SUMMER INTERNSHIP REPORT

Transcription

1 SUMMER INTERNSHIP REPORT PROJECT APPRAISIAL AND FINANCIAL MODELLING OF A THERMAL POWER PLANT UNDER THE GUIDANCE OF Mrs Indu Maheshwari, Dy Director, CAMPS, NPTI & Mrs. Priya Kumar, Senior Manager, Project Division, Power Finance Corporation Limited At Power Finance Corporation, New Delhi Submitted By Ankit Doveriyal Roll No. 15 MBA (POWER MANAGEMENT) (Under ministry of Power, Govt. of India) Affiliated to MAHARSHI DAYANAND UNIVERSITY, ROHTAK AUGUST 2013

2 DECLARATION I, Ankit Doveriyal, Roll No 15, student of MBA-Power Management ( ) at National Power Training Institute, Faridabad hereby declare that the Summer Training Report entitled PROJECT APPRAISIAL AND FINANCIAL MODELLING OF A THERMAL POWER PLANT is an original work and the same has not been submitted to any other Institute for the award of any other degree. A Seminar presentation of the Training Report was made on and the suggestions as approved by the faculty were duly incorporated. Presentation In-Charge (Faculty) Signature of the Candidate Countersigned Director/Principal of the Institute i

3 ACKNOWLEDGEMENT It is often said that life is a mixture of achievements, failures, experiences, exposures and efforts to make your dream come true. There are people around you who help you realize your dream. I acquire this opportunity with much pleasure to acknowledge the invaluable assistance of Power Finance Corporation and all the people who have helped me through the course of my journey in successful completion of this project. I wish to express my sincere gratitude to my Company Guide, Mrs. Priya Kumar (Senior Manager, Project Appraisal Division, PFC) for her guidance, help and motivation. Apart from the subject of my study, I learnt a lot from her, which I am sure, will be useful in different stages of my life. I would like to thank Mrs. Shweta Vithal (Dy Manager, Project Appraisal Division) for her help in understanding and formulating the model design and methodology as well as help me in acquitting to the Power Sector and clearing my concepts and Mr. Natesh Sarma (Officer, Project Appraisal Division) for his review and helpful comments. I would like to thank Mr. Rakesh Mohan, Senior Manager (HR) for providing me with this wonderful opportunity to work at Power Finance Corporation. I express my thanks to Mrs. Indu Maheshwari, Dy. Director, Faculty guide, NPTI for her kind cooperation during the period of my summer internship. I feel deep sense of gratitude towards Mr S.K.Chaudhary, Principal Director, CAMPS(NPTI), NPTI and Mrs. Manju Mam, Director, Mrs. Indu Maheshwari, Dy. Director, NPTI for arranging my internship at Power Finance Corporation and being a constant source of motivation and guidance throughout the course of my internship. I am grateful to my friends who gave me the moral support in my times of difficulties. Last but not the least I would like to express my special thanks to my family for their continuous motivation and support. Regards, Ankit Doveriyal Class of (NPTI) ii

4 EXECUTIVE SUMMARY Rapid economic growth has increased the burden of India s infrastructure, one of the country s week spots. An infrastructure deficit is widely considered to be one of the factors that could severely affect the economic growth of the country. In the past few years, policy makers have recognized the importance of infrastructure in economic growth and have made concrete efforts to accelerate infrastructure development. Power Sector continues to lag behind despite the introduction of progressive measures. Power shortages, increased tariffs, shortage of coal and dependence on imported fuel are on rise, while the poor health of the distribution continues to inhibit the inflows of investments which have possessed growth risk for the Indian Electricity Sector. India's demand for electricity is likely to cross 300 GW, in few years earlier than most estimates. Meeting this demand will require a fivefold to tenfold increase in the pace of capacity addition. With the growing demand of power, there is huge potential of investment in power sector of India. The power sector which is in the concurrent list of the Indian Constitution is under the purview of both the central government and the state government. The power sector which was earlier dominated by public sector undertaking is now seeing effective participation of the private sector which is now accountable for 28% of power generation in the country. Power Finance Corporation Ltd. (PFC) a public financial institution established In 1986 by the Ministry Of Power as a Financial Institution (FI) to provide financing solution to large capital intensive power project across India including generation, transmission, distribution and RM&U projects. My Summer Internship Project is Project & Entity Appraisal of Thermal Power Plant. It resolves around the appraisal of the power project promoted by the company ABC Power Limited, which has come for financial assistance of its Capital Expenditure and Working Capital Requirements. The project is being appraised after evaluating it on the various parameters set by Central Electricity Regulatory Commission (CERC) and the set parameters at PFC. My work also include appraisal of Promoters of the project which is based on set parameters at PFC.The aim of the appraisal is to finally arrive at the decision: whether PFC should finance the project or not. As per the guidelines of PFC the project is evaluated into two parts: Project Appraisal and Entity Appraisal. The format of the project report will be in the form of Agenda Note as per PFC norms. Project Appraisal is carried out by Project Appraisal Department which evaluate the financial and technical viability of the project. iii

