1 Project Report On Faculty Guide: Prof. Prabina Rajib Industry Guide: Prof. A P Dash Senior Faculty, PMI NTPC Submitted by – Arvind Singh Mahor Roll No. - 10BM60017, MBA (2010-12) Vinod Gupta School of Management IIT-Kharagpur A Project Report Submitted in partial fulfilment for the award of Master of Business Administration
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1
Project Report
On
Faculty Guide:
Prof. Prabina Rajib
Industry Guide:
Prof. A P Dash
Senior Faculty, PMI NTPC
Submitted by –
Arvind Singh Mahor
Roll No. - 10BM60017, MBA (2010-12)
Vinod Gupta School of Management
IIT-Kharagpur
A Project Report Submitted in partial fulfilment for the award of
Master of Business Administration
2
ACKOWLEDGEMENT
It is with a sense of gratitude, I acknowledge the efforts of entire hosts of well-wishers who
have in some way or other contributed in their own special ways to the success and
completion of this summer internship project.
First of all, I express my sage sense of gratitude and indebtedness to our Dean,
Prof. A. Tripathy and Placement In charge, Prof. Prithwis Mukherjee at
―Vinod Gupta School of Management, IIT-Kharagpur‖, from the bottom of my heart, for
their immense actions, support, and faith.
I would also like to thank my project guide at VGSOM IIT Kharagpur, Prof. Prabina Rajib
who had sent me many papers related to my project and been very helpful in the completion
of this project
I sincerely express my thanks to all our lecturers for their valuable guidance and intellectual
suggestions.
Also, I also express my sincere thankfulness to my project guide and mentor,
Prof. A. P. Dash at PMI NTPC Noida for his kind advice, suggestions and constant help in a
lot of various ways during project course. Also thank Prof. Behra of PMI NTPC who
suggestion many points to be considered in project like Five Year Plans and Clean Energy.
Further I express my gratitude to all my MBA friends and NTPC Library People who were
kind enough to help.
I sincerely thank to all of them for their valuable suggestions, motivation and
encouragement. I express my thanks to the entire NTPC for giving me an opportunity to work
there.
Arvind Singh Mahor
MBA, 2010-12 Class
VGSoM,
IIT Kharagpur
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CERTIFICATE FROM COMPANY
4
Table of Contents ACKOWLEDGEMENT ................................................................................................................................ 2
CERTIFICATE FROM COMPANY ................................................................................................................ 3
CONCLUSION AND SUGGESTIONS ..................................................................................................... 44
Appendix A ............................................................................................................................................ 45
Appendix B ............................................................................................................................................ 55
CASE LET - NTPC: CURRENT STATUS, FUTURE DEMANDS AND INVESTMENT NEEDED .................... 55
To provide the optimum integrated financial model of Capital Budget & Capital
Structure for the additional power capacity required as per the 12th
Five Year Plan and
Other Studies for the NTPC considering the public undertaking nature and various
regulatory provisions related to pricing, contracting of raw material, operations,
administration etc. by various regulatory authorities like CERC, Power Ministry and
Environment Ministry
To analyse the Power generation policies of developing and the developed countries,
particularly focusing on the India and China and recommending the changes for
Indian Power Sector to enhance the Capacity in most efficient manner.
METHODOLOGY Methodology will include the intensive and extensive research, study and analysis to come to
the required solutions and suggestions incorporating the Power Industry norms. It will have
two sections: [see Exhibit 1]
DATA COLLECTION
Primary data
Data gathered from the NTPC staff, discussion and internal survey.
Secondary data
Data gathered using the external sources like study reports by various agencies like Asian
Development Bank, World Bank, UNO and other consultancy organisations who worked in
the same area like KPMG etc.
EXPLORATORY AND MATHEMATICAL STUDY
In Exploratory and Mathematical study various financial tools were used giving the inputs
from values available in primary data & secondary data section. Using these exploratory
results, future policies for Power Capacity addition and Operational, Fund Raising &
Technical Efficiencies will be recommended.
IT APPLICATION
Finally, using available software tools like MS Excel various charts and table drawn for the
visual representation of the study and analysis.
RESULTS Indian Power sector greatly need to improve on various fronts to meet the 12
th Five Year
target of the power capacity addition in terms of Operational, Functional, Funding, Cost
Reduction, Environment Challenges, Human Resource, Administration, Regulations, Tariffs,
and Distribution. Along it, India need to look for the alternative energy and sources also
considering the cost involving in Oil and Coal import and their limited availability with
focusing on the environmental effects and the large power requirement for sustaining the
economic and social growth.
