Saurabh Gupta, AF Mercados EMI April 25, 2014

1. 2nd Annual Conference on Renovation, Modernization & Life Extension of Power PlantsIssues and Challenges in R&M for Key Stakeholders in India Saurabh Gupta, AF Mercados EMIApril 25, 2014 April 25, 2014

2. Structure of the Presentation • Understanding the characteristics of the current thermal power generation fleet • Mapping of overall R&M market potential • Key challenges impeding market development • Suggestions

3. Understanding the characteristics of current generation fleet

4. Significant proportion of aging capacity in the overall generation mix 46.2%of plants exceeded operating life ~183 units 28.6%of capacity exceeded operational life ~ 25000 MW 52.4% of capacity exceeded mid plant life ~47000 MW 67.7% of plants exceeded mid plant life ~ 268 units Age (Years) Plants exceeding operational life Plants exceeding Mid-life No. of Units (396 Units) Capacity (MW) (90,000 MW) * Excludes private sector Source: AF-Mercados EMI Analysis

5. Significant deviation in the Average Operating Heat Rate vis-à-vis Design Value Source: AF-Mercados EMI Analysis • Leads to: • Higher Specific Coal Consumption • Higher Emissions • Higher fuel cost and tariff

6. Auxiliary consumption (%) increases as capacity size reduces, differences also exist b/w state & central plants Source: AF-Mercados EMI Analysis * Average is higher due to one or two plants outliers, otherwise the group is lower than 9.2% Above indicates, strong need for R&M in the existing thermal power generation fleet

7. Significant Potential exists in the market Cumulative R&M/LE Potential in 12th and 13th Plan Source: AF-Mercados EMI Analysis At an aggregate level, total R&M/LE potential for the 12th & 13th plan period works out to be 43, 470 MW (171 Units)

8. However, several challenges have limited real opportunities to come in the market Has also restricted overall market development and entry of players

9. Key challenges impeding market development Market Challenges Regulatory Challenges Institutional Challenges Contracting Challenges

10. Key Market Related Challenges 1. Limited Market Opportunities 2 • OEMs have been the first point of contacts- Jobs were awarded on nomination basis with limited opportunities entering into the market 6 TPE Russia 3 BHEL BHEL 2 6 2 NASL BHEL (PPIL) NASL 11th Plan 10th Plan Only recently interest from a new set of vendors has come under tender based procurement incl. Doosan, Dongfang, GE, L&T etc

11. Key Market Related Challenges 2. Achievements not in line with targets (Weak Implementation) 3. Several opportunities do not reach the open market Past analysis of R&M market opportunities (2000-2007) : 2,094 MW 2,377 MW 18% 17% 9% 78% 2,030 MW For example: In case of Koradi Unit 1-4 of Mahagenco, tenders were floated for undertaking R&M works but were subsequently cancelled for various reasons. % target achieved against planned

12. Key Market Related Challenges 4. Limited appreciation of technical roles impeding market for technical consultants 11th Plan 10th Plan 6 6 9th Plan 2 2 2 In recent tenders new roles have come up incl. Env. Audit, Rapid Social Assessment, Quality Assurance – But needs to be carried forward and done on regular basis 1 1 1 1 NTPC Evonik IRC Engg. Services Utility Powertech Ltd TPE Russia CPRI BHEL BHEL NASL

13. Key Regulatory Related Challenges 1. Misaligned Benefit Sharing • Limited incentive to the generating company to improve efficiency • Benefits of improved efficiency achieved after R&M are fully passed on to the consumer during tariff revision • If a generator under achieves, the losses are generally borne by the generator 2. Limits to R&M investments Under current regime, the LE cost shall not exceed 50% of the EPC cost of a new generating unit

14. Key Contracting Related Challenges Weakly defined scope and open ended statements in the commercial contract shifts the risk substantially to bidders Delays in bid evaluation and award causing time gap between technical studies and commencement of actual work

15. Key Institutional Related Challenges • Limited Capacity of Utilities in Undertaking R&M Works • Limited training of utility professionals in the area of planning and execution • Absence of dedicated cell/department at the company level • Frequent transfers • Weak Implementation support by utilities during Implementation support of R&M • Entire risk and responsibility for completion of the project is passed on to the suppliers • Lack of collaborative approach O&M practices being followed by state owned generation companies in India are weak Source: CAG Audit Reports and Interaction of AF Mercados EMI with officials of various utilities

16. Suggestions

17. Suggestions Challenges related to Opportunity Origination and Limited Market Opportunities • Preparation of R&M Roadmap by the State Utilities • Enables the suppliers to plan their capacities and respond to opportunities when they are offered in the market • Regulators in each state need to design incentive and enforcement mechanism that encourage utilities to undertake R&M of inefficient and old plants • R&M Opportunities should be awarded through fair and transparent bidding process • Net financial returns should be the determining factor rather than capital expenditure incurred on R&M - Capex based approach does not take into account the possible efficiency improvement

18. Suggestions Regulatory and Funding Challenges • Generating companies undertaking R&M should be permitted to retain a part of benefit achieved through R&M - This is Consistent with the provisions of National Tariff Policy • Involvement of Private sector should be encouraged in both R&M and post R&M for O&M of the plant – Enables sustenance of efficiency gains realized during the R&M Contracting Challenges • Standard bidding documents for R&M should be prepared – This should also include the contractual framework and avoid general purpose clauses that impose uncapped risks • Independent assessment through specialized agencies to develop the technical specifications, and the scope of work should be mandatory • Utilities must be required to undertake a detailed cost benefit analysis by estimating the net financial returns from different options

19. Suggestions Institutional and Implementation Challenges • Formation of Dedicated R&M Cell - Creation of strong project management team within the utility is critical success factor. Further, frequent transfer of employees should be avoided to build institutional capacity and memory. • Preparation and implementation of O&M action plan- O&M practices should be reviewed at the start; and suitable O&M strengthening plan should be adopted, critical for retaining the benefits achieved • Creation of a formal system to document learning and experience of executing R&M projects – Must cover process adopted, risks encountered, occurrence of technical surprises etc. and lessons learnt

20. Thank You Saurabh GabaManager, ÅF Mercados EMI (Asia)Mercados Energy Markets India Private Limited 1202, Tower B, Millennium Plaza, Sector 27 Gurgaon, Haryana - 122002, India Tel: +91 124 4241750 | Mobile: +91 9899585432 | Fax: +91 124 4241751 saurabh.gupta@afconsult.com