5 Entity Appraisal is carried out by Entity Appraisal Department and involves evaluation of the promoter of the company on its financial flexibility and stability, the analysis of their business operations and the competence of the management. In the end the project involves the subjective analysis on both Project & Entity fronts and come up with the risk involved. The project reports ends with the Recommendations on whether to finance the project or not. iv

6 LIST OF ABBREVIATIONS BTG BU CEA CERC COD DPR EPC FSA FTA GCV GoI IPP IDC Kcal KV KWh MoP MoEF NOC O&M PFC PGCIL PLF PPA REC Boiler, Turbine & Generator Billion Units Central Electricity Authority Central Electricity Regulatory Commission Commercial Operation Date Detailed Project Report Engineering, procurement & construction Contract Fuel Supply arrangement/agreement Fuel Transport Agreement Gross Calorific Value Government of India Independent Power Producer Interest During Construction Kilo Calories Kilo Volts Kilo Watt Hour Ministry of Power Ministry of Environment & Forest No Objection Certificate Operations & Maintenance Power Finance Corporation Ltd. Power Grid Corporation of India Limited Plant Load Factor Power Purchase Agreement Rural Electrification Corporation v

7 LIST OF FIGURES Figure 1: Power Sector Structure...4 Figure 2: Energy Production in Billion kwh (2010)..5 Figure 3: All India Generation capacity.7 Figure 4: Business Strategy of PFC.13 Figure 5: Project Finance Structure..19 Figure 6: Actual power supply position in Tamil Nadu...40 vi

8 LIST OF TABLES Table 1: All India Region wise generation capacity..6 Table 2: Different Rating by major rating agencies.11 Table 3: Sanctions & Disbursements for the respective financial years..14 Table 4: Major Projects Funded by PFC..14 Table 5: Financial Highlights for the year Table 6: Approvals and Agreement Status...22 Table 7: Preliminary appraisal. 24 Table 8: Detailed Appraisal..26 Table 9: Approval and Agreement Status...38 Table 10: Project Cost Details..39 Table 11: Power requirement and availability for Tamil Nadu 40 Table 12: Project details...41 Table 13: Snapshot of project financial projections.45 Table 14: Sensitivity analysis sheet.46 vii

9 TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENT ii EXECUTIVE SUMMARY. iii LIST OF ABBREVIATIONS... v LIST OF FIGURES. vi LIST OF TABLES.. vii CHAPTER 1: INTRODUCTION INDIAN POWER SECTOR POWER SECTOR REFORMS INTRODUCTION TO INDIAN POWER SECTOR POWER SECTOR: DEVELOPMENTS & CURRENT STATUS MAJOR ISSUES INITIATIVES OPPORTUNITIES...9 CHAPTER 2: COMPANY PROFILE BACKGROUND MISSION CREDIT RATINGS OBJECTIVE OF PFC CLIENTS OF PFC RANGE OF SERVICES REFORMS SWOT ANALYSIS CHAPTER 3: OBJECTIVE AND SCOPE OBJECTIVE OF THE PROJECT SCOPE viii

10 CHAPTER 4: LITERATURE REVIEW AND RESEARCH METHODOLOGY LITERATURE REVIEW PROJECT FINANCE PROJECT APPRAISAL CALCULATION OF TARIFF RESEARCH METHODOLOGY...21 CHAPTER 5: PROJECT APPRAISAL & FINANCIAL MODELLING GUIDING PRINCIPAL FOR PROJECT APPRAISAL PROJECT & ENTITY APPRAISAL FINANCIAL MODELLING..28 CHAPTER 6: CASE STUDY PROJECT PURPOSE & SCOPE PROJECT DETAILS PROJECT COST CHAPTER 7: RISK ANALYSIS & SWOT ANALYSIS RISK ANALYSIS SWOT ANALYSIS LIMITATIONS..50 CHAPTER 8: CONCLUSION, RECOMMENDATION & LEARNING CONCLUSION RECOMMENDATIONS LEARNING BIBILIOGRAPHY ANNEXURE ix

