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ANAND ENGINEERING COLLEGEAGRA

PROJECTREPORT

CAPITAL BUDGETING OF NTPC LTD,UNCHAHAR

NTPC UNCHAHAR

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SUMMER TRAINING REPORT SUBMITTED TOWARDS THE

PARTIAL FULFILLMENT OF POST GRADUATE DEGREE INFINANCE.

CAPITAL BUDGETING OF ANALYISE NTPCLtd,

UNCHAHAR

SUBMITTED BY:MOHAMMAD ANAS

MBA- FINANCE (2011-2013)

INDUSTRY GUIDE:Mr. P. Gopal Ranga

Manager (Finance) AIBS, AUUPNTPC Ltd, Unchahar

ANAND ENGINEERING COLLEGEAGRA

UTTAR PRADESH

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TO WHOM IT MAY CONCERN

This is to certify that Mr. MOHAMMAD ANAS, a student of Anan

Engineering colleges undertook a project on Capital Budgeting oStage Analysis ofNTPC Ltd, Unchaharfrom, 25 July 2012 TO August 2012 .

Mr. MOHAMMAD ANAS has successfully completed the project unde

the guidance ofMr. P.Gopal Ranga sir.He is a sincere and hard

working student with pleasant manners.

We wish all success in her future endeavors.

Signature with dateName: - Mr. P.Gopal RangaDesignation: - Manager (Finance)Company Name: - NTPC UNCHAHAR

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CERTIFICATE of ORIGIN

This is to certify that Ms. MOHAMMAD ANAS, a student of MBA(Finance), Anand Engineering Colleges has worked at NTPC Ltd

Unchahar, under the guidance and supervision of Mr.P.Gopa

Ranga, Manager (Finance), NTPC Ltd, Unchahar.

The period for which he was on training was 8 weeks, starting from

25 July, 2012 to4 August, 2012. This Summer Internship repohas the requisite standard for the partial fulfillment the Po

Graduate Degree in Finance. To the best of our knowledge no part o

this report has been reproduced from any other report and th

contents are based on original research.

MOHAMMAD ANAS

(Stu

dent MBA, 3rd SEM)

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Roll No:-1100170025

ACKNOWLEDGEMENT

I express my sincere gratitude to my industry guide Mr.P.GopaRanga, Manager (Finance), NTPC Ltd, Unchahar, for his abguidance, continuous support and cooperation throughout mproject, without which the present work would not have beepossible.

I would also like to thank the entire team of Finance SectioTeam, for the constant support and help in the successfcompletion of my project.

Also, I am thankful to my faculty guide Mr.Gaurav Agarwal of minstitute, for his continued guidance and invaluable encouragement

MOHAMMAD

ANAS

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Contents

1. EXECUTIVE SUMMARY ..................................................................... 7

2. INTRODUCTION .................................................................................. 8

2.1. SCOPE OF STUDY .......................................................................... 8

2.2. OBJECTIVE BEHIND STUDY ............................................................... 9

3. INDUSTRY PROFILE .......................................................................... 103.1 OVERVIEW .............................................................................. 10

3.1.1 Thermal Generation .............................................................. 11

4. COMPANY PROFILE ........................................................................... 12

4.1. NTPC OVERVIEW ...................................................................... 12

4.1.1 Business of NTPC Ltd ...............................................................

134.2. SWOT ANALYSIS.................................................................... 14

4.3. NTPC Unchahar: An Overview .....................................................

15

5. Finance Department of NTPC, Unchahar ................................................

16

6. CAPITAL BUGETING .......................................................................... 18

6.1. Types of Budget in NTPC LTD Unchahar ..............................................

19

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7. CALCULATION OF CAPITAL BUDGETING IN STAGE-III ...............................

22

7.1. Cost Structure of a Project ......................................................... 227.2. Calculation of Net Inflow Stage -III ................................................

247.2.1. REVENUE ON ACCOUNT OF FIXE

CAHRGES ................................................................... 247.2.2. COST ON ACCOUNT OF FIXE

COMPONENTS: ................................................................. 277.2.3. MARGINAL CONTRIBUTION ON ACCOUNT OF ITEMS OF VARIABLE NATURE

28

8. Findings & Analysis ........................................................................... 29

9. Recommendations ............................................................................ 3710. Conclusion ....................................................................................... . 38

11. Reference .......................................................................................... 39

12. Annexure .......................................................................................... 40

12.1 Abbreviation ................................................................................. 4013. Case Study: NTPC in Comparison to its Competitors in the Era of Competitive

Tariff Bidding

.......................................................................................................... 4114. SYNOPSIS ........................................................................................... 55

1. EXECUTIVE SUMMARY

The aim of this project is to study the Capital Budgeting of NTPC LtdUnchahar. It also aims to make understand and bridge the gap between th

theoretical learning and practical learning. This report presents how capitabudgeting forms the backbone of finance in any company.

In NTPC most of the investment is done in either expansion or renovation oexisting assets. Hence to demonstrate the capital budgeting of Stage III oUnchahar power plant, performance reports since the date of commission i.e1 January, 2007 are taken into consideration in order to derive in how manyears the company can recover its initial investment.

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This report also highlights the how the tariffs are decided and what a

components are considered in order to derive the initial investment propossuggested to a thermal power plant.

2. INTRODUCTION

2.1. SCOPE OF STUDY

NTPC LTD is the largest producer of electricity in the country. From this study we se

that how company plans their budget according to their requirement is important.

i. Capital expenditure plans involve a huge investment in fixed assets. NTPC LTrequires capital investment for purchase of plant & machinery, land & buildinexpansion of existing unit, installation of new parts in existing machineries, boileheaters, tubes, construction of new office building, roads, bridges, replacement anmaintenance of existing parts, new technology and merger and acquisition.

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ii. Capital expenditure once approved represents long-term investment that cannobe reserved or withdrawn without sustaining a loss.

iii. Understanding the capital structure of NTPC. Of the total investment NTPC appfor 70% of amount with loans from Indian banks or foreign bank and 30% of thamount is raised through equity as per CERC.

iv. Capital Budgeting is done to assess the profitability of project.

It may be asserted here that decision regarding capital investment should be take

very carefully so that future plans of the company are not affected adversely.

S2.2. OBJECTIVE BEHIND STUDY

Capital budget system is a very vast subject. Simultaneously, it is a basic need every company to make the budget. Planning is essential to attain organizationgoals. This topic is very essential to every company and it has special importance the current competitive world.

Taking into consideration the vast importance of capital budget, the objective behinthis study work is as follows:

To study the need and importance of capital budgeting.

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To study the methods adopted by the organization in making capital budgetindecisions.

To understand the cost structure of the Stage III project.

To understand the revenue structure in case of power project in view of CER(Central Electricity Regulatory Commission) Tariff & Expenditure in case of ThermPower Plant and arrive at net cash flow.

Calculated Net Present value, Internal Rate of Return and Payback Period.

3. INDUSTRY PROFILE

3.1 OVERVIEW

The electricity sector in India supplies the world's 6th largest energy consumeaccounting for 3.4% of global energy consumption by more than 17% of globpopulation. the Energy policy of India is predominantly controlled by thGovernment of India's Ministry of Power, Ministry of Coal and Ministry of NeRenewable Energy and administered locally by Public Sector Undertakings (PSUsWith the growth of economy, the demand for energy has grown at an average of 3per cent annually over the past 30 years. According to the Government of Ind

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estimates, the power requirement in the country will increase to 200,000 MW b2012 and to 400,000 MW by 2020.

Almost 53 per cent of this capacity is based on coal, about 10 per cent on gas, 2per cent on Hydro, 8 per cent on renewable sources, about 3 per cent on nucleaand 1 per cent on diesel.Due to the fast-paced growth of India's economy, the country's energy demand ha

grown an average of 3.6% per annum over the past 30 years. In December 2010, th

installed power generation capacity of India stood at 165,000 MW and per capit

energy consumption stood at 612 kWh. The country's annual energy productio

increased from about 190 billion kWh in 1986 to more than 680 billion kWh in 200

The Indian government has set a modest target to add approximately 78,000 MW installed generation capacity by 2012 which it is likely to miss. The total demand fo

electricity in India is expected to cross 950,000 MW by 2030.

3.1.1 Thermal Generation

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Even with full development of the feasible hydro potential in the country, coal wounecessarily continue to remain the primary fuel for meeting future electricidemand. Imported coal based thermal power stations, particularly at coast

locations, would be encouraged based on their economic viability. Use of low ascontent coal would also help in reducing the problem of fly ash emissions.

Current installed capacity of Thermal Power as of February 28, 2011 is 111,324.4MW which is 64.75% of total installed capacity. Significant Lignite resources in thcountry are located in Tamil Nadu, Gujarat and Rajasthan and these should bincreasingly utilized for power generation. Lignite mining technology needs to bimproved to reduce costs.

Use of gas as a fuel for power generation would depend upon its availability a

reasonable prices. Natural gas is being used in Gas Turbine /Combined Cycle Ga

Turbine (GT/CCGT) stations, which currently accounts for about 10 per cent of tot

capacity. Power sector consumes about 40per cent of the total gas in the countr

New power generation capacity could come up based on indigenous gas finding

which can emerge as a major source of power generation if prices are reasonable.

national gas grid covering various parts of the country could facilitate developmen

of such capacities.

4. COMPANY PROFILE.

4.1. NTPC OVERVIEW

NTPC Limited is the largest thermal power generating company of India. A publ

sector company incorporated in the year 1975 to accelerate power development

the country as a wholly owned company of the Government of India. At presen

Government of India holds 84.5% of the total equity shares of the company and th

balance 15.5% is held by FIIs, Domestic Banks, Public and others. Within a span o

30 years, NTPC has emerged as a truly national power company, with pow

generating facilities in all the major regions of the country. Based on 1998 data

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carried out by Data monitor UK, NTPC is the 6th largest in terms of thermal powe

generation and the second most efficient in terms of capacity utilization amongst th

thermal utilities in the world.

In October 2004, NTPC launched its Initial Public Offering (IPO) consisting of 5.25%

as fresh issue and 5.25% as offer for sale by Government of India. NTPC thus

became a listed company in November 2004 with the Government holding 89.5% o

the equity share capital. In February 2010, the Shareholding of Government of Ind

was reduced from 89.5% to 84.5% through Further Public Offer. The rest is held by

Institutional Investors and the Public.

4.1.1 Business of NTPC Ltd a

The main activities of NTPC are setting up of power plants and powe

generation through its coal-based and gas-based power plants. The Companhas also diversified into construction of hydro power plants and generation o

hydro power besides trading and distribution of electricity. The Company

now entering into area of coal mining & coal washeries and oil exploration a

well.

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The business portfolio of the company is:

Power project construction

Generation of Electric power

Coal Mining and Coal washeries

Distribution, trading of electricity, trading of ash and other related producthrough its wholly owned subsidiaries.

The total installed capacity of the company is 34,194 MW (including JVs) with 15 cobased and 7 gas based stations, located across the country. In addition under JVs, stations are coal based & another station uses naphtha/LNG as fuel. The compan

has set a target to have an installed power generating capacity of 1, 28,000 MW bthe year 2032. The capacity will have a diversified fuel mix comprising 56% coa16% Gas, 11% Nuclear and 17% Renewable Energy Sources(RES) including hydrBy 2032, non fossil fuel based generation capacity shall make up nearly 28% oNTPCs portfolio.

NTPC has been operating its plants at high efficiency levels. Although the compan

has 17.75% of the total national capacity, it contributes 27.40% of total powe

generation due to its focus on high efficiency.

4.2. SWOT ANALYSIS

STRENGTHS OF NTPC

The Company has kept with itself sufficient liquid funds to meet any kind of casrequirements.

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Efficient working capital of plant.

Efficient growth with prospects of significant additions, modification an

replacement.

An early starter-more than 30 years experience in power sector.

Highly motivated and dedicated workers and officers, no industrial relatioproblem.

WEAKNESSES OF NTPC

Low level of innovation

NTPC dont have coal linkages

Some of the plant have become old and require investment in renovation anmodernization.

OPPORTUNITY FOR NTPC

Demand and supply gap.

Upcoming hydro and nuclear sector.

Huge opportunity in consultancy service.

Huge capital requirement for expansion, diversification, horizontal and verticintegration, and renovation & modernization.

THREATS FOR NTPC

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Limited experience of operating in a truly liberalized environment withcompetition.

Rising prices of raw materials.

Redirecting power may be constrained by inter regional connectivity.

Competitive Bidding of Tariff.

4.3. NTPC UNCHAHAR: AN OVERVIEW

Feroze Gandhi Unchahar Thermal Power Station

NTPC UNCHAHAR

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NTPC Unchahar Vision

To be the best Thermal Power

Station of the Country in

generating reliable and eco-

friendly power, improving the

quality of life of the

community and employees,

powering Indias growth!


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Some facts about the Station

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Approved capacity 1050 MW

Installed Capacity Stage I & II : 840 MW (2 x 210 + 2 x 210 MW)Stage III : 210 MW (1 x 210 MW)

Location

The site is located in the Rae Bareli district of Ut

Pradesh State, at a latitude of 2515'N and

longitude of 8119'E. It is bounded by villages Kanp

Faridpur and Khaliqupur Kurd and is at a distance

approximately 3kms from Mustafa bad (present nam

Unchahar) town on the Allahabad-Rae-Bareli

section of Northern Railways.

Approach

Unchahar is situated at Luck now Allahabad StaHighway

40 Km from Raebareli

85 Km from Allahabad.

120 Km from Lucknow

Coal SourcesCentral Coal Field Limited (CCL)

Bharat Cocking Coal Limited (BCCL)

Water SourcesSharda Sahayak Canal (Main Source)Dalmau Pump Canal (From River Ganga)(dur

closure of Sharda Sahayak canal)

Power Evacuation (220

KV)

Unchahar Raebareli Line 1 , 2 & 3 (PGCIL)

Unchahar Fatehpur- Line 1 & 2 (UPPCL)

Unchahar Kanpur Line 1,2,3 & 4 (PGCIL)Beneficiary

States

UP, Uttaranchal, Haryana, HP, J&K, Punja

Chandigarh, Rajasthan, Delhi & NVVNApproved Cost Stage I & II : Rs.2337.09 Crores

Stage III : Rs. 938.61 Crores

Unit Sizes 5x210 MWUnits Commissioned Unit I : 210 MW November 1988

Unit II : 210 MW March 1989Unit III : 210 MW January 1999Unit IV : 210 MW October 1999Unit V : 210 MW September 2006


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Brief Profile of the Project

The foundation stone of this project was laid by late Smt. India Gandhi, Ex Prim

Minister of India on 27.06.81. National Thermal Power Corporation has taken ove

the Feroze Gandhi Unchahar Thermal Power Project from UPRVUN Ltd. having th

capacity of 420 MW at a Plant Load Factor (PLF) of about 18% w.e.f. 13.2.92, now

is a 1050 MW power plant with PLF of more than 100%.

The project is now amongst the top performing thermal power plants of the count

and having the honor of beginning NTPCs enviable track record in turning aroun

the performances of stations it has taken over from SEBs through the adoption o

effective project management and Operation & Maintenance practices. NTP

Unchahar turnaround has been wonderfully brought out in the book India 2020

Vision for the New Millennium by none other than the first citizen of our countr

President A.P.J. Abdul Kalaam.

In line with the HR Strategy of NTPC, the project believes that for achieving top cla

performance people management and continuous development of its huma

resources is an imperative. NTPC Unchahar is also committed to prote

environment through a forestation, emission & efficient control and maximum as

utilization.

Operational structure of the organization

NTPC Ltd. has a 3 tier structure comprising Corporate Centre (CC), Region

Headquarter (five in numbers NCR, NR, SR, ER and WR) and Stations/Projects. Th

Board of Director is headed by the Chairman and Managing Director (CMD) and the

are six functional Directors, two independent Directors yet to be nominated by th

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Government of India and four Independent Directors. The Regional Executiv

Directors (RED) report directly to the CMD. Feroze Gandhi Unchahar Thermal Powe

Project is one of the stations in Northern Region with head of the station, the GenerManager (GM) report to RED (North). The functional heads at FGUTPS report to th

GM.

The Stage-I performance was improved to the level of other NTPC project

Simultaneously the stage-II work was taken-up in 1994. The Unit-III and Unit-

commissioned in Mar2000 and Jan2001 respectively. Now all five units a

performing well.

NTPC LIMITED-Unchahar has excellent record of accomplishment in the field

power generation and has surpassed Memorandum of Understanding targets set b

Govt. of India every year. By attaining the best of station performances, the level o

key parameters like station availability, ash utilization, auxiliary power consumptio

specific oil consumption, coal and make-up water consumption, heat rate etc

achieved by NTPC-Unchahar are much superior to CEA norms and amongst the bes

on all India basis.

In line with the HR Strategy of NTPC, the project believes that for achieving top cla

performance people management and continuous development of its huma

resources is an imperative. NTPC Unchahar is also committed to prote

environment through a forestation, emission & efficient control and maximum as

utilization.

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Originally known as Feroz Gandhi Unchahar Thermal Power Project (FGUTPPthe foundation stone was laid in June 1981 for construction of 5 units of 210MW. Thplant which was under Uttar Pradesh Rajya Vidyut Utpadan Nigam Limited with 2units of 210MW washanded over to NTPC on 13 February, 1992 becoming the first take over plant forNTPC and a challenge to bring in par with other NTPC projects, as it was performingpoorly at a mere 18% PLF. FGUTPP performance from the time of takeover has beenimproving steadily and is now at par with other NTPC stations having achieved a PLof 93.28% in the year 2010-2011.

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History

NTPC has come a long way from the day when construction of its first pithead super thermal powproject at Singrauli in Uttar Pradesh commenced. Here is a retrospective which chronicles NTPCachievements, year after year.

Our Company was incorporated on November 7, 1975 under the Companies

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A brief profile of the FGUTPP project is shown below:-

Location In Unchahar Tehsil, Raebareli DistrictPIN-229406

Approach On Lucknow Allahabad State Highway120Km from Lucknow, 85Km from

Allahabad and 35 Km from Raebareli.

Land Area For Stage-I 1953 Acres includingtownship. For Stage-II 250.7 Acres

Station Capacity Stage-I 2x210MW. Stage-II 2x210MW,

Stage-III 1x210MW

Coal Source CCL, BCCL, ECL approx. 700 KM fromthe station.

Fuel requirement Around 14,000 MT per day for stage-I &II.

Water Source Sharda Sahayak Canal (Main Source),Dalmau Pump Canal during shutdown of

Sharda Sahayak Canal.

Power Evacuation Double circuit 220KV lines toLucknow (UPPCL), double circuit

line to Fatehpur (UPPCL), twodouble.


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Act as a private limited company under the name National Thermal Power Corporation Private Limiteand the word 'Private' was deleted on September30, 1976 consequent upon the notification issued by thGOI Exempting government companies from the use of word 'private' in their name. On September 3

1985, our Company was converted from a private limited company into a public limited companSubsequently, the name of our Company was changed to its present name NTPC Limited and a frescertificate of incorporation was issued on October 28, 2005.

The name of our Company was changed to reflect the diversification of our business operations beyonthermal power generation to include, among others, generation of power from hydro, nuclear arenewable energy sources and undertaking coal mining and oil exploration activities.

For further information on our business including description of our activities, services, market of easegment, our growth, technology, market, managerial competence and capacity built-up, our standing wireference to our prominent competitors.

Our Company is not operating under any injunction or restraining order.

In July 1976, the registered office of our Company was changed from Shram Shakti Bhawan, New Delto Kailash Building, Kasturba Gandhi Marg, and New Delhi. Subsequently, in May 1979 the registereoffice of Our Company was shifted to NTPC Square, 62-63, Nehru Place, New Delhi and thereafter

October 1988 to its present location for administrative and operational efficiency.

Major events

1975- Incorporation of our Company.

1978Takeover of management of the Badarpur project

1982Commissioning of the first 200MW unit at Singrauli.

Center for education at Power Management Institute, Delhi established First direct foreign currenborrowing a consortium of foreign banks led by Standard Chartered Merchant Bank extends a loan of GB298.41 million for the Rihand project.

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1984

The transmission line based on High Voltage Direct Current technology, commissioned for powtransmission from Rihand to Delhi Singrauli project received World Bank loan of US$ 150 milliothrough GoI.

1986

Synchronized first 500MW unit at Singrauli Our Company became one of the first PSUs to issue bonds the debt market.

1987

5,000 MW installed capacity mark crossed.

1988First syndicated Japanese loan of 30 billion JPY raised.

1989

Consultancy division of Our Company launched First unit (88 MW) of our Companys first gas base

combined cycle power plant at Anta, Rajasthan commissioned.

1990Total installed capacity of 10,000 MW reached.

1992First acquisition by our Company of Feroze Gandhi Unchahar Thermal Power Station (2x210MW) froUttar Pradesh Rajya Vidyut Utpadan Nigam of Uttar Pradesh The transmission systems owned by oCompany were transferred to Power Grid Corporation of India Limited pursuant to legislation by thParliament of India.

1993

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IBRD extended direct loan of US0 million to Our Company under time slice concept for its projects.

199415,000 MW of installed capacity achieved Maiden declaration of dividend of Rs. 650 million JhanoGandhar (Gujarat) becomes our first thermal power station to have commissioned an integrated LiquWaste Treatment Plant.

1997'Nirvana' status granted by the GoI100 billion units generation in one year achieved a consortium

foreign banks led by Sumitomo Bank, Hong Kong extends foreign currency loan of 5 billion Japanese Yfor the first timeWithout GOI guarantee.

1998Commissioned the first Naphtha based plant at Kayamkulam with a capacity of 350 MW.

1999Our Companies Dadri thermal power project, Uttar Pradesh adjudged the best in India with a PLF

96.12% Dadri thermal power project, Uttar Pradesh certified with ISO 14001.

2002Three wholly owned subsidiaries, viz., NTPC Electric Supply Company Limited, NTPC Hydro Limitand NTPC Vidyut Vyapar Nigam Limited incorporated ESP [Electrostatic precipitators) set up at Talchpower plant 20,000 MW installed capacity mark exceeded.

2003

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Our Company undertook debt re-structuring. Raised funds through bonds (Series XIII and XIVConstruction of first hydro-electric power project of 800 MW capacity in Himachal Pradesh commencafter the investment Approval.

2004The award of contract for the first Super Critical Thermal Power Plant at Sipat Reached a total installecapacity of 22,249 MW with the Talcher Unit V getting synchronized on May 13, 2004 Our CompanFeroze Gandhi Unchahar Thermal station achieves a record PLF of 87.43% in current year up fro18.02% in February 92 when it was taken over by us LIC extends credit facility for Rs 70 billion. Rs. 4billion is in the form of unsecured loans and Rs. 30 billion is in the form of bonds Our Company makes debut issue of euro bonds amounting to USD 200 million in the international market First coal mininblock allotted Listing of our Equity Shares on the Stock Exchanges.

2005

Our Company received the International Project Management Award 2005 for its Simhadri project at tInternational Project Management Association World Congress. Oil block allocated under NELP V OCompany adopted core values 'BCOMIT' (Business Ethics, Customer Focus, Organizational Pride, MutuRespect and Trust, Innovation and Speed and Total Quality for Excellence). Our Company ranked as thThird Great Place to work for in India for second time in succession by a survey conducted by GroTalent and Business World 2005.

2006

Badarpur Thermal Power Station having an installed capacityof 705 MW transferred to Our Company.

2007

MOC, GOI granted in-principle approval for allocation of a new Coal block, Chatti-Bariatu (South) to oCompany subject to the conditions stipulated in the approval letter. The share of reserves is estimated to

354 Million Tones.

2008

Our Company adjudged as the Star PSU 2008 Board expanded by appointment of five independeDirectors India Power Award conferred on Centre for Power Efficiency and Environmental Protection.

2009

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Memorandum of understanding entered into with the Nuclear Power Corporation of India Limit(NPCIL) for development of nuclear power in India 30,000 MW installed capacity mark crossed. Lonterm fuel supply agreement signed with Coal India Limited for supply of coal to our power stations for

period of 20 years.

Our Company acquired 44.6% of presently paid-up capital of Kerala and Transformers and ElectricaKerala Limited from Government of Kerala at a total consideration of Rs. 313.4 million, subject to finprice to be based on the valuation of the assets of Kerala and Transformers and Electricals Kerala LimiteKerala and Transformers and Electricals Kerala Limited is engaged in manufacturing and repair of heavduty transformers International Gold Star Quality Award conferred on Centre for Power Efficiency anEnvironmental Protection.

- NTPC enters MOU with Nuclear Power Corporation of India Ltd. (NPCIL) to work together fdevelopment of Nuclear Power in India and for this purpose to form a Joint Venture Company for settinup Nuclear Power Projects.NTPC inks JV agreement with SAIL, RINL, Coal India and NMDC.

The foundation stone of this project was laid by late Smt. India Gandhi, Ex Prime Minister of India o

27.06.81. National Thermal Power Corp. has taken over the Feroze Gandhi Unchahar Thermal Pow

Project from UPRVUN Ltd. having the capacity of 420 MW at a Plant Load Factor (PLF) of about 18

w.e.f. 13.2.92, now it is a 1050 MW power plant with PLF of more than 95%.

NTPC Unchahar turnaround has been wonderfully brought out in the bookIndia 2020 A Vision for t

New Millennium by none other than the first citizen of our country, President A.P.J. Abdul Kalam

The contents are as given below:

Let us not overlook successes even in this gloomy situation. Unchahar thermal power station w

acquired by NTPC from government of Uttar Pradesh. Performance was improved dramatically

using de-bottlenecking techniques. Prior to take over the Unchahar station had a PLF of 18% in s

months thereafter it went up to 35.5% and in the twelve months to 73.7%! The availability fact

which was 27% at the time of takeover went up to 49.5% six months later and about 79.5% aft

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twelve months. Specific oil consumption, which is an indicative of wastage and inefficiency

operation which was at 21.8 %( ml) per Kilowatt hour at the time of takeover went down to 6

ml/Kwh in 12 months. These dramatic results have been obtained under ordinary or even oppressicircumstances and despite the absence of recognition by the system. While a days power breakdow

or an audit report on delay or excessive project costs hits headlines, nobody even bothers to menti

these achievements in a small column of a newspaper. Nor even is such achievement talked about b

politicians or bureaucrats!

We dont know who are the heroes & heroines who made these achievements possible throu

teamwork!

The project is now amongst the top performing thermal power plants of the country and having the hono

of beginning NTPCs enviable track record in turning around the performances of stations it has taken ov

from SEBs through the adoption of effective project management and Operation & Maintenance practice

NTPC Ltd. Unchahar has excellent record of accomplishment in the field of power generation and ha

surpassed Memorandum of Understanding targets set by Govt. of India every year. By attaining the beof station performances, the level of key parameters like station availability, ash utilisation, auxiliar

power consumption, specific oil consumption, coal and make-up water consumption, and heat rate etc

achieved by NTPC-Unchahar are much superior to CEA norms and amongst the best on all India bases.

Over the last five years, Indian economy has grown at a healthy rate of around 6 to 7%. The continue

economic growth is indispensable in raising living standards across all strata of society and securing hig

rates of employment and creating opportunity for millions of others.

Feroz Gandhi Unchahar Thermal Power Project is one of the stations in Northern Region with head

the station, the General Manager (GM) report to RED (North). The functional heads at FGUTPP report

the GM. The detailed organization structure is shown below:

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5. Finance Department of NTPC, Unchahar

Finance department is backbone of any organization. The growth of aorganization depends on effective & efficient finance management. In NTPC financdepartments is divided into following section:

STORE BILL SECTION

Material supplied to the contractors as well as material supplied in plant is don

through the medium of store bill section. The main instrument through which thpayment and accounting of stores are carried out in this section are purchasorders, store receipt vouchers, store issue vouchers, price stores ledger, goodreceipt, bank payment vouchers, material inwards slip purchase journal voucher et

They all use Letter of credit with validity of 90 days in case the materials aprocured from foreign sources.

WORK BILL & CONCURRENCE SECTION

All the contract bills, maintenance bills of plant & service bills are taken inconsideration under this section & accounting of all the transaction of these bills adone in this section. Finance department checks the order of the required material also checks the cost of material, availability of material & requirements of fund

This whole process is called concurrence & whole process look after by concurrencsection.

BUDGET & COMMERCIAL SECTION

This section compiles revenue budget and capital budget with the help of variou

departments. It also certifies budget for clearing proposal for placing order

Revenue or O&M budget includes employees cost, repairs and maintenanc

(including capital spares), station overhead. Under capital budgeting NTPC Unchah

maintain two types of budgets miscellaneous bought out assets (MBOA) and direc

capital outlay budget (DCO). This section also prepares cost sheet, CARR reports an

also prepares fuel price adjustment (FPA) for billing of energy through region

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office. This section also accounts for energy billing. Annual Accounts are prepare

and get audited by the book section.

FUEL ACCOUNTING SECTION

This section majorly contributes to the expenditure pattern in running a thermpower station. Thermal plant requires two fuel coal and oil. Coal is the major anprimary fuel and oil is the secondary fuel. This section deals with the accounting pathat calculates how much amount is spent in procuring the coal both domestical

and internationally, including the recovery charges.

CASH & BANK SECTION

All type of payments related to banks or through cash is considered. Bills frodifferent sections are meant for approval through this section.

ESTABLISHMENT SECTION

This section is one of the crucial sections of the finance department. The mafunction of this section is to deal with employees related payment and therespective accounting procedure. The payment is made to employees accounting ttheir entitlement. There are approximately 1053 employees in Unchahar. Themployees are categorized in three groups.

- Workmen

- Supervisor

- Executives

This section deals with the salaries of the employees. It also helps in releasin

payment for TA, DA, and Medical through advances and also settlement of claim

loans, LTC and other benefits.

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6. CAPITAL BUGETINGThe key function of the financial management is the selection of the most profitabassortment of capital investment; it is the most important area of decision making the finance manager because any action taken by the manager in this area affecthe working and the profitability of the firm for many years to come.

The need of the capital budgeting can be emphasized by taking into consideratiothe very nature of the capital expenditure such as heavy investment in capitprojects, long term implication, for the firm, irreversible decisions and complicates the decision making. Its importance can illustrated on the following other grounds.

(1) Unpredictable Nature of Forecast of Sales.The investment in fixed assets related to future sales of the firm during the life time of the assets purchased. shows the possibility of expanding the production facilities to cover additional saleshown in the sales budget. Any failure to make the sales forecast accurately wouresult in over investment or under investment in fixed assets and any erroneouforecast of asset needs may lead the firm to serious economic results.

(2) Comparative Study of Alternative Projects. Capital budgeting makes comparative study of the alternative projects for the replacement of assets whicare wearing out or are in danger of becoming obsolete so as to make the bepossible investment in the replacement of assets. For this purpose, the profitabiliof each project is estimated.

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(3) Timing of Assets-Acquisition. Proper capital budgeting leads to proper timinof assets-acquisition and improvement in quality of assets purchased. It is due to nature of demand and supply of capital goods. The demand of capital goods doe

not arise until sales impinge on productive capacity and such situation occurs onintermittently. On the other hand, supply of capital goods with their availability one of the functions of capital budgeting.

(4) Cash Forecast. Capital investment requires substantial funds which can only barranged by making determined efforts to ensure their availability at the right time

Thus it facilitates cash forecast.

(5) Worth-Maximization of Shareholders. The impact of long-term capitinvestment decisions is far reaching. It protects the interests of the shareholders anof the enterprise because it avoids over-investment and under-investment in fixeassets. By selecting the most profitable projects, the management facilitates thwealth maximization of equity share-holders.

6.1. Types of Budget in NTPC LTD Unchahar

There are three types of budgets prepared in NTPC Ltd Unchahar.

a. Direct Capital Outlay Budget (DCO).

b. Miscellaneous Bought out Asset (MBOA)

c. Operation & Maintenance (O&M)

Direct Capital Outlay Budget (DCO)

DCO represents all costs directly identified with capital works and includes the

following:

Cost of land

Infrastructure facilities

Civil/mechanical /electrical works

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Township

MGR and Construction facilities

It pertains to a capital nature work which yields a return over a period of timusually exceeding one year. Benefits are in the form of either increased revenue odecrease in cost. For DCO budget F&A department gets the circular in the month oMay and June.

There are three stages in direct capital outlay budget:

DCO-SATGE I or Renovation and Modernization (If a plant is older than 10 yearthen it comes under the head of Renovation and Modernization)

DCO-STAGE II

DCO-STAGE III

Miscellaneous Bought Out Asset (MBOA)

MBOA budgets are related to the investments of cash in the assets of thorganization other than capital assets. That may be for the office, school, clubhospital, and canteens etc. which are situated within the NTPC Township. It involvea series of outlay of cash resources in return for an anticipation flow of future. month of February F&A department get circular from CC to commence MBObudget.

Operation& Maintenance (O&M)

O&M expense budget is divided majorly under three heads Employee cost, Repair&Maintenance and Station Overheads.

i. Employee Cost:This cost mostly include the wages & salary distributed toemployees, medical claims and welfare expenses.

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ii. Repair & Maintenance: This is further divided into three components :-

Plant & Machinery: This includes routine expenditure and overhauling cost.

Building & other assets: Civil Construction work in Plant Area.

Township Assets: Civil Construction work in Township AreaIn all the cases, the cost is identified separately for the materials procured

and the job done.

iii. Station Overhead Cost: This includes any expenditure incurred in Plant Township other than the heads mentioned above like security expenses (salagiven to CISF), chemical & store consumed, advertisement & publicity, Powcharges (Revenue from the sale of ash at subsidized rate), etc.

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7. CALCULATION OF CAPITAL BUDGETING IN STAGE-III

The Feroze Gandhi Unchahar Thermal Power Project was originally conceived as Load Center Power Station with an ultimate capacity of 1050 MW (2x210 MW 3x210 MW) to be implemented in two stages by the Government of U.P. Stage-1 othe Project consisting of 2 units of 210 MW each were commissioned by UPRVUN 1989. Subsequently, the project was taken over by NTPC w.e.f 13.02.1992. NTPCafter taking over the project, revised the scope of the project and accordingly, StagII of 420 MW (2x210 MW) capacity was implemented and commissioned in the yea1999. The units mentioned above are presently under commercial operatioHowever, the status of various inputs were reviewed again and thereafter, thultimate capacity of the Project was proposed to be revised to 1050 MW. The StageIII is for addition of one unit of 210 MW. The investment approval for Stage-III othe project has been accorded in Nov 2003 at an estimate cost of Rs 939.2

Crores. Unit #5 has been synchronized in September, 2006. The unit is undcommercial operation since 2007.

7.1. Cost Structure of a Project

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In giving a proposal the most important elements are how the final suggested figuis derived. Thus in case of Thermal Power Plant following are the seven package coconsidered in order to arrive at final investment figure in case of project expansion

Since, land was already in position hence no investment was made for thacquisition of land for Stage-III NTPC, Unchahar.

Main plant Expenditure: This expenditure includes the main plant buildinarrangement. Location of the AB bay area and BC bay area. It also it includes thexpenditure of erection and maintenance of turbo-generators, locating the Boilearea which is a layout which keeps the boiler, air- pre heater and chimney appropriate position and construction of Switch Yard area.

Ash Handling: Construction of Ash water Pump house, Ash slurry, ash waterecirculation Pump house etc. for the ash generated during the operation of ththermal power station and utilizing the ash generated efficiently by making asbricks.

Water Pre-Treatment Plant: This pre treatment plant is designed to removsuspended /colloidal matters in the raw water. This system requires a commochemical house that will store chemical such as chlorine, lime, alum/PAC & tanks efor pre treatment.

General Civil Work: This expenditure includes the leveling and cutting of thsite area where the unit is to be constructed .This also involves the building of amajor foundations of equipments and structure which are supporting th

TG,ID,PA&FD Fans. It also involves building of main power house, service buildincum control room, mill building, conveyor galleries, cable & pipe racks.

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Chimney: Construction of one single flue lined reinforced concrete chimney tocatering to one 210 MW of Stage-III of the project. The fuel gas emission point is 27meters from the plants grade level.

Cooling Tower: Cooling tower is a RCC structure; its a separate building neamain power house.

DM Plant: Construction of separate RCC structure for De-mineralization plant.

7.2. Calculation of Net Inflow Stage -III

The main earning source for NTPC is through tariff. The main purpose of the tariff to cover the cost of the enterprise. When NTPC started there was only one part tarwhich included only fixed charges and after that two part tariff was introduced whiccomprised both Annual Capacity Charges (fixed) and Energy Charges (variableCurrently, NTPC is following Availability based Tariff (ABT) as per 2009-2014 TariAct.

In exercise of powers conferred under section 178 of the Electricity Act, 2003, and athe other powers enabling in this behalf. These regulations is called CentrElectricity Regulatory Commission Regulation 2004.The current regulations havcome into force on 1.04.2004, and unless reviewed earlier or extended by thcommission, shall remain in force for the period of 5 years.

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7.2.1. REVENUE ON ACCOUNT OF FIXED CAHRGES

These charges are levied on SEBs to recover the Annual Fixed Cost (AFC) of Generating Station which comprises the following components:

a) Return on equity: Return on equity shall be computed on pre-tax basis at thbase rate of 15.5% which is to be grossed up at the applicable tax rate. So in case NTPC, which is paying normal corporate tax @33.99%, the Rate of return on equiwill be 15.50/ (1-0.3399) =23.481%.

b) Interest on loan capital:The repayment of loan shall be considered from thfirst year of commercial operation of the project and shall be equal to thdepreciation allowed for that year. The rate of interest shall be the weighted averag

rate of interest calculated on the basis of the actual loan portfolio at the beginning each year applicable to the project. In case of Stage III calculation we have takeInterest @8% and Period of repayment as 10 years.

c) Depreciation: Depreciation shall be chargeable from the first year commercial operation and the value base for the purpose of depreciation shall bthe capital cost of the asset admitted by the Commission. Depreciation shall bcalculated annually based on Straight Line Method @ 5.28% of the capital cost of thasset.

d) Interest on Working Capital: The working capital of Unchahar generatinstation shall cover:

Coal stock sufficient for two months generation.

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Oil stock sufficient for two months generation.

Operation & maintenance expenses for one month.

Maintenance spares @ 20% of O&M Expenses.

Receivables equivalent to two months.

The Rate of interest on Working Capital for Unchahar generating station shall bequal to the short-term Prime Lending Rate of State Bank of India as on 01.04.200Interest on working capital shall be payable on normative basis notwithstanding ththe generating company has not taken loan for working capital from any outsidagency.

e) Operation & Maintenance expenses: The O&M expenses of UnchahGenerating Station shall be recovered based on the following recovery tabprovided by CERC for the current Tariff Period (2009-2014) irrespective of the actuO&M expenses incurred during the year :-

Year Recovery(Rs in Lakhs/ MW)

2007-2008 16.30

2008-2009 17.21

2009-2010 18.20

2010-2011 19.24

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2011-2012 20.34

2012-2013 21.51

2013-2014 22.74

f) Expenses on secondary fuel oil consumption: Expenses on secondary fuel oil shall be computed corresponding to normativsecondary fuel oil consumption (SFC), in accordance with the following formula:

SFC*LPSF *NAPAF *24*NDY*IC*10Where,

SFC = Normative Specific Fuel Oil consumption in ml/KwhLPSF = Weighted Average landed price of Secondary fuel in Rs/mlNAPAF = Normative Annual Plant availability factor in percentageNDY = Number of days in a yearIC = Installed capacity in MW.

The revenue part of secondary fuel is reimbursed @ 1ML/KWH in the tariff while thactual consumption is less than 1ML/KWH. This reflects the efficiency of the usage the secondary fuel. However this saving is to be shared equally with the statelectricity board. Since, the revenue and the cost part of the secondary fuel captured in the marginal contribution. Hence, no separate disclosure is for the samis made.

g) Compensation allowance for Renovation & Modernization activities

The useful life of a coal based generating station like Unchahar is 35 years. So order to increase the useful life of a project, certain renovation & modernizatioactivities are needed to be performed for the project before its useful life is over. Fthis purpose, CERC has made a provision in tariff for a separate compensatioallowance.

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Since Stage III has started its commercial operation since 2007, hence its life is lesthan 10 years. Hence while calculation we dont consider Renovation Modernization cost to calculate the recovery cost.

7.2.2. COST ON ACCOUNT OF FIXED COMPONENTS:

1. Operation & Maintenance: In calculation of cost on O&M starting four yeadata is taken and for 5th year the average of starting 4 years and increased by 6.5%

Thereafter for the following years the value is increased by 6.5%.

2. Depreciation: As per the CERC regulation plant is to be depreciated by 90where as its useful life is of 25years. The depreciation rate @5.28% for the first 1years and the balance depreciation should be spread over the remaining useful lifof 13 years.

3. Interest on Loan: The interest of loan value is same as the revenue fixecomponent figure.

4. Interest on Working Capital & Return on Equity: Both are financethrough internal accrual (Reserve & Surplus accumulated over the years). Hence, ncost is assigned to these in this model.

7.2.3. MARGINAL CONTRIBUTION ON ACCOUNT OF ITEMS OF VARIABLNATURE

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The Contribution is the accruals on account of operational efficiency with vis-a-vatariff norms. Example auxiliary power consumption allowed in tariff is 8.5%. Howeve

as per the historical data the auxiliary power consumption ranges between 7.5% an8%. Because of operational efficiency Marginal Contribution is generated. Historicalcontribution for stage-III in Unchahar is approximately Rs17.5 Crores. The figure kept constant over the useful life of the plant.

The contribution is calculated asContribution = Variable Revenue Variable Cost

This component is added to the Net Inflow on the account of Fixed Cost arrived aftethe deduction of Cost on account of the fixed components.

8. Findings & Analysis

The capital cost of Stage-III is Rs.939.28 Crores and the Capacity of Stage-III is 21

MW. Since NTPC according to CERC Act opts for 70% of the Capital Cost for Debt anthe remaining 30% for the equity. Hence the Debt amounts to Rs.657.496 Croreand the equity amount is Rs. 281.784 Crores.

Depreciation = Capital cost * 5.28% = Rs 49.59 Crores

The Net Cash flow for the 35 years of Plant life is shown in the Table 1.1. Th

calculation is divided as follows

Loan Calculation: The debt amount is calculated for 10 years. The Naverage loan is calculated by taking the average of opening loan anclosing loan.

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Revenue on account of fixed charges: As discussed in section 7.2.1

Cost on account of fixed components: As discussed in section 7.2.2

Marginal contribution on account of Items of Variable nature : Adiscussed in section 7.2.3

Net Present Value

The Net Present Value (NPV) of a Capital Budgeting project indicates th

expected impact of the project on the value of the firm. Projects with positive NPV are expected to increase the value of the firm. Thus, the NPdecision rule specifies that all independent projects with a positive NPV shoube accepted. When choosing among mutually exclusive projects, the projecwith the largest (positive) NPV should be selected.

The NPV is calculated as the present value of the project's cash inflows minus the

present value of the project's cash outflows. This relationship is expressed by thefollowing formula:

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Interpretation (for Table 1.2, given below)

Since the Net Present value calculated @10% for 35 year of cash flow is R41.80 Crores is a positive return, hence the investment in Stage III is a goo& acceptable decision. When compared to investment of Rs939.28 Crores, thNet Present Value of Rs 41.80 Crores is less after 35years. The major reasofor this behavior is more than proportionate increase in O&M expenses a

compared to the O&M recovery in Tariff as shown in figure 1.1. The employecost forms major part of O&M expenses. As the employee cost is higher thaprovided in Tariff, the net outflow in O&M expense is more.

NTPC Ltd is a PSU; hence the employee strength is fixed and cannot breduced. The employees salaries are being increased every year with basformula Basic + DA depending on the increase in inflation index. This results stickiness of the employee cost component.

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InternaRate oReturn

TheInternalRate Return(IRR) of CapitalBudgetinproject

thediscountrate which thNetPresentValue(NPV) of projectequals

zero.Whenchoosing

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Years Cash Flows

0 -939.28

1 114.34

2 105.453 95.724 78.455 97.006 97.557 98.138 98.71

9 99.3010 99.9011 100.5012 101.1113 103.8114 104.4215 105.0516 105.6617 106.2818 106.89

19 107.4920 108.0721 108.6422 109.1923 109.7124 110.2025 110.6626 111.0727 111.4328 111.73

29 111.9330 112.1331 112.2032 112.1833 112.0534 111.8035 111.41

Net presentvalue Rs. 41.80


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among mutually exclusive projects, the project with the highest IRR should bselected.

The determination of the IRR for a project, generally, involves trial and error or numerical technique.

Interpretation

The Internal Rate of Return for the Stage III is 10.49% is higher than the historic

cost of debt raised by NTPC which is 8% to 8.5% per annum. This includes the cost domestic debt as well as the foreign debt (the exchange rate variation has beeconsidered).

Since we have kept Return on Equity constant over the total life of the project. Thassumption is taken on the ground of conservatism because there is no clear cudirection by CERC regarding the provision of change in Capital cost of the project the future tariff period. Thus the constant ROE has pulled the NPV & IRR dow

because of the time value of money.

PAYBACK PERIOD

The Payback Period represents the amount of time that it takes for a CapitBudgeting project to recover its initial cost. The use of the Payback Period as Capital Budgeting decision rule specifies that all independent projects with Payback Period less than a specified number of years should be accepted. Whechoosing among mutually exclusive projects, the project with the quickest paybacis preferred.

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Interpretation

Analyzing Figure 1.2 & Table 1.3, the Payback Period of the Stage-III NTPC Unchaha

is 9.45 years.When we observe the Figure 1.2, we observe the investment line is linear. But Reality the Capital cost is never constant in case of thermal power project. They tento keep on increasing due to the addition capitalization during useful life of thermpower projects.

9. Recommendations

NTPC in order to cut down its operation cost it should adopt Lean Managemenand Six Sigma techniques.

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NTPC should try to procure cheaper machinery from foreign countries like Chininstead of being overly dependent on BHEL for supplies as discussed in the casstudy.

As discussed in the Case Study since Fuel accounts for 70% of the powgeneration cost. Private players like Adani Power, Reliance Power, Tata Power, JSWEnergy and Lanco Infratech have taken key initiatives to secure fuel supplies bacquiring coal assets and picking up equity in mines abroad to improve theprospects of winning power projects through tariff bidding route. Thus NTPC shoustart acquiring coal mines instead of purchasing from companies like Coal IndLimited. This will help NTPC to cut its operational cost and be more competitive.

NTPC can also increase the Variable component (Performance Related Pay) their salary structure so they can cut down some of its cost related to employee coin case of O&M expense.

NTPC should depend more on its internal accruals instead of relying on externdebt while going for expansion of exiting and setting of new projects. This wreduce the Overall cost of capital resulting in greater financial stability.

10. Conclusion

These researches highlight the importance of Capital Budgeting in an organizatioIn NTPC Ltd as it a Public Sector its most of the investment are in renovation

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expansion and acquisition of new thermal plants. Stage-III of NTPC, Unchahar wacommission in 2007 by increasing the capacity of Unchahar Thermal Power Statioto 1050 MW. On calculation of the payback period is coming around 9.45 year

Since the investments are more capital intensive in case of thermal power planthence it takes longer time to recover the initial investment cost.

The Net Present Value of Stage-III NTPC, Unchahar is Rs 41.80 Crores. The reason such low value of NPV is that major portion of O&M expense is Employee Cost whicis considerably higher than the recovery in tariff. Hence this causes reduction in thcash outlays. However, the Internal Rate of Return (IRR) is 10.49% is higher than thhistorical cost of debt raised by NTPC which is 8% to 8.5% implying acceptability othe proposal of setting-up of Stage-III, NTPC Unchahar.

The assumption of constant value of Return of Equity (ROE) based on ground conservatisms as CERC has no clear cut provision regarding the change in capitcost of the project in the future tariff period . Thus, constant ROE has pulled the NP& IRR down because of the time value of the money.

NTPC Ltd has excellent management skill and expertise in energy sector. But order to stay in competition with Private Players it needs to reduce its operation maintenance cost.

11. Reference

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http://www.studyfinance.com/lessons/capbudget/index.mv?page=01

Annual Budget Reports

www.ntpc.co.in

Financial Management by Prasanna Chandra

CERC Tariff Policy of 2009-2014.

www.moneycontrol.com

Indian Power Stations 2010 by NTPC

Delegation of Power by NTPC

Internal Management Reports

12. Annexure

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12.1 Abbreviation

ABT Availability Based Tariff

CENPEEP Centre for Power Efficiency & EnvironmentalProtection

IRR Internal Return rate

NPV Net Present Value

CERC Central Electricity Regulatory Commission

SFC secondary fuel oil consumption

FII Foreign Institutional Investor

DA Dearness Allowance

IGCC Integrated gasification combined cycle

KWH Kilo Watt hour

UMPP Ultra Mega Power Projects

PSU Public Sector Undertakings of Government of India

GOI Government of India

SEB State Electricity Board

ROE Return on Equity

O&M Operation & Maintenance

MOU Memorandum Of Undertaking

13. Case Study: NTPC in Comparison to its Competitors in theEra of Competitive Tariff Bidding.

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Abstract

NTPC Ltd is the major company of the Indian power sector. It is involved procurement, construction of power plants, their operation & maintenance and saof electricity to distribution companies all over India. The Company has diversified ioperations beyond thermal power segment and has added new business activitieby way of forward, backward and lateral integration. 34,194 MW (including JVs) wit15 coal based and 7 gas based stations, located across the country. In additiounder JVs, 5 stations are coal based & another station uses naphtha/LNG as fuel. Thcompany has set a target to have an installed power generating capacity of 28,000 MW by the year 2032.

The Electricity Act2003 has removed entry barriers to different segments electricity business with the objective of promoting competition. Trading and opeaccess are being introduced in phases. Competitive bidding process for procuremeof power from prospective developers has been introduced and states are invitinbid based on the competitive tariff.

The government of India is promoting series of Ultra Mega Power Projects (UMPwhere project developer will be selected on the basis of tariff based competitivbidding. With the introduction of Tariff based competitive bidding, merchandisinpower projects, open access and other initiatives of new Electricity Act2003, thcomplexion and contours of electricity market are undergoing substantial changeaccordingly NTPC is gearing up for leveraging emerging market opportunities.

The Study is carried out to highlight the issues and challenges for NTPC due to Ne

Electricity Act2003 allowing selection of bidder through tariff based competitivbidding, open access, merchandising power plants; governments initiatives on UltrMega Power Projects (4000 MW each) to tide over the power crisis and promotcompetition in electricity sector; upcoming competition from private players; riskassociated in execution of big projects.

These issues have gained very high importance for NTPC in the context of iunprecedented growth plans in electricity market of India. In fact, these are now thissues of strategic importance for NTPC to have a competitive advantage against thother domestic as well as global players.

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The objective of study is to compare the NTPC standing position with its competitoin the era of competitive bidding tariff. Identify what are the various risks NTPC caface as of being a Government organization that it can lack behind in competitivtariff bidding.

Introduction of NTPC

NTPC Ltd is a Maharatna company. It is the largest thermal power generatincompany of India; a public sector company incorporated in the year 1975 accelerate power development in the country as a wholly owned company of thGovernment of India. At present, Government of India holds 84.5% of the totequity shares of the company and the balance 15.5% is held by FIIs, DomestBanks, Public and others. Within a span of 30 years, NTPC has emerged as a trunational power company, with power generating facilities in all the major regions

the country. Based on 1998 data, carried out by Data monitor UK, NTPC is the 6tlargest in terms of thermal power generation and the second most efficient in termof capacity utilization amongst the thermal utilities in the world.

NTPC has been operating its plants at high efficiency levels. Although the companhas 17.75% of the total national capacity, it contributes 27.40% of total powegeneration due to its focus on high efficiency.

Until recently, NTPC had been operating in an almost controlled environment anhardly had any competition from private sector power producers. Though, privatsector companies like Reliance Energy, Tata Power and some other players werpresent but they could pose hardly any competition to NTPC because of hugdemand supply gap and geographical isolation. The other central state power sectundertakings namely SEBs, NHPC, NPC Neveli Lignite could also not pose ancompetition to NTPC because of similar reasons.

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Market Structure of NTPC

Referring to the figure 1.1, the major market share of Energy Sector is held by NTPi.e. 142, 2646.53 as of now. The largest Market Capital Structure indicates the largsize of the Company. NTPC has well established Plant distribution and networks.

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Table 1.1 Competitors in Power Sector with the Market Capitalization

When we look at the figure 1.2, 50% of Market share is only of NTPC. This Indicatethat NTPC have excess internal funds. Thus it qualifies for the funds rising with credrating of AAA+.Hence NTPC dominates the Energy Sector with a net profit of Rs 9,102.59 Crore

None of the Competitors are near to sales record of Rs 9,102.59 Crores.

The higher profits indicate that NTPC has high internal funds and hence does nhave any problems in raising funds both from domestic and international marke

The sales record demonstrates that NTPC has well established distribution annetwork that it can increase it sales to a great extent. NTPC has 35 years experience in the energy sector hence they have linkage and water sources neatheir plants. They do not require to work from scratch.

The Total Assets of Rs 101,521.10 Crores indicates that NTPC have the requireinfrastructure required for running of project in place. These all are the reasons texplain the dominant position of NTPC in energy sector.

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REGULATORY ENVIRONMENT IN INDIA

Electricity Act 2003: The New Era

It simplified administrative procedures by integrating the Indian Electricity Act, 191the Electricity (Supply) Act, 1948 and the Electricity Regulatory Commissions Ac1998 into a single Act. The Electricity Act, 2003 is based on the principles promoting competition, protecting consumers interests and providing power to a

The Act has freed the generation of electricity from licensing, and has liberalized th

captive power policy. Moreover, it provides open access to transmission andistribution network, and has laid out the stringent penalties for power theft. Thnew legislation can usher in paradigm shifts in the power sector. Competition will bpossible not just in generation, but also in every facet of the sector includindistribution. Moreover, private sector investment will be facilitated by greattransparency that will come about.

The Electricity Act 2003 has removed entry barriers to different segments of thelectricity business with the objective of promoting competition. Generation habeen de-licensed and open access in transmission has been provided. Trading habeen recognized as a distinct activity. Open access in distribution is beinintroduced in phases. The State utilities are being unbundled and corporatized fobetter performance and accountability. Power Regulatory Commissions have comout with notifications for open access and trading has emerged as a substantimarket activity. CERC has come out with Staff Consultation Paper on thestablishment of a Power Exchange. The operation of the power system has beetransformed with the Availability Based Tariff (ABT) regime and system disciplinhas been ensured.

The liberal captive and group captive regime foreseen under Electricity Act, 200should be realized on the ground. Indias liberal captive regime will not only deriveconomic benefits from availability of distributed generation but set competitiv

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wheeling charges to supply power to group captive consumers. This will pave thway for open access to distribution networks.

Grids of various regions viz. North-East, East, North and West have beeinterconnected and are now operating in synchronous mode and Southern Region connected through an asynchronous HVDC network. Establishment of inter -regionlinks and development of national grid has become a reality. Inter-regional powetransfers are on the increase. This will facilitate not only exchange of power frosurplus region to deficit region but also enable trading and development electricity market, including merchant power plants.

Competitive bidding process for procurement of power from prospective powdevelopers has been introduced and many States are inviting competitive bids. ThGovernment of India is also promoting a series of ultra mega projects where thdevelopers will be selected on the basis of tariff based competitive bidding.

COMPETITIVE BIDDING TARIFF

REDUCTION IN COST OF POWER:

There is at present no level playing field between Central Power Sector PSUs anothers. The tariff of the Central Power Sector PSUs is determined on the basis ocosts and norms with a guaranteed 14/16% post tax return on equity. This tari

determination regime gives little incentive to be efficient. The private sectogenerators do not get the comfort of the payment security mechanism available tCentral Power Sector PSUs under the TPA and the State power utilities do not get thassured post tax returns.

Competitive tariff bidding is level playing field for both private and public sector awarding the contracts of UMPP (4000MW) projects. Initially government used t

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award the contracts directly to the Public Sector Companies and in order to gecontract the Private players had to apply for various licenses and legal procedure

The competitive tariff bidding was introduced to promote low cost generation, whic

will benefit the consumers.

Tariff policy2006 was formulated with objective to:

a) Ensure availability of electricity to consumers at reasonable and competitivrates.

b) Ensure financial viability of the sector and attract investments.

c) Promote transparency, consistency and predictability in regulatory approacheacross jurisdictions and minimise perceptions of regulatory risks.

d) Promote competition, efficiency in operations and improvement in quality

supply.

The Centre's new Power Tariff Policy has proposed that distribution licensees shouprocure all future requirement of power through a process of competitive bidding.

All generation and transmission projects (with the exception of one time capacitexpansion of up to 50% of installed capacity of a generating plant) should b

competitively built on the basis of tariff based bidding. Public Sector Undertakingshall also be encouraged to participate in such bids even though the tariff policallows them a 5 year window wherein projects undertaken.

Tariff:The policy has also called for the introduction of multi-year tariff framewofor both public and private utilities. "This would minimize risks for utilities anconsumers promote efficiency and appropriate reduction of system losses an

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attract investments and would also bring greater predictability to consumer tarifon the whole by restricting tariff adjustments to known indicators on power purchasprices and inflation indices," the policy said.

TYPES OF BIDDING

In cases where tariff continues to be determined on the basis of costs and normregulators may either adopt a return on equity approach or return on capitapproach, whichever is considered better in the interest of consumers? In decidinthe level of return provided, the regulator should inter-alia take into account threturn available on long-term government bonds and reasonable risk premiumassociated with equity investments.

The policy, which was cleared by the Union Cabinet recently, has also given th

Central Electricity Regulatory Commission (CERC) the discretion to choose betweethe Return on Equity (RoE) and the Return on Capital Employed (RoCE) approacwhile setting the tariffs for a project.

The policy, which is supposed to act as the broad guidelines for regulators whisetting tariffs, also lays down a debt-equity ratio of 70:30 to be adopted for financinof future capital costs of projects.

According to the policy, a two-part tariff structure should be adopted for all longterm power procurement contracts from generation projects.

Transmission: In the case of transmission, the policy calls for "a suitabtransmission tariff framework for all inter State transmission, includin

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transmission of electricity across the territory of an intervening State as well as foconveyance within the State, needs to be implemented."

Distribution: In the case of power distribution, the policy asks State ElectricitRegulatory Commissions to determine and notify the standards of performance olicensees with respect to quality, continuity and reliability of service to all consumeof the State.Distribution should be bid out on the basis of a distribution margin or paid for byregulated distribution charge determined on a cost plus basis including a profit maup as mentioned above.

Advantage to NTPC

The Company has kept with itself sufficient liquid funds to meet any kind of cashrequirements. There no funds shortage, hence it comes under AAA+ credit ratingCompany. Hence, no problem in raising credit.

Adequate working capital of plant.

Expertise in O&M of the project which can prove beneficial in case UMPP.

Efficient growth with prospects of significant additions, modification andreplacement.

An early starter-more than 30 years experience in power sector .

Highly motivated and dedicated workers and officers, no industrial relationproblem.

NTPC has required expertise in the construction of a power project from erectiontill commissioning.

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Being a PSU, NTPC has easy access to governments funds and hence there is nopolicy hindrance in its way.

Established fuel linkage and water sources they dont have to work from scratch.

NTPC expertise in turnaround of the old power plants such as Talcher taken overfrom OSEB, Tanda from UPSEB efficient running of relatively newer plants likeUnchahar and Badarpur taken over from State utilities/ central govt.

Disadvantage to NTPC

In increasingly global environment, real threat will come from MNCs who arehaving access to cheap funds and technological superiority. The new global scenariwill force NTPC to rethink the strategy.

Private Sectors have access to cheaper technology from foreign countries likeChina with minimum time lags. Whereas in case of NTPC they have a runningcontract with BHEL. BHEL takes longer time to deliver the required machinery at ahigher cost.

With the opening up of the sector, more and more players are keen to put up

power plants because of new enabling regulatory mechanism. They will operate theplant with minimum overheads and flexible financing options.

Source of fund especially from stock market are cheaper compared to publicsector utilities. This is because of market perception that private sector can runbusiness more efficiently.

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Being a Public Sector Company NTPC has to bear to certain rules & regulationformulated from time to time. Where private sectors has no such restrictions.

NTPC has to go through a formal route of tendering where the bids are invitedfrom interested parties. Whereas in case of Private sector, they have independenceof awarding contract without inviting any bids.

Recommendation

I. Backward Integration

For UMPP, coals from captive mines as well as imported sources are envisaged. It isopined that captive coal mines are cheapest source of coal in India. Further,collaboration with leading players in coal mining for technical expertise or jointventure with CIL is preferred option. In case of Susan UMPP, the captive coal mine isidentified. NTPC can go ahead with collaboration or joint ventures route so that

sourcing can be tied up. This is the cheapest option to NTPC. Fuel accounts for 70%of the power generation cost.

Developers usually quote their fuel cost in escapable and non-escapable parts. Thelower the quantity under escapable category, the more competitive would be thetariff bid. That means those with their own coal mines would be in a better positionto quote a higher coal quantity under the non-escapable category.

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II. Forward Integration

The power sector is divided into three parts Generation, Transmission andDistribution. As a part of forward integration NTPC can starts its own Transmissionunit like Power Grid. Hence it will be in both Generation and Transmission. Sincepreviously Power Grid was part of NTPC. Hence, NTPC has experience in this areaand can in more competitive passion by grabbing this opportunity.

III. Joint Venture

NTPC can adopt the joint venture route along with the private players in case of theUMPP. In this NTPC will have access to the new technology and there will be resourc& assets sharing between the companies. Hence this will lead to the cheaper biddinof tariffs.

IV. New technology

NTPC should take lead in new technologies like supercritical, IGCC, PFBC etc. AsNTPC is leading power Sector Company, hence, people look towards NTPC for newtechnologies. NTPC will also be able to mitigate the risks associated with newtechnologies seeing its wider base. Further, NTPC can take lead role in CDMprogrammers so that some extra profit can be earned from the carbon credits. UMPprovides right opportunity to NTPC for adoption new efficient and environmentfriendly technologies.

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Worldwide, new technologies are available not only in turbine and boiler area butalso in the coal mining, oil / gas exploration. The new technologies will help in

reducing the tariffs as power plants can operate on higher efficiency on sustainablebasis for long time.

Conclusions

Thus its high time that NTPC should modify its strategies to compete in the era ofthe competitive tariff bidding. Competitive tariff bidding is a step in direction of totade-regulation of the electricity sector. The mantra is simple that Consumer isKing. Further, to stay competitive in global market, every organization has to

transform itself to new business models; otherwise, competitive forces will makeorganization redundant.

To achieve sustainable competitive advantage, NTPC has to think not only in termsof engineering excellence, operational excellence or excellence in project executionNTPC have to invent new business model catering to the need of presentstakeholders.

Reference: www.ntpc.co.in

www.moneycontol.com

www.psuindia.in

Tariff based Competitive-bidding Guidelines for Transmission Service

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NTPC Ltd,Unchahar.

Capital Budgeting Of Stage III NTPC Unchahar

Students Name: MOHAMMAD ANASIndustry Guide: Mr.P.Gopal RangaFaculty Guide: Mr. Gaurav Agrawal

Understanding of the integrity involved in a capitalbudgeting decision is very important for a finance person.

The project revolves around the factors which areimportant for capital budgeting decision. In a capital

intensive industry like power not only the capitalinvestment is very high but it has got long gestation

period and even longer payback period.NTPC being the largest power utility in India is veryimportant to nation as such because India is a power

deficit country and significant part of capacity addition isexpected to come from NTPC. Completion of project on-

time or before-time is important due to(i). It start generating revenue and hence profit before

schedule.(ii).The incidental expenditure during construction like

interest outgo is minimized.

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14. SYNOPSIS

Power sector is attracting a lot of capital becauseof assured Return on Equity. However the scenariohas changed from 5thJanuary 2011, where thegenerator has to bid for any Greenfield Project.

This brings the set of challenges to NTPC which hasgot a high cost structure and is not strong footedand responsive like private counterparts. Thebackward integration also poses lot of challengesto NTPC. A successful backward integration canonly ensure the raw material security and pricecompetitiveness of the electricity generated. Incase of merit order dispatch which is bounded toarrive in future.

mohd anas project

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