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COMPANY BACKGROUND
POWER INFRASTRUCTURE IN INDIA India is the fifth largest producer of electricity in the world and according to the Planning
Commission, while the State Governments account for 51.5% of the total generation capacity,
the central sector and the private sector account for 33.1% and 15.4% of the generation
capacity respectively. The Power industry in India derives its funds and financing from the
government, some private players that have entered the market recently, World Bank, public
issues and other global funds. India‘s total installed capacity of 173,626.40 MW as on March
31, 2011, the installed capacity of central power sector utilities, state sector entities and
private sector companies accounted for approximately 31.3%, 47.5% and 21.2%,
respectively. The following table sets forth a summary of India's energy generation capacity
as of March 31, 2011 in terms of fuel source and ownership:
See the organisation of Indian Power Sector Organisation [see Exhibit 2]
Sector Thermal Nuclear Hydro Renewable energy sources
Total
Central 40,747.23 4,780.00 8,885.40 - 54,412.63 State 52186.73 - 27,257.00 3,008.85 82,452.58 Private 19890.52 - 1,425.00 15,445.67 36,761.19 Total 1,12,824.48 4,780.00 37,567.40 18,454.52 1,73,626.40
NTPC PROFILE NTPC Limited (formerly known as National Thermal Power Generation Limited), India's
largest power company, was set up in 1975 with a vision “A world class integrated power
major, powering India‟s growth, with increasing global presence" to accelerate power
development in India. It has emerged as an „Integrated Power Major‟, with a significant
presence in the entire value chain of power generation business. NTPC is a Government-
owned entity with 89.5% of its paid-up capital contributed by the Government and the
balance of 10.5% being held with foreign institutional investors, financial institutions, banks,
and the general public. NTPC is primarily involved in constructing and operating power
stations. It is among the world‘s largest and most efficient power generation companies.
NTPC has installed capacity of 29,394 MW. It has
15 coal based power stations (23,395 MW),
7 gas based power stations (3,955 MW) and
4 power stations in Joint Ventures (1,794 MW).
The company has power generating facilities in all major regions of the country. It
plans to be a 75,000 MW company by 2017. NTPC is pursuing expansion of its business
activities into hydroelectric generation, coal mining, gas exploration, and participation in the
liquefied natural gas value chain, which supplements and supports its core power generation
activities.
NTPC Organisational Structure [see Exhibit 3]
Vision- A world class integrated power major, powering India's growth with increasing
global presence.
Mission- Develop and provide reliable power related products and services at competitive
prices, integrating multiple energy resources with innovative & Eco-friendly technologies and
contribution to the society
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Core Values - BCOMIT
Business ethics
Customer Focus
Organizational & Professional Pride
Mutual Respect & Trust
Innovation & Speed
Total Quality for Excellence
Corporate Mission
―Develop and provide reliable power, related products and services at competitive prices,
integrating multiple energy sources with innovative and eco-friendly technologies and
contribute to society‖.
For the growth so far [see Exhibit: 4].
PRODUCTS AND SERVICES
Power generation- The Company has formulated a long term Corporate Plan for 15 years up
to 2017. The Corporate Plan seeks to integrate the Company's vision, mission and strategies
for growth with the national plans and to provide the company the cutting edge in the
emerging competitive environment. NTPC is targeting to become a 75,000 MW plus
Company by 2017.
Consultancy-The Consultancy Wing of NTPC, with an ISO 9001:2000 accreditation,
undertakes all the Consultancy and turnkey project contracts for Domestic and International
clients in the different phases of Power plants. NTPC is registered as a consultant with several
leading international development and financial institutions such as The World Bank, The
Asian Development Bank, The African Development Bank and UNDP.
Power Management Institute- NTPC has full-fledged facilities at the Power Management
Institute, NOIDA for providing training in all aspects of power Plant Management and
Systems. It also has Full Scope Replica Training Simulators both for Coal as well as Gas
based Stations for training personnel in Operation and Maintenance of power plants.
SUBSIDIARIES AND JOINT VENTURES
Business development through Acquisition and Joint Ventures serves both NTPC's own
commercial interest as well as the interest of the Indian economy taking over being a part of
the acquisition process, is also an opportunity for NTPC to add to its power generation
capacity through minimal investment and very low gestation period. Group NTPC has 5
Subsidiaries and 17 Joint Ventures [see Exhibit: 5] in the following area:
Power Generation
Services
Equipment Manufacturing
Coal Acquisition
Power Trading
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PERFORMANCE HIGHLIGHTS
Coal based Stations performed at the highest ever Plan Load Factor (PLF) of 89.43 per cent
compared to 87.67 per cent last year. [see exhibit 6]. Seven coal based stations (Dadri,
Unchahar, Vindhyachal, Simhadri, Rihand, Tanda and Talcher-Kaniha) have achieved more
than 90 per cent PLF. Generated 188.74 Billion Units (BU) - an increase of 10.41 per cent
over the previous year. Contributed 28.50 per cent of the total electricity generated in the
country during 2006-07 with 20.18 per cent share of the total installed capacity of the nation.
PAF of both the coal and gas-based stations remained at healthy levels, which enabled the
company to earn efficiency incentives. The company‘s Plant Availability Factor (PAF) for
FY2011 as a whole stood at 91.67%, up 46bp Y-O-Y. During 4QFY2011, PAF of coal-based
plants stood at 96.4%, while PAF of gas-based plants stood at 96.87%. [Exhibit: 6]
FINANCIAL RESULTS
NTPC Ltd has declared its provisional unaudited revenues and profit for quarter and year-
ended March 31, 2011. The audited results are expected by May 20, 2011 post which we will
release a detailed results analysis. The provisional numbers indicate that the performance is
likely to be in line with CRISIL Equities‘ estimates. CRISIL continue to believe that NTPC is
better placed due to strong growth prospects, higher fuel security and a stable return model.
NTPC maintains fundamental grade of 5/5, indicating that the fundamentals of the company
are excellent relative to other listed securities in India. [Exhibit: 7] & [Exhibit: 8]
100% realization of the billing for the eighth consecutive year.
Provisional and un-audited Net Sales of Rs. 53,721 crore during 2010-11 as against
Rs. 46,169 crore (audited) during 2009-10, registering an increase of 16.36%. The
provisional and un-audited Gross Revenue is Rs.56,331 crore during 2010-11 as
against Rs.49,247 crore (audited) for the year 2009-10, an increase of 14.38%.
