SCALING UP RENOVATION AND

MODERNISATION OF THERMAL POWER

PLANTS IN INDIA – KEY FINDINGS OF A
SURVEY AND ROUNDTABLE
CONSULTATION

September 2009
 CONTENTS
Executive Summary ........................................................................................................................ 4

1. Renovation and Modernization Project Planning .................................................................... 10

2. Renovation and Modernization Project Schedule .................................................................... 16

3. R&M Design Specifications, Bidding and Contracts .............................................................. 21

4. Financing Renovation and Modernization Projects ................................................................. 28

5. Recommendations to Scale-up India's Renovation and Modernization Program .................... 31

Appendix 1: Thermal Power Plant Rehabilitation ........................................................................ 35

Questionnaire

Appendix 2: Agenda ..................................................................................................................... 42

Appendix 3: List of participants .................................................................................................... 44

Appendix 4: Comments on Contracting Methods for Power Projects………………………… ....... 47

 Abbreviations
ADB Asian Development Bank
BOP Balance of Parts
CEA Central Electricity Authority
CERC Central Electricity Regulatory Commission
CERs Certified Emission Reductions
DPR Detailed Project Report
EPCM Engineering Procurement Construction Management
GEF Global Environment Facility
GW Gigawatt
LIC Life Insurance Corporation
LROT Lease Renovate Operate Transfer
MAHAGENCO Maharashtra Generation Corporation
MoP Ministry of Power
MW Megawatt
PFC Power Finance Corporation
PLF Plant Load Factor
PPP Public Private Partnership
R&M Renovation and Modernization
RFP Request for Proposals
RLA Remaining Life Assessment
SEBs State Electricity Boards
TPP Thermal Power Plant
WB The World Bank

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 Executive Summary

INTRODUCTION
Renovation of thermal power plants is of strategic and urgent importance for India.
Presently, India has 162 units of 200/210 MW representing approximately 35 GWs and
more than 38 units of 500 MW (estimated at 20 GW) which are due for renovation;
while some R&M has been carried out over the last two decades, major activity in
R&M is planned for the coming decade. However, a range of barriers and
implementation challenges continue to delay rapid scale-up efforts to meet targets.

While, many of the issues affecting R&M projects in India have been well-documented
by organizations such as the Central Electricity Authority (CEA) and the World Bank,
there is a need for a thorough discussion and documentation of the key planning and
implementation challenges that continue to stymie development in this area. These
perspectives are best gathered from practitioners in the field (stakeholders in R&M
projects) tasked with the development and implementation of such projects.

The United States Agency for International Development’s ECO-Asia Clean

Development and Climate Program (ECO-Asia CDCP) organized a survey in April-
June 2009 with technical inputs from the World Bank, to solicit the input of industry
experts on the current status of R&M initiatives in India and ways to scale up India’s
R&M program. The survey aimed to pull together key information on successful
approaches, innovative methods, and pitfalls to avoid based on the experience of utility
managers, technology providers and power plant engineers in India and abroad.

Subsequently, a two-day roundtable discussion was held in Delhi on June 11-12, 2009
[Scaling-up Renovation and Modernization of Thermal Power Plants in India”] during
which the same issues were discussed among invited experts from India and abroad.
The workshop was organized by ECO-Asia CDCP and the World Bank in collaboration
with the Ministry of Power and CEA. This document provides the key findings from
both the survey and the workshop.

Since April 2008, ECO-Asia CDCP has been promoting a national dialogue on scaling
up R&M investments in India, and has been providing targeted technical assistance to
its partners in India. The World Bank through its Global Environment Facility (GEF)
supported a project on Thermal Power Plant Rehabilitation in India, and has been
working closely with its client state electricity boards (SEBs) to develop R&M
investment projects, which is now being considered by the Ministry of Power to be
crucial as “Phase 1” examples that will help pilot-test financing and technical
approaches, and hopefully, pave the way for a rapid scale up of R&M projects
elsewhere in the country.

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Approach
National and international experts were consulted on the following topics related to
R&M implementation:

1. Reducing design and implementation time for R&M projects.

2. Ways to market the R&M commercial opportunities in India to suppliers and
EPC contractors, with the objective of attracting new entrants into the Indian
R&M marketplace.
3. Managing procurement-related issues including bids, contracts, guarantees,
contingencies and penalties.
4. The key elements of a framework to support implementation of R&M projects
to address India’s national power supply needs, including financing and
institutional options.
This was done through a questionnaire (see Appendix 1), which was prepared and
mailed in mid- April 2009 to over 20 organizations identified by USAID/ ECO-Asia
CDCP and the World Bank.

The following organizations responded (in alphabetical order):

• Central Electricity Authority (CEA) of India
• Cethar Vessels Ltd (India)
• Energo Engineering Projects Ltd (India)
• Hitachi Ltd (Japan)
• HPGCL/Panipat (India)
• JPower Co (Japan)
• Maharashtra State Power Corp. (India)
• NTPC R&M Dept and Operations Dept (India)
• NTPC Alstom Power Services Private Ltd (India)
• Parsons Brinkenhoff (United Kingdom)
• RWE (Germany)
• Sargent & Lundy LLC (United States of America)
• Skoda (Czech Republic)
• TCE Consulting Engineers (India)

The responses to the questionnaire were summarized in a preliminary report which was
distributed and discussed further during a workshop organized in New Delhi on June
11-12, 2009 captioned “Key Findings of workshop on Scaling up Renovation and
Modernization (R&M) of Thermal Power Plants”. The agenda of the workshop is
included in Appendix 2. Participants from India and abroad (77) attended the meeting,
and were drawn from organizations with significant experience on TPP rehabilitation,
planning and implementing rehabilitation projects. This report summarizes the key
findings from both the questionnaire and the workshop. Issues are presented first,
followed by options to address them and finally recommendations that could lead to
specific next steps.

The main issues impeding implementation of R&M projects in India are:

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 • Difficulty in controlling R&M project scope, schedule and budget. Project
planning could be long, time-consuming and expensive. A major challenge to
strike the right balance between extensive testing/analysis and controlling
project preparation costs and schedule.
• There are not many well-qualified engineering and consulting companies in
India to support the country’s R&M program.
• There is limited willingness of suppliers to participate in R&M projects.
• Planning and implementing R&M projects requires experience in time-
consuming and resource-intensive activities. Indian power companies require
substantial strengthening of their expertise.
• Operating and maintenance practices of the majority of TPPs in the state sector
in India are inadequate resulting in rapid deterioration of plant performance and
reliability.
• A big challenge is to balance risks and benefits through appropriate contracts
(including performance guarantees).
• Recovery of R&M investments through tariffs and dispatch arrangements.
• There are no incentives for power companies to improve plant efficiency and
reliability.
• State utilities find it difficult to take long shut down for R&M due to power
shortage situation.
• Regulators take a long time in giving clearance for R&M schemes.

