kasture Dhaval Patel Piyush Nimgaonkar Chief General Manager Asst. General Manager Manager revati.kasture@careratings.com dhaval.patel@careratings.com piyush.nimgaonkar@careratings.com 91-022-67543 465 91-022-67543 438 91-022-67543 656 Disclaimer This report is prepared by Credit Analysis & Research Limited (CARE Ratings). CARE Ratings has taken utmost care to ensure accuracy and objectivity while developing this report based on information available in public domain. However, neither the accuracy nor completeness of information contained in this report is guaranteed. CARE Ratings is not responsible for any errors or omissions in analysis/inferences/views or for results obtained from the use of information contained in this report and especially states that CARE Ratings has no financial liability whatsoever to the user of this report. 8