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Investment Opportunity and Challenges Ultra Mega Power Projects May 2006 AFG Navin Wadhwani.

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Presentation on theme: "Investment Opportunity and Challenges Ultra Mega Power Projects May 2006 AFG Navin Wadhwani."— Presentation transcript:

1 Investment Opportunity and Challenges Ultra Mega Power Projects May 2006 AFG Navin Wadhwani

2 “If you are a global company and India is not part of your plan, then you have missed the bus” Dr. Manmohan Singh, Indian Prime Minister “We need to show the world the changes in the power sector” Mr. R. V. Shahi, Power Secretary

3 Ultra Mega Investment for Ultra Mega Power Projects Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment

4 Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects

5 Significant interest generated in 1990s Domestic Players Foreign Players Tata Power Enron AE S Cogentri x CMS Energy CLP PowerGen PSEG EDF J Power BSES Aditya Birla Essar Ispat Nagarjun a Hinduja’ s BPL GMR GVK Nationa l Power Clutch of Foreign and Indian players were vying to get a slice of the power play in 1990s Lanco Torrent Jindal Nationa l Grid NTPC NHPC CESC Appoll o RWE Eastern Generatio n Marubeni United Utilities Videocon JP Group Mirant Corp Daewoo Ogden Bayerwerk View Tracteb el Mission Energy VEWEnergie NRG Pacgen

6 Delays in decision making and project implementation Poor financial health of the State Electricity Boards –High T&D losses –Retail tariffs not cost reflective No independent regulatory structure/ framework in place –PPA renegotiation Problems with project configurations –Focus more on contracts rather than tariff competitiveness –Sub-optimal plant operating normative parameters –Focus on liquid fuel/ gas based projects rather than coal based projects Acquisition of “Mega Watts” as a driver to increase global presence proved to be an unsustainable strategy for MNCs –Change in strategy to focus on domestic/ concentrated geography –Global consolidation Though interest could not be sustained

7 Only few focused players remain Domestic PlayersForeign Players Tata Power AES CLP Gentin g Relianc e Energy Ispat GMR GVK Essar Lanco Torrent Jindal NTPC NHPC CESC Bhilwara Appoll o Entry through acquisition route Limited presence of foreign investors in the sector Some domestic players have displayed strong development skills

8 Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects

9 Winds of change: In recent years Power sector Introduction of Electricity Act 2003 and establishment of regulatory framework Dabhol restructured and resolved – demonstrating Government’s ability to take tough decisions Evolution of Indian promoters and emergence of focused power and infrastructure players A high volume and low margin play recognized in the power sector Relative improvement in financial position of SEBs Competitive tariff based power projects

10 Winds of change: In recent years Other areas GDP growth rate of 8% p.a. –Infrastructure development identified as core to achieving sustainable high GDP growth rate Buoyant capital markets with the BSE Sensex crossing the landmark 10,000 mark –Significant increase in market capitalisation and successful IPOs of of power companies Airports privatized (Mumbai, Delhi) in spite of serious resistance – demonstrating Government’s ability to take tough decisions Impetus on improving fuel supply/ sufficiency (e.g. NELP VI, CBM III, Budget proposal to de-block coal reserves) India’s economy is projected to be the fastest growing economy in the period to 2050

11 Fifth-largest and fastest growing market for Pepsi Bharti is amongst Warburg’s most successful investments (~ US$ 2bn realized from part stake sale), including sale of stake to Vodafone Contributes c. 12% of Unilever’s global profits GE realized US$ 500mn from 60% stake sale in its BPO arm Amongst the fastest growing markets for Coke in the past decade (19% CAGR) Temasek investments in India are approaching US$ 2bn India is averaging above 15% of the group profits of Standard Chartered In a study by FICCI, 77% of foreign investors in India were found to be profitable Foreign players have created wealth across sectors… Other sectors have attracted investments

12 Capital market support to power sector Market has rewarded domestic players Market Capitalization Rs crore 109,211 May 2003May 2000May , ,591 3, ,125 12,448 1,793 2, ,883 Tata Power Reliance Energy TorrentCESCNTPC GVKJaiprakash Significant increase in Market Capitalization leading to wealth creation Source: Bloomberg (Chart not to scale ) 185