Provisional and un-audited Profit after tax for the year 2010-11 is Rs.8,826.16 crore s
compared to Rs.8,728.2 crore (audited) during the year 2009-10, an increase of
1.12%.
Capital Expenditure of Rs.12,817.61 crore during 2010-11, an increase of 22.46%
over the last year‘s figure of Rs.10,467.13 crore. NTPC Group‘s capital expenditure
was Rs. 16,326.58 crore as against Rs.14,334.54 crore over the last year, an increase
of 14%
Contributed Rs.6,243.99 crore to exchequer on account of Corporate tax, Dividend
and tax thereon and wealth tax, an increase of 92% over the previous year.
Approved outlay for 2011-12 for NTPC‘s capital schemes is Rs.26,400 crore; for
NTPC Group, the outlay is Rs.30,843.72 crore.
For Financial Results [Exhibit: 11]
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PROJECT OBJECTIVE The Indian power sector has historically been beset by energy shortages which have been
rising over the years. In fiscal 2010, peak energy deficit was 12.7% and total energy deficit
was 10.1%. The demand for electricity has consistently exceeded the supply, and the demand-
supply gap has been widening. Rapid growth of the economy places a heavy demand on
electric power. Although generation capacity has increased substantially in recent years, it has
not kept pace with the continued growth of the Indian economy, despite low per capita
electricity consumption. Hence, India needs to think in long term manner to chalk out the
energy plan for sustaining the growth rate at same or more rates. We have to think for the
various alternative sources of energy also considering the environmental effects of global
warming. So, there is an utmost need of look for the non-conventional energy sources like
solar/bio/waste based plants.
Along it, the Indian Power sector is among the least efficient in the world in terms
of output units of electricity per unit of fuel (coal/gas/oil). Even if we compare India with
other developing nations like China and Korea, India is far behind in terms of generation
efficiency. Therefore, there are following goals of this project:
I. Future Power Capacity Additions
12th Five Year Plan (2012-2017) (the "12th Plan")
Power sector in the country is poised for record capacity addition of 15000MW during this
financial year said Shri Sushilkumar Shinde, Union Minister of Power inaugurating
International O&M Event ―Indian Power Stations - 2011‖ . It needs to plan to be a 75000MW
company by 2017. This is very important to sustain the growth rate of 9% yearly.
II. Power requirement Projection as per the Five Year Plans.
The analysis of power requirement considering the population and the economic growth upto
the 15th
Five Year Plan i.e. 2031-32. Hence, incorporating the past trend and other major
factors, draw the projected power plan using the Excel showing the each Five Year Plan‘s
Power target, yearly power target, cumulative growth pattern and Growth rate of power
requirement.
III. Calculation of various Parameters related to power generation
Calculation of cost of power generation per unit of primary and secondary fuel considering
their calorific value. Calculation of the fuel requirement to generate the power i.e. how much
to be imported and how much can be used from the domestically available coal store. Also,
calculating the tariff values to project the revenue from sales of electricity to various State
Electricity Boards (SEBs).
IV. Study of Long term Capital Requirement for the Power Generation
The analysis of debt, equity, earnings and other financial values for the projected future
power capacity considering the effects of Inflation, taxes, cost structure, tariffs and other
regulations. Hence, prepare a capital planning model using Excel showing the year wise
power generation, capital requirement, sales of power, profit, debt and equity. It will show the
need of future investment in the power sector.
V. Study of Power Sector in developed and Developing countries
Study and analysis of the differences between them in terms of functional, funding, technical
and regulatory methods, Particularly focusing on China and India and identifying the cause of
differences. Also, to recommend the various ways for the Indian Power Sector to Improve on
various fronts to achieve same level of efficiency.
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MAIN DELIVERABLES
Identification of causes of weak efficiency of Indian Power Sector compared to China
and other developed countries.
Study of funding the power projects and Borrowing from various financial agencies
like Asian Development Bank, World Bank, Bank Loa n etc.
Analysis of future power capacity addition by NTPC as per the Five year Plans.
Tariff calculation, cost calculation considering the fuel quality and other technical
parameters like calorific value, fuel consumption, auxiliary consumption etc.
Capital calculation to meet the future power capacity addition considering the
inflation, tax and borrowing issues.
Developing a financial model using Excel showing growth trend, capital requirement,
revenue, debt, earnings, equity and profit for each year.
MAIN GOALS
Proposals for the improvement of the Indian Power Sector.
Projection for the Power Capacity addition and the Investment needed for that in
future.
Financial Model using Excel and drawing the pictorial representation of the results.
SURVEY OF LITERATURE For the survey of the literature to know what had been done to meet similar targets satisfying
the various criteria, I studied various cases, articles, reports and research papers from
Academic Institutes and Industries related to the same situation.
POWER PROJECT FINANCING TRENDS Despite the fact that coal-fired power projects are being cancelled at a quickening pace, coal-
fi red power is not going away any time soon. The recent global recession has severely
disrupted the growth momentum achieved by many developing countries. Although the
current economic recovery has bestowed considerable benefits on many industrial nations, it
has only reached a few developing countries. In this context, as would be expected, the
financial environment for power utilities around the world continues to be difficult.
Reflecting both capital shortages and a slowing of demand growth, there have been major
reductions in investment programmes in the power sector.
