The Hindu Business Line : Power project promoters sourcing equipment directly

Bangalore, Sept. 16 Power project promoters have begun sourcing equipment directly from suppliers departing from the practice of inviting engineering, procurement and construction (EPC) contracts through the competitive bidding process.

The shift to directly sourcing equipment has been largely influenced by discounts global equipment suppliers, particularly Chinese makers, offer.

Global suppliers of boiler turbine and generator (BTG) sets are offering large discounts to offset the impact of a slowdown in offtake.

Capital costs

Companies that have taken advantage of the discounts include power producers such as JSW Energy Ltd that is implementing projects in Rajasthan (1,080 MW), Maharashtra (1,200 MW) and Karnataka (600 MW).

JSW’s Group Chief Financial Officer, Mr Krishna Deshika, said, “We have saved about 15 per cent of implementation costs using this method.”

Direct sourcing of equipment implies lower cost per MW. In the case of JSW’s Maharashtra project in Ratnagiri, the capital costs were just Rs 3.75 crore/MW. Projects implemented through the EPC route have seen capital costs in excess of Rs 4.5/MW. BTG for this project was sourced from China’s Shanghai Electric Corporation.

Independent power producers’ (IPPs) efforts to capitalise on the global BTG equipment capacity surpluses were triggered by the migration to a tariff bidding process.

Tariff bids implied that bulk buyers, especially state-owned grids, invited bids for power supplies on a long-term contract on the basis of the lowest tariff offered.

Consequently, IPPs opted for cutting back project implementation costs. Currently, equipment and building project infrastructure comprises at least 70 per cent of the overall capital costs. This, in turn, implied that reduced project costs translated into lower tariffs without compromising on equity returns.

Equipment guarantees

However, despite direct sourcing of BTG packages, equipment guarantees remain unchanged, industry sources. This was in view of the tight debt funding terms imposed.

Typically, project financiers insist on minimum performance guarantees for ensuring bankability.

The guarantees were to ensure that project debt servicing was fully secured. This was particularly since most IPPs are funded on a non-recourse or project recourse basis. This implied that financiers had recourse only to project cash flows in the event of loan delinquencies.

Besides, all contracted bulk purchase arrangements were done on a “take or pay” basis. This arrangement ensured that projects were assured of minimum cash flows even when asked to back down.

Conversely such arrangements also meant that power producers be available when buyers wanted to draw energy supplies.

Slippages in contracted availability implied that power producers would have to incur steep penalties to compensate for consequential losses. This, in turn, raised project debt risks where 75 per cent of funding was through debt.

However, Mr Deshika said, “BTG suppliers provide minimum guarantees the heat rate.”

Heat rate is the efficiency with which heat can be used to produce electricity. This provides assurance for project promoters against potential plant failures.

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