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TRANSCRIPT
Summer Internship Report
On
1. Future Outlook of Solar Grid Parity &
The Barriers for Solar Development in India
2. EPC Project Management of Thermal Power Plant
UNDER THE GUIDANCE OF
Mrs. Sugandha Agarwal, Fellow, CAMPS, NPTI
&
Mr. A.K. Gulati (Director, Projects)
At
Desein Indure Pvt. Ltd.
Submitted by
Rahul Malik
Roll No.: 63
MBA (POWER MANAGEMENT)
(Under the Ministry of Power, Govt. of India)
Affiliated to
MAHARSHI DAYANAND UNIVERSITY, ROTHAK
AUGUST 2012
ii
Declaration
I, Rahul Malik, Roll no. 63, student of MBA (Power Management) at National Power
Training Institute, Faridabad, hereby declare that the summer training report programme of
the National Power Training Institute, Faridabad hereby declare that the Summer Training
Report entitled
1. Future Outlook of Solar Grid Parity & The Barriers for Solar Development in
India
2. EPC Project Management of 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.
Mrs.Sugandha Agarwal Rahul Malik
(Project In charge) MBA in Power Management
Director/Principal of the Institute
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Acknowledgement
I express my sincere thanks to Mr. A.K. Gulati (Director, Projects), Desein Indure Private
Limited for giving me a great opportunity to work in such an esteem organization. I am
solemnly thankful to Mr. Sandeep Sharma (Dy. Director, Projects), Desein Indure Private
Limited for his guidance and support. I am also thankful to the entire staff of Desein Indure
Private Limited for sharing their knowledge and assistance.
I feel deep sense of gratitude towards Mr. S. K. Chaudhary, Principal Director, CAMPS, Ms.
Indu Maheshwari, Dy. Director, NPTI, Ms. Manju Mam, Dy. Director, NPTI, for arranging
my internship at Desein Indure Private Limited. I also take this opportunity to express my
sincere thanks to Ms. Sugandha Agarwal(Senior Fellow), NPTI for being my internal project
guide and providing valuable inputs in the completion of this project.
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Executive Summary
A. For Solar Grid Parity
The growing energy requirements of the Indian economy, coupled with the
environmentalconcerns arising from use of conventional energy sources, have created the
need to scout for sustainable sources of energy. India is endowed with numerous non-
conventional energy resources such as small hydro, wind, solar and biomass. After persistent
efforts, the share of renewable energy in utility scale installed power generation capacity in
India has gone up from a meagre 2% in 2003 to an impressive 13% by June 2012 with an
installed capacity of more than 25,409 MW. The potential for solar energy has been estimated
for most parts of the country at around 30-50 MW per square kilometre of open, shadow free
area covered with solar collectors and 300 sunny days in a year, India’s potential for
harnessing solar power is immense. But due to lack of conducive policy scenario till some
years back, the share of solar energy in total renewable power generation stands at a very low
level. Some of the key initiatives such as Indian Solar Loan Programme initiated in 2003 by
partnership of Indian banking groups with UNEP and Jawaharlal Nehru National Solar
Mission (JNNSM)initiated in 2010 by the Government of India gave a major thrust to the
Solar power developments thereafter.
The ambitious plan of raising the grid interactive solar power capacity to 20 GW by 2022
under National Solar Mission can be achieved with the increasing usage of grid and off grid
solar applications, government incentives and favourable project economics.
One part of report highlights how far or close we are from the target of grid parity. The
main challenge for solar power is that it needs to compete with the cheaper conventional
power available in the country. To attain a sustainable growth in the solar power generation,
project developers and government must target to achieve grid parity in the system. With the
changing business dynamics in solar, the Government has started playing a vital role in the
sector by extending attractive preferential tariff to the project developers. This has led to an
increase in the number of players participating in the solar business and thus exploring the
enormous existing potential. These encouraging developments would catapult India into the
league of developed solar markets in the world. The Government has stated giving support by
providing incentives to the developers and the manufacturers which would help in achieving
grid parity by advancing the efforts in increasing the cell efficiency and cost reduction of
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Solar modules. Economies of scale in project execution would also help inrealising grid
parity in near future, rather earlier than expected.
Again Solar PV projects capital costs have rapidly declined over the last few years; however,
taking a cue, the central and state regulators too have aggressively reduced the preferential
tariffs. In JNNSM Batch-II projects bidding, the power developers have bid aggressively for
solar projects factoring falling capital costs. Resultantly, most of the banks/Financial
institutions (FI) are shying away from funding these projects as Aggressive bidding implying
lower RoEs for the project developers. The banks/FI are preferring state based solar tariff-
based projects as these projects offer comparatively higher preferential tariffs v/s JNNSM
implying higher RoEs. Other part of the report contains barriers for the development of solar
power and their impact on the Jawaharlal Nehru National Solar Mission and on the target of
grid parity along with the suggestions to avoid them.
B. For EPC Project Management
Contract Management is the process that enables both parties to a contract to meet theirrights,
duties, obligations and responsibilities (i.e. allocate the risks) in order to deliver
theobjectives, services, required from the contract. It also involves building a good
workingrelationship between the customer and provider in general, and between Owner and
MainContractor or Consultant and Main Contractor or Main Contractor and Subcontractor so
on. It continues throughout the life of acontract and involves managing proactively to
anticipate future needs as well as reacting tosituations that arise.
The main purpose of project management is to obtain the services, performance,commitments
as agreed in the contract between the Client and the Contractor. This meansoptimizing the
efficiency, effectiveness and economy of the service, the performance, orrelationship
described in the contract, balancing costs against risks and actively managing the
Client/Owner and the Contractor relationship. Project management may also aim
forcontinuous improvement in performance over the life of the contract.
Engineering,Procurement and Construction/Commissioning (EPC), and its several variations,
havebecome the project delivery systems of choice for large process and power
facilities,domestically and internationally. The use of EPC is most notable for projects
requiringcomplex design, engineering work and the procurement of specialized equipment,
especiallywhere the owner desires to contract with a single entity for a turnkey delivery. EPC
contractsare frequently used on projects such as liquid natural gas facilities, steel mills, metro
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projectsand power plants. But, EPC is not limited to traditional process facilities; it has also
found itsway into large infrastructure developments (Power Plants, Metros, Flyovers etc...)
because of itsinvasive use, understanding the unique characteristics and risks associated with
the EPC formof delivery are crucial.
The project is an EPC (Engineering –procurement – construction) project has a variety
ofrisks, and they have been divided into project tender risk and implementation risk.
ProjectTender risk includes the risks of pre-tender risk and the risks at the tender offer phase,
while
Project implementation risk includes engineering, procurement, and construction risk.
Qualityrisk, cost risk, security risk, etc. all belong to the construction risk.
Monitoring of project activities has evolved as the most important activity which ensures the
smooth and scheduled completion of project while always keeping an eye on all the ongoing
activities.
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List of Figures
Figure 1 : Renewables installed capacity of India.....................................................................2
Figure 2 : Solar index may’2013................................................................................................5
Figure 3 : Investment in Power (INR billion)..................................................................8
Figure 4 : Projected year on year solar pv capacity addition by policies in India...................20
Figure 5: NSM/NVVN Phase 1 bidding result& tariff trend...................................................33
Figure 6 : Module pricing current trend...................................................................................33
Figure 7 : Declining trend of cost of silicon............................................................................34
Figure 8 : Cost trend and Predicted scenario...........................................................................35
Figure 9 : Solar Grid Parity by FY 2017 (Expected by CARE)...............................................35
Figure 10 : Rating of different barriers in India.......................................................................37
Figure 11 : GHI date for Bikaner Rajasthan............................................................................42
Figure 12 : Contribution of infrastructure related barriers.......................................................44
Figure 13 : General schematic diagram of the relationship between the parties.....................50
Figure 14 : Engineering – Procurement – Construction...........................................................52
Figure 15 : Basic contractual structure of a power project......................................................54
Figure 16 : Contract structure at Indure Pvt. Ltd......................................................................57
Figure 17 : Process of getting Engineering drawings approved from TCE at Indure...............59
Figure 18 : Process of getting MDCC (Material Dispatch Clearance Certificate) at Indure.. . .64
Figure 19 : Process of sub-contractinf at Indure Pvt. Ltd.........................................................71
Figure 20 :Key risks in EPC contract.......................................................................................75
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Table of Contents
Trainingcompletion certificate...............................................................................................ii
Declaration..............................................................................................................................iii
Acknowledgement...................................................................................................................iv
Executivesummary...................................................................................................................v
List of figures.........................................................................................................................viii
Table of Contents.....................................................................................................................x
Chapter 1: Introduction...................................................................................................1 - 12
1.1 Power Generation Scenario in India.................................................................................1
1.2 Overview of Solar Power in India...................................................................................1
1.3Historical Growth of the Solar Market in India.................................................................3
1.4Fundamentals of Solar Grid Parity....................................................................................5
1.5Engineering Procurement & Construction........................................................................6
1.6EPC Opportunities in Power Sector..................................................................................8
1.7Organisation Profile...........................................................................................................9
CHAPTER 2: LITERATURE REVIEW.....................................................................13 - 18
A.Solar Grid Parity...............................................................................................................13
2.1Literature Review............................................................................................................13
B.For EPC Project Management..........................................................................................15
2.2Problems faced by EPC Contractors...............................................................................17
CHAPTER 3: The facilitators of Solar power towards grid parity.........19 - 313.1The Semiconductor Policy, 2007....................................................................................19
3.2 Renewable Purchase Obligation (RPO).........................................................................20
3.3Renewable Energy Certificate (REC).............................................................................20
3.4Feed-in Tariff...................................................................................................................21
3.5Jawaharlal Nehru National Solar Mission.......................................................................22
3.6Incentives for RE by the Central Government................................................................24
3.7Development of Solar Cities...........................................................................................26
3.8Solar Technology Policies...............................................................................................26
3.9Indian State Grid Solar Policies......................................................................................27
3.10Payment Security Mechanism.......................................................................................30
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3.11Energy Security.............................................................................................................31
CHAPTER 4: Economics of solar market towards Grid parity...............32 - 35
CHAPTER 5: Barriers for solar power development in India.................36 - 485.1 Policy and Regulatory Barriers......................................................................................37
5.2Solar Radiation Data Aspect...........................................................................................41
5.3Infrastructure Aspect.......................................................................................................44
5.4Financial Aspect..............................................................................................................46
Chapter 6: EPC Project Management.........................................................................49 - 69
6.1 Introduction....................................................................................................................49
6.2 Contracts.........................................................................................................................49
6.3 Contractual Structure of a Power Plant..........................................................................54
6.4EPC..................................................................................................................................57
6.5Features of EPC Contracting...........................................................................................65
Chapter 7:EPC Sub-contracting of Thermal Power Plant.........................................70 - 76
7.1 Essential Steps in the process of sub-contracting...........................................................71
7.2Packages in a Thermal Power Plant................................................................................71
7.3 Contract Risk Analysis...................................................................................................74
Chapter 8: Suggestions & Recommendations..............................................................77 - 79
A.For Solar Grid Parity........................................................................................................77
8.1 Policy and Regulatory Aspect........................................................................................77
8.2Solar Radiation Data Aspect...........................................................................................78
8.3Infrastructure Aspect.......................................................................................................78
B. For EPC Project Management.........................................................................................78
Chapter 9: Conclusion....................................................................................................80 - 81
A.For Solar Grid Parity........................................................................................................80
B. For EPC Project Management.........................................................................................80
Chapter 10: Bibliography......................................................................................................82
ANNEXURES.........................................................................................................................83
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Chapter1: Introduction
1.1. Power Generation Scenario in India
The total installed capacity as on 31.01.2013 is 2,11,766 MW of which Thermal power plants
contributed 1,21,610 MW (Coal based) and 18903 MW (Gas based). Though the power
sector in India has witnessed a few success stories in the last 4-5 years, the road that lies
ahead of us is dotted with innumerable challenges that result from the gaps that exist
between what is planned versus what the power sector has been able to deliver. Coal
fired generation in India accounts for 57% of the total installed generation capacity and all
future estimates of capacity addition show that coal will continue to be the dominant fuel
source despite the recent short supply in the domestic coal. The envisaged coal based
capacity for the 12th plan period is 62,695 MW i.e. 82.7% of the total proposed capacity
addition (75,785 MW). In addition to the above, there is considerable gap between demand
and availability of power in the country in spite of substantial increases in capacity addition
in successive Five Year Plans. India faces severe peak shortages (Peak Deficit of 9% and
Energy deficit of 8.7% in 2012-13). New installations of Power Projects have been delayed;
furthermore cost of these new installations is high. In many of such projects the COD
(Commercial Operation Date) have been revised. This further increased the project cost.
As India stands poised on the edge of significant growth in power sector, it is critical to
promote technology trajectories that not only meet the near-term needs of the country but also
set the power sector on a path that would allow it to better respond to future challenges.
Current policies in the power sector are primarily driven by the need to increase generating
capacity, which has had the result of deploying the least risky and cheapest technology. On
the other hand, ever growing demand of electricity and concern about reducing the funds
involved in a power project, power sector has to implicitly push the debate on technologies
and new ways towards deployment of power projects. However, such technology choices
cannot be made blithely; today’s decisions about power plant technologies will have
consequences over the plant’s entire lifetime – a period of about 40-60 years.
1.2 Overview of solar power in India
India is densely populated and has high solar insolation, an ideal combination for using solar
power in India. In the solar energy sector, some large projects have been proposed, and a
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35,000 km2 area of the Thar Desert has been set aside for solar power projects, sufficient to
generate 700 GW to 2,100 GW.
In July 2009, India unveiled a US$19 billion plan to produce 20 GW of solar power by
2020. Under the plan, the use of solar-powered equipment and applications would be made
compulsory in all government buildings, as well as hospitals and hotels. On 18 November
2009, it was reported that India was ready to launch its National Solar Mission under the
National Action Plan on Climate Change, with plans to generate 1,000 MW of power by
2013.
Fig.1 Renewables installed capacity of India
According to a 2011 report by GTM Research and Bridge, India is facing a perfect storm of
factors that will drive solar photovoltaic (PV) adoption at a "furious pace over the next five
years and beyond". The falling prices of PV panels, mostly from China but also from the
U.S., has coincided with the growing cost of grid power in India. Government support and
ample solar resources have also helped to increase solar adoption, but perhaps the biggest
factor has been need. India, "as a growing economy with a surging middle class, is now
facing a severe electricity deficit that often runs between 10 and 13 percent of daily need"
With about 300 clear, sunny days in a year, India's theoretical solar power reception, on only
its land area, is about 5000 Petawatt-hours per year (PWh/yr) (i.e. 5000 trillion kWh/yr or
about 600 TW). The daily average solar energy incident over India varies from 4 to 7
kWh/m2 with about 1500–2000 sunshine hours per year (depending upon location), which is
far more than current total energy consumption. For example, assuming the efficiency of PV
modules were as low as 10%, this would still be a thousand times greater than the domestic
electricity demand projected for 2015.
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1.3 Historical Growth of the Solar Market in India
The development of grid interactive renewable power has essentially taken off with the
Electricity Act 2003 which mandates the State Electricity Regulatory Commissions (SERCs)
to:
Promote generation of electricity from renewable sources of energy by providing
suitable measures for connectivity with the grid and sale of electricity to any person,
and
Fix certain minimum percentages for purchase of renewable power.
The National Electricity Policy 2005 has further provided for progressive increase in these
levels and purchases by distribution companies through competitive bidding process. The
Rural Electrification Program of 2006 was the first step by the Indian Government in
recognizing the importance of solar power. It gave guidelines for the implementation of off-
grid solar applications. However, at this early stage, only a mere 2MW of capacity was
installed through this policy. This primarily included solar lanterns, solar pumps, home
lighting systems, street lighting systems and solar home systems. In 2007, as a next step,
India introduced the Semiconductor Policy to encourage the electronic and IT industries. This
included the Silicon and PV manufacturing industry as well. New manufacturers like Titan
Energy Systems, Indo Solar Limited and KSK Surya Photovoltaic Venture Private Limited
took advantage of the Special Incentive Scheme included in this policy and constructed plants
for PV modules. This move helped the manufacturing industry to grow, but a majority of the
production was still being exported. There were no PV projects being developed in India at
this stage. There was also a need for a policy to incorporate solar power onto the grid. The
Generation Based Incentive (GBI) scheme, announced in January 2008 was the first step by
the government to promote grid connected solar power plants. The scheme for the first time
defined a feed-in tariff (FIT) for solar power (a maximum of INR 15 per KWh). Since the
generation cost of solar power was then still around INR 18 per KWh, the tariff offered was
unviable. Also, under the GBI scheme, a developer could not install more than 5MW of solar
power in India, which limited returns from scale. One of the main drawbacks of the GBI
scheme was that it failed to incorporate the state utilities and the government in the project
development, leaving problems like land acquisitions and grid availability unaddressed. As a
result, despite the GBI scheme, installed capacity in India grew only marginally to 6MW by
2009. In June 2008, the Indian government announced the National Action Plan for Climate
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Change (NAPCC). A part of the plan was the National Solar Mission (NSM). It was
announced in December 2009 with the aim of finally initiating the solar industry in India.