13 Capital market support to power sector Positive response from the capital markets to public issues in the power sector More IPOs on the anvil – –PFC, NHPC, GMR Successful raising of funds through FCCBs/GDR route – –CESC GDR issue (Rs.180 crore) – –Tata Power FCCB issue (Rs.900 crore) Successful listing of power companies Rs. crore Source: Bloomberg, News reports

14 Past: Power sector liberalisation Present: India Rising Future: Ultra Mega Power Projects

15 Overview of UMPP Ultra Mega Power Projects MoP, CEA and Power Finance Corporation are working together on developing seven ultra mega power projects under tariff based competitive bidding route Projects will be awarded on Build, Own and Operate (BOO) basis Each with a capacity of 4000MW with scope of further expansion Role of Ministry of Power MoP is playing an important role as a facilitator to coordinate with concerned Ministries/ agencies and State Governments for ensuring: –Coal block allotment/ coal linkage –Environment/ forest clearance –Required support from State Government and its agencies –Financial closures by Financial Institutions –To facilitate PPA and proper payment security mechanism with State Govt./ State Utilities –Monitoring the progress of Shell Companies w.r.t. predetermined timelines

16 Potential financing avenues Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment Financial Investors Debt Financing Leveraged Structures Target large Infrastructure focused PEH for last mile financing Extended tenures Mezzanine debt / structured financing Given the large quantum of financing required an optimal mix of multiple sources of financing is quite essential Strategic Foreign Investor Providing capital & technical know-how Equity Capital Markets Fund raising through booming capital markets Domestic Developer Focused power & infrastructure companies with proven track record

17 Global interest being generated UMPP road shows generating interest – Key players Domestic PlayersForeign Players NTPC AES CLP Korea Electric Relianc e Energy Tata Power EssarTorrent GMR GVK Jai Prakas h Jindal Steel and Power Mitsui and Company Suez Energy Sumitomo Corp. Aditya Birla Power Video- con Siemen s Itochu Energy Infra. Alstom ABB Caterpilla r Tronoh Alco Combine Duncan Machneil EDF Positive interest from Domestic Players though limited/ cautious interest from foreign players Includes equipment suppliers

18 Key investor concerns/ issues Will the Government deliver this time –Delays in project implementation Poor financial health of the SEBs –Availability adequate payment security mechanism Regulatory Risk – Reopening of PPA’s Key issues raised based on past experience Transmission capabilities to evacuate and transmit power across States Timely availability of captive mine Fuel supply arrangement for imported coal projects Poor financial health of the SEBs – –Availability adequate payment security mechanism Partnership with domestic players involving huge financial commitment – –Control/ ownership issues Risk/ return profile Key issues in context of UMPP Initiative

19 Government initiatives Some past concerns proposed to be mitigated Delays in project implementation Poor financial health of the SEBs Regulatory Risk – Reopening of PPA’s Problems in project configurations SPVs created to ensure initial requirements of sanctions and securing clearances Ministry of Power coordinating with concerned ministries/agencies Adequate payment security mechanisms being proposed Electricity Act 2003 Open access in transmission Tariff based bidding Competitive tariff structures Focus on coal based projects MitigantsPast concerns

20 Key pre-requisites for successful delivery Timely delivery of project development milestones committed by Government (e.g. consents, approvals, land acquisition etc) Bankable payment security mechanisms Reliable and effective power evacuation systems to enable transmission across states Delivery of captive coal mines Fuel price risk mitigation for the Coastal imported coal based power projects Regulatory clarity – mitigate regulatory risk

21 1234 Suggested Approach To achieve successful investment in UMPPs One on one investor interaction – Would lead to higher investor confidence 2 staged approach for implementing UMPPs – Successfully award 2-3 projects and then garner greater interest for the balance projects Phased manner of project development - Will reduce stress on financing Key pre- requisites to be put in place (e.g. Bankable payment security mechanism, Fuel supply etc)

22 Ultra Mega Investment for Ultra Mega Power Requiring a total of ~Rs 100,000 cr With Rs 25,000-30,000 cr Equity investment Limited window of opportunity to attract long-term equity participation in the growth of Indian power sector Repeat/ replicate the success achieved in other sectors Opportunity and Challenge


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