11 CHAPTER 1: INTRODUCTION 1.1. INDIAN POWER SECTOR Electricity is one of the most vital infrastructure inputs for economic development of a country. The demand of electricity in India is enormous and is growing steadily. The vast Indian electricity market, today offers one of the highest growth opportunities for private developers. At the time of independence in 1947, the country had a power generating capacity of 1,362 MW. Prior to independence the power sector was regulated by The Indian Electricity Act, 1910 which was the first basic legal framework for the electricity sector in the country. Supply of energy was the main concept around which various provisions were woven. The act talked about the Licence for generating and supplying electricity, Competition in generation and supply areas, Framework of wires and works, Licensee and Consumer relationship, Safety Measures and Theft of electricity in the power sector. Post independence our priorities changed, the supply of electricity which was limited to cities and towns was to be spread across the country, especially in rural areas. This was seen as a social responsibility of the Government to provide electricity to all. Thus The Electricity Supply Act, 1948 was passed in the Central legislature to facilitate the establishment of regional co-ordination in the development of electricity which envisaged formation of State Electricity Boards (SEB) as an arm of State Government to discharge their responsibility of providing electricity to all. The act mandated that every State shall constitute a SEB. SEB s were entrusted with the task of developing power generation, transmission as well as distribution facilities. The Act also called for formation of Central Electricity Authority (CEA), which was envisaged as the main technical arm of the Central Government. It also had to perform the role of technical advisor to the State Government, SEB, Generation Company or any other agency and form regulations on certain aspects of which the most important was the technoeconomic clearance of generation projects. However, in 1970s SEBs started making losses largely on account of political interference, mismanagement and inefficiencies in operations. Flat rate tariff (near zero usage charge) were introduced for the agricultural connections and high tariff was imposed on industrial & commercial users, such cross-subsidy led to increase in theft and the losses increased. As the boards were not able to make money, they became increasingly dependent on the government for funding. Because of the shortage of funds, SEB s were unable to increase generation capacity and were not maintaining their assets. Therefore, SEB s went into a vicious cycle that led to further drop in the performance of their operations and subsequently increased their losses. In 1980s, the SEBs were able to show about 3% of statutory returns with the help of flawed accounting system but in practice the accruals were not sufficient for growth and the boards sought assistance from state governments. In this situation, the government decided to create central generating utilities i.e. National thermal power corporation (NTPC) & National Hydro Power Corporation (NHPC) to improve the condition of power sector. The government also tried to connect the generating entities scattered all over the country non-uniformly 1 P age

12 by forming The National Grid and thus trying to overcome generation demand supply gap prevalent in different states. In response to the balance-of-payment crisis in 1991, the government of India decided to open up various sectors in the economy including power sector. The power generation sector was de-licensed and the private parties were allowed to setup generating facilities. The change in notification gave numerous incentives to private sector such as 16% return on equity for plants that operated at plant load factor (PLF) of 68.5%, five year tax holiday, two part tariff, equity requirements as low as 20% of project cost and selective guarantees from central government for payment default by SEBs. This liberal set of policies initially created excitement among the private investors to setup plants. However, the excitement soon subsided because of the large political risks and payment capacity of the already bleeding SEBs. The state board s losses were increasing mainly due to theft and had to increasingly depend upon government subsidy. Less than 17,000 MW were added vis-à-vis a planned addition 40,000 MW in the period Further, such generous incentives given by the government to the foreign investors wherein almost all the risks were borne by the state board drew lot of criticism. SEBs were earning 12.2% internal rate of return on their own plants and therefore paying 16% return to IPPs which did not make sense. Under the 1910 and 1948 Acts, powers of regulation including tariff regulations were vested on the Government. This concentration of power in the Government and Government organizations resulted in inefficiencies of various sorts, the most prominent manifestation was being lack of rational and professional approach to tariff fixation. As part of reforms strategy, it was, therefore, considered necessary to distance the sensitive aspect of tariff regulation from the political executives on the independent Regulatory Commissions. Thus, Government brought in The Electricity Regulatory Commissions (ERC) act, 1998 which was the first step taken by the government to move itself away from the regulatory aspect of the power sector and fixation of tariff for the energy being used by the consumer. By this act the various losses occurring at the SEBs level and the bottleneck caused due to bureaucracy prevalent in the government organizations and political interference were tried to minimize by formation of Central Electricity Regulatory Commissions (CERC) at central level and State Electricity Regulatory Commissions (SERC) at every state. The CERC and SERC had main responsibility of tariff determination for Central Government and State Government owned generating stations respectively. Bullish economic growth story of any country depends on a robust power generation & delivery model POWER SECTOR REFORMS THE ELECTRICITY ACT 2003: A REVOLUTION Competition with regulatory oversight is the framework around which the Electricity Act, 2003 is woven - competition to encourage efficiency in performance and regulatory oversight, to safeguard consumer s interest and at the same time ensure recovery of costs for the investors. The journey of distancing of Government from regulations that started in 1998 has culminated in The Electricity Act of According to the new law The 2 P age

