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Saturday, 18 October 2014 00:00
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Lessons from UMPP fiasco need to be learned

Given how almost all of the 55,000 MW of power capacity created in the country over the past few years, by way of competitive bidding, is in some form of trouble—either tariffs have been asked for or there is litigation over it—you would think some lessons would have been learned. Instead, as the auction process for two ultra mega power plants (UMPPs) in Odisha and Tamil Nadu which cost around Rs 25,000 crore apiece show, this has not happened and, as a result, private sector players have written to the Power Finance Corporation saying they are withdrawing due to uncertainties over the new bid document. There were, it is true, problems with the earlier agreements in that it was not easy to get a developer out once the contract had been awarded—so the feeling was the developer would use the coal but not meet its contractual obligations.

But, in a bid to fix this, the power ministry seems to have gone the other way while creating a design-build-finance-operate-transfer model. So, the new UMPPs, going by the power companies’ assertions, have stacked most of the powers with the power utility that buys power—the power producers association says there are 27 events of default for the developer and only 3 events of default for the utility. Indeed, even the central electricity regulator had warned against this model saying that since the bidder would not have clear title/ownership, getting loans for the project would be problematic. In any case, as we have seen in the case of power projects which wanted to stop supplies when they did not get a higher tariff, it took one Supreme Court order to restore supplies—so the fear of developers squatting on projects and not meeting their obligations seems a bit overblown.

The other problem the bidding document did not address the issue of cost escalations beyond the control of the developer. This includes not getting clearances on time or fuel prices escalating. A simple solution was to let the cost of coal be a pass-through—in the case of the UMPP based on imported coal—with a coal regulator determining costs. One of the reasons why we are in this mess, of course, is that with regulators not doing their jobs properly, the new bid documents have sought to govern through contracts which, as we have just seen, is a process that cannot work since it lacks the necessary flexibility



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