RECOMMENDATIONS

1. Improve regulations affecting R&M projects and streamline approval process

Recovery of all reasonable investments in R&M projects needs to be secured through
appropriate tariff regulations and plant dispatching.

In general, the investment in R&M should be justified on the basis of financial returns
to be generated by the project after R&M is completed. Also, the approval process
needs to be streamlined as many organizations (both State and Central Government) are
involved. Approval of R&M projects should be obtained with some certainty before
the project is implemented. It is recommended that a working group be established in
collaboration with the Ministry of Power and the leading Utilities like NTPC,
MAHAGENCo and financial agencies like the World Bank, ADB, and KfW to propose
specific changes in the regulatory process. The World Bank has carried out a
comprehensive study on the issues affecting R&M projects which provides a lot of
useful information and specific recommendations on what should be done.

The same working group should consider providing incentives for power companies to
enhance the plant efficiency and explore the possibility to conduct performance-based
procurement in R&M projects. Improved efficiency should benefit both the plant
owners and the customers (public). Dispatching rules should allow plants to take
advantage of improved efficiency; also, if certified emission reductions (CERs) are
generated, the plant owners should receive a large part of the CER revenue.

2. Develop standardized documents for project planning, bidding and contracts

There is broad consensus that standardized documents would be very helpful to Indian
power companies planning R&M projects. While it is recognized that each project

6
would have unique characteristics and requirements, it is much easier to adopt a
standardized document which reflects lessons learned from past experience in R&M
projects rather than try to develop a document from scratch. Considering that many
plants in India utilize the same standard design, standardized documents should be
more applicable. It is recommended that the following documents are developed:
(A) Guidelines on how to plan and implement R&M projects
(B) Scope of Consultancy Services
(i) Design Consultant
(ii) Project Implementation Consultant
(iii) Quality Assurance Consultant
(C) Bid Documents
(D) Commercial Contracts

A. Guidelines on how to plan and implement R&M projects: Realization of all the
important factors and good planning are the key to a successful project. More
specifically, it is important to get an experienced consultant, provide all the available
data on the design and operating history of the equipment, and carry out a
comprehensive performance and remaining life assessment followed by an evaluation
of all the available options. The next step is to define the scope of R&M operations
which should be aligned with the available budget and the contractual arrangements
should be such that minimize project delays.

CEA has developed a draft document providing guidance for planning and
implementing R&M projects. It is recommended that this document be enhanced
further to be more comprehensive in the guidance it provides. This enhancement could
be possibly done under the Technical Assistance (TA) provided to CEA by the World
Bank.

B. Consultancy Services: It is recommended that a comprehensive document be

developed identifying all activities included in R&M project planning and preparation
including a standardized scope of work for consultant(s). Activities to be included are:
• Data gathering;
• Plant walk-down’
• Energy audit;
• Pre-R&M performance testing;
• Residual life assessment (RLA);
• Steam Path Audit (SPA);
• Stress analysis of critical piping;
• Potentially non-destructive and destructive evaluation;
• Review of O&M practices; and
• Clear definition of scope of R&M project and post-R&M performance targets.

USAID/ECO-Asia CDCP will take the initiative to contact key stakeholders to develop
(in collaboration with CEA and the World Bank) a guidance document for procuring
consultancy services and planning R&M projects.

C. Bid Documents: Standardized bid documents are difficult to be developed mainly

because the scope of each project is likely to be different. However, there are enough
common elements in the 210 MW plants to develop a standard document which could

7
be adjusted to fit the site-specific requirements. It is understood that GTZ is providing
technical assistance which includes support in standardizing bid documents and
commercial contracts.

D. Commercial Contracts: Standardized contracts would be beneficial as a starting

point, even though they would need to be adjusted to fit the needs of each R&M
project. The standardized contracts should address the following:
• The contract may be an EPC (with one contractor) or multiple contracts; most of
the responders to the questionnaire and participants of the workshop suggest
that multiple contracts are more suitable for R&M projects in India; the steam
turbine in particular is a component which could be tendered separately from
the rest of the plant;
• Two-stage bidding should be considered;
• Clear acceptance test for each contract should be defined;
• The scope of the project, its objectives and the budget should be consistent;
• The contract should balance risks and rewards in a fair way;
• Based on scope finalized for 4-5 projects, an attempt can be made to develop
scope of work that indicates mandatory recommended and optional scope.
Bidding can be attempted for entire scope with take off and add on price for
various items.
• Consultant should clearly establish techno economics of renovating vis-a-vis
putting up new more efficient units either on one to one replacement basis or
installing a single big unit in place of no. of small units.
• Contracts should deal with price escalation in case the project implementation is
long; and
• The contract should deal with “surprises”; one way to do so is to separate
requirements for a transparent evaluation and the actual scope required for the
R&M project; this could be done by defining part of the scope as firm, but also
request of unit prices for additional scope on as needed basis.

The GTZ technical assistance program may support the development of standardized
commercial contracts.

3. Provide assistance to make it easier to take the unit out of service for R&M
Considering the widespread lack of adequate power supply in India, it is very difficult
to obtain permission to take a unit out of service to implement an R&M project. Very
often, even though there is initial approval, last minute delays are common creating
serious problems in project implementation. It is recommended that the Central and
the State Governments collaborate to allocate more power supply to companies
planning R&M projects.

4. Bulk tendering
Tendering multiple units together should be explored urgently especially for the steam
turbines which are of identical design (210 MW LMZ or Siemens turbines). Also, a
central organization could be established to stock high-cost low-risk spare parts.

5. Get the private sector involved in R&M financing

Participation of the private sector in R&M projects should be explored and encouraged
urgently. Private-Public-Partnership (PPP) Guidelines should be developed and

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opportunities should be sought to apply such concept. The Lease-Rehabilitate-Operate-
Transfer (LROT) option may be the most suitable option short-term. ESCO type
financing may be considered, too.

6. Disseminate best practice experience from other countries

International best practices are important for Indian power companies planning R&M
projects. A tour of plants which have implemented 210 MW LMZ design plants in
Eastern Europe has been proposed by USAID and supported by all participants. It will
tentatively be planned for September-October, 2009. Also, it would be beneficial to
have a “road show” highlighting the potential market and investment required for R&M
in India so as to encourage equipment suppliers and engineering companies to
participate in R&M projects in India. The World Bank and GTZ could assist further in
the dissemination of relevant experience from other countries to India. Competitive
pricing would be possible if more companies get interested in R&M works in India.

7. Substantial enhancement is needed in the skills of power companies

A significant effort is needed to enhance the skills of Indian power companies to:
• Plan and implement R&M projects; also, manage complicated projects with
multiple contractors;
• Establish an R&M team in the headquarters;
• Establish data monitoring and archiving data systems; and
• Improve substantially the way power plants are operated and maintained.

