The 4000 megawatt coal-fired Cheyyur Ultra Mega Power Project is likely to be a non-starter at best, or a financial disaster for consumers, Tamil Nadu Generation and Distribution Company (TANGEDCO) and the state government if it actually gets built, according to a recent report by the Institute for Energy Economics and Financial Analysis (IEEFA).
The report assessed tariff rates and risks associated with the Cheyyur project after the government proposed revised bidding guidelines to make the project more attractive in response to the withdrawal of prospective bidders who said the project was too risky.
"Even with revised guidelines, the risks of the project remained daunting enough to deter investors and lenders," IEEFA said.
"In the unlikely event of the project being awarded by end 2016, the report estimates that electricity from the power plant will have a levelised cost of Rs. 5.93 per unit - far higher than average cost of coal-based electricity. That is bad news for electricity consumers and tax-payers in Tamil Nadu," it said.
S. Gandhi, former TNEB engineer and president of Power Engineers Society of Tamilnadu said in the report: "Seen together with Tamil Nadu's indebtedness, TANGEDCO's hopeless financial situation and the political culture of extending freebies and heavily subsidised electricity, Cheyyur project's expensive electricity will worsen the state's financial situation,"
IEEFA said following last year's Cheyyur bidding fiasco, the ministry of power revised the bidding guidelines to allow promoters to pass on fuel cost and foreign exchange volatility to electricity consumers and own the project after the contract period.
The guidelines also guaranteed that acquisition of "critical" land will be completed by the time of the bidding. However, there is little clarity on what is critical land and what is not critical.
According to IEEFA at Cheyyur, land acquisition for the coal conveyor corridor, road and rail access and the ash pipeline have not even commenced. The potential land-losers, however, have indicated that they will not part with their farms. Regardless of whether or not these lands are seen as critical, the project cannot take off without roads or a means to bring coal from the port to the power plant.
IEEFA's report points out that the revisions help neither the consumers nor the investors. "The fuel-cost pass-through will expose consumers and the state electricity board to tariff volatility. Any future increase in coal cess would add on to this volatility. Moreover, the uncertainty over land acquisition would deter investors" said Jai Sharda, a financial analyst at IEEFA and one of the authors of the report.
"The Cheyyur project is particularly irrelevant considering that Tamil Nadu is set to become power surplus, and has no need for such a massive baseload capacity enhancement," he said.
According to the report, "The real issue with the Tamil Nadu electricity sector is not the availability of power generating capacity, but the high indebtedness and grid transmission and distribution losses. The state's power distribution company, TANGEDCO had accumulated losses of Rs. 650 billion over the decade to March 2015.
One of the key drivers of this indebtedness is the loss incurred in transmission and distribution of electricity in the state. Aggregate Technical and Commercial (AT&C) losses in 2014-15 were at an exceptionally high 24.4% against an global grid average of 6-8% and best practice is Germany at 4-5%. The high debt and losses incurred by TANGEDCO prompted rating agencies to downgrade its rating to 'C+' in the annual integrated ratings of state distribution companies."