13 Government is distanced from all forms of regulation, viz., licensing, control over generation, captive generation, tariff fixation etc. Now the Government remains there only as a facilitator. The Act talks about the need and ways of implementing Competition in the power sector while considering the concerns associated with it, about the electrification of rural areas and about liberalization of power sector. While Liberalization is the mantra, the Electricity Act does not encourage an unbridled growth for the sector. The regulatory Commission have been envisaged as the watchdogs which have a responsibility to put a check on the cost of generation through powers to regulate tariffs for supply of electricity from a generating company to the distribution licensees on long term power purchase agreements, as also with power to look into the costs of generation. The act also provides the bases for formation of National Electricity Policy (NEP), National Tariff Policy (NTP), Rural Electrification, Open access in transmission, phased open access in distribution, Mandatory SERCs, licence free generation and distribution, power trading, mandatory metering and stringent penalties for theft. SERCs provide Regulatory guidelines on quality of service standards that are to be achieved and maintained by the utility and ensure their compliance by providing for Complaint Redressal Mechanism & Appointment of Ombudsman. SERCs mentions about the consequences that are to be followed by the utility for non-compliance of the guidelines NATIONAL ELECTRICITY POLICY In pursuance of the provisions of the Electricity Act, 2003 the Central Government came out with National Electricity Policy on 6th February The policy prescribes the following objectives: Providing universal access in next five years for which significant capacity addition and expansion would be required. Meeting the demand fully by 2012 and to have spinning reserves after meeting peak requirements. Bringing about improvements in quality of supply at reasonable rates. Increasing per capita availability to over 1000 kwh per year by Ensuring a minimum lifeline consumption of 365 kwh per year per household as a merit good by Financial turnaround and attainment of commercial viability of all entities in the sector. Protection of consumers interest NATIONAL TARIFF POLICY In pursuance with section 3 of the Electricity Act 2003, the Central Government notified the Tariff Policy on 6th January According to the Act, the CERC and SERCs are to be guided by the Tariff Policy in framing its regulations. It lays out the following objectives: Ensuring availability of electricity to consumers at reasonable and competitive rates; 3 P age

14 Ensuring financial viability of thee sector and attracting investments; Promoting transparency, consistency and predictabilityy in regulatory approaches across jurisdictions and minimizing perception of regulatory risks; ; Promoting competition, efficiency in operations and improvemeni nt in quality of supply RURAL ELECTRIFICATION POLICY Electricity has been recognized as a basic human need. It is the key to accelerating economic growth, generation of employment, eliminationn of poverty and human development especially in rural areas. The Rural Electrification Policy was notified in August 2006, with the objective of improving access and quality of electricity supply in rural areas so as to ensure rapid r economic development by providing p electricity as an input for productive uses in i agriculture, rural industries etc. For this the Central government has launched in April, 2005 an ambitious scheme Rajiv Gandhi Grameen Vidhyutikaran Yojana (RGGVY) aimed d to establish Rural Electricity Distribution Backbone (REDB) with w at least a 33/11 KV substation; Village Electrification Infrastructure (VEI) with at a least one Distribution transformer in a village or hamlet; Stand alone grids with generationn where grid supply is not feasible. Subsidy towards capital expenditure too the tune of 90% is channelizedc d through REC, which is a nodal agency for f implementation of the scheme. Electrification of f 1500/- per connection in all rural habitations. The Management of Rural Distribution is undertaken through franchisees. A three-tier quality monitoring has been built into the electrified Below Poverty Line (BPL) households is financed with 100% capital subsidy scheme. RGGVY has thuss resulted in huge investments s in providing electricity connections in rural India INDIAN POWER SECTOR STRUCTURE Figure 1: Power Sector Structure Source: powermin.gov.in 4 P a ge

15 1.3 INTRODUCTION TO INDIAN POWER SECTOR Electricity is one of the most vital infrastructure inputs for economic development of a country. The demand of electricity in India is enormous and is growing steadily. The vast Indian electricity market, today offers one of the highest growth opportunities for private developers. Since independence, the Indian electricity sector has grown many folds in size and capacity. The generating capacity has increased from a meagre 1,362 MW in 1947 to more than 225,113 MW by May 2013, a gain of almost 200 times in capacity addition. India's per capita energy consumption is 778kWh in a rise of almost 400 percent since Although, India's energy consumption per unit of output is still rising, but it is expected to level off and to decline in the future. India consumes two-thirds more energy per dollar of gross domestic product (GDP) as the world average. India consumes only about 18 percent of the energy per person as the world average. Over 65 per cent of India's electricity is produced in thermal facilities using coal or petroleum products. Almost 19 per cent electricity is generated by hydroelectric facilities. In its quest for increasing availability of electricity, the country has adopted a blend of thermal, hydro and nuclear sources. Out of these, coal based thermal power plants and in some regions, hydro power plants have been the mainstay of electricity generation. Of late, emphasis is also being laid on non-conventional energy sources i.e. solar, wind and tidal which constitutes about 12 percent of the total energy generation. 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, ,326 Figure 2: Energy Production in Billion kwh (2010) 4,207 1,145 1, Source: wikipedia.org India is one of the main manufacturers and users of energy. Globally, India is presently positioned as the fifth largest manufacturer of energy, representing roughly 2.4% of the overall energy output per annum. It is also the world s fifth largest energy user, comprising about 3.3% of the overall global energy expenditure per year. In spite of its 5 P age