O&M management could and should be part of the R&M project, but all other
enhancements need to be made before R&M projects commence.
• Training institutes like NPTI and (PMI – NTPC) can organize dedicated course
on R&M practices for Indian Utilities.

8. The Indian Government and the power companies need to take certain actions to
ensure interest by equipment suppliers and international engineering companies
More attractive R&M policies in India combined with the worldwide economic
recession and therefore a lower interest in the construction of new power plants are
likely to stimulate more interest among foreign suppliers in the Indian R&M sector than
they have shown in the recent past. Nevertheless, additional actions should be taken
including:
• Presentation regarding quantum of R&M work to be done in India in next few
years.
• Show management commitment to implement the project in a fair and
transparent manner.
• Provide proof of financing.
• Work with State and Central Government agencies to streamline the approval
process.
• Bundle, if possible, multiple units (in the same plant site or multiple sites) to
increase the size of the project and make it worthwhile for suppliers to get
involved.
• Explore the feasibility and suitability of performance-based contracting for
R&M projects based on desired performance outcomes.

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 1
Renovation and Modernization Project Planning
Proper planning of TPP rehabilitation is the foundation for a successful project. It
involves early planning (to identify if and when a TPP needs rehabilitation), as well as
what is the scope, schedule and budget for the project. Key issues and possible
solutions to project planning are identified and discussed in the section below.

1. Issue: Difficulty in controlling R&M project scope, schedule and budget. There
are many examples in which the scope of the project has changed (in most cases
increased) substantially from the early stages of planning to the final implementation.
Some of these changes could not be planned for, as a rehabilitation project by its very
nature has “surprises” after key equipment is opened and inspected. However, much of
the scope increases could be foreseen and planned for accordingly.

Controlling the scope is the biggest challenge which has implications on both schedule
and budget, because:
• It determines if R&M is justifiable;
• It determines the preliminary scope, schedule and budget, and equally important
the level of uncertainty associated with it; this uncertainty determines what
additional assessments are needed and how the contract should be structured;
and
• It sets limits with regard to scope, schedule and investment levels; items which
require replacement or repair go to a fixed scope; items which are uncertain or
optional could be separated to be handled differently (e.g., bidders may offer
unit prices instead of a fixed price).

The justification of the R&M project needs to be established at the power system
level; in other words, it should be clear that the R&M project should be able to compete
with all competing power generation supply options including (but not limited to)
replacement of the plant with a new coal-fired plant (at the same or different site), also
replacement of number of small units with single efficient unit of bigger size, other
renewable power plants including renewable, natural gas, hydroelectric and nuclear,
and purchase of power from another source 1.. Also, alternate scope of the R&M project
should be considered and evaluated as R&M projects cover a broad spectrum of options
to be included; some are essential for safe and reliable plant operation; others are
essential to meet environmental standards and requirements; finally, others are optional
and could be evaluated based on economic considerations.

Economic criteria commonly used are:

• Economic and financial rate of return;
• Payback period; and
• Net present value (NPV).

While preparatory work (good planning with extensive testing and life assessment)
could help define better the project scope, there is always an uncertainty; when major

1
This may not be applicable to India as the country suffers from limited power supply
10
plant components are opened (especially boiler and steam turbine). Surprises are
common. This uncertainty can only be reduced through:
• Careful planning including extensive testing and life assessment, which requires
commitment of human and financial resources;
• Utilization of organization with proven experience in R&M (including OEMs
and experienced consultants); and
• Build-in adequate contingency and contractual flexibility to deal with scope
adjustments.

The R&M project scope needs to be defined based on careful analysis including:
• Data gathering;
• Plant walk-down
• Discussions with O&M personnel
• Analysis of Plant history and past performance
• Energy audit;
• Performance testing;
• Residual life assessment (RLA);
• Steam Path Audit (SPA);
• Stress analysis of critical piping;
• Potentially non-destructive and destructive evaluation; and
• Clear definition of post-R&M performance targets.

Important inputs and sources of data include: historical data (especially causes of
reliability and performance problems); performance compared to the design conditions,
O&M experience and practices, generic problems of the power fleet, OEM
recommendations, etc. The evaluation should be comprehensive and not limited to just
equipment. Investigation should address procedures, training, O&M practices, and
other causes for not meeting plant metrics. The consulting engineer should also provide
recommendation on how to package the work. Input from equipment suppliers (OEMs
and non-OEMs) should be sought early in the planning stage both in terms of the
specific equipment as also new designs and technologies which may have emerged.

During the workshop, it became clear that Indian power companies would benefit from
some guidance on the above activities and (if possible) standardization of their scope.
The World Bank, CEA and USAID/ ECO-Asia CDCP will collaborate to develop both
guidelines and such standardized documents.

Lack of plant equipment design and performance data is a major issue in most power
plants in India. An effort needs to be made to start collecting such data for future uses.
Implementation of R&M projects provides an opportunity to start data gathering and
should be included in the scope of the project.

2. Issue: The scope of most R&M projects in India is driven by a procurement list
rather than clear performance-oriented goals. As a respondent to the questionnaire
stated: “Upstream planning of R&M projects remains weak presently with project work
loaded towards procurement shopping list.” One Indian power company executive
observed that there was absence of “Destination or goal oriented R&M”. R&M projects
are not linked to any discreet targets like improvements in availability, efficiency,
safety or reduction in manpower etc. R&M projects are still locked in the traditional
11
mindset of one to one replacements, which essentially translates to developing a
shopping list and exercising the procurement cycle. Viewing R&M from the lens of
clearly defined destinations clarifies the underlying relationship/hierarchy amid the
above listed points and high end solutions (HES) emerge as key focus area.”

Clear performance-oriented goals should be set early in the planning stage based on
which the scope of the R&M project is developed and against which the project is
evaluated.

3. Issue: Project planning could be long, time-consuming and expensive. How

does one strike the right balance between extensive testing/analysis vs. controlling
project preparation costs and schedule?

More than any other activity of R&M planning, testing of the unit and analysis are very
time-consuming and resource-intensive activities. Testing may include performance
testing, destructive and non- destructive evaluation.

In general each project is different and the project team needs to assess its unique
characteristics and decide the right balance between testing and analysis on the one
hand and shortening of the project implementation schedule on the other. Early
planning (see previous issue) should decide (among others) the pace of the project. For
example, if the plant has been operating and maintained well with comprehensive
maintenance records which are easily available, then the plant staff and a consultant
may be able to agree on a reasonable scope of the R&M project without additional
testing and analysis. However, if there is lack of data and concerns about the condition
of key plant components, it may be worthwhile taking the time early one to investigate
further. After all (as it will be mentioned later on in the discussion related to project
schedule), it is suggested that assessments start 3-5 years before the R&M project is
ready for implementation.