As an important instrument for changing the mix of a country's energy
consumption; the critical need to improve efficiency and resource utilization; and, perhaps
most important, the availability of capital. Over the past few years, the slowing down of
economic activity has reduced the growth of electricity demand in most developing countries.
However, in some countries — such as China (10.9%), India (6.6%), Indonesia (19%),
Pakistan (9%), and Turkey (8%) - the growth of electricity consumption has been constrained
by supply and there is a large unsatisfied demand, which has a high economic cost for those
countries.
Investment patterns and the energy mix
Power systems offer efficient means of using coal, lignite, and gas to distribute energy
to a wide range of users. Hydropower, nuclear, and, to some extent, geothermal
energy can only be harnessed effectively in the generation of electrical power.
The large scope for this is evidenced by electricity's major share in the energy sector.
For many countries, changing the energy sources from which electricity is generated
is an essential part of adjusting to the higher price of oil.
11
World Bank projections have indicated that
the cost of imported oil for electric power
generation will account for about one third
of developing countries' oil imports.
The economics for substitution are
particularly attractive in countries that have
an abundant supply of indigenous gas. The
scope for changing the generation mix
depends on the size of the system and the
country's specific conditions.
Several countries will continue to rely
heavily on oil or expensive hydropower
and will be unable to avoid costs of 12 to
24 cents per additional kilowatt-hour, but
the use of imported coal is not economical
because either power systems are modest
in size or the countries are landlocked,
raising transportation costs.
Two important considerations are the
significant economies of scale in their
construction and the fact that for technical
and economic reasons they must operate
close to their full available capacity.
Co-financing arrangements
For those World Bank borrowers that can borrow on commercial terms, export credits and
commercial banks constitute the most important source of external financing. Under the
traditional arrangement for co-financing with commercial banks, the World Bank and a
commercial bank enter into separate loan agreements with the borrowing country. Loans from
the commercial banks are on market terms and negotiated directly by the banks with the
borrower. In an endeavour to strengthen its role as a catalyst for more commercial
investment, the World Bank introduced innovative new co-financing instruments. The so-
called "B" loan programme was designed to increase the participation of commercial banks
in projects assisted by the World Bank. It was intended to supplement the Bank's traditional
methods of co-financing with the private sector and, to provide a wider ran.ge of options for
structuring-financed operations. Under the "B" loan scheme, three additional options become
available that permits the Bank to participate in financing from commercial sources, in
addition to making a direct loan, the new options are:
Direct financial participation in the later maturities of a "commercial loan‖
Guarantees of the later maturities of a private loan instead of direct funding
Contingent participation in the later maturities of a commercial loan that, initially,
would be financed entirely by commercial lenders.
Looking at new possibilities
In-the context of its overall energy lending operations, the Bank is actively looking at
the possibilities for nonrecourse or limited recourse financing techniques as a means
of mobilizing additional resources for power development.
These techniques allow commercial firms and lenders to finance attractive projects on
the basis of the projects' own cash flow, rather than on the basis of an overall
guarantee offered by the host government or the project owner.
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The required conditions for successful project financing of this nature include a
reasonable perception of country and project risks; a strong and internationally
recognized project sponsor; preferably an export orientation of the project; and
generally a long-term purchase contract.
The World Bank's electric power lending
The World Bank has been the largest single international financier of electric power in
developing countries. In countries where the power sector is well developed and well
managed, a sector loan may be made. An analysis of the projects financed shows that
over the past six years there have been a distinct movement away from oil-fired
thermal generation towards hydro-generation, with significant activities in
transmission, distribution, and rural electrification.
On average. Bank finance covers about 30% of the total project costs. It also helps in
strengthening institutions in the power sector — by advising on priorities for system
development, management structure, electricity tariffs, financial and technical
operating practices, and by enhancing their ability to raise funds for expansion from
domestic as well as public or private external sources- other than the Bank.
Local currency requirements
The availability of domestic resources also will be a decisive factor in the success or
failure of power investment programmes. Many developing countries have difficulty
in mobilizing domestic resources for power investment partly for reasons specific to
the sector, partly because political pressure keeps rates below appropriate levels, and
partly because domestic savings in general are low and financial markets are almost
non-existent.
Revenues from power tariffs often covered local investment costs and external
borrowings were used to finance foreign exchange requirements.
Investments now being contemplated have longer gestation periods and much higher
costs requiring loans with longer maturities than are generally available. Reliance on
budget support for financing power investment means that investment often has to be
restrained when macroeconomic pressures on the budget become severe.
Inability to raise domestic financial resources has delayed the implementation of
power investments in many countries, leading to shortages of power and heavy
economic losses due to the disruption of production. Shortage of local currency also
hampers maintenance programmes that reduce the output of existing generating plant.
Power Projects Finance (PPF)
The Power Project Finance (PPF) market, defined as the largest markets, represents an
important segment of the total power market in developing countries. Examination of the PPF
market shows the following regulatory and financial trends:
A strong commitment by the host government to private power is a key determinant of
activity in a country. Most projects have BOO structures and long-term contracts.
Other structures and merchant pricing are rare.
There is relatively little private risk debt capital.
Countries with strong domestic capital markets provide a large portion of their own
debt requirements
Projects development time is considerably shorter in the countries with private power
experience than in countries without it.