16 extensive yearly energy output, Indian Power Sector is a regular importer of energy, because of the huge disparity between oil production and utilization. Usually energy, especially electricity, has a major contribution in speeding up the economic development of the country. The existing production of per capita electricity in India is above 778 kwh per annum. Ever since 1990s, India s gross domestic product (GDP) has been increasing very rapidly and it is estimated that it will maintain the pace in couple of decades. The rise in GDP should be followed by an increase in the expenditure of key energy other than electricity. The gross electricity production capability of Indian Power Sector is placed at around 2,25,133 MW as on May Though, this is still not enough. All the Regions in the Country namely Northern, Western, Southern, Eastern and North- Eastern regions continued to experience energy as well as peak power shortage of varying magnitude on an overall basis, although there were short-term surpluses depending on the season or time of day. The energy shortage varied from 19.1% in the Southern Region to 1.2% in the Western Region. As per CEA s forecast for among the regions, only the Eastern region would have a surplus of 10.2%. Region-wise picture in regard to actual power supply position in the country during the year is given below: Table 1: All India Region wise generation capacity Sl No. Region Coal Gas DSL Total Nuclear Hydro R.E.S Total 1 Northern Western Southern Eastern N Eastern 6 Islands All India Source: Power ministry as on In the past, the power sector growth has not kept pace with the economic expansion and this has resulted in India experiencing a 13 per cent shortage in peak capacity and 8 per cent in energy terms, on an overall basis. Driven by the requirement to enhance the budgetary allocations to social sectors to meet the emerging requirements of sustainable growth, the Government has envisaged a manifold increase in the role of the private sector in the financing and operations of the power sector. Significant structural and regulatory reforms have paved the way for increased private sector participation in all aspects of the sector. Many of the legal and regulatory requirements to enable this are in place, while the operational provisions are in different stages of implementation in different states. As per CEA s forecast for ,432 MW of capacity is expected to be added, comprising 15,234 MW of thermal power, 1,198 MW of hydropower and 2000 MW of nuclear power. Capacity addition during stood at 20,502 MW. 6 P age

17 1.4 POWER SECTOR: KEY DEVELOPMENTS AND CURRENT STATUS Indian government forecasted the economic growth to be 6.1% - 6.7% for the year and to sustain this growth it is imperative for the power sector to grow with the same pace. Therefore, it becomes essential to assess the power sector by analysing its current status, the key challenges faced by it, and its future growth drivers. Power is considered to be a core industry as it facilitates development across various sectors of the Indian economy, such as manufacturing, agriculture, commercial enterprises and railways. Though India currently has the fifth largest electricity generation capacity in the world pegged at 2,25,133 MW, the growth of the economy is expected to boost electricity demand in coming years Figure 3: All India Generation Capacity Source: powermin.gov.in Thermal Nuclear Hydro RES Total Captive India saw a total capacity addition of approximately 54,000 MW during the 11 th Five Year plan, of which approximately 47 per cent was contributed by the central government, 34 per cent from the state government, and a little over 19 per cent from the private sector. As per the Planning Commission report capacity addition of 88000MW is estimated in 12 th five year plan. Some examples of top public sector companies include National Thermal Power Corporation (NTPC), Damodar Valley Corporation (DVC) and National Hydroelectric Power Corporation (NHPC). Some key companies in the private sector include Tata Power and Reliance Energy Limited. In India, power is primarily generated from thermal and nuclear fuels, hydro energy and renewable sources. India s power generation capacity has significantly increased since 2008, and is also expected to show a strong growth in the future. However, India faced a power deficit of approximately 8.5 per cent and a peak demand deficit of over 10 per cent in FY11 primarily due to fuel shortage. This shortage can be attributed to aggregate technical and commercial (AT&C) losses, which is about 30 per cent with a high variance across various utilities. Therefore, it is essential for the government to work proactively to increase the sector s generation capacity in a sustainable manner by addressing key 7 P age

18 challenges, such as supply shortage and distribution losses without damaging the environment, to attain a high growth rate during the 12th Five Year Plan. To cope with the demand deficit, the Indian government has implemented various progressive measures to maximise the country s power generation capacity and improve distribution. Some examples of such measures include rural electrification programmes and ultra mega power projects. In particular, the inflow of foreign direct investments is expected to step up capacity addition significantly. The government has allowed FDI of up to 100 per cent through the automatic route in all segments of the power sector except for nuclear energy. Consequently, the sector has drawn about US$ 4.6 billion investment over the past decade, of which US$ 1.6 billion came in FY12 alone. Hence, we can comfortably say that the Indian power sector has strong future growth prospects. Consequently, we need to assess the various policy initiatives that have had a positive impact on the sector, and capitalise upon them further to ensure a strong future growth. 1.5 MAJOR ISSUES The most important sector in infrastructure is the power sector. There is about 90 GW of capacity under various stages of construction and attending to the outstanding issues facing these projects must be given a high priority. However, given the time lag involved in implementing power projects, it is necessary to ensure that projects which will be commissioned only in the Thirteenth Plan can also move ahead satisfactorily. Almost half the capacity in the Twelfth Plan is projected to come from the private sector and the position is likely to be the same in the Thirteenth Plan. Private sector investors in power generation have faced many problems in recent times. They include (i) Inadequate supply of domestic coal and unanticipated increase in prices of imported coal. (ii) Difficulties with clearances for captive mines, as well as for generating stations. (iii) Land availability (iv) Poor financial health of some state electricity distribution companies which are the main customers and which suffer from insufficient tariff adjustment plus inefficiencies in collection. (v) Inadequate availability of domestic natural gas. (vi) Inadequate fuel supply agreements for coal. (vii) More recently, difficulties in obtaining finance from both external and domestic sources. 1.6 INITIATIVES PPP IN POWER To attract private sector participation, government has permitted the private sector to set up coal, gas or liquid-based thermal, hydel, wind or solar projects with foreign equity participation up to 100 per cent under the automatic route. The government has also launched Ultra Mega Power Projects (UMPPs) with an initial capacity of 4,000 MW to attract billion of private investment. Out of the total nine UMPPs, four UMPPs at Mundra (Gujarat), Sasan (Madhya Pradesh), Krishnapatnam (Andhra Pradesh) and Tilaiya Dam (Jharkhand) have already been awarded. The remaining five UMPPs, 8 P age