Some of the responses to the questionnaire reproduced verbatim, will provide more
insight into this issue and the potential solutions:

• “The plant owner can save time and budget by providing accurate and useable
data as soon as possible. This would save time and costs, reduce risks and
result in an optimum design and bid. Presently in India, there is too much
responsibility placed on the vendor. Uncertainties about the project scope result
in project delays.”

• “More time spent on careful project planning/preparation may save time and
costs later on in project implementation.”

• “Rely on the experience of the R&M design engineer, the Site O&M expert and
Supplier’s experience in a similar unit elsewhere.”

• “Short tests by taking readings from operations and compare with heat balance
calculation, based on design data. Compare theoretical versus actual
performance.”

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4. Issue: Occasionally, an R&M project, which originally seems competitive,
grows so much in scope and budget that it becomes non-competitive. Should one
set cut off points to reverse project decisions to proceed with the project or adjust
its scope significantly?

The intent of the question was to ask whether the plant owner should set some
maximum investment for the R&M project, above which the project becomes
uneconomical; thus if at some time during R&M project planning the budget
projections increase above this level, then the decision could be made to stop the
project.

The survey respondents were quite clearly against the suggestion. It was agreed that if
adequate project planning is done, reversal of project decisions can be avoided. Indeed,
in most cases reversing the early decision is not going to be necessary. However, there
have been a few cases where the initial investment requirement (developed in the pre-
feasibility study) more than doubled in the next assessment (feasibility study). In such
cases, it is still early in the planning process and a decision to proceed or not may still
be justifiable. This is particularly relevant when the R&M investment requirements are
already too close to that of building a new plant.

5. Issue: Evaluation of R&M projects is not easy to make as there are many
uncertainties; power companies prefer simple and clear criteria for making R&M
related decisions. Are there any criteria which have been adopted/used to
determine whether an R&M project is justified or when to proceed with such a
project?

Some power companies have established criteria such as:

• The criterion for proceeding with the R&M is completion of 100,000 operating
hours or 15 years life of the plant. R&M project may be considered as justified if its
life is extended further by at least 15 years and the investment is returned back as
early as possible in its extended life. Earlier, CEA has given criteria of per MW cost
less than Rs. 1.25 crore. The World Bank has indicated a norm of half the cost of
Greenfield project as the limiting criteria.
• One engineering company stipulates as below:
‰ PLF less than 40%: Retire or Life Extension Program
‰ PLF around 40%: Life Extension Program possible
‰ PLF 40-60%: R&M to achieve at least 65% PLF
‰ PLF above 60%: Adopt latest O&M practices to achieve higher performance.

These are general criteria which should be used to alert the power company that it is
time for evaluating the R&M option. However, the actual evaluation should be a
thorough assessment which evaluates the R&M project against alternatives based on
well-established industry criteria such as levelized cost of power generation, rate of
return of the investment, payback period and NPV.

6. Issue: There are not many well-qualified engineering and consulting companies
in India to support the country’s R&M program.

Certainly, adequate number of experienced engineering companies in India cannot be

found to support the expected demand for the R&M program. A number of
13
international companies have established local subsidiaries, but the availability of
expertise from the head office is not adequate; this may relate partly to the lack of
willingness of power companies to provide the required compensation and partly
because the engineering companies prefer to staff projects with lower labor cost. The
end result is that R&M projects do not get access to the pool of expertise required to
plan and implement R&M projects.

Most responses to the questionnaire support the above points. To quote some of them:

• “There are some organizations, but they do not have a stake for preparing the
best specifications for the plant owner.”

• “There are a number of consultants in India that are extensions of international

companies. However, the involvement of personnel experienced in R&M
projects abroad is essentially absent due to the high labor costs. The contracts
need to tie-up specific involvement of experienced personnel which requires
meticulous and effective contract writing. Such demand would slowly improve
the consulting field for R&M in India as the cost incurred will get internalized
and so will the documents/expertise. The demanding specifications will only
alter the market towards higher end improvements away from one-by-one
replacement.”

• “Standards for cost estimates and detail work specifications need to be

developed to enable an environment where unchecked competition among
service does not prevail- when a serious service provider providing quality gets
penalized, in an open bidding scheme, as others are ready to provide same job at
a lower cost.”

If there is a market demand for R&M engineering and consulting services which
provide a good opportunity many engineering-consulting firms are expected to be
developed in India, both local companies and affiliates of international firms. As one of
the respondents stated: “Demand and supply rule applies here." With more money
invested in R&M, there would be interest shown from more consulting firms.”
However, such firms need to be compensated in a way commensurate to the quality of
service they offer. Getting access to the right expertise from the headquarters of
international engineering-consulting firms is a matter of contract negotiations.

7. Issue: Planning and implementing R&M projects requires experience in time-

consuming and resource-intensive activities

Indian utilities are reluctant to manage and bear the costs of such large infrastructure
projects. These costs include: (a) Identification of expert human resources; (b) forming
separate groups at plant as well as corporate levels; (c) Specific task assigning to the
different persons/groups; (d) Imparting required training to the respective persons; and
(e) All other activities necessary for development of a resourceful dynamic group.

Significant strengthening of the power companies is needed to carry out R&M projects.
Even if most of the responsibility is shifted to contractors (especially an EPC contractor
or an owner’s engineer), significant scope remains within the power company
including: management of the contracts, technical oversight to ensure that the right
14
decisions are being made and ability to follow the implementation of complicated
projects (manage scope changes, control schedule and budget, etc.). Hiring staff with
the right qualifications and training are needed. Also, power companies should
consider establishing management groups at the headquarters dedicated to R&M
projects, provided that there are enough projects to be implemented.

8. Issue: Operating and maintenance practices of TPPs in India are inadequate

resulting in rapid deterioration of plant performance and reliability.

This issue is well documented and has potentially significant impacts on the post-R&M
performance. Substantial effort is devoted to this under the World Bank R&M Program
which supports specific power companies and CEA to strengthen their O&M
management capacity. It is highly recommended that an O&M strengthening
component is included in the scope of R&M projects. While seemingly a separate
issue, R&M projects provide an opportunity to add the necessary capability in power
companies to manage O&M operations.

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 2
Renovation and Modernization Project Schedule
The main issues associated with the schedule of R&M projects are: predicting the
duration, reducing it as much as possible and making sure that the actual schedule stays
close to the predicted one. Downtime of the unit (during which there is no production
of electricity) is critical especially for India which is supply-constrained. In order to
understand the schedule better, it is important to explore the key factors affecting it and
the main milestones. This section addresses the key issues in this regard.

MAIN ISSUES
‰ What is an appropriate budget and schedule level that should be allocated
for planning an R&M project? Items to be included among others are: data
analysis; performance testing; component testing (destructive and non-
destructive evaluations); techno-economic analysis comparing feasible
alternatives; development of R&M project scope and investment requirements.