The NSM guidelines indicated that the government had improved on the shortcomings of the
GBI scheme. It aimed to develop a solar industry, which was commercially driven and based
on a strong domestic industry. The extra cost of generation of solar power was being borne
by the federal government under the GBI scheme. Even before the NSM, Gujarat was the
first state to come up with its own solar policy in January 2009. The Gujarat solar policy
initiated a process of the states formulating their own policy frameworks independent of the
federal guidelines. The renewable purchase obligations for state distribution companies, a
demand-driven scheme, further accelerated the formulation of solar policies at the state level.
These policies exist independent of each other as well as the NSM. One of the key novelties
of the Gujarat policy was that it introduced the concept of solar parks. These parks offered a
comprehensive solution to concerns over land acquisition, grid connectivity, and water
availability, hence offering developers a project allocation packaged with the necessary
infrastructure. Other states like Karnataka, Andhra Pradesh and Rajasthan have followed suit
in developing solar power development programs. Rajasthan has implemented land banks as
well to make land acquisition easier. As more states plan to meet their solar power
obligations, new policies are expected to be offered, creating as very vibrant set of markets
across the subcontinent.
Tariff Policy 2006 requires fixation by SERCs of a minimum percentage of Renewable
Purchase Obligation (RPO) from such sources taking into account availability of such
resources in the region and its impact on retail tariffs and procurement by distribution
companies at preferential tariffs determined by the SERCs. The tariff policy also states that
procurement of renewable power for future requirements shall be done through renewable
resource specific competitive bidding process and in the long-term, renewable energy
technologies would need to compete with other sources in terms of full costs. As of date,
most of the SERCs have specified percentages for purchase of electricity from renewable
sources of energy. Preferential tariff for grid interactive renewable power is being given in
most potential States. Uniform guidelines by Central Electricity Regulatory Commission
(CERC) for fixation of such preferential tariffs have been issued. Further, the recent
amendment in Tariff Policy provides for 0.25% Solar RPO by 2013 and 3% by 2022. In
January 2010, CERC issued a notification on ‘Terms and Conditions for recognition and
issuance of Renewable Energy Certificate for Renewable Energy Generation’. Renewable
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Energy Certificate (REC) seeks to address the mismatch between availability of renewable
sources and the requirement of the obligated entities to meet their renewable purchase
obligation. It allows certificate holders to sell renewable energy to States deficient on this
front, individual or other trading entities is expected to stimulate competition and create a
market for power across States. The National Load Dispatch Centre (NLDC) has been
appointed as Central Agency for implementation of RECs. Renewable Energy Certificate
Mechanism has been launched on 18 November 2010.Based on this, States like Maharashtra,
Gujarat, Chhattisgarh and Kerala have started accepting application for accreditation of
renewable energy projects.
India is at the 2nd place in solar index - while PV tariffs were cut in January, this was
counter-balanced by the announcement that import duties on CSP equipment are to be
scrapped. Further, it is anticipated that India’s solar market will be an attractive alternative
for investors shifting their focus away from Europe’s failing solar sector.
Fig 2: solar index May’2013 Source: Ernst & Young
1.4 Fundamentals of Solar Grid parity
Grid parity is the point at which means of generating electricity from alternative energy
produces power at a levelized cost that is equal to or less than the price of purchasing power
from the grid. Reaching grid parity is considered to be an important point in the development
of new sources of power, the point at which it becomes a contender for widespread
5
development without subsidy support. The term is most commonly used when discussing
renewable energy sources, notably photovoltaics, wind power and wave power. It is widely
believed that a wholesale shift in generation to these forms of energy will take place when
they reach grid parity.
Grid parity is most commonly used in the field of solar power, and most specifically when
referring to solar panels. This is due to a dramatic reduction in the capital cost of related
equipment that took place between about 1990 and 2010, when the price of electricity from
these sources dropped about 25 times. This rate of price reduction is accelerating; between
late-2009 and mid-2011, the wholesale cost of solar modules has dropped approximately by
70%.
Solar panels have a major advantage in terms of scalability. Compared to most sources, like
wind turbines or hydro dams, PV can scale successfully to systems as small as one panel or as
large as millions. In the case of small systems, they can be easily installed at the customer's
location. In this case the LCoE competes against the retail price of grid power, which
includes all upstream additions like transmission fees, taxes, etc, and are generally much
higher than wholesale prices. In order to encompass all of these possibilities, Japan's NEDO
defines the grid parity in three phases:
1st phase grid parity: residential grid-connected PV systems
2nd phase grid parity: industrial/transport/commercial sectors
3rd phase grid parity: general power generation
As solar panels do not use fuel and are largely maintenance-free, the levelized cost of
electricity is dominated almost entirely by the capital cost of the system. If one makes the not
unrealistic assumption that the discount rate will be similar to the inflation rate of grid power,
then one can calculate the levelized cost simply by dividing the original capital cost by the
total amount of electricity produced over the system's lifetime. Modules are generally
warranted for 25 years and suffer only minor degradation during that time, so all that is
needed to predict the generation is the local insolation.
1.5 Engineering Procurement & Construction
An explicit focus on technology policy and process of implementation in the power sector is
imperative in order to ensure that any technology decisions are made with deliberate care.
The increasing emphasis on the facilitator role of the Government has led to increased
emphasis on private sector stake in power projects in the years following the structural and
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economic reforms. In the context of unbundling of infrastructure projects through
Concessions, Leases, etc. In case of electrical and mechanical works, including erection on
site as well, the recent design-build and turnkey type projects, where the contractor does the
majority of the design as per the outline or performance specifications prepared by the
employer’s engineer, the Plant and Design Build Contract could be used.
In the case of generation projects with private participation such as BOT or similar models,
where the concessionaire takes up the total responsibility for the financing, construction and
operation of the project, the EPC or Turnkey contract is more prevalent
Engineering, procurement and construction (EPC) contracts are the most common form of
contract used to undertake construction works by the private sector on large-scale and
complex infrastructure projects. Under an EPC contract a contractor is obliged to deliver a
complete facility to a developer who need only turn a key to start operating the facility; hence
EPC contracts are sometimes called turnkey construction contracts. In addition to delivering a
complete facility, the contractor must deliver that facility for a guaranteed price by a
guaranteed date and it must perform to the specified level. Failure to comply with any
requirements will usually result in the contractor incurring monetary liabilities.
However, because of their flexibility, the value and the certainty sponsors and lenders derive
from EPC contracts, and believe EPC contracts will continue to be the predominant form of
construction contract used on large-scale infrastructure projects in most jurisdictions.
This report will only focus on the use of EPC contracts in the power sector. However, the
majority of the issues raised are applicable to EPC contracts used in all sectors. EPC contracts
are legal documents which specify the terms and conditions of theproject, between the EPC
contractor and the project owner. The main featuresof EPC Contracting cover the fixed price
contract and commitment to the timelydelivery and performance of thermal power plant. It
also covers the performanceguarantee arranged by the EPC Contractor in case of default. This
feature also covers the defects liability and Project Company’s right to dovariation in the
project. The features have also focused about the suspensionand termination of the project.
The threat from force majeure is also covered asfeature.The EPC Contractor can give some of
his work to the efficient Sub-contractorsand can share their efficiencies for the development
to the project. The EPCContractor can hire the services of the Subcontractor but only he will
beresponsible for all work towards the Project Company.
1.6 EPC opportunities in Power Sector
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India is an energy deficit country but rising as a world’s leading economic power. India is
growing with India is an energy deficit country but rising as a world’s leading economic
power. India is growing with India is an energy deficit country but rising as a world’s leading
economic power. India is growing with almost 8% GDP growth rate every year but to sustain
this growth India must be ready to full GDP growth rate every year but to sustain this growth
India must be ready to full-fill all future needs of energy. Keeping in mind the current and
future requirements government has promoted the private participation in electricity sector by
the liberal Electricity Act 2003. Government has also set the target of “Power for all by year
2012”. To achieve this target government has set target also set the target of “Power for all by
year 2012”. To achieve this target government has set target to make a 78,700 MW
generating capacity addition during generating capacity addition during 11th plan and an
estimated capacity addition of an estimated capacity addition of 1,00,000 MW in 12th plan,
for this government wants the private participation to build the infrastructure, for this
government wants the private participation to build the infrastructure. Robust economic
growth and enhanced industrial activity has significantly increased demand for power in the
country, leading to as much as 12% peak hour power shortage. This makes a compelling case
for further large scale investments in the sector. In the Twelfth Five Year Plan, total
investment is estimated to be INR12, 576 billion. Construction intensity in the power sector is
around 38% at present and is expected to result in construction opportunity worth INR4, 780
billion.
Fig. 3: Investment in Power(INR billion)
Power sector investment is likely to increase significantly in the generation segment with the
announcement of 14 ultra-mega power projects (UMPPs). Out of these, four (Sasan, Mundra,
Krishna Patnam and Tilaiya ) have already been awarded to private players. What is most
heartening about the power sector is the record growth in generation capacity addition and
8
initiatives that have helped to create sound policies and regulatory frameworks, which have
had a positive effect on promoting competition and investments in the sector.
In present scenario in India, government is inviting private players to setup the generating
units by signing in present scenario in India, government is inviting private players to setup
the generating units by signing a PPA. The availability of huge reserves of coal and easy
availability of gas, motivating the and easy availability of gas, motivating the government to
focus on to settle the thermal power plants of high capacity. The concept of UMPP has also
evolved in India with generating capacity of 4000 MW each. The huge capacity plants reduce
the cost of generating electricity and increases various other efficiencies.
The increasing emphasis on the facilitator role of the Government has led to increased
emphasis on private sector stake in power projects in the years following the structural and
economic reforms. In the context of unbundling of infrastructure projects through
Concessions, Leases, BOO, BOOT etc...
1.7 Organisation Profile
DESEIN PRIVATE LTD. was founded in 1965 by late Mr. O.P. Gupta, an eminent power
engineer & entrepreneur. The company was started with a small group of 3 engineers with a
mission to provide engineering consultancy services of international standards. Today, it has
core competency in all infrastructure projects covering all disciplines of engineering, viz.,
civil, structural, architectural, mechanical, electrical, chemical, environmental, controls &
instrumentation.
Earlier, only the State Electricity Boards built power plants and very few industries set-up
power plants for generating power for captive use and the State Governments always
outsourced the engineering consultancy tasks to foreign multi-nationals. DESEIN wanted
India to be self-reliant in this sector and hence started the company with the motto of "Self
Reliance in Engineering".
With sustained efforts and hard work, DESEIN got a full consultancy job from concept to
commissioning from Andhra Pradesh State Electricity Board to build a 2x110 MW thermal
power station at Kothagudem. Since then, DESEIN has been an engineering partner & active
participant in the nation's power sector growth story by designing over 32,000 MW of India's
power generating facilities. Today, the company designs units of upto 800 MW capacity
which is the largest unit size being built in India at present with super critical technology.
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DESEIN has also kept pace with the latest tools and developed the capability to do detailed
engineering using 3D modelling for smooth & timely execution of projects.
DESEIN has also been actively associated with central government statutory bodies such as
Central Board of Irrigation & Power (CBIP), Central Electricity Authority (CEA), etc. for
standardization & modernization of thermal power plant design & engineering. Protection of
environment has always been a major concern and in 1987 we set up a separate division
manned by a group of specialists in this field to provide environmental engineering solutions
to mitigate pollution arising out of new projects. Since then, the team has undertaken
specialized studies to determine the impact and suggest remedial measures for setting up of a
large number of new projects.
Over the years, the company has also developed the skills for providing operation and
maintenance services for power stations. It has successfully executed a 3-year contract for
operation & maintenance of 4x120 MW Power Plant and associated Desalination Plants in
Libya way back in 1980. Currently, DESEIN is operating & maintaining 8 power plants in
India & abroad.
The founder's mission to achieve "Self Reliance in Engineering" has already become a reality
and the company has widened its core competency from power plant engineering to
providing "Design Services for Infrastructure".
1.7.1 TheIndure Private Limited
The Manufacturing & Contracting Arm of the Group is an ISO 9001:2008 certified
company incorporated in 1970
Today the company is the:
a. Largest suppliers of Ash Handling Systems on turnkey basis for Power Plants
in India & abroad, and
b. Leading EPC Contractor for Power Plants & Material Handling Systems
c. Also offers EPC solutions for solar power plants (both thermal as well as PV)
in association with reputed international technology providers & EPC
contractors.
1.7.1.1 Ash Handling Systems: World leader in the manufacture and supply of complete
ash handling systems
Supplied >230 ash handling systems for power plants with a total capacity of over
70,000MW in India & abroad
10
Has technical collaboration with Macawber Engineering Inc., USA for Dense
Phase Ash Handling Systems
Licensee of Warman, Australia for manufacture of high efficient Ash Slurry
Pumps
Supplies Ash Handling Systems on turnkey basis which include design &
engineering, manufacturing, supply, erection, testing & commissioning.
Indigenization of Ash Handling Systems and Components which is of special
relevance in India because of the poor quality coal having very high ash content
which is also highly abrasive in nature.
1.7.1.2 EPC Contracting for Power Plants
Offers turnkey solutions for complete power plants as well as complete balance of
plant packages including entire civil works of the power station on EPC basis.
In house capability in engineering, procurement, project management,
construction, testing, commissioning and operation & maintenance of power
plants.
Successfully executed / under execution Complete BoP including entire Civil
Works of the following major Power Projects:
i. 2x525 MW at Angul in Orissa for Monnet Power Co.
ii. 2x250 MW at Chhabra in Rajasthan for RRVUNL
iii. 1x250 MW at Suratgarh in Rajasthan for RRVUNL
iv. 2x250 MW at Panipat in Haryana (Major BoP Packages) for REL/HPGCL
v. 2x250 MW at Bhavnagar in Gujarat (Major BoP Packages) for BECL
vi. 2x210 MW at Parichha in Uttar Pradesh (Major BoP Packages) for
vii. TPL/UPRVUNL
viii. 1x63 MW in Chhattisgarh (Complete Mechanical BoP) for SV Power
Successfully executed 8 Complete Power Plants of 8 MW to 50 MW sizes which
include the first Coal fired Power Plant of 2x20 MW capacity in UAE
1.7.1.3EPC Contracting for Coal / Lignite Handling Systems
INDURE has set up a separate division for executing coal / lignite handling
systems on turnkey basis.
Successfully executed / under execution many assignments as a part of above
mentioned EPC contracts
11
In addition, 2 other contracts are currently under execution for:
1x500 MW Vindhyachal Power Plant of NTPC
2x250 MW Power Plant of Bhavnagar Energy Co. Ltd.
Chapter 2: Literature Review
12
A. Solar Grid Parity
2.1. Literature Review
The world bank report on “cost reduction study for solar thermal power plants” [1999]
proposed the steps to assess the current and future cost competitiveness of STPPs with
conventional power systems and to determine the market potential for STPP with particular
emphasis on developing countries, and also to identify an overall strategy for promoting
accelerated development of STPP.
As per the study of BNEF on “Re-considering the Economics of Photovoltaic Power”
[2010]. It is found that In many cases, current PV costs and the associated market and
technological shifts witnessed in the industry have not been fully noted by decision-makers.
The perception persists that PV is prohibitively expensive, and still has not reached
„competitiveness. We find that the commonly used analytical comparators for PV vis a vis
other power generation options may add further confusion. In order to help dispel existing
misconceptions, we provide some level of transparency on the assumptions, inputs and
parameters in calculations relating to the economics of PV. The paper is aimed at informing
policy makers, utility decisionmakers, investors and advisory services, in particular in high-
growth developing countries, as they weigh the suite of power generation options available to
them.
World bankin its study on “Unleashing the Potential of Renewable Energy in India” [2010]
concluded that India needs an order-of-magnitude increase in renewable energy growth in the
next decade. To add 40GW by 2022, India will have to meet the ambitious target of the
JNNSM, double its wind capacity, quadruple its small hydropower power capacity, fully
realize co-generation capacity, and increase biomass realization by a factor of five to six.
These ambitious targets have made creation of an enabling environment for renewable energy
development particularly urgent and topical. Accelerating the use of renewable energy is also
indispensable if India is to meet its commitments to reduce its carbon intensity. The power
sector contributes nearly half of the country’s carbon emissions. On average, every 1GW of
additional renewable energy capacity reduces CO2 emissions by 3.3 million tons a year.
Local ancillary benefits in terms of reduced mortality and morbidity from lower particulate
concentrations are estimated at 334 lives saved/million tons of carbon abated.