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PRIVATE POWER FINANCING: PROJECT FINANCE TO CORPORATE FINANCE Limited recourse project financing of power generation projects has been widely promoted as
a solution to the intractable problem of getting private credit to a sector dominated by no
creditworthy borrowers and public agencies— from the point of view of both those supplying
capital and those needing it. In such a scenario project financing of independent power
producers (IPPs) may seem the only way to get new capacity fast. In the developing world,
however, the public-private partnership in project-financed IPP ventures has been
disappointingly slow to produce results. The need for corporate balance sheet support for
private power sector investments is gradually being recognized, and the benefits of this shift
in financing structure are worth reflecting on because:
(I) Balance sheet support by the main partners in an IPP financing offers greater security to
lenders and provides easier (and perhaps cheaper) access to long-term debt—critical to
sustainable power sector financing given that IPPs typically depend on debt for 60 to 75 per
cent of their financing requirements.
(II) While equity in limited recourse project finance is almost exclusively private, balance
sheet support by IPP sponsors can open access to public equity markets, which are deeper and
generally cheaper.
(III) Increased corporate balance sheet support is a corollary to the restructuring in the
world‘s power sectors.
Project Finance is more expensive for an IPP
Project finance implies that the lenders to a project have recourse (or claim) only to
the project‘s cash flows and assets. In effect, then, the project is financed ―off the
balance sheet‖ of the project sponsors. Such project finance is termed nonrecourse
and is at one extreme of the project finance–corporate finance continuum of financing
possibilities.
In practice, project finance in developing countries is backed by sponsor or
government guarantees provided to give lenders extra comfort. In traditional corporate
financing, at the other extreme of the financing continuum, lenders rely on the overall
creditworthiness of the enterprise financing a new project to provide them security.
This combination of security, liquidity, and information availability allows debt to be
issued at a lower cost than through project finance. Further, because the enterprise‘s
overall risk is diversified over all the activities that it is engaged in, the cost of equity
is also usually lower.
The financing advantage for both debt and equity makes the overall cost of capital
lower for corporate finance. It also has low transaction cost because it avoids the high
cost of negotiating the web of carefully structured legal contracts with purchasers and
commercial lenders necessary under project financing.
Purchasing utilities weigh the risk that state regulators will disallow investment costs
against the perceived lower risk (and lower profits) of purchasing electricity from an
IPP, an arrangement in which all costs can be passed through or expensed.
Increasing balance sheet support for IPPs
As sector unbundling and self-generation expand choice for wholesale and (potentially) retail
consumers, and thus increase demand uncertainty, balance sheet support by IPPs will play an
important role in sharing demand risk among key participants.
Project developers operate in a fiercely competitive market for international projects.
Assuming competitive bidding, the primary source of competitive advantage lies in
the ability to find financing at the lowest cost, as differences in technical and
operating abilities become virtually indistinguishable among the frontrunners. (Other
attributes may, however, predominate in negotiated, non-competitive IPP deals.)
14
In the competitive international IPP market, several trends indicate that balance sheet
support is the preferred means for achieving this cost-of-capital advantage. Project
developers are putting their own balance sheets at risk—or those of their parent
companies—to raise cheaper debt for projects and to finance their equity contribution.
Creating consolidated balance sheets
Developers are pooling projects into entities that are then able to raise capital on the strength
of a combined balance sheet comprising the ―pooled‖ assets of the different projects.
Providers of equity and debt then finance the business of building and operating private
generation facilities rather than an individual power plant. Pooling spreads project risk.
For a multinational developer, it also reduces country-specific risk. And for a
developer with a few projects already under commercial operation, pooling offers the
advantage of an immediate revenue stream for repaying debt and paying dividends.
Pooling has two other benefits.
- First, it enables project developers to tap public equity markets—most private
project developers finance the equity component of a project privately.
- Second, it enables developers to raise cheaper debt on a corporate finance
basis.
IPP sponsors that have used this approach include Consolidated Electric Power Asia
(CEPA), raised debt and equity in the capital markets on the basis of its corporate
strategy of building multiple power plants in Asia.
POWER REFORMS – TECHNOLOGICAL AND FINANCIAL PERSPECTIVE The Government is convinced that rapid and self-sustaining growth of power sector and its
financial viability is essential for a speedier and sustained socio economic development.
Recognizing the need for reforms in the power sector, the Government of India has
endeavoured to evolve a national consensus for reforms hence the Electricity Regulatory
Commission Act was enacted. The power sector reforms programme endeavours:
To supply electricity to the consumers under the most efficient conditions in terms of
quality and cost in order to support the economic development of the State;
To take effective steps to enable the power sector to mobilize, from within the sector,
adequate financial resources for financing grid expansion requirements;
To create an operating and regulatory environment conducive to investment and
competition so as to foster entry of private participants into power generation,
transmission and distribution and to attract the capital and expertise required to
support power system up gradation, expansion and service quality improvement.
The Electricity Act 2003 is an attempt to introduce competition into the power sector. The Bill
envisages transforming the sector from a system of monopoly providers at regulated rates to a
system in which different companies compete to provide electricity. Key features are:
1. To disaggregate the functions of generation, transmission and distribution with a view to
creating independent profit centres and accountability;
2. Reorganization and restructuring of the State Electricity Boards in accordance with the
model, phasing and sequencing to be determined by the respective State Governments (States
would have the freedom to retain their Boards until they decide to restructure their industry);
3. States to determine the extent, nature and pace of privatization. (public sector entities may
continue if the States find them sustainable);
4. Competition, economy and efficiency to be promoted in the best interests of the consumers
and the national economy;
5. Transmission to be separated as an independent function for creation of transmission
highways that would enable viable public and private investments in the electricity industry;
15
6. Facilitation of private investment in transmission to be broadly retained;
7. Present entitlements of States to cheaper power from existing generating stations to remain
undisturbed; and Compulsory metering for enhancing accountability and viability;
8. Central and State Electricity Regulatory Commissions to continue broadly on the lines of
the Electricity Regulatory Commissions Act, 1998;
9. Special provisions for promoting access to electricity in rural areas and for the
economically weaker persons and Stringent provisions to minimize theft and misuse; and
10. Provisions for transition from a State-owned monopoly to a liberalized and competitive
industry.