One organization estimates that 30 months are needed from inception to completion:
• Inception and DPR preparation: 12 months
• Selection of implementing agency: 6 months.
• Execution time: 9 months.

While this is feasible for some projects, it seems very short for extensive R&M. Most
of the respondents and workshop participants put the time requirements as follows:

Typical Schedule for R&M

Project assessment and planning 18-25 months

Tendering and appointment of consultant 2-3 months
Data analysis 2 months
Performance tests 1-2 months
Feasibility study 5 months
Specifications and bidding documents 4-7 months
Bid evaluations/selection of winning bid 4-6 months
Contract negotiations 4-6 months
Procurement lead time for equipment (including delivery) 12-18 months
Project implementation 2-9 months

Total 36-58 months

It should be noted that lead time for equipment procurement reflects market conditions
as they were up to 2008 (“sellers market”). In recent months, projections are that the
lead time for critical path items has been reduced to the 8-10 months reducing the total
project time to 32-50 months (roughly 3-4 years).

16
A recommendation by an experienced overseas power company was to carry out plant
life assessment ideally 5 years before implementation of R&M project. Develop scope
of the R&M project and divide it into the following categories:
– Items which can be implemented without plant shutdown;
– Items requiring plant shutdown of less than 15-25 days; and
– Major tasks requiring long plant outage.

Then, one can plan to implement the first two categories during planned operations and
short planned or un-planned outages, leaving only the third category to be implemented
during extended outages.

Most utilities in India conduct R&M work in the following sequence:

(i) Approval & tendering for Thermal Performance Test (TPT) and RLA Study.
(ii) Conduct TPT & RLA.
(iii) List the scope from findings and budgetary approval for R&M.
(iv) Tendering, technical scope finalization by mutual discussions with vendors &
finalization of scope; amendment of scope to all vendors, obtaining price offers
and award contract.
(v) Implementation.

The process as above takes about 2 to 3 years, before award of contract. In the period
between TPT & RLA and the implementation of R&M, normally the units that undergo
R&M do not get any maintenance priority. During this period, the deterioration
continues and additional scope evolves. Besides the above, TPT & RLA are conducted
by OEMs and reputed agencies. In case of rest of the areas like BOP (balance of plant),
the scope is derived from the O&M. When the actual work is executed by the
respective suppliers, the scope differs.

The financing arrangement is done based on initial scope envisaged and estimates. As a
result of increase, changes in scope contractual discussions restart. There is
considerable delay in settling this issue of revised scope and allocation of additional
funds to the project. In some projects, the utilities are able to divert funds from
maintenance to R&M. In some, a compromise is achieved by reduction of scope
elsewhere. In a few cases, the utility and vendor have gone for arbitration also. But in
majority of the cases, the additional scope is pushed on to the vendor without any
additional price, by citing various techno-commercial conditions of contract. However,
the performance guarantees remain unchanged and the schedule is not revised unless
some major equipment, not envisaged originally, are to be replaced. For these reasons,
the suppliers/contractors treat the R & M job as risky and instead prefer to do new
plants, wherein the scope is better clarified.

While this process (followed by Indian power companies) is rational, a number of

improvements are needed. During the workshop, it was recommended that a
standardized process is developed which is reflected in the scope of the consulting
organization and the scope of the assessments.

‰ What is the minimum downtime for an R&M project?

17
 • Plant outage ranges from 45 days to 9 months depending on the scope of the
project; minimum 75-90 days should be planned if the steam turbine is to be
opened.
• Examples in India include: 68 days (Tata –Trombay Unit-5); public sectors
examples of 11 months (Kothagudam Unit-5) to 1.5 years (Bhatinda Unit-1 &2)

The downtime is affected significantly by the scope of the repairs of critical path items,
especially the steam turbine and the boiler. As such, the operating conditions of these
components and prior repairs play an important role. In most extensive R&M projects,
70-90 days is considered the minimum outage.

‰ Can R&M be implemented in short annual shut-downs over 2-3 years? If so,
how?

• Many components can be implemented in short outages, but boiler, steam

turbine and generator need longer outage. While this is desirable in most cases,
if the project implementation is spread over many years, guaranteeing
performance and commercial agreements become challenging; this is because
long operating periods intervene between R&M activities.

• There have been cases in NTPC such as Tanda (4x110 MW) and Talcher
Thermal (4x60+2x110 MW) where R&M was taken up during annual shut-
downs over 3-4 years, without substantially enhancing the routine shutdown
period.

The answer is that some of the R&M activities can be implemented during planned
shut-downs, but most likely not the complete scope, especially if it includes opening the
steam turbine and significant repairs in the boiler and the generator. Optimum time for
implementation of each item included in the R&M project should be part of
comprehensive planning.

‰ What are the key factors affecting R&M project schedule?

Delivery time for long lead items is the most critical factor; examples include: steam
turbine rotor and generator; during the period 2004-08, steam turbine components took
up to 26-30 months for delivery; however, recently 8-10 months are quoted by
suppliers.

Other factors which affect project schedule too include:

• Limitations by the plant owner to take unit off line for the required outage; this
is particularly common in India where plant downtime may increase
substantially the availability of electricity in neighboring regions; permission
from State officials is often required to take the unit off line making outage
schedule uncertain.
• Often, it is necessary to adjust the scope of the project in the middle of its
implementation; making associated decisions is time-consuming for a variety of
reasons, some related to required approvals from State and Central Government
authorities, others related to renegotiation of the contract with the supplier or
EPC contractor.

18
 • Delays ordering critical supplies are common, too.
• Data gathering, assessment and definition of scope of R&M is time-consuming
and may result in delays. This is particularly important in cases of lack of
historical data and information on the latest design of the plant components.
• Site readiness to accommodate both engineering staff and equipment suppliers
may also contribute to delays.
• Lack of experienced consultants may prolong the selection process.
• Funding approvals and availability of funds may also contribute to project
delays.

‰ What are the critical project milestones and critical path items?

• Critical milestones:
– Appointment of Consultant
– Completion of RLA Study
– Completion of DPR for R&M
– Completion of R&M specifications
– Award of Major R&M packages
– Completion of Engineering and Supplies
– Start of unit shutdown for R&M
– Completion of R&M implementation and unit synchronization
– Acceptance test
– Performance monitoring during guarantee period

• Critical path items:

– Engineering of Boiler and Turbine
– Supplies of Boiler and Turbine islands
– Implementation of Boiler and Turbine islands are the most important
items in the critical path

‰ What is an appropriate budget for planning R&M projects?

“3-6% of the total R&M budget should be allocated for planning.” This includes all
preparatory activities such as data gathering, performance testing, RLA, assessment of
options, development of scope of the R&M project, bid specifications, request for
proposal package and bid evaluation up to and including the selection of the contractors
to carry out the R&M project.

