Investment Opportunity and ChallengesUltra Mega Power Projects

May 2006

Navin Wadhwani

“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

Ultra Mega Investment for

Ultra Mega Power Projects

Requiring a total of~Rs 100,000 cr

With Rs 25,000-30,000 crEquity investment

Past: Power sector liberalisation

Present: India Rising

Future: Ultra Mega Power Projects

Significant interest generated in 1990s

Domestic Players Foreign Players

Tata Power

Enron

AES

Cogentrix

CMS Energy

CLP

PowerGen

PSEG

EDF

J Power

BSES

Aditya Birla

Essar

Ispat

Nagarjuna

Hinduja’s BPL

GMR

GVK

National Power

Clutch of Foreign and Indian players were vying to get a slice of the power play in 1990s

Lanco

Torrent

Jindal

National Grid

NTPCNHPC

CESC

Appollo

RWE

Eastern Generatio

n

Marubeni

United Utilities

Videocon

JP Group

Mirant Corp

Daewoo

OgdenBayerwerk

View

Tractebel

Mission

Energy

VEWEnergie

NRG

Pacgen

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

Only few focused players remain

Domestic Players Foreign Players

Tata Power

AES

CLP

Genting

Reliance

Energy

Ispat

GMR

GVK

Essar

Lanco

Torrent

Jindal

NTPCNHPC

CESC

Bhilwara

Appollo

Entry through acquisition

route

Limited presence of foreign investors in the sector

Some domestic players have

displayed strong development

skills

Past: Power sector liberalisation

Present: India Rising

Future: Ultra Mega Power Projects

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

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

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

Capital market support to power sectorMarket has rewarded domestic players

Mar

ket

Cap

ital

izat

ion

Rs

cro

re

109,211109,211

May 2003May 2000 May 2006

625625

3,9353,935

370370

2,5912,5913,0103,010

351351155155

11,12511,12512,44812,448

1,7931,7932,7282,728

7397391,8831,883

Tata PowerTata Power Reliance EnergyReliance Energy TorrentTorrent CESCCESC NTPCNTPC

GVKGVK JaiprakashJaiprakash

Significant in

crease in M

arket Capita

lizatio

n

leading to w

ealth creatio

n

Source: BloombergSource: Bloomberg

(Chart not to scale(Chart not to scale))

185185

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. croreRs. crore

Source: Bloomberg, Source: Bloomberg, News reportsNews reports

Past: Power sector liberalisation

Present: India Rising

Future: Ultra Mega Power Projects

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

Potential financing avenues

Requiring a total of~Rs 100,000 cr

With Rs 25,000-30,000 crEquity investment

FinancialInvestors

Debt Financing

Leveraged StructuresTarget large Target large Infrastructure focused Infrastructure focused PEH for last mile PEH for last mile financingfinancing

Extended tenuresExtended tenures

Mezzanine debt / structured Mezzanine debt / structured financingfinancing

Given the large quantum of financing required an optimal mix of multiple sources of financing is quite essential

Strategic ForeignInvestor

Providing capital & Providing capital & technical know-howtechnical know-how

Equity Capital MarketsFund raising through booming Fund raising through booming capital marketscapital markets

DomesticDeveloper

Focused power & Focused power & infrastructure infrastructure companies with companies with proven track recordproven track record

Global interest being generated

UMPP road shows generating interest – Key players

Domestic Players Foreign Players

NTPC AESCLP

Korea Electric

Reliance

Energy

Tata Power

EssarTorrent

GMR

GVK

Jai Prakas

h

Jindal Steel and

Power

Mitsui and

CompanySuez

Energy

Sumitomo Corp.

Aditya Birla

PowerVideo-con

Siemens

Itochu

Energy Infra.

Alstom

ABB

Caterpillar

Tronoh Alco

Combine

Duncan Machneil

EDF

Positive interest from Domestic Players though limited/ cautious interest from foreign players

Includes equipment suppliers

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

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

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

1

2

3

4

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)

Ultra Mega Investment for

Ultra Mega Power

Requiring a total of~Rs 100,000 cr

With Rs 25,000-30,000 crEquity 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