Other recent changes include:
Electricity Regulatory Commission
Private Sector Investment in Power Transmission
Limit for Central Electricity Authority (CEA) approval raised
Liberalized Hydro Policy
Mega Power Policy:-
The Cabinet approved a new policy for mega-power projects defined as a plant of
more than 1000MW). This envisaged the establishment of a Power Trading
Corporation; exemption of customs duty on equipment imports and easing
administrative controls such as those relating to environmental clearances.
Second Generation Reforms:-
Power as a subject falls under the concurrent list and hence is under the jurisdiction of
the State Governments. With the Central Government putting in place a series of
legislations to usher in reforms in the Power Sector, the onus now lies with the State
Governments in the country to initiate and implement reforms in this sector.
Effective Market Monitoring Function for deregulated electricity
METHODOLOGY Since, this project is Analysis cum Financial model for the Power sector i.e. NTPC and
particular focus is on the analysing the Power Sector issues in developing world particularly
focusing on India and China. Along it, to develop a Financial Model for the Capital Planning
for the NTPC to meet the Power Generation targets as per the Five Year Plans and propose
the ways for the improvement of Indian Power Sector. Therefore, methodology for this
project included the following activities:
Activity Description
Activity – I Study of the status of Indian Power Sector Infrastructure
Activity – II Study of the Global Power Sector and Funding pattern of the Power
Projects.
Activity– III Comparing the Indian and Chinese Power Sector and pointed the learnings
for Indian power sector from the China to enhance the efficiency.
Activity – IV Capital Budgeting for a Dummy Project using assumptions
Activity – V Power Generation target for the India as per the Five Year Plans and the
World Bank Report. And Projection of the Capital requirement.
Activity – VI Financial Strategies & Fund Raising by NTPC.
Activity – VII Calculating the Cost of the Capital i.e. Cost of Debt and Equity funding.
Activity – VIII Developing the Capital Budgeting Model Using the Excel.
Activity – IX Opportunities and Challenges.
Activity – X Conclusion and Suggestions.
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STATUS OF THE INDIAN POWER SECTOR
Demand and Supply Analysis
India ranks 5th in the world in terms of total installed capacity; it is one of the lowest in terms
of per capita consumption of power. The Government adopts a system of successive Five
Year Plans that set out targets for economic development in various sectors, including the
power sector. Still, India has continuously experienced shortages in energy and peak power
requirements. According to the Central Electricity Authority's ("CEA") monthly review of the
power sector ("CEA Monthly Review") published in March 2011, the total energy deficit and
peak power deficit for March 2011 was approximately 7.5% and10.3%, respectively.
Power Generation Efficiency
Indian power generation are among the least efficient in the world. After comparing these
statistics to International Energy Agency (IEA) statistics it is noticed that thermal power
generation in both sources is the same. The oil input in thermal power plants was also found
to be the same. For coal input a difference was found of 10–12% higher. The reason for this
could be different conversion factors to convert from tonne coal to energy. IEA uses e.g. a
conversion factor of 18 GJ/tonne coal for India for 2003, while Ministry of Statistics and
Programme Implementation(MOSPI) uses a conversion factor of 16.6 GJ/tonne coal based
on GCV for 2003 (16.1 GJ/tonne based on NCV, with 0.97 conversion from Gross calorific
value (GCV) to Net calorific value (NCV)). This explains the difference in higher coal input
in IEA statistics. The Energy and Resource Institute (TERI) gives even lower values for coal
input for power generation than; 4.3 vs. 4.5 PJ in 2001. IEA gives 5.0 PJ for 2001. In this
analysis we will use the fuel input data for coal (corrected to NCV) from to calculate the
energy efficiency for coal-fired power generation.
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Weighted average efficiency of fossil-fired power production
GLOBAL POWER SECTOR ANALYSIS 80% of global population lives in developing areas. Of the 6.0 billion populations, in the
Organisation for Economic Co-operation and Development (OECD) countries the total
number is approximately 1.2 billion. As regards energy consumption, 16% of the global
population in the OECD countries would consume, by the year 2030, more than 40% of
energy and the balance about 84% of the global population in the non-OECD areas would
consume a little less than 60% of the total energy consumed in the world. World electricity
generation rose at an average annual rate of 3.7%, greater than the 2.1% growth in total
primary energy supply. De-regulation in areas of the global energy markets has led to fierce competition.
Now more than ever electricity has to be produced at a lower cost with many countries
imposing ever tightening environmental legislation to reduce the impact power generation has
on the environment. The enormous challenges are recognised in providing electricity as
efficiently as possible and strive to develop technology to meet your needs. Collectively,
developing countries use 30% of the world's energy, but with projected population and
economic growth in those markets, energy demands are expected to rise 95 %. Overall global
consumption is expected to rise 50 % from 2005 to 2030. As mentioned earlier, coal
constitutes the most dominant constituent of the energy sector. Different types of coal power
plants contribute by 50% to the total global power generation at the end of the time horizon
Power Sector Reforms worldwide
Many countries are currently working to create more competitive environments for electricity
markets in order to promote greater efficiency. These efforts affect
Regulation,
Funding and capital raising,
Industrial structure, and
Ownership.