19 namely in Sundergarh District (Orissa), Cheyyur (Tamil Nadu), Girye (Maharashtra), Tadri (Karnataka) and Akaltara (Chattisgarh) are yet to be awarded. To create Transmission Super Highways, the government has allowed private sector participation in the transmission sector. A PPP project at Jhajjar in Haryana for transmission of electricity was awarded under the PPP mode. Further, to enable private participation in distribution of electricity, especially by way of PPP, a model framework is being developed by the Planning Commission. ADVANCED TECHNOLOGIES It has already been announced that 50 per cent of the Twelfth Plan target and the coalbased capacity addition in the Thirteenth Plan would be through super-critical units, which reduce the use of coal per unit of electricity produced. Supercritical (SC) power plants, which operate at steam conditions 560 o C/250 bars, can achieve a heat rate of 2,235 kcal/kwh as against a heat rate of 2,450 kcal/kwh for sub-critical power plants. The specific CO2 emission for super-critical plants is 0.83 kg/ kwh as against 0.93 kg/kwh for sub-critical plants. Super-critical technology is now mature and is only marginally more expensive than sub-critical power plants. Determined efforts are needed to achieve these results, and prioritisation of coal linkages will be necessary to incentivise adoption of super-critical technology. ULTRA SUPER CRITICAL An Ultra Super Critical (USC) coal-based power plant has an efficiency of 46 per cent compared with 34 per cent for a sub critical plant and 40 per cent for a Super Critical (SC) plant. Thus, with an USC or SC plant, the savings in coal consumption and reduction in CO2 emission can be substantial. A 10,000 MW power plant will generate 60 billion units of electricity per year at around 70 per cent load factor. It has a specific heat of 1,870 kcal/kwh compared to 2,530 kcal/kwh for a sub-critical plant. Thus, every unit generated with USC will save kg [(2,530-1,870)/4,000] coal of 4,000 kcal/kg; and 60 billion units will save 9.9 million tonnes of coal per year. 1.7 OPPORTUNITIES 1. Long-term health of power sector seriously undermined (losses Rs 70,000 crore per year). However, aggregate technical and commercial (AT&C) losses are slowly coming down. State Governments must push distribution reform. 2. Hydropower development seriously hindered by forest and environment clearance procedures. Need to look at special dispensation for these States, especially Arunachal Pradesh. 3. A time-bound plan to operationalize development and evacuation of hydropower from NER required. Road connectivity is an issue for expeditious project completion. 4. Given limited connectivity of NER with other parts of the country (through Siliguri corridor), access through Bangladesh needs to be explored. 5. Electricity tariffs not being revised to reflect rising costs. Regulators are being held back from allowing justified tariff increases. 9 P age

20 CHAPTER 2: COMPANY PROFILE 2.1 BACKGROUND PFC was established in July 1986 as a Development Public Financial Institution (PFI) under Section 4A of the Companies Act, It is dedicated to the Power Sector. It is a wholly owned by Government of India. A Nav-Ratna public Sector Undertaking. It has highest safety ratings from domestic and international credit rating agencies and also ISO Certification for the Project Appraisal System. PFC provides financial assistance to all types of power projects like Generation, R&M, Transmission, Distribution, system improvement, etc. PFC encourages optimal growth and balance development of all segments of power sector through assigning priorities for financing different categories of projects. The state sector utilities are the main beneficiary of PFC s financial assistance. PFC has also been funding private sector projects for last 5-6 years. 2.2 MISSION PFC's mission is to excel as a pivotal developmental financial institution in the power sector committed to the integrated development of the power and associated sectors by channelling the resources and providing financial, technological and managerial services for ensuring the development of economic, reliable and efficient systems and institutions. * Consistently rated Excellent for its overall performance against the targets set in Memorandum of Understanding (MoU) by the Government of India (GoI) since * Nav-Ratna Public Sector Undertaking. * Ranked among the top 10 PSUs for the last four years. 2.3 CREDIT RATINGS Placed at Sovereign Rating by International Rating Agencies - Moody s and Standard & Poor s for long term foreign currency debt. Placed at the highest safety ratings by accredited rating agencies in India - CRISIL and ICRA Domestic borrowings include term loans and bonds; External borrowings take the form of Syndicated Loans, Fixed & Floating Notes. Consistently rated Excellent by the Government of India (GOI) for overall performance against the targets set in Memorandum of Understanding (MoU) between GOI and PFC. 10 P age

