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PPA BETWEEN BSES ANDHRA POWER Ltd. and APTRANSCO

PPA BETWEEN BSES ANDHRA POWER Ltd. and APTRANSCO. Presentation by K. Raghu Associate President APSEB Engineers’ Association Dt: 16/01/2002. This presentation consists of. Load forecast-Need for additional power. Availability of gas reserves in K-G basin.

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PPA BETWEEN BSES ANDHRA POWER Ltd. and APTRANSCO

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  1. PPA BETWEENBSES 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 NTPC’s 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 T&D 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 scenario……………40.00BCM.

  8. Requirement of gas • A) Existing Plants: • APGPCL 1&2 (272MW) • GVK (216MW) • SPECTRUM (208MW) • KONDAPALLY(355MW) • TOTAL = 1051 MW. • Therefore, gas required for the existing plants @ 0.005 MCMD per MW = 1051X 0.005 =5.255. • Gas required per year = 5.255X365=1918MCM. • I.e 1.918 BCM. • @ 85%plf gas requirement will be =0.85X1.918=1630.36MCM= 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 = 8.53X365=3113MCMD= 3.113BCM • @ 85%plf gas requirement will be =0.85X3.113=2.64 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)),scheduled 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 risk…and 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 up“short 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)x100=6.25%. • In real terms the increase in fixed cost = 597x0.876x6.25x0.99/100=Rs 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 85/80-99=6.187 paise. • 2. Effect of increasing the debt repayment period from 9 to 11 years = 0.006x48x100x2/9=6.40 Paise. • 3. Effect of increasing the capacity from 200MW to 220MW=(220/200)x99-99=108.9-99=9.9 paise. • 4. Effect of provision for increase in capacity by 5%=1.05x108.9-108.9=5.44 paise. • Total increase = 6.187+6.40+9.9+5.44=27.92 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 0.699+$0.006 cheaper?

  28. Fixed cost for similar project-Is 0.699+$0.006 cheaper?

  29. Fixed cost for similar project-Is 0.699+$0.006 cheaper? • Average fixed cost for the identical project = 1662.66/15= Rs 110.844 Crore • Fixed cost per unit @ 85 PLF = 110.844/(220*0.876*0.85)=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.

  30. What should be the Fixed cost for BAPL? • Average fixed cost to be allowed = Rs 110.844Crore. • @ 85% plf fixed cost per unit = 110.844/(220*0.876*0.85) = 67.66 Paise. • Since the O&M contract provides for 92% PLF, the fixed cost per unit shall be 67.66*85/92= 62.51paise. • If 5% increase in installed capacity is allowed, fixed cost recovery per unit shall be 62.51/1.05=59.53 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 115/700x100=16.42% 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 GSA“FALL 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 80:20 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 (163+23.16)=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 & O&M contracts. • Various technical parameters specified in the Equipment Supply and O&M 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 & O&M contracts. • This will unduly benefit the IPP, as all the benefits from EPC and O&M 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 O&M 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 90%PLF, the IPP will not only collect incentive from APTRANSCO but also gets benefited from the penalty levied on O&M 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 Board’s 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 92%PLF as per O&M 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 O&M 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

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