.RiteshPothanin his research study on “Top 5 predictions for Indian solar PV for rest of
2012”[2011] found that Solar PV is heading for Off-grid applications especially commercial
13
rooftops, due to accelerated depreciation and increasing power costs – Because Solar PPA per
kWh will be at prices below Rs. 8 and of course due to too many organizations chasing non-
existent PPA. The next wave will be those organizations who can spare space for onsite use
and tail end local generation.he also found that Solar EPC prices would average between 7-9
Crores per MWp depending on the quality of the material.Panel prices may decrease but
efficiencies will increase which will nullify the decline in price.also Solar REC prices are
bound to fall – Due to EPC costs averaging out to that of wind projects per MWp, with REC
projects being unavailable and only by those wanting to avail of accelerated depreciation.
Also due to the fact that most states will use their policies to cover for their deficits and many
will not have the money to pay for such costly power anyway. Also discoms will setup their
own plants since this will impact their bottom-line tremendously.again Solar power plant
consolidations will begin in earnest by 2013 with Discoms reneging on PPAs due to legal
issues – Those who have lucrative PPAs may hold on unless their EPCs have been unable to
deliver the quality and management, which will be a headache for small PPA holders. Also
Solar PPA prices.Small Solar EPC players will exit the grid arena and either fold up or focus
on off-grid PV and Thermal applications – Sadly there is a glut of Solar EPC providers which
has resulted in a fragmented market impacting survivability of those without the deep pockets
of an international parent. Margins are also wafer thin currently which is another deciding
factor.
MNRE on its strategic plan [2011] told that it has MNRE has initiated systematic
programmes for renewables including for research and development. Renewable energy is
currently experiencing increasing vibrancy across all sectors of the economy driven by
sustained economic growth and growing global concerns regarding climate change. There are
various stakeholders that directly/indirectly contribute towards the promotion of renewable
energy, and each one has some aspirations and expectations from this sector, just as they have
a significant responsibility. This is in a way laying foundation of a new economy that is
inclusive, sustainable and aspires for decarbonisation of energy in a definite time frame.
However, there is a long way to go. In order to create an enabling environment, the Ministry
as a policy maker will have a significant contribution to make.
B. For EPC Project Management
Steiner et al (1969), states that a project is an organization of people dedicated to a specific
purpose or objective. Projects generally involve large, expensive, unique, or high risk takings
14
which have to be completed by a certain date, for a certain amount of money, within some
expected level of performance. At a minimum, all projects need to have well defined
objective and sufficient resources to carry out all the required tasks.
Cleland et al (1985) describes a project as a combination of human and nonhuman resources
pulled together in a temporary organization to achieve a specified purpose. In EPC method
engineering, procurement and construction are done in one contract, engineering services is
under completion, and meanwhile procurement delivery, site mobilization, construction and
erection are done in parallel. Management has major role for coordination and successful
completion of EPC project. Using applied project management techniques and organizations
with project control and management experiences are pivotal basis of these contracts. A
company is successful who can manage engineering and procurement to reach standards
while reducing costs of procurement.
Bryan S. Shapiro et al, (1994). Normally the outside independent architect or engineer
prepares the plan and specifications for the owner prior to tendering. This means that the
architect or engineer is legally responsible to the owner for design defects according to his
professional services contract.
Under a conventional contract, the owner employs plans and specifications by way of a
competitive bidding format to obtain tender bid and to select the successful contractor. This
means that the owner warrants the sufficiency of the plans (full disclosure of information),
and assumes any liability for defects in the plans and specifications that he provides to the
contractor. Conversely, the contractor is responsible for defective construction and
workmanship, but has no liability for design, defects.
The typical construction contract approach leaves a big hole between the design professional
and the contractor. These two parties are not linked by contract: they do not owe any
contractual duties each other, although recent jurisprudence suggests that in certain
circumstances, the design professional may indeed owe a legal duty in tort to a bidding
contractor. Also, their bonding and insurance requirements are arranged independently.
Legally, in this typical construction approach, the design professional and the contractor
occupy positions that are on the “opposite side of the table”
Employer's new to the design and build concept seem to find this mandate difficult to accept
when they realise that they do not have the exclusive say or a free hand in deciding the
implementation or outcome of the end product.
15
Prudent design and build contractors will often ensure that their contractual rights are
protected by notifying of claims for delay, time related damages and actual costs for having
to implement such instructions that are tantamount to variation instructions. Disputes as to
whether an instruction constitutes a variation often revolve around the employer's
requirements.
Gwen Flora et al (1998) In Malaysia, the last decade has seen most of the construction
projects have been implemented using the traditional procurement method. But in recent
years, as project get more complex which demand greater emphasis on management
techniques and engineering skills, the traditional procurement approach was found not
suitable to the current needs. Design and Build procurement method is an alternative to
traditional method which is rapidly popular in Malaysia, especially in the public sector.
Design and Build acclaimed to be beneficial to all parties such as clients, architect, engineers
and contractors.
MuraliSambasivan et al, (2005) The Design and Build construction process has been part of
the construction industry. Today, the process is growing rapidly in this industry. As it has
been grown in popularity, Design and Build has evolved all manner of hybrids. However,
many contractors are less gleeful about the benefits that might be expected. In theory, Design
and Build puts the contractors in charge of the whole project. However, Design and Build
also not exclude were faced problem by contractors in the construction industry. One of the
common problems are delay in construction, this because of a global phenomenon and the
construction industry in Malaysia is no exception.
Michael Pollick et al, (2006) A professional contractor should also have an understanding of
his or her limitations. The client works with an architect and financier long before the first
shovel of dirt is removed by a contractor. During the bidding process, a contractor may have
to work with the building's architect to discuss potential problems with a design element. If
the complexities of the building’s design or the potential cost overruns threaten to overwhelm
a contractor's skills, he or she needs to step back and allow other contractors to win the bid. A
good contractor understands that the success of the project depends on his or her ability to
hire the right independent subcontractors and follow the wishes of the client.
S. W. Nunnally et al, (2007) The legally essential elements of a construction contract include
an offer, an acceptance, and a consideration (payment for services to be provided). The offer
is normally a bid or proposal submitted by a contractor to build a certain facility according to
16
the plans, specification, and conditions set forth by the owner. Acceptance takes the form of a
notice of award, as stated earlier. Consideration usually takes the form of cash payment, but it
may legally be anything of value.
IrHarbans Singh KS et al, (2007)Appearing under various labels such as general contract,
‘employer-design’ contracts and the like, traditional general contracts are basically
characterized by the separation of the design form the manufacture (i.e. construction or
installation) elements of the contract. The employer causes the design to be prepared by his
professional designers and thereby takes full responsibility for the design. Depending on the
contractual arrangement selected, the employer may also cause bills of quantities to be
prepared. Under these methods of contract procurement, the contractor builds or
manufactureswhat the designers have designed and/or specified. He is only responsible for
the material and workmanship aspects of the contract and for the performance of his
subcontractors (inclusive of any nominated sub-contractors) not withstanding its ‘time tested’
credentials such contracts are slowly losing favor with the onslaught of increasingly complex
projects preferring the newer paths of contracts procurement, e.g. ‘package’ deal type,
construction management etc.
NuhuBraimah et al, (2008) said that the delays and disruption to contractor’s progress are a
major source of claims and disputes in the construction industry. The matters often in dispute
concern the dichotomy in responsibility for delays (projects owner or his contractors) partly
because of the multifarious nature of the potential sources of delays and disruption. Besides
that, the factor adversely affecting the cost performances of project are conflict among project
participants, ignorance and lack of knowledge, presence of poor project specific attributes
and non-existence of cooperation, hostile socio economic and climatic condition, reluctance
in timely decision, aggressive competition at tender stage and short bid preparation time.
2.2. Problems faced by EPC Contractors
1. Mansfeild NR, Ugwu OO & Doran T, (1994)
Delays causes are financing of and payment for completed works, poor contract
management, changes in site condition and shortages in materials
2. Odeyinka HA &Yusif A, (1997)
Delay via project participants and extraneous factors
17
3. K.C. Iyer& K.N. Jha, (2005)
The factor adversely affecting the cost performances of project are conflict among
project participants, ignorance and lack of knowledge, presence of poor project
specific attributes and non-existence of cooperation, hostile socio economic
andclimatic condition, reluctance in timely decision , aggressive competition at tender
stage and short bid preparation time.
4. M.S. MohdDanuri, M.E. CheMunaaim,H.Abdul Rahman &M.Hanid, (2006)
Late and non-payment caused severe cash flow problems especially to contractors.
5. Abdul Rahman Ayub&JanidahEman, (2006)
Some common types of problem faced by Bumiputera contractors in Malaysia
construction industry are shown as follows:
i. Lack of expertise and experiences
ii. Over-optimistic estimation in tender bids
iii. Material price escalation
iv. Financial Problems
v. Materials supply networking
vi. Lack of construction materials and machineries
vii. Inefficient and ineffective planning and management
viii. Communication problems
6. Wellington DidibhukuThwala&MpenduloMvubu, (2008)
Financial constraints
Late payment by clients
Relationships between emerging contractors and suppliers
difficulties when running a business
7. NuhuBraimah&IssakaNdekugri, (2008)
Delays and disruption to contractor’s progress are a major source of claims and
disputes in the construction industry. With increased project complexity and
requirements coupled with multiple parties all subject to their performance
exigencies, the resolution of such claims and disputes has become a matter of the
greatest difficulty.
Chapter 3:The facilitators of Solar power towards grid parity
18
3.1 The Semiconductor Policy, 2007
The Indian semiconductor industry was at a nascent stage 4-5 years ago. Most of the players
in this industry were focused on fabless chip design and there were no players with
capabilities in semiconductor fabrication (fab) or in ‘eco-system’ manufacturing.
On March 21, 2007 government notified the Special Incentive Package Scheme and on
September 14, 2007 notified the guidelines for the operation of the Scheme. The policy
provides comparable incentives for development of both fab and eco-system units. However,
the incentives make investments in ecosystem units more attractive.
Key points for the Semiconductor policy are:
20% capital subsidy for the first 10 years for an SEZ unit
25% capital subsidy for the first 10 years for a non-SEZ unit
Exemption from CVD for both fabrication and ecosystem manufacturing for non-SEZ
units
Amongst the eco-system units, various factors seem to favour investment in photo-voltaic
(PV) units in the short term. Some of these factors are:
a. Lower Capex requirement: Typically, capex requirement for PV units is lower than
that for fabs.
b. Lesser technology obsolescence risks: Technology life cycles for PV units tend to be
much longer than that in fabs.
c. Initiatives by the government: There have been various initiatives by the government
providing incentives for production and usage of solar energy in India.
All these factors supported the growth of PV market in india and subsequently supported the
growth of solar. On the basis of PV market growth eia has projected the year on year solar
PV capacity addition by 2016 comprising the addition under Karnataka, Gujarat, Rajasthan
and NSM policies.
19
Fig 4: Projected year on year solar PV capacity addition by policies in India source: eia
3.2 Renewable Purchase Obligation (RPO)
The Government of India under the aegis of the Prime Minister’s National Action Plan for
Climate Change (NAPCC) envisages a sustainable future for the country through
multipronged actions ranging from energy efficiency to forest conservation to greater share of
energy from renewable sources. One of the key actions taken by the GoI and regulatory
bodies has been to introduce Renewable Purchase Obligation in India. India aims to derive
15% of its energy requirements from renewable energy sources by the year 2020. RPO is one
of the tools of implementing this ambitious goal. Under these rules, distribution companies,
open access consumers and captive consumers are obligated to buy a certain percentage of
their power from renewable sources of energy.
3.3 Renewable Energy Certificate (REC)
The Government of India introduced the Renewable Energy Certificate (REC) Scheme in
2011 in order to kick-start the renewable energy market in India. India aims to generate 15%
of its energy requirements through renewable sources by the year 2020. India has significant
potential in Wind Energy, Solar Energy, Bio-mass and Bagasse as well as energy through
small hydroelectric projects. The REC mechanism is an important part of the plan to achieve
this ambitious target. It provides a financial incentive to producers of renewable energy
thereby providing more attractive returns on their investment in such projects. It also enables
companies that intend to purchase green power or are obligated to do so to buy RECs from
sellers in the market.
20
3.3.1 Salient features of REC framework
a. Renewable Energy Certificate (REC) mechanism is a market based instrument to
promote renewable energy and facilitate renewable purchase obligations (RPO)
b. REC mechanism is aimed at addressing the mismatch between availability of RE
resources in state and the requirement of the obligated entities to meet the renewable
purchase obligation (RPO).
c. Cost of electricity generation from renewable energy sources is classified as cost of
electricity generation equivalent to conventional energy sources and the cost for
environmental attributes.
d. The RE generators will have two options ¡V either to sell the renewable energy at
preferential tariff fixed by the concerned Electricity Regulatory Commission or to sell
the electricity component and environmental attributes separately.
e. On choosing the second option, the generator can sell the ‘electricity component’ to
either the local distribution company at its average power purchase cost, the traders,
open consumers or to the power exchanges at a mutually agreed/market determined
price. In addition, the ‘environmental attributes’ can be exchanged in the form of the
REC.
f. The Central Agency (the National Load Despatch Centre has been designated as
Central Agency) will issue the REC to RE generators.
g. One REC will be equivalent to 1 MWh of electricity injected into the grid.
h. The REC will be exchanged only in the Power Exchanges approved by CERC within
the band of a minimum and a maximum price to be determined by CERC. CERC has
already notified the price band.
The distribution companies, Open Access consumer, Captive Power Plants (CPPs) will have
the option of purchasing the REC to meet their Renewable Purchase Obligations (RPO).
3.4 Feed-in tariff
A feed-in tariff also known as advanced renewable tariff is a policy mechanism designed to
accelerate investment in renewable energy technologies. It achieves this by offering long-
term contracts to renewable energy producers, typically based on the cost of generation of
each technology. Technologies such as wind power, for instance, are awarded a lower per-
kWh price, while technologies such as solar PV and tidal power are offered a higher price,
reflecting higher costs. In addition, feed-in tariffs often include "tariff degression", a
21
mechanism according to which the price (or tariff) ratchets down over time. This is done in
order to track and encourage technological cost reductions. The goal of feed-in tariffs is to
offer cost-based compensation to renewable energy producers, providing the price certainty
and long-term contracts that help finance renewable energy investments. Feed-in tariffs can
be used to accelerate the pace at which renewable energy technologies become cost-
competitive with electricity provided from the grid. The rapid deployment of renewable
energy under feed-in tariffs seen in countries like Germany, Denmark and Spain has
undoubtedly contributed to reducing technology costs, and hence, in accelerating this trend.
India's Central Electricity Regulatory Commission (CERC) in New Delhi announced
September 17, 2009 new regulations launching a system of feed-in tariffs for renewable
energy, including both wind and solar energy. It was not clear from CERC's press release that
the feed-in tariff regulations were in response to the National Action Plan on Climate
Change. The action plan calls for five percent of electricity generation in India to be from
renewable sources by 2010 and to increase one percent per year for the next ten years.
3.5 Jawaharlal Nehru National Solar Mission
The Jawaharlal Nehru National Solar Mission (also known as the National Solar Mission) is a
major initiative of the Government of India and State Governments to promote ecologically
sustainable growth while addressing India’s energy security challenges. It also constitute a
major contribution by India to the global effort to meet the challenges of climate change.
Named for Jawaharlal Nehru, the Mission is one of the several initiatives that are part of
National Action Plan on Climate Change.
Objectives:
The objective of the National Solar Mission is to establish India as a global leader in solar
energy, by creating the policy conditions for its diffusion across the country as quickly as
possible. The mission will adopt a 3-phase approach as follows:
Phase 1: Remaining period of the 11th Plan and first year of the 12th Plan (up to
2012-13),
Phase 2: Remaining 4 years of the 12th Plan (2013-17),
Phase 3: 13th Plan (2017-22).
22
Targets:
To create an enabling policy framework for the development of 20,000 MW of solar
power by 2022.
To ramp up capacity of grid connected solar power generation to 1000 MW within
three years by 2013.
Additional 3000 MW by 2017 through the mandatory use of the renewable purchase
obligation by utilities backed with a preferential tariff.
To promote programs for off-grid applications, reaching 1000 MW by 2017 and
2000MW by 2022.
To create favorable conditions for solar manufacturing capability, particularly solar
thermal for indigenous production and market leadership.
30% capital subsidy for certain category of solar energy system.
Renewable Purchase Obligation (RPO) mandated for power utilities,.
Set up 20 million stand alone rural solar power plants in special category states such
as Lakshadweep, Andaman & Nicobar Islands and Ladakh region of J&K by 2022.
Border areas would also be included.
To achieve 15 million sq. meters solar thermal collector area by 2017 and 20 million
by 2022.
The ambitious target of 20,000 MW or more for 2022 will be dependent on the
learning of the first two phases, which if successful, could lead to conditions of grid
competitive solar power. The transition could be appropriately up scaled, based on
availability of international finance and technology.