21 Table 2: Different Rating by major rating agencies a DOMESTIC RATING AGENCY RUPEE BORROWINGG Long Term Short Term CRISIL ICRA International Rating Agency AAA LAAA P1+ A1+ Moody s Baa3 At par with Finch BBB- sovereign Rating Standard & Poor s BBB- Source: PFC website 2.4 OBJECTIVE OF PFC PFC in its present role has the followingg main objectives: - To rise the resources from international and domestic sources at the competitive rates and terms and conditions and on-ward lend these funds on optimum basis to the power projects in India. To act as catalyst to bring institutional, managerial, operational and financial improvement in the functioning of the state power utilities To assist state power sector in carrying out reforms andd to support the state power sector during transitional period of reforms 11 P a ge

22 2.5 CLIENTS OF PFC State Electricity Boards State Power Utilities State Electricity/Power Departments Other State Departments (likee irrigation Department) engaged in the development of the power project Central Power Utilities Joint Sector Powerr Utilities operative Societies Municipal Bodies Private Sector Power Utilities and Co- 2.6 RANGE OF SERVICES Fund Based Rupee Term Loan Foreign Currency Term Loan Buyer s Line of Credit Working Capital Loan Loan to Equipment manufacturer rs Debt Restructuring/ Refinancing Take out Financing Bridge Loan Lease Financing Bill Discounting 12 P a ge

23 Non-Fund Based Guarantees Exchange Risk Management 2.7 REFORMS & RESTRUCTURING INITIATIVES PFC has been actively persuading State Govt. to initiate reformm and restructuring of their t power sector in order to make them commercially viable. In this regard following initiatives have been taken:- PFC is providing financial assistance to lending criteria/exposure limit norms. reform-minded Statess under relaxed PFC has decided to provide technical/financial assistance to State Utilities for structurall reforms off the State Power Sector. Govts. / Power Reform Group constituted in PFC to advice and assists the Statete Govt. /Power Utilities to formulate suitable restructuring programmes s. Figure 4: Business Strategy of PFC Source: PFC Website 13 P a ge

24 Table 3: Sanctions & Disbursements for the respective financial years Particulars Financial Year Sanctions Disbursement Source: PFC website Table 4: Major Projects Funded by PFC Name of the Project Capacity (MW) Cost (Crs) Amount funded Malwa TPS 2x Khaperkheda TPS Extn. 1x Kameng HEP 4x Koradi TPS 3x Mejia Extn. Unit 2x Sagardighi TPS PH1 2x Chandrapura Extn. Unit 7&8 2x Panipat TPS Stage V 2x Source: PFC website Table 5: Financial Highlights for the year Profit after Tax Loans and Grants Sanctioned Loans and Grants Disbursed Net Worth Reserves and Surplus Rs 3032 Crore Rs Crore Rs Crore Rs Crore Rs Crore No. of Employees 379 Source: PFC website 14 P age

25 2.8 SWOT Analysis Strengths Govt. of India s undertaking. Good quality management Well established, long standing relations in the power industry Implementing agency for Mop s schemes including AG &SP and APDRP Highest credit rating (due to government ownership) Weaknesses Poor asset quality with most of the lending to SEBs, whose loan repayment capabilities in the long run is doubtful. Concentration risk attributed to lending in single sector. Opportunities Power sector presents significant investment opportunities. Providing investment gateways & consultancy for domestic and external financial agencies. Having new business opportunities to cover the entire range of activities in the Power sector. Threats PFC has significant exposures entities which are loss making, financially weak an dare defaulting to most of their creditors. Delinquencies by these entities to PFC could impair the currently sound Balance Sheet of PFC. With increasing exposure to SEB s, their weak balance sheet may affect PFC s creditworthiness. 15 P age

26 CHAPTER 3: OBJECTIVE AND SCOPE 3.1 OBJECTIVE OF THE PROJECT The objective of the Project Report is: 1. Finding out the factors affecting a project s capital and operational expenditure which in turn have an impact on the cash outlay and revenue flow of the project and their study. Thus, performing Project Appraisal of a 660 MW Coal Based Supercritical Thermal Power Project. 2. A financial model of a 660 MW Coal Based Super-critical Thermal Power Project so as to study the effect of above factors on tariff and revenue flows. 3. To find out probable values of IRR, DSCR among other ratios using the financial model to study the feasibility and attractiveness of a 660 MW Coal Based Supercritical Thermal Project. 3.2 SCOPE Scope of project covers installation, commissioning, operation and maintenance of 660 MW coal fired Thermal Power Plant and associated systems. Indian power sector wants to ramp up the installed capacity to meet the growing demand. Large Power Projects enjoy economics of scale and help in lowering the tariff of supply. This project helps to find out the factors that will affect the project cost and thus have an impact on total investment and operational expenses of the project. The assessment and analysis of these factors will help in determining the project cost, the associated risks and ultimately the tariff for supply from the project and thus the revenue and cash flows. Such information is vital in making financial decisions and project appraisal. The study may also help in understanding of ways to mitigate the risks. 16 P age