‰ What is an appropriate schedule and budget contingency?

• 10-12% overall schedule contingency, but no more than 5% contingency on

plant shutdown
• Responses of Indian companies differ significantly from foreign companies
(suppliers, engineering companies and consultants); Indian companies estimate
5-10% budget contingency not including price escalations which are standard;
foreign companies suggest 10-30% depending on the level of early planning
assessment carried out.

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‰ Should the contingencies levels change as the project moves from early
planning to final implementation?

Most responses suggested that contingencies should not change during the
implementation of the project. The intent of the question was to explore whether the
contingency should be reduced as the project moves from planning to implementation;
at least in theory, when contracts are signed, the uncertainty (and hence the required
contingency) should be much lower than in early planning stage.

RECOMMENDATIONS
Predicting, minimizing and maintaining the R&M project schedule is challenging
because it is impacted by numerous factors including regulatory approvals, contractual
negotiations with the consultant and the equipment supplier or EPC, availability of
critical components etc. Hence, realization of all the important factors and good
planning are the key to a successful project. More specifically, it is important to get an
experienced consultant, provide all the available data on the design and operating
history of the equipment, and carry out a comprehensive performance and remaining
life assessment followed by an evaluation of all the available options and definition of
the appropriate scope. The scope should be aligned with the available budget and the
contractual arrangements should be such that minimize project delays.

Also the following points need to be given attention:

• Early engagement of the suppliers of critical components could reduce the

overall schedule, as well as the downtime of the unit.

• Realistic alignment of the scheduled plant outage with the R&M project is
essential; both may need to be adjusted to achieve optimum results.

• Funds shall be allocated to the project and the contractor should be motivated
with a reasonable contract price (and possibly incentives) to complete the work
in time.

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 3
R&M Design Specifications, Bidding and Contracts
Development of the design specification and the complete request for proposals, as well
as bid evaluation, selection of the contractor(s) to implement the project and final
contract negotiation are part of project planning. However, they are differentiated from
the first part of planning which is dominated by technical assessments focusing on the
development of the R&M project scope. This latter part of planning focuses on
formulation of contracts (commercial agreements) to implement the R&M project.

DESIGN SPECIFICATIONS AND FORMULATION OF R&M PROJECT SCOPE

Development of the design specifications is the culmination of the early planning
process and reflects the results of the technical and economic analyses carried out. At
this stage, the design specifications and scope of the project are defined mainly for the
purpose of commercial bidding during which it is possible that additional changes to
the R&M project scope may be made, depending on the offers of the bidders. Two of
the key questions which emerge during this phase are the following.

1. Should one separate scope of items, which are linked to:

• Plant life extension and safe operation
• Plant output increase
• Plant efficiency improvement

It is difficult to separate all components of the R&M project scope, because most of
them affect more than one parameter (reliable operation/safety, efficiency and output).
Nevertheless, it may be beneficial to attempt to separate the scope to the extent
possible. Scope which clearly relates to reliable and safe plant operation (life
extension) is necessary to be implemented and often is easy to define; also, it may be
more suitable for a fixed price contract. Efficiency- and output-related components
may have many options and associated costs; so, they may be more suitable to a more
flexible procurement rules framework. Also, efficiency-related scope may need to be
differentiated to be linked to CO2 emission reduction potential and may contribute to
Certified Emission Reductions (CER).

2. Design Specifications: What is the most appropriate way to specify the R&M
project?
• “Performance specifications” or “design specifications”?
• Even for items which are clear that they need to be corrected, specifying the
design may limit the supplier’s ability to optimize performance and may be used
as a reason for not achieving guarantees. What is the right balance between
design specification and performance specification?
• How do you deal with scope which is highly uncertain?

In most cases, “performance specifications” are preferable; they define the sought after
performance relative to the present operating and design conditions, and they provide
flexibility to the bidder to investigate alternatives to achieve this or even better
performance. Considering that the bidders are the most knowledgeable in terms of the
21
design of the equipment, this approach achieves the best results. Its main disadvantage
though is that different bidders are likely to offer different designs and may complicate
the bid evaluation (difficult to compare different scopes of work achieving different
performance).

Here are some perspectives from respondents to the questionnaire:

• It is best to use ‘design specifications’ for life extension scope and ‘performance
specs’ for efficiency improvement and plant output increase scope; the
challenge is to separate the two.

• NTPC employs a hybrid approach; in addition to the functional requirements,

design and sizing criteria are specified. It is true that specifying design criteria
may not result in most optimum design but it incorporates the necessary
margins and safety factors required for reliable operation over a long period of
time that is expected of the plant after R&M.

• An international engineering company clarified its outlook as follows:

“Generally, performance based specification with critical design parameters is
preferred. There is a tendency to overload specifications with material that is
covered in codes or which are specific to a particular product (manufacturer).
Some R&M work can result in greater scope as true conditions are identified. It
is important that an unbiased professional assessment be developed by an
independent party which can also recommend preferred ITB format, evaluation
criteria, hold points, etc. Usually it is best to obtain unit prices for uncertain
scope areas to avoid large contingencies in the contractor’s price. It is suggested
that if the performance approach to R&M specifications is used, the best way to
evaluate the results for bidder selection is to use an evaluation criteria which is
driven by the performance parameters used to justify the project. This can be
done by having the various vendors provide the specific input parameters to the
evaluation equation as part of the bid in addition to the pricing and schedule
data usually requested. This requires a high level of planning for the project
specification.”

The optimum formulation of the specifications depends on project-specific

considerations which need to be determined during the planning phase and the plant
owner working closely with its consultant is in the best position to determine.
Nevertheless, the following are clear and can be concluded:

• When deciding how to formulate the specifications, it should be kept in mind

that they serve two separate objectives:
(A) Defining the optimum scope for the specific needs of the power plant;
(B) Making the bid evaluation transparent; ideally, comparison of identical
scope of different bidders (comparison of apples with apples).
These objectives could be addressed easily by specifying a scope mainly for bid
evaluation purposes and asking the bidders to provide a unit price for additional
scope which may be required. The fixed scope should reflect the results of the
engineering analysis (see planning phase) and should be fairly certain that it
needs to be implemented. In most cases, even if it turns out that less work

22
 needs to be completed, it is not a problem as the remaining components (e.g.,
boiler tubes) could be used by the plant owner are spare parts.
• Even when design specifications are used, suppliers should be provided the
flexibility to offer a better design.
• The suppliers should be provided with clear guidelines as to what is the scope
for bid evaluation and what for satisfying the plant’s actual needs. Also, it
should be clear how decisions will be made when the scope needs to be adjusted
during project implementation.