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Regulatory and Structural Changes
Regulatory changes can lead to the elimination of monopolies and reduction of
governmental intervention in the electric power industry.
Reforms include the reduction of price controls and tariff restrictions and the
elimination of subsidies. Structural changes are characterized by the division of the
industry into its three major functions
- generation,
- transmission and
- distribution
and a commitment from governments to ensure that independent producer and other
power-related enterprises will have full and fair participation in each of these
functions.
Ownership trends include an emphasis on privatization and commercialization to
attract private capital from foreign and domestic sources.
Privatization and Funding pattern of the Power Projects
Many non-OECD countries facing high electricity demand growth favour privatizing their
electric power sectors and opening their markets to foreign firms. This approach can free up
large amounts of public capital, which can be used instead for social programs. In addition,
private ownership allows managerial accountability, market efficiency, and better customer
service while reducing government deficits and international debt. The reasons for electric
utility privatization are numerous and vary from country to country. Some of the more
evident reasons include the following:
Raising revenues for the state through asset sales
Acquiring investment capital
Improving managerial performance
Moving toward market-determined prices
Technology transfer
Reducing the frequency of power shortages
Reducing the cost of electricity to consumers through efficiency gain
Taking advantage of creating national and regional power grids, and
Privatization of formerly state-owned electric power assets in developing countries has
opened up enormous investment opportunities. For foreign investors, investment in overseas
electricity assets offers opportunities to achieve potentially higher returns and, in many cases,
to realize greater growth opportunities than are available at home.
In many parts of the world, financial capital may be a greater resource constraint
than primary energy supplies. It has been estimated that over the period 1993 to 2010
investment to sustain the power generation infrastructure will require from 0.1 to 0.2 per cent
of gross domestic product (GDP) in the industrialized countries, 0.6 to 1.1 per cent of GDP
in China, and as much as 1.0 to 1.6 per cent of GDP in India.
In the industrialized world, restructuring of electricity markets is seen as a way to
enhance competition, bringing market forces to bear for the benefit of consumers. In the
developing world, privatization is seen as a way to attract foreign capital for investment in the
energy infrastructure while preserving public capital for other important projects.
Private power is beginning to make large contributions to power sectors in developing
countries. Private power is introducing new sources of financing to developing country power
sectors, providing new services, and creating competitive power markets.
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Nearly two-thirds of all the capital raised for new private power projects was
provided under Project finance structures, in which project cash flows and assets, rather than
sponsors balance sheets, provide security to lenders. From a regulatory perspective, a strong
commitment to private power is a key determinant of PPF activity i n a country. Structurally
power project finance has involved largely build-own-operate (BOO) project structures and
long-term contract. Merchant power plants are rare. The vast majority of debt has involved
direct finance or credit enhancement from export credit agencies and multilateral
development banks. Development times average two to three years, and is less in countries
with PPF experience. The private sector uses a variety of mechanisms for managing risks. In
half of the projects examined it relied on central government guarantees. In the rest, it relied
on alternative mechanisms such as government loans, public insurance, local government
support, and strong commitments by utility off-takers. Private power continues to face many
challenges in developing countries. Protracted contract renegotiations and a lack of adequate
government risk assumption may erode investor confidence and restrain private investments.
Continued growth may require greater private debt capital risk taking. The primary drivers for
these FDIs have been:
Competition and anti-trust regulations, preventing major acquisitions in the domestic
markets.
The opening up of the domestic markets to international players, as a result of the
restructuring in a number of countries.
The stagnation of electricity demand in most developed markets, due to improved
energy efficiency.
The poor financial health of the power industry in many countries, which has resulted
in the opening up of many domestic markets to foreign private investments.
A pressure on profit margins, as a result of increased competition.
COMPARISON OF THE CHINESE AND INDIAN POWER SECTOR
The comparison of India was made with China because, India, when just independent, was
much similar to China in terms of demographics and infrastructure availability. China has
surged far ahead of India in its quest to satisfy the demand for power. China and India have
similar socioeconomic characteristics but distinct political setups. Unlike other emerging
economies, these countries also constitute two huge, unexplored markets for consumer
products. Both China and India are more heavily dependent on coal for electricity generation
than are the other developing Asian nations. China has been a role model, among the
developing countries, in carrying out reforms in various sectors in infrastructure.
The Demand – Supply Situation
Growth in electricity generation averaged 8% per annum during the last 15 years.
Nonetheless, electricity supply did not keep pace with growth in demand.
Strong projected growth in electricity demand in China results from two factors.
Increased need for rural electrification. The Chinese government is working to keep electric power growth in line with
economic growth.
Energy Consumption Projections for China
If electricity demand grows, as expected, at 8 to 9% per annum, China would need to
add about 18-20 GW of capacity per year10.
Even with a growth rate of 7% (low-case scenario), the growth in China‘s power
generating capacity will be about 16 GW per year. This still accounts for more than
20% of the world‘s new capacity.