27 CHAPTER 4: LITERATURE REVIEW AND RESEARCH METHODOLOGY 4.1. LITERATURE REVIEW The literature survey was carried out by reviewing various journals on project appraisal and financial model of a power plant. Few journals reviewed are: P.L.Kingston [1973] in IBM System Journals suggested, The use of computers in financial planning has become an area of increasing interest to financial management and data processing users. Computing systems facilitate the use of financial models in that they allow for the storage and retrieval of a representation of a financial plan and also for the evaluation of the consequences of what if conditions. Thus a financial model is a tool that can assist in the entire business planning process whether it be forecasting, cash management, or projection of profits. This paper presents introductory concepts that provide a basis for systems design and implementation of financial models. Described are the terminology, the basic components of financial models, and two general approaches to the construction of these models. W Wetekamp [2011] suggests how Net Present Value (NPV) can be used as a proper tool to ensure effective project management. The author proves that investment project's appraisal methods, such as e.g. NPV, can and should be used as an ongoing monitor of project health. What is more, even in case of project turbulences Net Present Value can be used as a key instrument for finding the most appropriate solutions. Robert Lundmark et al [2012] analyzed how market and policy uncertainties affect the general profitability of new investments in the power sector, and investigate the associated investment timing and technology choices. They developed an economic model for new investments in three competing energy technologies in the Swedish electric power sector. The model takes into account the policy impacts of the EU ETS and the Swedish green certificate scheme. By simulating and modeling policy effects through stochastic prices the results suggest that bio-fuelled power is the most profitable technology choice in the presence of existing policy instruments and under our assumptions. The likelihood of choosing gas power increases over time at the expense of wind power due to the relative capital requirement per unit of output for these technologies. Overall the results indicate that the economic incentives to postpone investments into the future are significant. Reports of similar projects for thermal power plants were also reviewed. The reports of previous batches on similar topic and the referenced data were helpful in determining data for this project. The literature available within the company helped a lot in understanding Project Finance and factors of project cost which are summarized as: 17 P age

28 4.2 PROJECT FINANCE Project financing is an innovative and timely financing technique that has been used on many high profile corporate projects, including infrastructural and power. Employing a carefully engineered financing mix, it has long been used to fund large scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydroelectric projects. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects worldwide. Project financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. A knowledge base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to analyze cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility. Project finance is different from traditional forms of finance because the credit risk associated with the borrower is not as important as in an ordinary loan transaction rather the identification, analysis, allocation and management of every risk associated with the project is given more importance. Project finance is the financing of long term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project. Usually, a project financing scheme involves a number of equity investors, known as sponsors. As well as a syndicate of banks which provide loans to the operations. The loans are most commonly non-recourse loans, which are secured by the project itself and paid entirely from its cash flow, rather than from the general assets or creditworthiness of the project sponsors. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms. Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound. Project finance is often more complicated than alternative financing methods. It is most commonly used in the mining, transportation, telecommunication and public utility industries. 18 P age

29 Figure 5: Project Finance Structure Sponser(s) Equity Dividend Debt Debt Service Lenders O&M Support Project Company Electricity Payments Equipment Provider Connections Civil Works Source: PFC Library Zoning Local Permits Construction Contracts Risk identification and allocation is a key component of project finance. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable (unfinanced able). To cope with these risks, project sponsors in these industries (such as power plants or railway lines) are generally completed by a number of specialist companies operating in a contractual network with each other that allocates risk in a way that allows financing to take place. The various patterns of implementation are sometimes referred to as "project delivery methods." The financing of these projects must also be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits for each party involved. 4.3 PROJECT APPRAISAL Licenses Certification Regulatory Authorities Electricity Deliveries Power Purchaser Tariff for such electricity Obligation to buy electricity It is an assessment of a project in terms of its economic, social and financial viability. A lending financial institution makes an independent and objective assessment of various aspects of an investment proposition. It is defined as taking a second look critically and carefully at a project by a person who is in no way involved or connected with its preparation. He is able to take independent, dispassionate and objective view of the project in totality, along with its various components. There are some steps for Project appraisal. Management Appraisal: Management appraisal is related to the technical and managerial competence, integrity, knowledge of the project, managerial competence of the promoters etc. The promoters should have the knowledge and ability to plan, implement and operate the entire project effectively. The past record of the promoters is to be appraised to clarify their ability in handling the projects. 19 P age