3. Who should be involved in development of design specifications? What is the

role of:
• Engineering Department of the power company?
• Plant engineers including O&M staff?
• Corporate planning?
• Outside consultants?
• Equipment suppliers?

Planning and implementing an R&M project is a collaborative effort requiring input

from many different departments within the organization and outside organizations
(governmental, Indian and international). As such, R&M is a challenge as a
management problem, too.

‰ The Engineering Department of the power company usually leads the life
assessment and scope definition; this could be done in-house or by hiring and
supervising a consultant. Also, The Engineering Department acts as a project
manager to finalize interface among all project participants, fix design and
sizing criteria; resolve O&M problems through design modifications; etc.

‰ The Plant O&M Department should participate and provide critical input
regarding:
– The condition of existing equipment, especially broken requiring
replacement or repair
– Historical performance and issues
– Suggestions on how the problems could be addressed in the future
– Recommendations which will make O&M easier and more effective.

‰ Corporate planning should be involved especially in the early planning phase to

ensure the cost-effectiveness of the project and how it fits into the generation
system.

‰ Consultants are needed throughout R&M planning and implementation to

provide critical expertise depending on the in-house expertise of the plant
owner. They bring in lessons learned and experience from past projects, and
ensure that the project is planned and implemented using industry standards and
best practices.

‰ Suppliers (especially the original equipment suppliers) should participate early

in the planning process to provide input as to the realistic options for &R&M

23
 scope including new technologies which can be used. However, special
attention should be paid to avoid specifying the R&M project in such a way that
it provides one or more suppliers a competitive advantage. The perspective of
an Indian power company on this issue was that so far, suppliers have had a
minimal role in early project planning. However, it is desirable that at least two
major suppliers are involved at the RLA/ DPR stage so that when scope is
frozen during the bidding stage, it is more likely to be achieved without
deviations.

An international engineering company spelled out its perspective in specific

terms: “Suppliers should be contacted by the consulting engineer to assure that
proper performance and cost inputs to the evaluation are included in the
evaluation of each project. Suppliers (equipment) have a self serving interest to
sell their product and are generally willing to provide the input required to
support the analysis. Suppliers should market their product to make plants and
engineers familiar of their products and benefits. Supplier’s involvements in
studies that are paid by the plant or studies in return for award of contract are
not in the best interest of the plant. An independent study should be prepared
that has no outside vested interest in any specific solution.”

‰ Insurance auditors participate in many OECD countries. If insurance companies

are not currently involved in R&M projects in India, the feasibility of such an
approach should be evaluated.

REQUEST FOR PROPOSALS AND BIDDING

Some of the questions related to the request for proposals (RFP) and bidding include:
• How many packages should the scope be divided into?
• How to increase the interest of bidders to respond to the RFP? In recent years
(especially 2004-08), suppliers have been very busy building new power plants
worldwide (including in India) and have been less interest to seek participation
in R&M projects which are by their very nature more complicated.

‰ Bidding as a turnkey project or in multiple packages?

The overall consensus was that there is no ‘One Size Fits All’ solution to bidding. Each
method (turnkey package or multiple packages) has its own advantages and
disadvantages.” Indian power companies seem to prefer Turn-key (EPC), even though
it is more suitable to new projects.” Most companies (around the world) prefer multiple
packages, typically five or six. The most common components are: boiler, turbine-
generator, high value electrical equipment, instrumentation & controls, and balance of
plant (BOP).

‰ Limited willingness of suppliers to participate in R&M projects

Suppliers and foreigner engineering companies have not shown much interest in India’s
R&M market in recent years. One reason is that they have been very busy with new
power projects worldwide. However, their perspective is that they would be more
interested in the Indian R&M market, if and when they are convinced that R&M
projects will actually be implemented with reasonable business risks allocated to
suppliers and engineering companies. As one respondent to the questionnaire
24
emphasized: “The participants in R&M projects need to be confident that their
investment to obtain the work is justified. Bidding is expensive (requiring time and
resources). However, the lack of project initiation discourages participants. In addition,
the risk borne by the bidders (due to lack of project initiation or commercial risks) will
further deter their interest to work in an environment where it is difficult to clearly
determine final costs.”

More attractive R&M policies in India combined with the worldwide economic
recession and therefore a lower interest in the construction of new power plants could
stimulate interest among foreign suppliers in the Indian R&M sector. Nevertheless,
additional actions should be taken including:
• Show management commitment to implement the project in a fair and
transparent manner.
• Provide proof of financing.
• Work with State and Central Government agencies to streamline the approval
process.
• Bundle, if possible, multiple units (in the same plant site or multiple sites) to
increase the size of the project and make it worthwhile for suppliers to get
involved.

CONTRACT DESIGN AND NEGOTIATIONS

‰ Balancing risks and benefits through appropriate contracts (including
performance guarantees) is very challenging. Often, the specified scope of the
project and the required guarantees are not consistent. Also, the specifications are
open-ended shifting substantial risk to the bidder. An example of a statement:
“Anything not mentioned above, but required for safe, efficient, reliable and
requirement by the engineer-in-charge has to be carried out by the bidder within
the same time frame and with no financial implication”

In designing the contract(s), it is important to remember that:

• The least cost option is to ask the organization which is in the best position to
control a particular risk to assume the liability associated with this risk. For
example, if the plant owner is in the best position to control one specific risk
element, it is best that it does not try to shift it to another organization; doing so
is possible, but the other organization will request increased compensation (and
rightly so), because it can not control the risk directly.
• R&M projects have inherent risks associated with the inability to predict the
exact operating condition of equipment before they are opened and inspected.
It is not fair for the plant owner to ask the supplier(s) or EPC contractor to
assume this risk. If it does, the supplier would have to price the project
assuming worst case outcome resulting in high price.

‰ What is the right level of guarantees, which should be required?

The level of guarantees should be based on fair balance of risks-rewards, as stated

previously. Also, in India, a well-established two-tier guarantee system is generally
used:

25
 • Level-I guarantees include parameters, which have direct commercial
implications such as Heat Rate, Gross Power Output, Auxiliary Power, Boiler
Efficiency, etc. These guarantees should be subjected to Liquidated Damages.
However no rejection criteria should be specified.
• Level-II guarantees include parameters, which do not have direct commercial
implications such as Noise, Emissions, Start up & shutdown capabilities etc.
Some items of Level II could have compensatory and punitive damages (e.g.,
emissions), but others may require design adjustments (e.g., noise) or receive
penalties in the bid evaluation.

‰ What are the advantages and disadvantages of EPC (Turn-key Engineering

Procurement Construction) vs. EPCM (Engineering Procurement
Construction Management)?

In general, the EPCM concept is not widely known or being practiced in India, even
though it is widely used in OECD countries. Appendix 3 provides a summary
description of the pros and cons of EPC and EPCM based on a memo provided by
WorleyParsons Inc. (an engineering company which provides EPCM type services).

