Tata Ultra Mega

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	25797
Company name	Coastal Gujarat Power Limited
Country	India
Sector	Utilities
Environmental category	A
Department	Infrastructure
Status	Pending Disbursement

Date SPI disclosed	November 27, 2007
Projected board date	March 27, 2008
Previous Events	Signed: April 24, 2008 Approved: April 8, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Coastal Gujarat Power Limited (CGPL or the company) will build, own and operate a 4,000MW (5 units of 800 MW each) ‘ultra mega’ imported coal and supercritical technology based power plant at the port city of Mundra in the state of Gujarat in India. The project will be the first 800 MW unit size supercritical technology thermal power plant in India and will likely be the most energy efficient coal based thermal power plant in the country. The project, awarded by India’s Ministry of Power through tariff based competitive bidding, is being sponsored by Tata Power Company Limited (Tata Power or the sponsor). It will sell its generation to the utilities of five different states (the procurers) in the power starved regions of western and northern India through a long term 25 year take-or-pay Power Purchase Agreement (PPA). The project will cost about $4.14 billion and will sell power at 25 year levelised tariff of INR2.26 per kWh which is competitive compared to current prices of bulk power in India. The project will source imported coal from mines of Indonesia and other countries and will use the Mundra port facilities (operated by the Adani group of Gujarat) for the project. The main plant equipment is being supplied by Doosan (supercritical boilers) and Toshiba (steam turbine generators). The project is the first private sector power project in India to be based on the energy efficient supercritical technology. The use of this technology in this plant will help reduce the average Green House Gases (GHG) emissions of Indian power plants per unit of electricity generated in the country. Based on the new technology and other measures being taken by the company, the project will meet the IFC social and environmental Performance Standards. This is also IFC’s first financing of a supercritical plant anywhere in the world.

The project fits well with the Government of India’s (GoI’s) plans of attracting significant investments in the country’s power sector which is facing a huge demand supply gap. India is currently facing enormous demand supply gap of about 11% energy shortage and 14% peak power shortage. This gap is very severe in some states such as Maharashtra which suffer from acute deficit of about 19% energy shortage and 27% peak power shortage. The growing gap in the country could lead to significant impacts on industrial growth and corresponding economic development. It is expected that if India is to sustain its current level of GDP growth of 8 – 9% per annum, it would need to add about 160,000 MW in generation capacity in the next 10 years. The demand supply gap will also increase as more rural households (currently rural household electrification level of only about 44% in the country) are electrified under the accelerated rural electrification program being currently undertaken by the GoI. Therefore, there is an urgent need to achieve significant generation capacity addition in a short time frame which will help meet the rising electricity demand and lead to economic development of the country. It is expected that large projects of this kind will help reduce the demand supply gap and the economic impact of delays which are encountered by most infrastructure projects in the country. The project will sell power to the states of Gujarat, Rajasthan and Maharashtra in western India and Haryana and Punjab in northern India. All these states currently suffer from energy shortages ranging from 7% to 19% and peak power shortages of about 10% to 30%. The project will play an important role in reducing these gaps with cheap and reliable supply which will also help in improving access to electricity in the country.

- Abatement of GHG emissions:

The project uses supercritical coal technology, which has been approved by CDM-Executive Board as a “Clean Development Mechanism” for power projects in India. Due to the use of this technology and choice of unit sizes, the thermal efficiency of the project (LHV, gross) will be higher by about 70%, 30% and 20% as compared to the average thermal efficiency (LHV, gross) of coal based power plants in India, across the globe and OECD. Therefore, the project will result in reducing the average carbon emissions of India’s electricity generation system per unit of electricity supply.

IFC’s approach towards abatement of climate change impacts includes investment focus on:

- renewable energy including small and/or run of the river hydro, wind and biomass sources;
- transmission and distribution to reduce technical losses and improve energy efficiency;
- supercritical coal technology, ultra supercritical or subcritical coal technology with energy efficiency higher than existing national average of the sector;
- enhancing access to natural gas based energy including supporting infrastructure like LNG Terminals, and gas transmission and distribution grids;
- improved management of municipal solid waste and waste water systems; and
- leveraging Kyoto Mechanisms (Clean Development Mechanism), to enhance the attractiveness of less GHG intensive energy generation and delivery approaches.

Since the most technologically proven method of reducing GHG emissions is improving power plants efficiency, IFC is giving high priority to funding more efficient power projects which will reduce the carbon emissions intensity in the country and reduce the average overall environmental impact of the country’s power generation system. It is expected that India will continue to be dependent on coal to fulfill its power requirements due to limited availability and high pricing of gas, hydro and other renewable sources. Therefore, IFC is supporting thermal power projects which have better GHG and environmental performance than the average plants in India, given the country’s large needs for incremental electricity supply.

Project sponsor and major shareholders of project company

Tata Power is one of India’s largest private power companies promoted by the Tata Group (Tatas or the Group) with operating generation capacity of about 2300 MW, distribution assets in Delhi and a transmission company. For the financial year ending March 31 2007, Tata Power had total revenues of $1.6 billion, EBITDA of $331 million and asset base of about $2.8 billion. Tata Power is listed on the Indian stock exchanges with a current market cap of about $5.5 billion and is locally rated AA by Crisil, S&P’s Indian subsidiary. The Group holds about 32% shares in Tata Power through its parent company Tata Sons Limited. Tata Power currently holds 100% shares of CGPL.

Total project cost and amount and nature of IFC's investment

The total project cost is estimated at about $4.14 billion which includes $3147 million of capital cost along with other items. The proposed investment by IFC is an A Loan of up to $450 million. IFC is also considering investing up to $50 million in equity as part of its exposure to the project. Additionally, IFC and CGPL are exploring the possibility of syndicating up to about $300 million in B loans for the project.

Location of project and description of site

The project is located at Tundawand Village, Taluka Mundra, District Kutch in the state of Gujarat, India. The land required for the project is estimated to be 1,242 ha. The project site is barren and sandy land with minimum cultivation and patches of thin vegetation. There is no inhabitation within the proposed site. The site is on the coastal area of the Gulf of Kutch, but is remotely situated from urban areas or ecologically sensitive areas such as national parks, wildlife sanctuaries, etc. The main project area is located more than 500 meters away from the High Tide Line, meeting the stipulation of the Coastal Regulation Zone. The site is located at 25 km from Mundra port where imported coal is planned to be unloaded. The project site is linked with a good network of rail and roadways. Economic resources of the area surrounding the project site include agriculture, livestock and animal husbandry, and some fishery.

Anticipated development impact of the project

According to the electricity consumption statistics of the International Energy Agency, India has a very low per capita consumption of electricity at about 437 kWh per annum as compared to its counter part emerging economies of China (about 1528 kWh) and Brazil (about 1941 kWh) and much lower than developed economies of United States (about 12541 kWh) and Japan (about 7701 kWh). The country faces severe shortages of about 11% of energy demand and 14% of peak power demand. The regions of the country where the project will supply its generation are the worst affected by the power crisis with energy shortages ranging from 7% to 19% and peak power shortages ranging from 10% to 30% of demand. The low availability of power is seriously hampering industrial growth/competitiveness and corresponding economic benefits to the country. Lack of growth in power generation capacity and associated transmission and distribution network is one of the most critical factors for India to sustain its current GDP growth rate. It is expected that India needs to add about 160,000 MW in generation capacity in the next 10 years in order to sustain its current GDP growth rate of about 8 – 9% per annum. This implies that India needs to more than double its current generation capacity of about 132329 MW in the next 10 years which will require huge efforts and investments from both national and state governments as well as the private sector including international investors. The significance of this target is immense considering that India has been able to add only about 40195 MW in generation capacity in the last 10 years. Large power plants such as the proposed project will play a significant role in achieving the capacity addition targets in the envisaged timeframe and will help the country sustain its growth levels leading to overall economic development of India’s large population.

The project will provide a competitive source of electricity to partly reduce the current power shortages and help meet the growing demand for electricity in the country. Cheap and reliable power from the project will help in improving the competitiveness of Indian manufacturing and services industries which have to often rely on expensive standby diesel generation to fulfill their power needs. Competitively priced power will also improve access to electricity in rural and urban areas of the country while reducing the subsidy burden on state governments. Therefore, the project will have significant impact not only in terms of reducing the prevalent demand supply gap but in reducing the average electricity costs in the country leading to improved access and industrial competitiveness.

The project will have the following additional development impacts:

- Employment:

The project will create an estimated 5000 jobs during construction and 700 jobs during operation. This significant creation of employment will lead to economic benefits in the project area and further development of additional economic activities leading to incremental employment.

- Growth in port and transmission capacity:

The project will source its coal through the Mundra Port which is undergoing a large expansion, a part of which (corresponding to approximately $200 million) will be utilized by the project. The transmission system is also being expanded, at an estimated cost of over $1 billion, to accommodate incremental power from the project. Both these facilities will result in large additional investment in the country and corresponding job creation and economic development. Growth in transmission capacity will result in strengthening of the inter-state grid system which will enable early development of future power plants which would use these facilities for transmission of their generation to different parts of the country leading to improved access.

- Tax transfers:

The project will make significant tax payments to GoI, estimated at over $350 million over the life of the project. Growth in the associated facilities and imports for the project will lead to significant additional tax and custom duty payments to the government.

- Social and Environmental:

Lack of access to electricity (which is dependent on availability and price) has significant deleterious impacts on health, natural resources and environment. Burden of these impacts is often borne disproportionately by women, children and other vulnerable groups. The project will contribute to enhanced access to electricity through supply of cheap and reliable power.

- Lower GHG emission intensity:

While the total GHG emissions may be high, the GHG emissions per KWh of energy generated from the project will be about 750 gCO2/kWh as compared to 1259 gCO2/kWh (national average India for coal based power plants, 2005), 919 gCO2/kWh (world average for coal based power plants, 2005) and 888 gCO2/kWh (OECD average for coal based power plants, 2005). The project will have a GHG emission intensity which is lower by 40%, 18% and 15% as compared to the average GHG emission intensity of coal based power plants in India, across the globe and OECD. The project will use about 10.8 million tonnes of coal annual to generate 29,000 million kWh of electricity (net), emitting about 23.4 million tonnes of CO2, based on the imported coal calorific value of 5,750 kcal/kg and 40.5% efficiency (net, HHV) of supercritical technology. A typical subcritical power plant recently developed in India has generating efficiency of around 35% (net, HHV), and is likely to use 24.1 million tonnes of coal (domestic), emitting 28.8 million tonnes CO2, or 12.5 million tonnes of imported coal, emitting 27 million tonnes CO2, to generate the same amount of electricity. Assuming both plants use the same imported coal, the project will avoid the burning of 1.7 million tonnes of coal per annum, resulting in a reduction of carbon emissions of 3.6 million tonnes CO2 per year.

IFC's expected development contribution

IFC has a significant role to play in the project leading to high development contribution which is summarized as follows:

- Demonstration effect:

The ultra mega power projects are one of the most important components of GoI’s policy in the power sector. India’s electricity sector is faced with severe shortages and urgently needs capacity addition if India is to sustain its economic growth rate. As mentioned above, India needs large capacity addition to fulfill its electricity requirements which will reduce the prevalent demand supply gap and meet incremental demand due to higher industrial activity, improved access in rural areas and rising per capita consumption of electricity in the country. These generation targets will require large scale investments from not just the central and state governments but also from Indian private sector and international power project developers, investors and other banks and financial institutions. This project is the first ultra mega power project whose success is extremely important to boost the confidence of both domestic and international investors in India’s power sector. IFC’s support to this large project will help bring this required confidence of investors in the country’s power sector, its reform process which is currently underway and improve its risk profile for international investors. IFC will also play the role of a neutral broker in the project which involves multiple stakeholders.

- Catalytic role:

The Indian power sector including this project has large financing needs. Such large financing needs are difficult to be fulfilled by domestic banks alone and will need the support of several international institutions including multilateral agencies. IFC has a strong role to play in the financing of this project which is expected to help attract the financing of other multilateral agencies like ADB, export credit agencies like Korean Exim and other foreign and local banks. IFC’s support of this project will improve the confidence and reduce the risk perception of banks and financial institutions in this project. IFC’s financing of the project will also have the catalytic effect of improving investor confidence in the Indian power sector leading to larger contributions from international institutions in future projects as well.

- Filling the financing gap:

The project has large debt financing need in excess of $3 billion which the local banks will find difficult to fulfill. This is a large requirement for a single project which requires the project to seek the support of multilateral agencies like IFC who have a strong role to play in filling the financing needs of the project.

- Long Tenor Financing and better structuring:

The project was won on the basis of tariff based competitive bidding and it needs long term financing to achieve financial closure with reasonable comfort to lenders. While Indian local banks are able to provide financing with door to door tenors of about 15 years for this project, IFC will provide its debt with much longer tenor of about 20 years and higher average maturity than the local banks. This will enable the project to be structured in a way which will reduce its risk profile and enable it to attract more foreign and local bank financing. The significantly longer tenor of IFC loan will further improve the risk profile of the Indian power sector and enable it to attract international financing in the future.

- Higher environmental and social standards:

There is strong additionality to be derived from IFC’s involvement with the project in terms of improving its environmental and social performance and its impact on the local communities. While the Tata Group is known for its sensitivity to environmental and social issues, IFC is helping them comply with our Performance Standards which are more stringent than GoI guidelines and will result in better management of environmental and social impacts of the project. IFC has worked with the company in conducting a detailed social impact assessment which would not be required without IFC’s involvement. This assessment will enable the project to appropriately assess and mitigate the social impacts on the local communities affected by the project. IFC’s involvement will result in lower emissions of air pollutants (sulfur dioxide, particulate matter) from the plant than the emissions if IFC was not involved in the project because of the more stringent IFC guidelines than those required by GoI standards. Therefore, IFC’s involvement will improve the environmental and social outcomes of the project.

Environmental and social issues - Category A

This is a category A project according to IFC's environmental and social review procedure. CGPL is developing the project in compliance with IFC’s Performance Standards on Social and Environmental Sustainability.

The following key environmental and social issues were appraised by IFC through site visit, meetings with CGPL and Tata Power officers in charge of environmental and social assessment and management, and interviews with representatives of selected villages:

- CGPL’s environment and social assessment and corporate environmental, social, and health and safety management systems and their implementation;
- CGPL’s community engagement;
- labor and working conditions including CGPL’s plan for influx labor management;
- emissions to soil, air, water and impacts on ambient conditions;
- alternative assessment for pollution control measures;
- condenser cooling system and thermal discharge;
- cumulative impacts of the project and the adjacent other project;
- energy efficiency and GHG emissions;
- community health, safety and security during construction and operation;
- land acquisition and compensation for both the project site and associated facilities;
- impacts on natural habitats including marine environment;
- potential impacts on indigenous peoples and other vulnerable project affected persons; and
- potential impacts on cultural heritage.

Details of the IFC’s appraisal findings including CGPL’s action plans are provided in the Environmental and Social Review Summary.

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