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Under the base-case scenario, the projected mix of generating capacity indicates that
the share of thermal power will remain stable at about 75-78%. This translates into an
addition of about 15,000 MW/year to thermal capacity or an investment of
approximately $15 billion/year in thermal power.
More than 90% of this investment will be directed to coal-based power generation.
Given the projected huge increase in overall energy usage by 2020 (162 per cent), a
massive investment in other energy infrastructure.
By 2020 China will be consuming as much electricity as the U.S., although the latter will
achieve that level through a modest 33 per cent increase over the 23-year time frame.
POWER SECTOR REFORMS IN CHINA
The Chinese Ministry of Electric Power (MoEP) began reorganization and it had been
completely dismantled now. Along with many other ministries, its commercial and regulatory
functions have been divided and now rest in the hands of several different Chinese
organizations. State Power Corporation of China (SPCC): As part of the Chinese
Government's efforts to "separate government functions from enterprises" the SPCC
represents a wholly state-owned investment that controls approximately 80 per-cents of all
power assets in China. Encouraging the localization of production is this market has been a
key objective of the Chinese Government. SPCC's Main Duties in this Respect are:
Formulating China's electric power development strategies, legislation and policies,
including investment policy, technical policy and major energy production and
consumption policies.
Formulating unified energy industry planning in collaboration with the State
Development Planning Commission and other governmental agencies like CEC.
Supervising the implementation of related national policies, decrees and plans.
Providing services to regional and provincial electric power enterprises.
Reform policies adopted by the Chinese Government
China has a sound energy / electricity conservation record among developing countries.
Various measures to improve the efficiency of electricity use have been introduced in
attempts to reduce the need for new generating capacity, and these measures have been
successful, as is indicated by the low ratio of 0.86 for the elasticity of growth in electricity
demand to GDP growth achieved during the last decade.
Faced with fiscal revenue constraints, the government is now promoting a shift in the
energy conservation programs to rely more on market-based incentives and introduce
innovative and commercially based contractual and financing mechanisms.
The Government is also encouraging efficient energy use through reliance upon
energy price increases.
Significant progress has been made in many ways to simplify the tariff, improve its
structure and bring it into line with costs.
Consumer prices for electricity now reasonably reflect economic costs in many
provinces as time of use pricing is being done.
Tariffs in China's power sector
Both Provincial and Central authorities have purview over the formulation and approval of
electric power tariff rates. Tariff rate formula and application with regard to the grid system,
is an area expected to change with the issuance of new regulations introducing competition
into the grid. There are four kinds of tariffs.
State Base Tariff: It is also known as the catalogue price and generally only pertains to
older, state-financed plants.
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New Plan Tariff: It has a very complex formula and it applies to post-1985-built
plants).
Additional Quota Tariff: It varies from province to province and is based on the state
government‘s decision.
Financing in Chinese Power Sector
The International Energy Agency (IEA) estimates China will need to invest 2.765 billion into
the industry by 2030 to cope with demand – an estimated one quarter of the total global
energy sector investment within that period.
China has its own special set of barriers: investment controls incorporation rules,
usury laws, and lending rules, as well as unclear and changing CDM regulations.
All profits from future generation were remitted back to the government. Chinese
banks began to provide long term loan.
Foreign direct investment has played a critical role in financing the expansion of
China‘s electric power infrastructure and is expected to play an even more important
role in the future despite being restricted—for now—to strictly joint ventures
involving less than 50 per cent ownership.
Private investors have been involved in developing power projects through three main
methods:
- Joint ventures (JVs),
- Initial public offerings (IPOs) on stock exchanges, and
- BOT agreements.
Criteria for approval of foreign capital
The current power demand in the proposed region
The financing costs with regards to the international markets
Capability of the project to bear the tariff rate
Projects financial structure
Foreign exchange balancing plan
Scope of Chinese power plants to utilise foreign capital
Construction of new thermal (including co-generation) power plants.
Construction of new hydroelectric plants (including pumped storage units).
Construction of new nuclear power stations.
Power generation projects involving renewable energy or new technology.
Expansion of or the technological renovation of an existing power plant.
Rolling exploitation mechanism
A "rolling exploitation mechanism" means that the income from the first plant does not need
to be used for repayment of loans, but can be used for continued development of other power
projects. It is being employed for both hydropower and nuclear power to provide financing
for new projects.
FDI IN CHINA'S POWER SECTOR
To reduce chronic electricity shortages and enhance the efficiency of Chinese power plants,
China opened its doors to foreign direct investment (FDI). The volume and characteristics of
FDI in China's power sector, its impact on energy efficiency, and the factors that limit this
impact have the following characteristics:
The volume FDI in China's power sector fell below target during 1995 - 2000 by a
substantial margin, most likely because of persistent institutional barriers to FDI.
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To avoid the lengthy central government approval process for large plants and to
minimize risk, early FDI tended to be in small-scale, gas- and oil-fired plants using
imported equipment and located in coastal provinces. However, more recent FDI tends to
be in larger coal-fired plants that use more Chinese equipment and tends to be located in
the north as well as the east.
FDI in china is likely having a significant positive impact on energy efficiency. Almost a
third of the 20 FDI plants in our survey sample use advanced efficiency enhancing
generating technologies, and a fifth are cogeneration plants.
Institutional bias in favour of small-scale plants has hampered the contribution of FDI to
energy efficiency and Uncertainty associated with the approval process of FDI projects,
electricity sector regulation, and the risk of default on power purchase contracts.
The institutional arrangements available for FDI in the Chinese power sector are: