Advance orders of equipment behind competitive quotes

Advance orders of equipment behind competitive quotes
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First Published: Thu, Jul 10 2008. 10 25 PM IST

Heavy duty: A power distribution grid near Muzaffarnagar, Uttar Pradesh. Chinese suppliers have made deep inroads into India, whose equipment needs as of now are estimated at Rs3 trillion. Photograph:
Heavy duty: A power distribution grid near Muzaffarnagar, Uttar Pradesh. Chinese suppliers have made deep inroads into India, whose equipment needs as of now are estimated at Rs3 trillion. Photograph:
Updated: Thu, Jul 10 2008. 10 25 PM IST
Companies such as Lanco Infratech Ltd and Adani Power Ltd, both aggresive players in India’s power sector, have been able to quote low tariffs for mid-sized and large power plants because of advance orders they placed eight months ago with Chinese firms such as DongFang Electric Corp. and Harbin Power Equipment Co. Ltd.
Heavy duty: A power distribution grid near Muzaffarnagar, Uttar Pradesh. Chinese suppliers have made deep inroads into India, whose equipment needs as of now are estimated at Rs3 trillion. Photograph: Rajeev Dabral / Mint.
The projects, awarded through the international competitive bidding route, are given to the firm that quotes the lowest power tariff. Lanco bid Rs1.19 per unit of electricity for the 4,000MW Sasan power project in Madhya Pradesh that it was initially awarded, before being disqualified for violating some tender conditions. Adani bid Rs2.69 a unit for the 4,000MW power project at Mundra in Gujarat that was won by Tata Power Co. Ltd, which quoted Rs2.26 per unit.
The equipment ordered by the companies can only be used in mid-sized or large plants because each unit of equipment has a capacity of at least 660MW. Although Lanco is building 11 power plants with a total capacity of 7,163MW, it cannot use the equipment it has ordered in all these plants. Adani is building six power plants with a total capacity of 9,900MW.
“These companies have got very competitive rates as they placed the orders for super critical equipment (660MW and above) without even knowing whether they would develop any such project. This resulted in them getting low rates of below Rs3.75 crore per MW,” said a person familiar with the development, but did not wish to be identified citing commercial considerations.
Lanco and Adani have placed orders for 7,920MW and 5,280MW with DongFang Electric and Harbin Power, respectively.
“This is the truth behind quoting aggressive tariffs for setting up power generation projects by Indian firms. The flip side is that such firms may be badly hit if they are not able to tie up projects for the remaining equipment already ordered,” the person added.
An Adani Power executive, who did not wish to be identified, confirmed the strategy, but said that in case the company did not have enough power projects where it could use the equipment, it would “simply sell it in the market and earn appreciation on the equipment”.
State-owned Bharat Heavy Electricals Ltd is the largest and only local supplier of power equipment and the government has expressed concern over the ability of the company to cater to increasing demand. India expects to add 78,577MW of generating capacity in the five years between 2007-08 and 2011-12. In 2007-08 it added 9,300MW.
Questions emailed to Lanco Infratech’s spokesperson and the China offices of DongFang Electric and Harbin Power went unanswered.
Wen Ya, DongFang’s chief representative in India, declined to comment on Lanco’s placement of advanced orders and said his company has “a strategic partnership with Lanco. Different companies have their own strategy to bid for projects and have partnerships for the same. We quote a reasonable price”.
Chinese suppliers have made deep inroads into the market here, riding on the back of India’s huge appetite for power generation. India’s equipment needs as of now are estimated at Rs3 trillion.
A New Delhi-based power sector analyst, who did not wish to be identified, said firms had become “innovative in the way they are contracting for equipment. Even the equipment manufacturers are giving a reasonable flexibility in terms of the delivery timings. Such an approach does make sense as even if the utilities are not able to bag the projects, they can offload it in the market, since the equipment has the standard super-critical specifications (660MW and above).”
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First Published: Thu, Jul 10 2008. 10 25 PM IST