Source: MNRE
23
Mission Strategy (Phase 1 and 2):
The first phase announced the board policy framework to achieve the objectives of National
Solar Mission by 2022. The policy announcement has created the necessary environment to
attract industry and project developers to invest in research; domestic manufacturing and
development of solar power generation and created the critical mass for a domestic solar
industry. The mission works closely with State Governments, Regulators, Power utilities and
Local Self Government bodies to ensure that the activities and policy framework being laid
out can be implemented effectively. Since some State Governments have already announced
initiatives on solar, the Mission will draw up a suitable transition framework to enable
aggressive growth.
3.6 Incentives for RE by the Central Government
a. Capital Subsidy: Some technologies like small hydro, biomass and solar PV (off-
grid) systems are provided support through capital subsidy based on installed
capacity. An indexation method has been devised to calculate subsidy amounts for
various technologies.
b. Accelerated Depreciation: The Government of India currently allows accelerated
depreciation at the rate of up to 80% in the first year on a written-down value (WDV)
basis for equipment under Section 32, Rule 5 of the Income Tax Act.
c. Generation Based Incentive (GBI) schemes: The Ministry of New & Renewable
Energy has already introduced Generation Based Incentive (GBI) schemes separately
for wind and solar energy. Under the Scheme for Solar Energy, GBI is provided to
support small grid solar power projects connected to the distribution grid (below 33
KV) to the state utilities. Indian Renewable Energy Development Agency (IREDA)
has selected 78 projects with a total capacity of about 98 MW for which the Ministry
will provide GBI of Rs. 12.41 per kWh to the State utilities when they directly
purchase solar power from the project developers. The quantum of GBI to the utilities
is kept fixed, as a difference of the CERC tariff for 2010-11 (Rs. 17.91 per kWh) and
a reference tariff of Rs. 5.5 per kWh. These projects are expected to be commissioned
during 2011- 12. Grid solar power projects in the capacity range of 100 kW to 2 MW
each, connected to HT grid below 33 KV are eligible under the scheme. A project
developer is required to be initially pre-registered with the state designated agency
and thereafter register online with IREDA. The first 100 MW capacity projects
registered with IREDA are eligible for GBI. The project developer is also required to
24
meet the technical requirements on performance and grid connectivity of the solar
power plant.
d. Income Tax Holiday: Section 80 IA of the Income Tax Act offers a 10-year tax
holiday within a block of first fifteen years during the life cycle of all infrastructure
projects which also includes renewable energy power generation projects.
e. Excise Duty Exemption: Government of India is offering 100% exemption in Excise
Duty for most renewable energy generation project components. The components that
are offeredsuch exemption are specified under List 9 of Section No. 237 of the
Central Excise Tariff Act, 1985. The normal rate of Excise Duty for such components
is 16%.
f. Customs Duty Exemption: Government of India is offering concessional Customs
Duty of 5% for selected components of renewable energy generation power projects
under the Customs Tariff Act, 1975 (51 of 1975). The electrical components and
machinery used in renewable energy power projects attracts Customs Duty of 7.5% or
10% (depending upon components). Further, Govt. of India vide Notification No.
30/2010-Customs dated 27 February 2010 has offered concessional Customs Duty for
all machinery imported for the initial setting up of a solar power generation project or
facility.
g. Foreign Direct Investment: 100% FDI investment is allowed in renewable energy
generation projects.
h. Deduction in Taxable Income: Under Section 10(23G) of the Income Tax Act,
income from an infrastructure capital fund or company or a cooperative bank (from
the assessment year 2002/03) by way of dividends, interest, or long-term capital gain
from investments made in infrastructure business, etc., is exempt till 2012.
i. Renewable Regulatory Fund (RRF): All power generation projects are required to
schedule the power. Any deviation from the schedule is liable to be penalised.
However, wind and solar power projects are allowed limited deviation from their
schedule. In order to compensate the applicable unscheduled interchange (UI) penalty
to state utility because of default of RE power schedules within the allowed limits, it
is proposed to create a renewable regulatory fund to compensate the same. This fund
is proposed to be created by the National Load Dispatch Centre (NLDC) on the lines
of UI Pool Account at the regional level. Payments on account of renewable
regulatory charges, as described in the Regulations, and interest, will be credited to
this account.
25
3.7 Development of Solar Cities
The Ministry of New and Renewable Energy is implementing a programme on ‘Development
of Solar Cities’. The programme aims to reduce a minimum of 10% of the projected demand
of conventional energy of the city through energy efficiency measures and renewable energy
installations. A total of sixty cities are proposed to be developed as solar cities during the
Eleventh Plan period including two model solar cities. So far, sanctions have been issued for
11 cities in the States of Uttar Pradesh (2 nos.), Gujarat (2 nos.), Maharashtra (3 nos.),
Uttarakhand (1 no.), Haryana (2 nos.) and Nagaland (1 no.). Further, ‘in-principle’ approval
has been given for eight cities in the States of Tamil Nadu (1 no.), Madhya Pradesh (1 no.),
Manipur (1 no.), Andhra Pradesh (1 no.), Chattisgarh (2 no.), Tripura (1 no.) and Union
Territory of Chandigarh, for developing them as Solar Cities.
The Ministry is providing financial support up to Rs. 50 lakh for each solar city to the
respective State Governments for preparation of a master plan, setting-up institutional
arrangements for the implementation of the master plan, awareness generation and capacity
building activities. Further, for two model solar cities, financial support of 50% upto a
maximum of Rs. 9.50 crore will be available towards the cost of installation of renewable
energy systems. An amount of Rs. 47.58 lakh has been released for 11 cities sanctioned so
far.
3.8 Solar Technology Policies
The Government is aware that US Companies are bidding for Solar Power Projects in India.
The subject of domestic content was raised by US in the fifth trade policy review of India
which took place at WTO Geneva in Sep, 2011. US has viewed the condition of domestic
content stipulated in the guidelines for selection of Solar Power Projects under Jawaharlal
Nehru National Solar Mission (JNNSM) to be inconsistent with the WTO obligations. The
reaction of the Government has been that domestic content requirement is applicable to Grid
Solar Power Projects of Phase-I of JNNSM which is essentially procurement of solar power
by Government through designated entity NVVN. Hence there is no violation of WTO
obligations.
The Government has targeted to achieve generation of 20,000 MW of solar power by 2022.
Government has also put in place policies for Phase-I (upto 2012-13) of the Mission to
support sourcing from domestic firms.
26
Sourcing key supplies from domestic firms has been encouraged. For this, a condition of
domestic content has been stipulated in the Guidelines for Selection of Grid Connected Solar
Projects which states that in case of PV projects, based on crystalline silicon technology,
being selected in Phase-I, Batch-I -- use of solar modules, Batch-II -- use of solar cells and
modules of Indian origin is mandatory. Import of thin film modules and CPV modules is
permitted. Also, 30% domestic content is mandatory for all new solar thermal power projects
sanctioned under Phase-I of the Mission.
3.9 Indian State Grid Solar Policies
A number of states have begun drafting policies post JNNSM to incentivize solar generation
within their states. Power distribution companies also have begun to set up plants under
Renewable Purchase Obligation (RPO) targets for state / private distribution boards and
captive units. A common problem shared by most states is paucity of power due to
insufficient generation and poor fiscal state of the utilities due to political and financial abuse.
Only a very few state power utilities are cash rich similar to Gujarat and have good credit
ratings. This is a major reason why, inspite of allowing 100% Foreign Direct Investment
(FDI) into the Power sector as far back as 2003, the government has not been able to attract
serious investments by large global power generation companies in India. Most of them have
adopted a wait and watch policy to date.
Below are a few key states that have begun promoting their own solar programs:-
Gujarat
Gujarat is witnessing a large market for the resale of PPAs by developers who often took up
projects with the intent to sell them at a higher price to international developers. This has
increased the project development costs and is threatening to make many projects unviable.
As a result, only a limited number of projects under the Gujarat solar policy are currently
moving forward successfully. Many projects are finding it difficult to attain financial closure
and are facing significant delays. Land acquisition is proving to be a challenge for projects in
Gujarat. There are a limited number of land-banks (large areas of land acquired and
consolidated by the government for the use of developers), thereby pushing developers to
purchase private land, which is usually a burdensome and slow process. Developers have to
engage directly with multiple land owners, facing issues with prices, location, land transfer
procedures and right-of way, amongst others. With the increasing interest from developers,
there is a nexus developing between brokers and land owners impacting the price of land in
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Gujarat. The limited availability is leading to multiple brokers offering the same pieces of
land to different developers. Realizing this, the owners have started quoting higher prices for
the land. The brokers in turn have begun promising them a higher price in order to secure
their clientele. This is significantly escalating land prices for potential sites in the state.
Rajasthan
The Rajasthan solar policy through its Renewable Energy arm RRECL was released in May
2011 and an enforcement date of 19 April 2011, with the aim to push Rajasthan to the
forefront of the Solar Movement in India. In the Initial stages of solar, a majority of
developers preferred the state for its high solar irradiation as well as plentiful availability of
waste and arid land. The state government has leased out a large amount of land for a pittance
for solar farms, and the JNNSM policy was announced which put the brakes on the state. The
projects with the land allocated and permissions in place were moved to JNNSM under the
migration and small solar scheme, with the vast majority of all solar allocations being given
to the state.
There have been almost 1.5GW of applications to the RRECL and the stated target by the
year 2012-14 for Rajasthan is 10GW with a JNNSM similar coal bundling policy to subsidize
tariffs. The first phase of allocations for 100MW with CSP and PV given equal weightage is
believed to begin shortly.
The key goals of the policy were to ensure use of arid land, generate employment, create an
industry as well as an R&D hub and promote the state as a solar hub. However given the poor
financial state of the state distribution authorities, whether solar subsidies will be possible for
such a large amount is questionable.
Uttar Pradesh
The Uttar Pradesh Power Corporation Limited has recently issued an Expression of Interest
for the generation of a 100MW at a very low tariff of Rs. 4.74 per unit of power. Whether
there will be takers for this is highly improbable unless availing of RECs are allowed.
Delhi
The city of Delhi is in the process of launching a rooftop policy which will incentivize use
and sale of residential generated solar power to the grid. The national capital city has
tremendous issues of load shedding in peak usage months and expects to use the power to
minimize impact to residential location.
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The policy proposal announced envisages a target of 20MW over 3 years by house owners
who would have the option of either paying 30% of the total cost of installation or can lease
their roof to a solar power developer, who would then set up a unit. The remaining 70%
would be financed by banks. The home owners would have to sign power purchase
agreements with the state distribution companies for the approval for feeding power into the
grid. Home owners will get to earn approx. Rs.17 ($0.38) per kWh of power produced
through the solar panels, which will be directly fed into a grid. The utilities may even deduct
the amount the house owner earns through the solar unit from the electricity bill. These
agreements will be for 25 years and are on similar lines of Feed in Tariffs followed in
Germany and other nations.
Punjab
Punjab had one of the first commissioned solar plants of 2MW by Azure Power Private
Limited which powered 32 villages and was on the forefront of the GBI scheme of MNRE.
The Punjab Energy Development Agency is the nodal authority for the generation of non-
conventional energy of the power surplus state. It deserved a mention because it was one of
the pioneer distribution boards that encouraged solar power.
Maharashtra
The largest consumer of power in the country has issues with the cost of solar power due to
the high costs of cross subsidies provided to the poor and agricultural users to the tune of Rs.
4000 Crores or approx. $1 Billion. Recently Maharashtra State Power Generation Company
(MAHAGENCO) has handed out a large chunk of the EPC for a 150MW solar power plant in
Dhule district to a consortium between Lanco and Juwi.
MAHAGENCO had connected its first ever solar plant of 1MW to the grid in April 2010.
The Maharashtra Electricity Regulatory Commission MERC has set the cost of Rs. 12 per
KWh as the sale priceof power from the solar farm with a technology split of 2:1 between
crystalline and thin film. There are two other farms of 1 MW and 4 MW being built as well.
Tata Power one of the largest generators of power in the state has also commissioned a 3MW
solar power plant in April 2011 at a procurement cost of Rs. 17.91 per KWh unit, at Mulshi,
to meet its own Renewable Purchase Obligation (RPO) of 0.25% of total power distribution
with a renewable target of 20-25% of its generation portfolio. This plant has generated just
short of 1.6 million units per MWp yearly.
29
Karnataka
The draft Karnataka Renewable Energy Development Limited (KREDL) Solar policy with
targets from 2011-2016 has called for suggestions with a final policy effective from the 1 of
June. The decade long target of installed solar projects call for 3% of the total state energy
generation by the year 2022.The state has set itself a target of 126MW by 2013-2014,
including those projects sanctioned under JNNSM with a total capacity of 200MW by 2016.
Plant sizes will be restrained to a maximum of 10MW for both thermal and PV, with a
minimum of 5MW. A tariff of Rs. 14.50 for PV grid as well as rooftop / small solar plants
and Rs. 11.35 for Solar Thermal is applicable for projects commissioned upto March 2013
based on the KERC order dated 13 July 2010. Our final part in this three part series will
cover the Central Government’s Offgrid Policy as well as ground realities on Solar Power in
India. The author leads an Advisory organization focused on Renewable Energy Projects and
also runs two of the largest renewable energy forums on linkedin.com dedicated to the Indian
subcontinent.
3.10 Payment security mechanism
Payment Security Scheme to enable financial closure of projects under Phase 1 of the
Jawaharlal Nehru National Solar Mission (JNNSM) by extending Gross Budgetary Support
(GBS) amounting to Rs.486 crore to MNRE in the event of defaults in payment by the State
Utilities / Discom to NTPC VidyutVyapar Nigam (NVVN), the Central Agency which will
purchase Solar Power from the developers and sell it to the utilities bundled with unallocated
Thermal Power available from NTPC utilities. The scheme will facilitate setting up 1000
MW grid connected solar power projects to achieve targets of the National Solar Mission.
The core component of the Payment Security Scheme is to create Solar Payment Security
Account (SPSA) financed from GBS to MNRE to have availability of adequate funds to
address all possible payment related risks in case of defaults by distribution Utilities for the
bundled power. The PPAs have a robust mechanism for recovering the payments for the
supply of bundled solar power through Letter of Credit System.
The Payment Security Scheme (PSS) is implemented by the Ministry of New and Renewable
Energy (MNRE) with the provision of NVVN opening the SPSA for this purpose and drew
funds as per mechanism/ provisions of the Scheme. The funds for each year is allocated by
MNRE into SPSA.
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3.11 Energy Security
IEP has defined energy security as, “The country is energy secure when we can supply
lifelineenergy to all our citizens as well as meet their effective demand for safe and
convenientenergy to satisfy various needs at affordable costs at all times with a prescribed
confidencelevel considering shocks and disruptions that can be reasonably expected.” As
growth of theeconomy is directly linked to the availability of electricity and resources, the
PlanningCommission of India has invited public participation anddiscussion on India’s future
energysecurity. This report confines itself to theelectricity sector and not energy as a whole.
India’s present electricity generation system is coal dominant and poses a threat
towardsachieving energy security. India’s coal production capacity during 2009/10was
534.33 metrictonnes, and import was 70 metric tonnes. Despite this huge coalcapacity, 27
thermal powerprojects were operating with critical coal stock of less than7 days in Nov 2010.
This wasmostly because of less receipt of local coal, delay in import of coal, and
transportation issues.There are limitations on scaling up of local coal production. Further,
poor quality of coalforces power projects to rely on coal imports. In order to ensure coal
resources, Indian companies like Lanco, Adani, JSW, etc, are acquiring foreign coal fields to
assure coal supplies for their thermal power projects. Other than coal, the countries having
major oil reserves are politically unstable. Resource risks increase with increased dependence
on fossil fuels. Hence, higher energy penetration from RE, and diversification of power
generation resources will ensure a balanced energy system. Diversification in the use of fuels
may also be important for energy security. Fuel transformation such as coal/oil to biomass
can meet demand when conventional fossil fuel supplies are affected. Rather, this will reduce
the dependence on coal and optimise the utilisation of renewable energy sources. Hence,
usage of fuel shift technologies and applications need to be promoted.
Solar resource is cost-free resource. After payback of capex, solar projects will have least
running costs and have the potential to supply electricity at competitive rates on a long-term
basis. The fossil fuel costs are increasing because of increasing demand in diminishing
reserves. With increased use of RE technologies and technology breakthrough, these projects
will achieve grid parity. Continuation of RE capacity addition will help in achieving capacity
additions when technology breakthrough/grid parity is achieved. Also this will help in
gearing up for expansions and resolving the related issues of higher RE penetrations.
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Chapter 4: Economics of solar market towards Grid parity
With prices of conventional electricity rising and of solar falling faster than predicted, some
analysts say grid parity can be achieved by 2017, a couple of years earlier than predicted.
Indian solar energy sector is gearing up. After a sluggish growth for over two decades, solar
energy picked up in the past two years, thanks to, coal price rise.
In 1980, coal was available at INR 250 per tonne and thermal power was produced at `0.40
per unit, now the same quality of coal is sourced at INR 3000 per tonne. As a result, cost of
thermal power has gone up to INR 5 per unit, a 12 times increase in the period. If similar
trend continues, the cost of thermal power will be INR 8 per unit in 2017 while it is predicted
that the per unit price of coal based thermal power will be INR 15 by 2030.
Unlike a coal plant, solar plant incurs negligible running cost. In 2009 the cost of setting up a
utility-scale solar plant was about INR 17 crore per MW, while now contractors quote INR
12 crore per MW. For a long time the cost of solar modules was 60%-70% of the total project
cost. This has come down to 50%.
The results of JNNSM bidding has shown some interesting figure that the total cost for per
unit procurement of power from solar PV has declined as in batch 1 of JNNSM phase 1
lowest bid was of 10.95 which has reduced to 7.49 in batch 2 is a huge decrease of 31%.
Also, CERC tariff has declined from 17.91 to 15.39 in batch 2.
This price movement coincides with the drastic fall in the global price of solar modules, the
backbone of the more popular photovoltaic solar plants, from USD 4 per watt of capacity in
2010 to less than USD1. According to Solar man, Dr. S. P. GonChaudhuri, “Cost of solar cell
was around USD 100 per watt in 1980 but at present, the same is around USD 1.5 per watt.
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Fig 5: NSM/NVVN Phase 1 bidding result & tariff trend Source: MNRE
According to scientific prediction, the minimum estimated cost of solar cell will be USD 0.5
per watt in the year 2035 and onwards. By then, solar power will be available at around INR
2 - INR 3 per unit while power generated from coal will be INR 15 if the price rise of coal
follows the current trend.”
Fig 6: Module pricing current trend Source: BNEF
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Silicon, wafer, cell and module prices crashed in recent past and continue to fall further.
(Silicon price from $450 / kg in 2008 to $ 50 / kg in 2011 and cell price from $ 2 to $ 0.6/
W). Declining cost on PV systems, innovations in technologies and efficiency gain will
support rapid development and long term viable investment.
However, going forward, cost reduction is not expected to maintain current pace as the
Balance of Systems (BoS), which accounts for 40% of the system costs is increasing. Further,
rising labour and land costs are also expected to cap the cost reduction going forward. Still it
is expected that the cost reductions to occur at 10-11% till FY17E (v/s 35 40% in the last few
years)
Fig7: Declining trend of cost of silicon Source:BNEF
On the basis of above figures it can be thought that solar power may reach grid parity by
2017 (i.e. cost equivalent to average grid cost for conventional energy sources) primarily on
account of
Capital cost reduction of solar projects.
Increasing economies of scale and.
Improvement in rapidly maturing solar PV technology
34
Fig 8: Cost trend and Predicted scenario Source:BNEF
On the contrary, the conventional energy prices are expected to rise steeply owing to Increase in consumer tariffs by state distribution companies to align it with their
average power purchase costs. Domestic coal shortage leading to higher imports, in turn implying rising power
purchase costs for distribution companies and Less possibility of substantial AT&C losses reduction to curb tariff hikes.
Fig 9: Solar Grid Parity by FY 2017 (Expected) Source: CARE
So on the basis of above projections it can be said that India is now not very far from solar
grid parity which is expected to reach by 2017 (as per CARE).
35
Chapter 5: Barriers for solar power development in India
The need for enacting policies to support renewable energy is often attributed to a variety of
barriers or conditions that prevent investments. As a result of barriers renewable energy is put
at an economic disadvantage relative to other forms of energy supply.
Five most critical barriers which could be addressed in the short term are:-.
a. The first is the general perception that renewable energy costs more than other
energysources, resulting in cost-driven decisions and policies that avoid renewable
energy.While making such comparisons, the explicit or hidden subsidies for
competing fuels is often ignored.
b. Second, even though lower fuel and operating costs may make renewable energycost-
competitiveon a life-cycle basis, higher initial capital costs can mean that
renewableenergy provides less installed capacity per unit of initial investment than
conventionalenergy sources. Thus, renewable energy investments generally require
higher amountsof financing for the same capacity.
c. Third, due to its inherent intermittent nature, renewable energy sources feeding into
anelectric power grid do not receive full credit for the value of their power.
d. Fourth, renewable energy projects are typically smaller than conventional
energyprojects and generally have high transaction costs, including for resource
assessment,developing project proposals, assembling financing packages and also for
negotiatingpower-purchase contracts.
e. Fifth, the environmental impacts of fossil fuels (externalities) that often result in
realcosts to society are difficult to evaluate, although environmental impacts
andassociatedcosts are often included in economic comparisons between renewable
and conventionalenergy, investors rarely include such environmental costs in the
bottom line used tomake decisions.
As per the survey done by World Bank Around 63% of the developers interviewed stated
thatbarriers in policy and regulatory aspects were the most significant barriers. Around 53%
of thedevelopers stated that along with policy barriers, the infrastructure barriers are critical
too.Approximately 37% of developers viewed solar radiation dataas one of the important
barrierswhich also has a key effect on the financing of the solar power projects in the country.
36
Fig 10:Rating of different barriers in India Source: World bank survey
5.1 Policy and Regulatory Barriers
Solar thermal developers had a strong argument about the mission document do not mention
hybridization or storage options for solar thermal technology. This according to them is a
lacuna which needed to be filled in as early as possible so that the power plants could be
utilized to the maximum, with higher Plant Load Factors, better stability and guaranteed
production of power.
a. The timelines for financial closure put unnecessary pressure on the developer. The
financial institutions being aware of the fact that the developers need the milestone to
be achieved within 3 months were in a stronger negotiation position on interest rates.
Furthermore the EPC providers were negotiating better rates for themselves since the
time given for technical tie up were reasonably tight.
b. The allotment of the projects were not based on the prior experience and the financial
strength of the developers.
c. The manufacturers on the other hand were of the opinion that the government also roll
out the policy for increased spending on R&D in the country ie Lack of R&D is again
the major barrier.
d. Lack of backing from the Government in the form of increased incentives more
number of manufacturing facilities/lines.
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5.1.1 Specific issues pertaining to JNNSM
Selection Criteria
There was a division of opinion on the selection criteria of the JNNSM draft guidelines
between the developers. Only 28% of the developers as per the survey of world bank believed
that the selection criteria were appropriate. 28% of the developers who stated that the criteria
were appropriate were of the opinion that the Guidelines have been well thought of and have
balanced the requirements.
Around 22% of the developers stated that the criteria were harsh believed that the financial
criterion of net worth was not necessary. They suggested that if the project developer could
achieve the financial closure then the financial net worth criteria could be relaxed. Also the
fact that the developers who would invest in these projects would have to retain their equity
locked in for at least three years was a major barrier and the developers suggested that it may
be removed. About 50% of the developers who were certain that the criteria were relaxed
pointed out that the technical criteria like experience of installations abroad, successful
operational plants and experienced manpower should be strengthened and should allow only
those technologies which have a historical background of being tried and tested and have
operational experience of at least 2-3 years.
Timelines for milestones to be achieved
Approximately 90% of the developers interviewed stated that the timelines for milestones to
be achieved in the draft JNNSM guidelines were unrealistic in nature. The rest 10% of the
developers were of the opinion that they had already started their development work around
1- 2 years ahead in time and thus were able to match up with the timelines as given in the
guidelines. Developers stated that the timeline for financial closure should be increased to 6
months and they should be penalized only if the implementation schedule is not on time. The
criteria to have financial closure by a certain date would put unnecessary pressure on the
developers. The time for land acquisition also took about a year according to developers. The
developers also opined that the land related criterion (of having possession of land), as given
in the draft guidelines was not clear.
Domestic Content Criteria
There was a difference in opinion on the issue of domestic content. Around 60% of
developers stated that the domestic content should not be included in the first phase. They
were of the view that the first phase, should focus on having the best quality equipment and
38
components at competitive rates to be installed and commissioned successfully to achieve the
target of 1000MW. This would also enhance local knowledge about implementation of solar
power projects in India. The second phase could build on the learning’s from the first phase
and could integrate domestic content for the solar projects. There was also a strong
distinction between the opinions of solar thermal project developers and the solar PV players.
While 90% of solar thermal developers believed that the domestic content criteria could be
easily met, rest 10% of the developers were not in favour of the criterion. These developers
who were against the criteria stated that though they could achieve the domestic content
criteria, they strongly believed that India did not have the requisite knowledge or the
experience in installation and commissioning of such MW size grid connected solar power
plants. Of the PV players interviewed, 75% argued that domestic content will act as a major
barrier to development of solar PV plant in the country, taking into consideration the limited
manufacturing capability/capacity of PV modules in the country. 25% of the PV developers
felt that they were ready to go ahead with any domestic content criteria since they were either
manufacturers or they had a technical tie up with module manufacturers of the country.
Issues with regard to PPA with NVVN
Bankability – All the developers interviewed felt that the draft PPA was not
bankable. The main concern was that NVVN did not have the requisite
bankable parameters for e.g. a strong balance sheet, on which the PPA is
hinged.
Guarantees against nonpayment – All the developers were of the opinion that
if NVVN fails to pay the tariff amount, there should be another mechanism,
such as creation of a special fund to pay the developers on time for the
electricity delivered by the developer.
Central Electricity Regulatory Commission (CERC) Tariff Order
The developers had strong opinions on the CERC tariff order. There was a significant
divergence in views between solar thermal developers and solar PV developers. While 100%
of PV developers stated that the CERC has come out with apt considerations on all
parameters for e.g. capital costs and O&M costs, 80% of solar thermal developers argued
strongly that the capital cost for solar thermal of INR 15.31Cr/MW was by far on the
conservative side and that CERC did not take into consideration the suggestions made by the
solar thermal developer’s on this. Some of the developers specified that Plant Load Factors
(PLFs) changed from region to region since it is dependent on the solar radiation data in each
39
region; zone specific tariffs are the best way to go ahead. They reasoned that Gujarat and
Rajasthan were arguably the best sites for having higher PLFs which could not be achieved in
states like Madhya Pradesh, West Bengal, Karnataka and Andhra Pradesh. Hence power
projects to be implemented in states other than Gujarat and Rajasthan should have higher
tariffs so as to compensate for the lower radiation levels. This would also help solar power
development across all states of India and not only be concentrated in these two states.
Tariff Bidding
Around 90% of the developers were not in favour of tariff bidding process and had strong
reasoning behind it. According to the developers, A good tariff is a market driver but the
bidding process would negate the incentive provided to the developers and would not allow
the market to grow. No other country has ever gone for tariff bidding at such an early stage.
Some of the developers compared solar to wind technology and opined that even though wind
is a proven and well established market, there is no tariff bidding as of today.A few
developers opined that the quality of the power projects would suffer since the developers
who have opted and won the bid would use low quality equipment/modules to realise profits
from the project.
The developers argued that while competition is good for any market development it needs a
mature market and solar market in India had not yet matured and that the tariff bidding
process should be implemented in the second phase. The developers also suggested that the
selection criteria should be strongly based on strict technical criteria. The developers who
have a proven and well established technology and who are already in contractual agreement
with technology provider should be given preference over others. The other 10% of the
developers were of the opinion that the bidding would not lead to any problems. In their
opinion, ultimately it is the developers who bids the tariff, and will have to perform as per the
prescribed terms and conditions and if they fail to perform they would be liable to pay
penalty to NVVN. This according to them was a huge risk which would prevent the
developers from bidding very low.
5.1.2 Specific issues pertaining to migration
Approximately 78% of developers were opting for migration. 22% of developers did not want
to migrate and were going ahead with developing projects in Gujarat or Rajasthan under the
state government policies. The developers opting for migration had all the criteria satisfied
40
and were looking forward to migrate to JNNSM since they were of the opinion that the state
government tariffs were not very encouraging.
5.2 Solar Radiation Data Aspect
Detailed solar and weather condition assessments are necessary to understand project
economics for solar power systems. In Solar PV plants for example, the plant¡¦s operating
capacity is highly sensitive to global horizontal irradiance (¡§GHI¡¨) and the consequent
bearing on the project cost is significant. For a given MW capacity, the GHI will determine
the plant size (number of panels required, land requirement etc.), capacity factor and plant
costs. A change in GHI directly impacts the electricity production and in turn, the revenues
realized. It is to be noted that understanding the project costs and returns after accounting for
the impact of solar radiation levels will have an impact on tariff expectations. Similarly, a
detailed understanding of direct normal irradiance (“DNI”) is critical for solar thermal
systems and consequently it is a critical component of the technical analysis for the
development of the solar park. The dependence of project risks and returns on the solar
resource availability at a particular site will also impact lender’s perception of these projects
and affect overall bankability.
The significant impact that measurements of solar radiation and climatic conditions will have
on a solar power projects has led investors and project developers to stress the importance of
gathering detailed information for potential sites. Ideally, on the ground measurement should
be collected over a period of 10 years. In addition, ground measurements should be compared
and correlated to satellite based analyses to present a comprehensive understanding to project
stakeholders.
41
Fig 11: GHI date for Bikaner Rajasthan Source: IMD
Thus measured data will definitely improve the accuracy of satellite-based modelling of solar
radiation and validation of solar resource forecasting methods.
Data comparison – Simulated vs. Ground measurement
At present the solar radiation data in India is available from the many different sources.
The data sources from which developers are working are:
National Renewable Energy Laboratory (NREL), USA – The NREL solar resource
maps have a resolution of 10 kms. These maps have been developed using weather
satellite data incorporated into a site-time specific solar mapping approach developed
at the U.S. State University of New York at Albany.
India Meteorological Department: IMD has carried out some ground measurement in
Gujarat but at limited number of stations. All stations do not employ same
configuration of instruments and also do not monitor the same parameters. Moreover,
these stations are located at far off distances from potential solar power plant sites,
thus data so collected does not provide accurate and precise input for power plant
output calculations.
METEONORM: METEONORM is Global Meteorological Database and provides
comprehensive meteorological reference, incorporating climatic data obtained from
IMD ground stations. In addition, they provide interpolation models and design
software, and have over 23 years of experience in the field.
42
3TIER: 3TIER is a global weather resource assessment firm. Their data set is based
on geostationary satellites and is high resolution (2.6 km) data obtained using
patented Perez model for DNI estimation.
Except data from India Meteorological Department (IMD) all the other sources use weather
models driven by weather satellite data.
Limitations of these data sources are:
Distance: Data from typical measurement stations can be extrapolated over a 100
kmradius and the current IMD stations are far away from the identified sites.
Granularity: The NREL model is based on a 10km grid which is not considered
verygranular. Granularity can be increased by using more granular models and
measuringground data at multiple locations.
Frequency of Measurement: Some data models are based on daily average satellite
dataand compute hourly estimates from it, while the recommended input is half
hourly datato increase accuracy.
Validation of Models: Most existing models have been built using U.S.
and/orEuropean data and need extensive validation for India, taking into account site
specificatmospheric conditions e.g. Aerosol Optical Depth (AOD).
Correlation of Data Sources: There is large variation in data from different sources.
The developers had mixed opinion on the solar radiation data availability in the
country.Around 80% of developers stated that this was almost as big as the infrastructure
barrier. Thesedevelopers believed that there would be variation between the ground level data
and simulated data and the variation could be anywhere between 10-15%. The rest of the
developers did not have any apprehensions on going ahead with the projects based on
simulated data which the developers purchase from expert data providers. There was also a
significant difference of opinion between solar PV and solar thermal developers. Though
80% of the PV developers suggested that the government should provide radiation data, all
the solar PV developers were comfortable in setting up their projects based on the simulated
data, whereas 90% of the solar thermal developers insisted that on ground measurement is a
must. Around 20% of the solar thermal developers had already conducted on ground
measurement. Around 10% of solar thermal developers were of the opinion that the
Government had done its best to bring out the policy and were ready to help the government
in collating data after their projects had been set up.
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5.3 Infrastructure Aspects
Barriers with regard to infrastructural requirements emerged as one of the most important
barrier for the solar power developers in the country. The three most important parameters in
infrastructure (apart from the requisite solar irradiation) required for developing a solar power
project are
a) Gradient – the land needs to be almost flat
b) Proximity to evacuation and
c) Accessibility.
The fourth important parameter which is of critical importance specifically to solar thermal
power projects is the proximity to water resource. Almost 80% of the developers have stated
that it is the most important issue along with policy issues amongst the five parameters.
Fig 12: Contribution of infrastructure related barriers Source: World bank survey
The lead times required for all the approvals were quite substantial and hence the developers
have highlighted the need for government intervention to reduce the same. In some cases, the
developers of solar thermal power projects did not obtain allotment near to the water resource
since the developers of PV projects were already allotted the land near the water resource.
These types of issues have made the developers raise questions on the knowledge of the state
agencies which are allotting the land to solar power developers.
Single Window Clearance for solar power project was one of the most important issues which
was debated by the developers. It is possible to bundle the land evacuation and water related
44
approvals under one clearance and the developer would have to approach just one entity to
avail this clearance provided he meets the criteria set by the guidelines. But this is a step to be
taken up by the state governments. While 90% of the developers were for it, 10% of the
developers opined that it was not always possible for the states to provide for a single
window clearance. One of the developers stated that it would be easier for Rajasthan to
provide single window clearance since they had already identified government land banks for
solar power development whereas Gujarat had a very few government land pockets. The
developer suggested that since purchase of land in Gujarat is mostly private the government
could provide single window clearance for other approvals required.
5.3.1 Specific issues with relation to land
Land related issues were the most discussed of all the infrastructure related issues with the
developers. The process of land acquisition differed from state to state. While Gujarat gave a
free hand to developers to choose based on the developers criteria (the type of land they
needed), Rajasthan adopted a different path of first identifying government waste land for
developing solar power projects and then allotting them to various developers. The lead time
to acquire land in states by the developers could range anywhere between 6-12 months and in
some cases more than a year. Land was the most important barrier as stated by 45% of
developers as far as infrastructure issues are considered. The rest of the developers own the
land on which they are developing the Projects and hence did not face any barrier.
5.3.2 Specific issues with relation to water
The canals in Gujarat and Rajasthan are the only water resource available to the solar power
developers. The developers apply to the local authorities to disburse annual estimated amount
of water to them. The authorities then analyse and gauge the current water usage pattern and
also account for future usage either for irrigation or domestic use and then allocate the
amount of water needed for the power project. Around 30% of the developers had already
received allocation from the state authorities for water usage. While another 50% of
developers had applied, they were still waiting to hear from the concerned authorities on the
allocation. The rest 20% are waiting for the clarity in guidelines to obtain water allocation.
The lead times required for acquiring this approval ranged from 3 - 6 months.
5.3.3 Issues related to evacuation
The developers need to submit an application to the nearest sub-station to evacuate the
power.
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The state conducts load flow studies and then either strengthens the grid or gives evacuation
approval to the developers.
The developers insisted that evacuation system was one of the most critical barriers next to
land issues. According to developers, even if there is land available with requisite amount of
solar irradiation, the absence of a 66/132kV grid network in certain areas to evacuate power
has made it difficult for the developers to choose the land. This has also led to a sharp price
rise in those areas where the transmission line/substations are available. However, the
developers opined that obtaining the evacuation approval (once the evacuation sub-station
was identified) was relatively easy since there was clarity on how to go about it. The lead
time according to developers for obtaining evacuation approval was 3-4 months.
5.3.4 Issues related to other approvals
The developers needed to seek other approvals too, other than land, water and evacuation.
The list of other approvals required for setting up of solar power projects are:
Approval from Land Usage Authorities
Approval from Pollution Control Board
Approval from Aviation ministry
Approval from local authorities on water usage
While the land usage authority¡¦s approval is a one-time exercise, the approvals from
pollutioncontrol board and water usage have to be renewed every year. The lead time for all
these approvals is 3-4 months.
5.4 Financing Aspects
Historically, renewable energy projects have faced financing problems because of
variousreasons. The main reasons are:
High Capital Costs
Low Plant Load Factors
Intermittency or infirm nature of the power generated
Access to funds/Subsidy from government
Policy and Regulatory issues ¡V low tariffs, low or no access to markets
Knowledge barriers among financing institutions/banks on renewable energy
technologies.
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The focus of the government on clean energy by providing incentives, experience gained in
renewable energy by the developers and also competition between developers has led the
markets to overcome many of these barriers in India with specific relation to wind and
biomass sector. Since solar is still in its nascent stages of development, some of these barriers
still do exist.
Debt to Equity Structures with which developers are working in India
D: E ratio was 70:30 at the time of JNNSM phase 1. Since it is a new technology to India, the
ratio should have been 80:20.
Equity and Debt financing issues
a. About 80% of the project developers had their equity tied up and the rest 20% were
still in process of forming a consortium. The developers already having a joint venture
with technology providers were the most comfortable with equity tied up and waiting
eagerly for the final guidelines to be announced.
b. Around 20% of the developers opined against the draft guidelines which states that
the investors can exit from any equity participation only after three years of successful
operation of the projects. According to these developers, these guidelines would
prevent some of the venture capitalists/angel investors from investing in solar energy
sector.
c. All the developers were in talks with lenders both in domestic as well as international
markets. Around 80% of the developers felt very strongly about debt closure and
stated that the 3 month timeline given by the draft guidelines for financial closure was
very tight.
d. The developers also opined strongly that the Indian banks and financial communities
should have been involved right from the beginning of the process to disseminate
knowledge on solar power so that they would have been more welcoming to the sector
as a whole.
e. Around 20% of the developers sated that the debt tie up would become difficult
because they were only looking at international markets for lenders and the recent
economic crises had put pressure on many financial institutions abroad.
f. While equipment leasing option always remained very exciting to the developers, the
developers insisted that the technology providers were hesitant with regard to the
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bankability of the PPA. The lenders were also weary on the timelines the government
has taken to bring out the final guidelines of JNNSM.
Risks involved in financing and their mitigation measures adopted by the developers
The main risks as perceived by the developers for financing include the PPA risks and Solar
Radiation Data risks. To reduce these risks the developers have approached MNRE with a
petition to make the PPA bankable and are positive that the Government of India would
provide some sort of guarantees of payment with regard to electricity delivered by the power
projects (either through GOI bonds or through creation of special fund(s) specifically
designed to minimize the risk). Some of the developers have already started on ground
measurement to ascertain the simulated radiation data in order to satisfy the financial
institutions.
CDM as a possible part-financing option
All the developers interviewed, both solar PV and solar thermal were interested in obtaining
carbon credits for their power plants. Around 70% of solar thermal developers were going
ahead on their own to get their project registered under the UNFCCC. The rest 30% of the
solar thermal developers stated that in case a viable and good Programme of Activity (PoA)
backed model of carbon financing was available, they would definitely be a part of the PoA.
All Solar PV developers agreed that since the cost accrued to registering their project at
UNFCCC would render claiming carbon credits unviable, PoA was the best solution
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Chapter 6: EPC Project Management
6.1 Introduction
EPC contracting serves as the delivery system for many of the most complex and most
expensive projects in the world e.g. construction of bridge, highway projects, port projects,
power projects etc. EPC contracting of power plants expects a lot of experience in the field
of building of power plants and understanding of Project Company’s specific need. Project
Companies award the EPC contract and transfer most of the project’s risks towards the EPC
contractor, while the contractor also gets freedom to do work for building everything in the
plant in his own way as per the given specification. Power generating companies transfers
the business of Engineering, Procurement and Construction work to the EPC Contractor. EPC
contractor performs all the activities in EPC and makes the marginal profit, by providing
various services through a single responsible entity and by negotiating with upstream,
equipment and material suppliers. EPC contractor try to make an optimal mix between cost,
time and quality in consideration with possible risks and minimum targeted profit.
6.2 Contracts
The law of contract is contained in the Indian Contract Act, 1872. The law of contract is the
foundation upon which the structure of modern business is built. In a situation if either of
the parties were free to go back on its promise without incurring any liability, there would
be endless complications and it would be impossible to carry on trade and commerce.
According to section 2(h) of the Indian Contract Act 1872: “An agreement enforceable by
law is a contract”
“A binding agreement between two or more persons which creates mutual rights and duties
and which is enforceable at law (IrHarbans Singh KS 1, 2007)”
Essential Elements of a Valid Contract
1. There must be an offer and acceptance between parties.
2. There must be intention to create legal relation.
3. There must be lawful consideration.
4. Parties must be competent to contract.
5. There must be free consent for both the parties.
6. There must be a lawful object of the contract.
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7. Contract may be oral but in some agreements it must be in written.
8. There must be certainty in agreement.
9. There must be possibility of performance.
10. Contract must not expressly be declared as void.
Contracting Methods in Power Sector
Traditional Approach (Design-Bid-Build)
EPC/ Packages Approach
6.2.1 Traditional Project Approach
Design-bid-build, also known as Design-tender, is a project delivery method in which the
agency or owner contracts with separate entities for each the design and construction of a
project. Design-bid-build is the traditional method for project delivery and differs in several
substantial aspects from design-build. This system has long been used in the West, and it has
been developed well. So it was called Traditional Approach. Meanwhile the project is divided
into small individual parts for construction, so it was called Fragmented Approach as well.
The most outstanding character of DBB is that the procedure of the project construction has
to follow the order of Design- Bid- Build. Only when the former one has finished, the later
one can start.
Fig. 13: General schematic diagram of the relationship between the parties.
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Potential problems of design-bid-build
Failure of the design team to be current with construction costs, and any potential cost
increases during the design phase could cause project delays if the construction
documents must be redone to reduce costs.
Redesign expense can be disputed should the architect’s contract not specifically
address the issue of revisions required to reduce costs.
Development of a "cheaper is better" mentality amongst the general contractors
bidding the project so there is the tendency to seek out the lowest cost subcontractors
in a given market. In strong markets, general contractors will be able to be selective
about which projects to bid, but in lean times, the desire for work usually forces the
low bidder of each trade to be selected. This usually results in increased risk (for the
general contractor) but can also compromise the quality of construction. In the
extreme, it can lead to serious disputes involving quality of the final product, or
bankruptcy of a sub-contractor who was on the brink of insolvency desperate for
work.
As the general contractor is brought to the team post design, there is little opportunity
for input on effective alternates being presented.
Pressures may be exerted on the design and construction teams, which may lead to
disputes between the architect and the general contractor.
Benefits of design-bid-build
The design team is impartial and looks out for the interests of the Owner.
The design team prepares documents on which all general contractors place bids.
With this in mind, the "cheaper is better" argument is rendered invalid since the bids
are based on complete documents. Incomplete, incorrect or missed items are usually
discovered and addressed during the bid process.
Ensures fairness to potential bidders and improves decision making by the owner by
providing a range of potential options. It also identifies new potential contractors.
Assists the owner in establishing reasonable prices for the project.
Uses competition to improve the efficiency and quality for owners.
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6.2.2 Engineer-Procure-Construct (EPC) Approach
EPC has emerged as the delivery method of choice for executing system projects in all
market sectors. The acronym EPC is short for “Engineer-Procure-Construct,” which implies
that a single entity has complete responsibility for a project from start to finish.
EPC Contracts are the most common form of contract used to undertake construction works
by the private sector on large scale and complex infrastructure projects. Under an EPC
Contract a contractor is obliged to deliver a complete facility to a developer who need only
'turn a key' to start operating the facility, hence EPC Contracts are sometimes called turnkey
construction Contracts. In addition to delivering a complete facility, the Contractor must
deliver that facility for a guaranteed price by a guaranteed date and it must perform to the
specified level. Failure to comply with any requirements will usually result in the Contractor
incurring monetary liabilities.
Fig. 14: Engineering – Procurement – Construction
In the EPC approach, the EPC firm assumes overall responsibility for the project, there by
relieving the customer of this burden and risk. The customer deals with a single-point contact
– the EPC project manager thus simplifying the lines of communication.
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In an EPC approach, as a single responsibility is been taken. Communication between
engineering design, procurement, and construction begins immediately, which makes
accelerating the project schedule possible without imposing greater risk. Customers skeptical
of using an EPC approach for projects are generally concerned with the perception that EPC
projects command a premium price. This is not true. EPC can be more cost-effective when
the value of the risk assumed by the EPC firm is considered, along with the early revenue
generating benefit of the accelerated project schedule.
The use of EPC and Design-Build as a project delivery method has increased significantly in
both the public and private sectors. The movement away from the typical "design/bid/build"
method to EPC and Design-Build has altered the traditional relationships among the owner
and the contractor. These altered relationships have shifted the risks assumed by each party in
traditional construction contracts.
However, because of their flexibility in the value the EPC contract is continuing to be the
predominant form of construction contracts used on large-scale infrastructure projects. In
India project companies and construction firms were using different project contracting
approaches depending upon the type of project.
Advantages of EPC:
Responsibility is divided clearly.
The whole schedule can be cut down.
Less stress because there are various managers.
The owner knows the whole prices of the project.
Disadvantages of EPC:
Because bidding happens before the engineering is complete, it is difficult for the
owner to identify what the work exactly is.
The owner’s ability to control the project is low.
The pre-tender stage cost can be very large.
The tasks across E, P, and C call for more management skills.
The EPC contractor holds greater responsibility so it is pivotal to have someone who
has the right qualifications for the job.
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6.3 Contractual Structure of a Power Project
The diagram below illustrates the basic contractual structure of a project-financed power
project using an EPC contract.
Fig 15: Basic contractual structure of a power project
The detailed contractual structure will vary from project to project. However, most projects
will have the basic structure illustrated above. As can be seen from the diagram, the project
company will usually enter into agreements which cover the following elements:
An agreement which gives the project company the right to construct and operate the
power station and sell electricity generated by the power station. Traditionally this
was a concession agreement (or project agreement) with a relevant government entity
granting the project company a concession to build and operate the power station for a
fixed period of time (usually between 15 and 25 years), after which it was handed
back to the government. This is why these projects are sometimes referred to as build
operate transfer (BOT) or build own operate transfer (BOOT) projects5.
However, following the deregulation of electricity industries in India, merchant power
stations are now being constructed. A merchant power project is a project which sells
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electricity into an electricity market and takes the market price for that electricity. Merchant
power projects do not normally require an agreement between the project company and a
government entity to be constructed. Instead, they need simply to obtain the necessary
planning, environmental and building approvals. The nature and extent of these approvals
will vary from place to place. In addition, the project company will need to obtain the
necessary approvals and licences to sell electricity into the market.
In traditional project-financed power projects (as opposed to merchant power
projects) there is a power purchase agreement (PPA) between the project company
and the local government authority, where the local government authority undertakes
to pay for a set amount of electricity every year of the concession, subject to
availability, regardless of whether it actually takes that amount of electricity (referred
to as a take or pay obligation). Sometimes a tolling agreement is used instead of a
PPA. A tolling agreement is an agreement under which the power purchaser directs
how the plant is to be operated and despatched. In addition, the power purchaser is
responsible for the provision of fuel. This eliminates one risk variable (for the project
company) but also limits its operational flexibility.
In the absence of a PPA, project companies developing a merchant power plant, and lenders,
do not have the same certainty of cash flow as they would if there was a PPA. Therefore,
merchant power projects are generally considered higher risk than non-merchant projects.
This risk can be mitigated by entering into hedge agreements. Project companies developing
merchant power projects often enter into synthetic PPAs or hedge agreements to provide
some certainty of revenue. These agreements are financial hedges as opposed to physical
sales contracts. Their impact on the EPC contract is discussed in more detail below.
A construction contract governing the construction of the power station. There are a
number of contractual approaches that can be taken to construct a power station. An
EPC contract is one approach. Another option is to have a supply contract, a design
agreement and construction contract with or without a project management
agreement. The choice of contracting approach will depend on a number of factors
including the time available, the lenders’ requirements and the identity of the
contractor(s). The major advantage of the EPC contract over the other possible
approaches is that it provides for a single point of responsibility. This is discussed in
more detail below.
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Interestingly, on large project-financed projects the contractor is increasingly becoming one
of the sponsors i.e. an equity participant in the project company. Contractors will ordinarily
sell down their interest after financial close because, generally speaking, contractors will not
wish to tie up their capital in operating projects. In addition, once construction is complete
the rationale for having the contractor included in the ownership consortium no longer exists.
Similarly, once construction is complete a project will normally be reviewed as lower risk
than a project in construction; therefore, all other things being equal, the contractor should
achieve a good return on its investments.
Normally most projects and almost all large, private sectors, power projects use an EPC
contract.
An agreement governing the operation and maintenance of the power station. This is
usually a long-term operating and maintenance agreement (O & M agreement) with
an operator for the operation and maintenance of the power station. The term of the O
& M agreement will vary from project to project. The operator will usually be a
sponsor especially if one of the sponsors is an independent power producer (IPP) or
utility company whose main business is operating power stations. Therefore, the term
of the O & M agreement will likely match the term of the concession agreement. In
some financing structures the lenders will require the project company itself to
operate the facility. In those circumstances the O & M agreement will be replaced
with a technical services agreement under which the project company is supplied with
the know-how necessary for its own employees to operate the facility.
An agreement governing the supply of fuel to the power station. This is usually a fuel
supply agreement, often with the local government authority that regulates the supply
of the fuel used to run the power station (e.g. coal, fuel oil, gas etc.). Obviously, if
there is a tolling agreement there is no separate fuel supply agreement. In addition, in
some markets and for particular types of projects the project company may decide not
to enter into a long-term fuel supply agreement but instead elect to purchase fuel in
the spot market. This will usually only be feasible for peaking plants and in locations
with ample supplies of the necessary fuel. For hydro and wind projects there is also no
need for a fuel supply agreement. However, this paper focuses on thermal plants.
Many of the issues discussed will be applicable to hydro and wind projects, however,
those projects have additional risks and issues that need to be taken into account.
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Financing and security agreements with the lenders to finance the development of the
project.
Accordingly, the construction contract is only one of a suite of documents on a power project.
Importantly, the project company operates the project and earns revenues under contracts
other than the construction contract. Therefore, the construction contract must, where
practical, be tailored so as to be consistent with the requirements of the other project
documents. As a result, it is vital to properly manage the interfaces between the various types
of agreements. These interface issues are discussed in more detail later.
The contract structure at IndurePvt. Ltd.:
Fig 16: Contract structure at IndurePvt. Ltd.
6.4 EPC
EPC contracting serves as the delivery system for many of the most complex and most
expensive projects in the world. EPC stands for Engineering, Procurement and Construction,
so EPC includes three main aspects of any project i.e. Engineering, Procurement and
Construction.
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In Indian power sector after the introduction of Electricity Act – 2003, the generation has
been de-licensed, and as a result many private players are attracted towards the opportunities
in the power sector. The new private players are generally interested in earning the revenue
by operating the plant and they don’t want to (or are able to) build the plant, which is another
complex and risky business. This general approach gave the opportunity to the EPC
contractor to participate in the EPC contracting of the power plants. EPC contracting of
power plants expects a lot of experience in the field of building of power plants and
understanding of Project Company’s specific need. Project Companies award the
EPCcontract and transfer most of the project’s risks towards the EPC contractor, while the
contractor also gets freedom to do work for building everything in the plant in his own way
as per the given specification. We can understand EPC by elaborating the terms Engineering,
Procurement and Construction separately specifically for power plant projects.
6.4.1 Engineering
Engineering of construction projects is consists of many things. First, one needs to make anall-
around and detail arrangement for technique, economy, resource, environment etc., whichis
needed to construct the project. It also needs integrated activity, which includes
analysis,demonstration and compiling design paper.
According to the size and complexity of the construction project, engineering is dividedinto
two or three stages of engineering. To the civil construction projects, engineering isdivided
into Preliminary Design and Working Drawing Design. For the industrial projectsand complex
infrastructure projects there is sometimes one more stage. Technical Design orExpended
Preliminary Design is added between the above two stages.
6.4.1.1 Design of project
Designs are done for the whole project and its components in case of Power Projects.
EPC contractor is expect to design
a. Layout of the plant
b. Layout of various equipment
6.4.1.2 Design basis and technical standards
Design is based on the design requirements of EPC contract, including:
a. The outcome document of the owner’s preparatory work.
b. The country’s technical standards where the project is located.
c. Technical standards agreed upon in the contract.
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d. Construction and engineering-related laws, such as construction law,
environmental law, product law, etc.
e. Good engineering practice.
6.4.1.3 Design document inspection and approval
In the process of EPC contract implementation, design document inspection and
approval are the way that owners control design quality. EPC contracts have the
following provisions:
a. Owners have the right to inspect any documents in connection with the
project.
b. If the contract requires that certain documents subject to the approval of
owners, contractors should submit the document to the owners or PMC
(Project Management Contractor), which is commissioned by the owners, to
carry out examination and approval.
c. Within the required timeframe, owners should inspect the design document. If
there are problems, owners can have contractors modify them.
d. The drawings and documents shall not be used for the project before
inspection and approval have occurred.
e. If contractors want to modify the document, which is already approved by the
owners, they still need to report to the owners for approval.
f. The outcome document of the contractor's design should use the language
stipulated in the contract.
Fig 17: Process of getting Engineering drawings approved from TCE at Indure
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6.4.2 Procurement
In EPC Contracting ‘Procurement’ is the level where a lot of expertise experience is required.
EPCcontractor has to procure all the items required in the Power Project. So before starting
the projectcontractor look for all possible sources from where he/she can procure the items.
The contractor has tomake a strong relationship with upstream suppliers in terms of quantity,
quality, price, and deliverytiming; otherwise EPC contractor has to bear all loses due to
inefficiency of the upstream suppliers.
Procurement activities can be divided into two main kinds of activities.
1. Procurement of Materials
2. Procurement of Services
i. Procurement of MaterialsProcurement of material requires a lot of vendor selection and negotiating
skills for EPC contractor. Inthe procurement of materials the contractor has to
procure various items some of them are as follows:
ii. Procurement of Raw Material:
Raw material includes Cement, Steel (other metals),Concrete etc. EPC
contractor can make a long term cost effective supply agreement withcement
and steel suppliers who can provide the items of desired quality standards.
iii. Procurement of Equipment:
Procurement of equipment requires technical consultancyand marketing skills.
EPC contractor has to decide whether he wants to procureequipment from
onshore suppliers or offshore suppliers. Offshore suppliers can
providecheaper and more efficient equipment but the tax effectiveness will be
required. For theprocurement of equipment the EPC contractor can go for
bidding or can make a supplyagreement with the supplier. EPC contractor can
also provide the technical consultancy tothe suppliers or can arrange desired
specifications from the project company.
iv. Procurement of Services
The erection of power plant requires a lot of services. The main kind of
services may be of followingtype.
Technical Consultancy
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Civil Consultancy
Man Power
Managers
Engineers
Supervisors
Daily wage workers
Logistic
Guarantor
Sub-Contractors
6.4.2.1 SAP
SAP is an ERP (Enterprise Resource Planning) software. It can literally run an entire
enterprise. Companies can run SAP's transactions to support their Order to Cash, Procure to
Pay, Plan to Produce, Hire to Retire business processes, and much, much more. It has a user
friendly GUI which assists user at every step and results in fast & smooth operation. It is
normally used in companies to generate purchase orders, sales orders, maintain schedule lines
etc.
It is used in Project Management department of IndurePvt. Ltd. for making purchase orders.
6.4.2.2 General responsibility for procurement
General contract provisions about procurement include the following aspects:
a. Contractors should be responsible for all the materials needed such as raw
materials,equipment’s, and other consumables.
b. Contractors should have procurement departments that are in charge of procurement
tasksand the coordination to make sure the work is efficient.
c. Contractors should choose the transportation routes and make a distribution plan based
onroad conditions.
d. If others claim for the bad transportation, contractors should make sure that owners
willnot suffer the loss and negotiate with the claimant and pay for the loss.
e. Contractors should prepare procurement process documents according to the
contractsrequirements and submit them to owners to monitor the contractors’ work.
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6.4.2.3 Monitoring the procurement process
It includes the following aspects:
a. Contractors shall prepare an overall procurement plan and submit it to the
owners.Procurement plans should be consistent with the requirements of the project
and contractorsshould pay special attention to significant equipment.
b. Contractors should inform owners of the major plant that is going to be used including
theplant name, dispatch point, loading port, unloading port, inland transportation, and
point ofarrival at site.
c. For the main materials and equipment, their source should be limited to the list
ofsuppliers appointed in the contract and other suppliers who have been approved by
theowners.
d. Contractors should carry out the supervision and management for the vendor, supplier,
and manufacturer during the whole procurement process.
e. For the significant equipment, contractors should supervise the manufacturing to
controlthe quality and progress.
f. Owners have the right to check the equipment and materials at a reasonable
timeincluding the inspection of the progress in manufacturing and during the quality
testingprocess.
g. Any equipment in the manufacturing process can be inspected as written in the
contract.
h. Owners have the right to request the contractors to provide non-priced supply contract
fortheir inspection.
6.4.3 Construction
In EPC after engineering and procurement of material and services construction of the plant
is anotheractivity of EPC contractor. Construction is about erection of power plant it require a
lot of engineeringsupervision. In construction phase EPC contractor has to erect all the
necessary buildings for power plant.
EPC contractor has to do a lot of planning for construction about what kind of work can be
donesimultaneously and what are critical works those requires separate attention and time.
Thesynchronization between all the departments is necessary for the ease of construction e.g.
the supply ofraw material and equipment must be on time and as per specification. During
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construction a lot of skillperson are required and their skill decide the quality of construction
in terms of cost and time.
6.4.3.1 Regulations on construction in EPC contract
a. The contractor shall follow the owner or the contract’s opinion.
b. The contractor should provide sufficient management personnel and send full-
time projectmanagers to be responsible for on-site management.
c. Construction personnel must have appropriate skills and have good
professional ethics.
d. Construction equipment provided by the contractor, once transported to the
site, are considered special construction equipment. Without owner's
permission they should not be transported from the scene.
e. During the construction period, contractors should keep the construction site in
goodorder. When the project is close to completion, they should do a good
job-site cleanup.
f. The contractor has to get approval from the consultant before dispatching
goods to site.
g. The construction must be based on contracts, specifications, and other
documents.
h. The contractor must complete the construction during the given period,
together with the preparation of the different documents, as well as the test,
otherwise the contract should bear a delay in compensation.
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Fig 18: Process of getting MDCC (Material Dispatch Clearance Certificate) at IndurePvt. Ltd.
6.4.4 Monitoring of Project
This is indeed the most important activity which ensures that the project is not going behind
schedule. There are various activities which aids in the monitoring of the project:
Daily progress reports
Monthly progress reports
Gantt Charts
Co-ordinating with engineers at site
Primera: It is a project management software which aids in maintaining the progress
of project with planned schedule. It assists in constructing Gantt Charts for the project.
It constantly highlights critical activities to ensure they top priority for the manager. It
shows the completion status of all activities with time. It highlights the activities which
are going behind scheduled time. In other words, it aids a manager to keep check on
important activities with its user friendly GUI.
6.4.5 EPC Contracting Of Thermal Power Plant Projects
The concept of EPC contracting has evolved because of the complexity of the power projects.
A powergenerating company can run the power plant efficiently and can earn revenues but
the power generationcompany may not be the expert in building of the power plant, which is
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another complex business. Powergenerating companies transfers the business of Engineering,
Procurement and Construction work to theEPC Contractor. EPC contractor performs all the
activities in EPC and makes the marginal profit, byproviding various services through a
single responsible entity and by negotiating with upstream,equipment and material suppliers.
EPC contractor is responsible for delivery of facilities for a guaranteed price by a guaranteed
date and itmust perform to the specific level (quality). Failure to comply with any
requirements will usually result inthe contractor incurring monetary liabilities. So EPC
contractor try to make an optimal mix between cost,time and quality in consideration with
possible risks and minimum targeted profit.
6.5 Features of EPC Contracting
The basic features of and EPC contract are as follows.
6.5.1 A single point of responsibility
The contractor is responsible for all design, engineering, procurement,
construction,commissioning and testing activities. Therefore, if any problem occurs the
project company needonly look to one party-the contractor- to both fix the problem and
provide compensation.
6.5.2 A fixed contract price
Contractor assures the project company or the owner about the stated cost of project. Risk of
costoverruns and the benefit of any cost savings are to the contractor’s account. The
contractor usuallyhas a limited ability to claim additional money which is limited to
circumstances where the projectcompany has delayed the contractor or has ordered variations
to the works.
6.5.3 A fixed completion date
EPC contract includes a guaranteed completion date that is either a fixed period after
thecommencement of the EPC contract. If this date is not met the contractor is liable for
delayliquidated damages (“DLDs”). DLDs are designed to compensate the project company
for lossand damage suffered as a result of late completion of the power station. To be
enforceable incommon law jurisdictions, DLDs must be a genuine pre-estimate of the loss or
damage that theproject company will suffer if the power station is not completed by the target
completion dateThe genuine pre-estimate is determined by reference to the time the contract
was entered into.
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6.5.4 Performance guarantee
Power company’s revenue depend on the performance of the power plant and if the power
plantdoes not give predetermined efficiency and reliability then project company has to bear
financialloses. Project Company transfers loses because of poor performance and reliability
to the EPCcontractor in terms of ‘performance liquidated damages’ (“PLDs”).PLDs must
also be a genuine pre-estimate of the loss and damage that the project company willsuffer
over the life of the project if the power station does not achieve the specified
performanceguarantee. PLDs are Net Present Value (NPV) calculation of the revenue forgone
over the life ofthe project.
6.5.6 Bankability
A bankable contract is a contract with a risk allocation between the contractor and the
projectCompanythat satisfies the lenders. Lenders focus on the ability of the contractor to
claimadditional costs and/or extensions of time as well as the security provided by the
contractor for itsperformance. The less comfortable the lenders are with these provisions the
greater amount ofequity support the sponsors will have to provide.
6.5.7 Subcontracting
Subcontracting is another feature of the subcontracting, in which contractor transfers some of
hiswork to the subcontractor in consideration with the time, cost and quality of the work.
6.5.8 Security
It is standard for the contractor to provide performance security to protect the project
company ifthe contractor does not comply with its obligations under the EPC Contract. The
security takes anumber of forms including, a bank guarantee for a percentage, normally in the
range of 5-15%, of the contract price. Theactual percentage will depend on a number of
factors including the other security available to theproject company, the payment schedule
(because the greater the percentage of the contract priceunpaid by the project company at the
time it is most likely to draw on security i.e.: to satisfy DLDand PLD obligations the smaller
the bank guarantee can be), the identity of the contractor and therisk of it not properly
performing its obligations, the price of the bank guarantee and the extent ofthe technology
risk;
a. Retention:
Withholdingapercentage(usually 5% to 10%) of each payment. Provision isoften made to
replace retention
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b. Advance payment:
Advance payment guarantee, if an advance payment is made; and
c. A parent company guarantee:
This is a guarantee from the ultimate parent (or other suitable related entity) of thecontractor
which provides that it will perform the contractor's obligations if, forwhatever reason, the
contractor does not perform.
6.5.9 Variations
The project company has the right to order variations and agree to variations suggested by
thecontractor. If the project company wants the right to omit works either in their entirety or
to beable to engage a different contractor this must be stated specifically. In addition, a
properlydrafted variations clause should make provision for how the price of a variation is to
bedetermined. In the event the parties do not reach agreement on the price of a variation the
projectcompany or its representative should be able to determine the price. This
determination issubject to the dispute resolution provisions. In addition, the variations clause
should detail howthe impact, if any, on the performance guarantees is to be treated. For some
larger variations theproject company may also wish to receive additional security. If so, this
must also be dealt within the variations clause.
6.5.10 Defects liability
The contractor is usually obliged to repair defects that occur in the 12 to 24 months
followingcompletion of the performance testing. Defects liability clauses can be tiered. That
is the clausecan provide for one period for the entire power station and a second, extended
period, for more critical items.
6.5.11 Intellectual property
The contractor warrants that it has rights to all the intellectual property used in the execution
ofthe works and indemnifies the project company if any third parties' intellectual property
rightsare infringed.
6.5.12 Force majeure
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The parties are excused from performing their obligations if a force majeure event occurs.
Forcemajeure clauses are almost always included in EPC Contracts. Generally,
theassumption appears to be that "the risk will not affect us" or "the force majeure clause is a
legalnecessity and does not impact on our risk allocation under the contract". Both of
theseassumptions are inherently dangerous, and, particularly in the second case, incorrect.
The underlying test in relation to most force majeure provisions is whether a particular
eventwas within the contemplation of the parties when they made the contract. The event
must alsohave been outside the control of the contracting party. There are generally three
essentialelements to force majeure:
It can occur with or without human intervention
It cannot have reasonably been foreseen by the parties, and
It was completely beyond the parties’ control and they could not have prevented
itsconsequences.
The preferred approach for a project company is to define force majeure events as being any
ofthe events in an exhaustive list set out in the contract. In this manner, both parties are aware
ofwhich events are force majeure events and which are not. Clearly, defining force majeure
eventsmakes the administration of the contract and, in particular, the mechanism within the
contract fordealing with force majeure events simpler and more effective
"An Event of Force Majeure is an event or circumstance which is beyond the control
andwithout the fault or negligence of the party affected and which by the exercise of
reasonablediligence the party affected was unable to prevent provided that event or
circumstance is limitedto the following:
a. Riot, war, invasion, act of foreign enemies, hostilities (whether war be declared or
not)acts of terrorism, civil war, rebellion, revolution, insurrection of military or
usurpedpower, requisition or compulsory acquisition by any governmental or
competentauthority;
b. Ionising radiation or contamination, radio activity from any nuclear fuel or from
anynuclear waste from the combustion of nuclear fuel, radioactive toxic explosive or
otherhazardous properties of any explosive assembly or nuclear component;
c. Pressure waves caused by aircraft or other aerial devices travelling at sonic or
supersonicspeeds;
d. Earthquakes, flood, fire or other physical natural disaster, but excluding
weatherconditions regardless of severity; and
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e. Strikes at national level or industrial disputes at a national level, or strike or
industrialdisputes by labour not employed by the affected party, its subcontractors or
its suppliersand which affect an essential portion of the Works but excluding any
industrial disputewhich is specific to the performance of the Works or this Contract.”.
6.5.13 Packages
As EPC contracts are very complex in nature so, EPC-contractor breaks the whole project
workinto modules. The isolated modules can be called as packages, and set of modules which
isisolated from others can also be considered as package. These packages help the contractor
incontrolling the project work in terms of time and cost. Packages also helps in estimating
thecompleted or remaining work.
6.5.14 Suspension
The project company usually has right to suspend the works.
6.5.15 Termination
This sets out the contractual termination rights of both parties. The contractor usually has
verylimited contractual termination rights. These rights are limited to the right to terminate
for non-payment or for prolonged suspension or prolonged force major and will be further
limited by thetripartite or direct agreement between the project company, the lenders and the
contractor. Theproject company will have more extensive contractual termination rights.
They will usuallyinclude the ability to terminate immediately for certain major breaches or if
the contractorbecomes insolvent and the right to terminate after a cure period for other
breaches. In addition,the project company may have a right to terminate for convenience.
6.5.16 Performance specification
Unlike a traditional construction contract, an EPC Contract usually contains a
performancespecification. The performance specification details the performance criteria that
the contractormust meet. However, it does not dictate how they must be met. This is left to
the contractor todetermine. A delicate balance must be maintained. The specification must be
detailed enough toensure the project company knows what it is contracting to receive but not
so detailed that ifproblems arise the contractor can argue they are not its responsibility.
Chapter 7: EPC Sub-Contracting of Thermal Power Plant
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Generally in EPC-Contract of thermal power projects the ‘Project Company’ awards the
provision offacility of ‘subcontracting’ to the contractor. The main aspect behind giving the
provision is that, thepower plant projects require for each module, the expertise work and
expertise supervision. Power plantprojects are so complex that all the work by a single entity
with the best efficiency is not possible;subcontracting helps the EPC contractor to gather
some expertise hands from outside world. Though inEPC-contracting the contractor may
have the rights to avail the services of the sub-contractor but the basicof EPC contracting
remain intact i.e. single point of responsibility towards the EPC-Contractor.
The provision for subcontracting by the Project Company gives the facility to the contractor
but it alsoenhances the project management complexity. Now the contractor has to
synchronize all his activitieswith his sub-contractors and has to monitor and supervise them
time to time. With the participation of thesub-contractor, the contractor is responsible towards
the project company, not only for his activities butfor the sub-contractor’s activities also. The
EPC-contractor and the subcontractor come into a contractafter formal procedure which
includes all the essentials of a valid contract.
It is always expected from the sub-contractor that he will execute the work with more
efficiency than themain EPC-contractor in terms of cost, time and performance. The
efficiency in the cost increases the subcontractor’srevenue and for efficiency in cost the time
management must be on prime in considerationwith the performance.
Sub-contractor mainly concentrates on his core-competencies and takes the workaccordingly.
The subcontractorworks as the lowest entity in the hierarchy of contract work of the project
development afterProject Company and the main EPC-contractor and thereforerisks relevant
to the dependencies on the high level entities are higher for sub-contractor. The bonding
between the EPC contractor and his sub-contractors is very important as if there is a good
professional understanding then the EPC-contractor and sub-contractors then they can
represent themselves as a team while bidding and their efficiencies and goodwill in the
market can beat the rivals.
7.1 Essential steps in the process of sub-contracting
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In the process of subcontracting the risks of the EPC-contractor increases manifold, so the
process of subcontractingexpects a formal way of execution. In the process of subcontracting
the following must beincluded.
1. Short listing and approval of sub-contractor
2. Preparation of commercial terms & conditions
3. Approval for floating the tender
4. Review of technical specification of the package
5. Receipt and analysis of ‘Techno-commercial’ bids
6. Arrangement of Techno-Commercial discussions with Bidders
7. Finalization of Technical Evaluation Reports (TER)
8. Entries in ERP
Fig 19: Process of sub-contractinf at IndurePvt. Ltd.
7.2 Packages in a Thermal Power Plant
The building of a power plant includes a lot of complicated set of activities. Some of the
activities whichare linked to each other and are independent from other activities can be
recognized as ‘package’ of theproject work. The packages help to control the project work
and turn the complex project work intobuilding block activities. Clubbing of the packages is
possible but while clubbing the packages, care istaken to ensure that engineering progress is
similar for all packages that are proposed to be clubbed sinceit would be difficult to order a
package if engineering progress of any of its constituent packages is poor.The packaging
concept helps the EPC-contractor to transfer some of his work to expert sub-contractorswho
brings more efficiency in the activities.
The main objective behind the packaging of the power projects are as follow:
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1) Cost optimization
2) Manageability of the contract
3) Timely execution
4) Commonality of sub-contractor’s core business strength
5) Synergy in various packages in terms of coordination and related inter-disciplinary
7.2.1 List of Packages inThermal Power PlantProjects
Studies and Investigations
Soil Investigation and Topographical Survey
Seismic Study
Water Intake Study
Geo-Hydrological Study
Drainage Study
Ground Water Analysis for Drinking & Construction
Sea Water Analysis for CW, ACW, Desalination & DM water System
Ash Pond Leaching Study
Land filling & construction Material Sourcing Study
Wind Tunnel Test
Fuel Oil (HFO & LDO) Logistic Study
Coal flow ability Study
Ground Improvement & Optimization Study
Fly Ash Utilization Study
Site Enabling Facilities
Construction Office
Electrical in the Construction Office
Development of Storage & Fabrication Yards
Construction Stores + Cement Sheds
Construction Water incl. Drinking Water Facility
Construction Power System
Emergency DG Set for Construction Power
Site Communication Facilities (Including Tower, VSAT, Local Server, etc.)
Weigh Bridge
Area Lighting
Field Quality Lab
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Portable Toilets + Portable Pantry
Air Conditioners
Engineering and Consultancy
Cooling Tower Consultancy
BTG Studies
Engineering Consultancy Contract for Civil & Architecture works
Engineering Consultancy for Mechanical/Electrical & C&I Packages
Chimney consultancy
Civil
Non Plant Buildings
Sea/River/Dam Intake System
Sea water waste system with pipeline
External civil works for Coal Transportation ( foundations of conveyor system)
NDCT /IDCT(Cooling Tower)
Piling & Test Piles
Raw water Reservoir
Structural Steel Fabrication and Erection
Rain Water Harvesting Pond
Sewage System
Switchyard Civil works
Procurement
Cement - Procurement
Structural Steel
Reinforcement steel
RMC
Mechanical Procurement
Compressed Air System
Desalination Plant
D. M. Plant
Chlorination System
Cooling Tower Equipment (IDCT)
Coal Handling Plant (Supply & Erection)
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Ash Handling Plant & Ash Water Recirculation System
CW/ACW pumps
Misc. pumps
Electrical Procurement
Power Transformers (Incl. Distribution, GT, ST, UAT & ICT)
LT Auxiliary Transformer
Bus ducts
HT Switchgears (11KV, 6.6 & 3.3 KV)
LT Switchgears
HT Power Cables
LT Power & Control Cables
DG Set
Supplies of Lightning Protection System + Earthing Rods + Cable Trays
and Accessories,
Support Structures, Earth Fault with Lightning Prot, Earthing& Grounding
Wireless Communication System
7.3 Contract risks analysis
Project has a variety of risks; According to the contract life cycle, they are risks in
theestablishment phase of the contract and implementation phase of the contract. In the phase
ofcontract establishment, the risks can be divided into pre-tender risks and tender offer risks.
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Fig 20: Key risks in EPC contract
7.3.1 Risks in the establishment phase of the contract
(a) Pre-tender risks
The risks involved in it are as follows:
Political risk, such as the relationship between two countries
Inaccurate information.
Agents are unreliable.
Unfamiliar with the market.
Unfamiliar with the situation of competitors.
Decision-making errors.
(b) Tender offer risks
Inadequate preliminary work.
The tender requirements are not clear.
Shortage of basic information about design.
Failure about the prediction of the implementation phase.
Failure in the selection of joint venture partners or sub-contractors.
Underestimating the bid of the quoted price.
7.3.2 Risks in the implementation phase of the contract
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(1) Project engineering risks
Risks caused by owners and project management companies.
Risks caused by sub-contractors.
Risks caused by contractors.
(2) Project procurement risks
Risks caused by owners and project management companies.
Risks caused by suppliers.
Risks caused by fund.
Risks caused by sub-contractors.
(3) Project construction risks
Risks caused by engineering and procurement.
Risks caused by the coordination situation of partners.
Risks caused by natural and social circumstances in the host country.
7.3.3 Risk of time and cost overruns
Huge time taken to develop the projects and to bring them to a stage, where notice to
proceedto the contractor can be given. For IPP's also there is a big time gap between proposal
andnotice to proceed. As a result the contractor have to hold prices over long periods with
thecurrent volatility in prices of most of the inputs like steel etc. this has become a
difficultsituation for contractors.
As on February 2011, out of a total of 559 ongoing infrastructure projects in India, 293
weredelayed. Out of the delayed projects, 69 were a month to a year behind schedule, while
67projects were delayed by 13–24 months, 107 by 25-60 months and 37 by over 60 months.
Chapter 8: Suggestions &Recommendations
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A. For Solar Grid Parity
Targeting the solar Grid parity in India by 2022 and seeing its future prospects, following
suggestions are given for considerations.
8.1 Policy and Regulatory Aspects
Tariff Bidding should not be there in the initial stages of development of solar PV
technology. To promote the technology new comers in the field should be promoted.
Since plant Load Factors (PLFs) changes from region to region as it is dependent on
the solar radiation data in each region; so inspite of CERC tarrif zone specific tariffs
should be there.
The minimum and maximum capacity to be developed by a single developer could be
ascertained based on the prior installation experience of the developer worldwide to
achieve higher success rates.
Strict Technical Criteria to be put in place with technology experience along with
operational data for 1-2 yrs should be a prerequisite.
Cost of solar thermal projects to be revised in the CERC benchmarking exercise and
thus tariffs for solar thermal power projects to be revised upwardly
Policy for hybridization/storage with extra incentives for the same to be in place.
Hybridization needs to be considered on an accelerated scale, particularly for CSP and
an enabling regulatory framework needs to be evolved with appropriate safeguards for
hybrid technologies.
The Domestic Content criterion should be removed to create competition and this
would possibly result in deployment of technologies which are already
commercialized and have operational experience abroad.
Backing from the Government in the form of increased incentives should be given to
set up more number of manufacturing facilities/lines so that India could become a hub
for cell/module/solar block manufacturing in the world.
There needs to be stricter enforcement of state RPOs. If states don’t fulfill their
mandatory renewable energy requirements then the penalties must be strictly
enforced.
8.2 Solar Radiation Data Aspect
While potential is generally known, it has not been accurately quantified.
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Confidence in models is not very high, given limited ground data but still 80% of
developers were ready to go ahead with their Projects. So, reliable data should be
made available.
Ground measurements, where they exist, are not comprehensive since some of the
developers have used the diffused radiation measurements to arrive at direct radiation
data. So, some standard radiation measurement technique should be followed.
Without confidence and validation, data cannot be considered bankable. The
government needs to have its own set of database (approved and certified For E.g
CWET data for Wind) so that the bankability issue of data could be resolved
8.3 Infrastructure Aspects
Single Window Clearance should be there with the government acquiring land and
providing evacuation to the same and then transferring it to the developers.
The evacuation network should be strengthened and guaranteed availability of
transmission line should be provided by the utilities.
Land should be allotted according to technology.
B For EPC Project Management
As the industry evolves, successfully EPC firms will adapt to the demands of the market.
Projects being developed today are not the same as those that were built a decade ago, and
contracting and construction methods have changed as well. Likewise, the future will hold
new challenges for constructors. Ultimately, though, cost is the bottom line in contracting,
and this is where most attention is being directed. As the experience grows in this market and
competitive pressure mount, contractors were driven to reduce contingency costs and other
premiums. It is very competitive market, but the customer would always like to see a tighter
situation. Turnkey contracting is a risk and reward equation. Project companies are looking
for contractors to take a certain amount of risk, and contractor expects to make a profit for
taking those risks. There need to be a reasonable balance between risk-taking and reward. A
review of the contracts in the last two decades in India indicate that stress is laid more and
more on the following conditions and they have undergone dynamic changes in the recent
past:
Sharing of risk
Transparency in evolution of tender
Performance security and retention
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Maintenance and defects liability
Project delay and its compensation
Payment of advances
Payment terms and interest on delayed payments
Price variation clauses
Dispute settlement mechanism and amicable settlement
Insurance of works
Limitations of liability
Variations and its pricing
Assignments and its undertakings
Few points, which are the key drivers of a successful EPC, are given below:
Carefully evaluate each project
Develop an execution plan
Offer an array of services
Leverage technology
Source locally
Distribute the risks
Operate globally
Chapter 9: Conclusion
A. For Solar Grid Parity
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Phased development of additional 5000 – 7500 MW through competitive bidding willresult
solar energy into self-sustainability and cost economic viable solution for largescale
development.
Development at economy of scale in solar energy will allow explosive development
through open access, REC, captive and IPP mode.
With 3% RPO mandate under the Electricity Act 2003, Solar energy expected to
achieve grid parity in 2015 – 17, the solar energy will surpass NSM target and achieve
capacity built up to 50000 – 60000 MW in 2022.
Grid Parity of PV power in India will be reached first for the C&I segment (sometime
in phase 2 of NSM) followed by the Residential sector (around phase 3 of NSM).
By 2020, LCOE of PV power is likely to be lower than thermal based grid power in
residential and
C&I segments of market States likely to reach first grid parity are Gujarat and
Maharashtra, mainly due to high grid prices and solar radiation availability. Financing
methods and grid price escalation rates will determine the exact time frames when
grid parity will be reached 17.
B. For EPC Project Management
In 12th plan 90,000 MW capacityaddition is proposed. In all this capacity addition program a
large participation of privateplayers is expected. Private players will playthe role of Project
Company and will look forthe efficient EPC Contractors of thermalpower plants. Therefore
there are a largenumber of opportunities for EPC Contractorsof thermal power plants in
recent years. EPCContractor can work as a turnkey EPCContractor or they can adopt the
strategy ofSplit EPC Contracting, Multi Party EPCContracting. EPC Contractor can avail
thefacility of available EPC-Sub-contractors toshare their efficiencies in terms of cost, time
and performance. Only a systematic and structured selectionprocedure can result into
assigning the work to an efficient sub-contractor. Due to the complexity andlonger period and
dependency on large number of parties makes the thermal power plant projectsmorerisky.
Therefore a proper planning and risk management is necessary in EPC contracting of thermal
power plants. EPC Contracting is one of the most challenging works; it requires alot of
experience in work and ability to face all the possible challenges. Developing sound and
efficient project management practices will not only help the power sector but all the
Infrastructure projects. The learning and experience achieved by dealing with the challenges
80
in EPC will make the Contractors more competent. This in-turn will result in timely
completion of projects and reduction in losses.
However the Indian market still suffers few typical problems as follows:
a. Tendency to specify EPC Contracts with onerous liquidated damages clauses and
associated schedule and performance guarantees, often with no limitation to potential
of EPC liabilities, this does not help either the owner or the contractor often resulting
in mark up on prices to cover risks. Even lenders are now taking an appropriate view
depending upon the financial styles of contractors.
b. Tendency to have lopsided risk sharing. This situation needs to be corrected. EPC
firms are now asking contracting authority for appropriate risk sharing between them.
c. Tendency to put clauses which require almost everything to be approved by owner or
owner consultant. This is a major cause of project delays and consequent disputes.
This situation is now slowly changing.
d. Tendency for cash retention Impacting contractor cash flows.
Chapter 10: Bibliography
RPO- REC regulations of various states.
81
Report on Global trends in Renewable energy Investment 2011: Analysis of Trends
andIssues in the Financing of Renewable Energy by United NationsEnvironment
Programmeand Bloomberg New Energy Finance,
Tariff Orders of Various States.
www. cerc.co.in
www.cea.nic.in
www.powermin.gov.in
Report by Fraunhofer institute systems and innovations research.
www.wikipedia.com
Report on Renewable Energy Tariffs, RPO and REC Mechanism by ABPS
www.mnre.in
www.ireda.in
www.iexindia.com
World bank report on barriers of solar power development.
Report on Renewables 2011 Global Status Report by REN21, 2011.
Electricity Act, 2003
National Tariff Policy, 2006
National Action Plan on Climate Change, 2008
Jawaharlal Nehru National Solar Mission, 2010 batch 1 and batch 2 bidding.
CARE agency report on solar grid parity expectation.
Report on Increasing global renewable energy market share: Recent trends
andprospective by United Nations department of economics and social affairs
Annexures
1. Letter which IndurePvt. Ltd. Sends to TCE for approval of Engineering Drawing:
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2. Incoming letter from TCE showing their comments:
83
3. Screenshots of SAP:
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4. Screenshots of Primevera:
85
86