Additional comments from respondents to the questionnaire:

• Some large power companies retain in-house the role of Project management
including Construction management even in large EPC contracts. [Issue: How
does the EPC control the project implementation?]

• EPC Advantages:
– Single point responsibility; easier on plant owner; no substantial
coordination needed
– Lenders prefer EPC
– Lower risk for plant owner and financial institutions, but there are limits
to the risks an EPC can assume

• EPC Disadvantages:
– More expensive
– If the EPC assumes too much risk, eventually the plant owner may be
affected.

• EPCM:
– If packages are too many, coordination becomes problematic and time-
consuming
– Trust needs to develop between the power company and the EPCM.

In North America and Western Europe, there is seems to be a tradition of trust between
engineering companies and power companies, which is reflected in flexible contracts
often ‘cost-plus”. Also, contracts among suppliers and power companies are flexible
allowing inspection of the equipment first and then finalization of the scope of the
project.

In the case of India, it seems that the following options are feasible:

26
 • Either multiple contracts or an EPC with a fixed price component and flexibility
to expand the scope based on unit price offers.
• EPCM (hiring an engineering company to serve as owner’s engineer) with
multiple equipment supply and construction contracts as required.

‰ How to you manage guarantees in the case of multiple bid packages?

The industry practice (worldwide) is to have clear guarantees for each component or
system of the power plant which is validated through a standardized acceptance test.
This has proven to be adequate for short-term performance; the complications usually
arise long-term either through deteriorating performance or equipment failures. Issues
which arise in these cases include:
• Interdependency of performance of the various plant components may makes it
difficult to determine what component is causing what performance
deterioration. The result may be long litigation and eventually the plant owner
has to assume part of the losses due to equipment malfunctioning or cost of
repairs/replacements.
• Often, guarantees have limited duration (1-2 years is typical, sometimes even
less) and the owner assumes all adverse performance and reliability impacts.

So, eventually the plant owner is likely to assume substantial risks. There are no viable
alternatives except for the single EPC contract, which is theoretically the best option for
the plant owner; however, as pointed out earlier, it comes at a higher prices, as the EPC
contractor needs to be compensated for the increased level of risks he is assuming.

27
 4
Financing Renovation and Modernization Projects
How do you finance an R&M project? The options available include:
• Public sector financing
• Potential carbon credit revenue
• Loans
• The role of private sector financing.

Some issues associated with project financing in India are:

• The regulator allows a maximum amount of investment independent of the
needs of the specific power plant;
• Investments are made upfront and regulatory approval follows project
completion; this shifts all the risk to the plant owner;
• The approval process is cumbersome, time-consuming and uncertain involving
many State and Central Government Agencies; and
• There is no incentive to improve the efficiency of power plants; in fact, if the
efficiency is improved, the regulator may increase the required efficiency
benchmark, reducing the benefits to the plant owner.

As a result, it is very difficult for plant owners to recover their investments in R&M
projects.

Recovery of R&M Investments Through Tariffs and Dispatch Arrangements

Government agencies maintain that R&M projects payback periods ranging from 5 to 7
years, should be adequate for the power sector to undertake such investments.
However, the industry differs in their assessment stating that R&M projects require
higher investments than that specified by the regulations and take longer to be
implemented.

The main issue is that regulations fix the R&M investment to Rs. 0.8-1.2 Crore/MW
($170-255/kW). Considering that prices of power plant equipment have increased
substantially in the last 5 years worldwide, this level of investment is not appropriate
any more. Also, each power plant is different both in terms of its operating condition
(hence the required R&M investments) and its value to the power system; as a result,
different level of investment should be allowed for each unit.

Some improvements have been made through the new CERC regulations (2009-13 and
14):
• Return on equity has increased from 14% to 15.5%; and
• Incentives switched from PLF (Plant Load Factor) to PAF (Plant Availability
Factor).

However, the industry still considers the regulatory framework inadequate. “R&M
investments are to be done upfront and capital expenditure reimbursements claimed
from the regulator after implementation of R&M. This shifts the entire risk to the owner
utility making them bear a large amount of regulatory risk. In the recent regulation for

28
2009-14, CERC has suggested upfront approval of the DPR by them, but exact
modalities of this are yet to be worked out.”

International experience suggests that actual and reasonable investments in R&M

should be recovered through the Fixed Charge component of the tariff which should
include:
• Depreciation on new investment
• Interest on new R&M loan
• Return on Equity on the R&M investment

The regulatory framework governing approvals of R&M projects need to be improved

to ensure recovery of reasonable investments; this framework should allow investments
to vary from plant to plant (based on its needs and cost-effectiveness); also, it should
reduce the regulatory risk with regard to the approval process.

No incentives for power companies to improve plant efficiency and reliability

CERC Tariff Regulation 2009-13 provides for a fixed amount of O&M compensation
(Rs.5 Lakhs/MW-yr); no efficiency and reliability improvement incentives are
provided.

Some comments from respondents are given below:

• “The performance parameters are revised/reviewed by the regulator from time
to time. Because of this, the norms become progressively more stringent over
time i.e., the efficiency improvement achieved after R&M may have to be fully
passed on to the consumer during the next revision. This absence of incentives
makes the owner (utility) be conservative and show preference for one to one
replacements (new power plants), with less R&M investment, retaining the
earlier performance parameters, instead of going for efficiency improvement,
which normally call for higher investment.”

• “Incentive should be given in tariff policy to Utilities to encourage R&M. Any

extra power (above an agreed minimum) should be allowed to be sold freely and
without restrictions and any improvement on the heat rate (above an agreed
minimum) should be used by the utility as reduced variable O&M costs. In
other words without a clear gain to the utility there is no benefit in pursuing
improved solutions.”

• “CERC, in their tariff regulations for 2009-14, has given an alternative option of
Special allowance of Rs 5 lakhs / MW/year, to be appropriately escalated every
year, which can be taken in lieu of the other option of a full fledged R&M, the
investment of which can be claimed for capitalization after undergoing all the
approval processes. This special allowance method can at best sustain the
existing levels of performance and will not encourage improvement in
efficiency thro’ R&M. Instead, CERC may like to consider servicing a
benchmark figure of say Rs 1.50+ Cr/MW of R&M investment thro’ the normal
method of loan and equity, to be recovered through tariff, without the lengthy
processes of approval for capitalization. In this manner, the time taken for these
approval processes can be reduced and the owner utility will be incentivized to

29
 go for optimum R&M, best suited for each unit, including uprating and
efficiency improvement.”

Improved efficiency should benefit both the plant owners and the customers (public).
Dispatching rules should allow plants to take advantage of improved efficiency; also, if
certified emission reductions (CERs) are generated, the plant owners should receive a
large part of the CER revenue.

A number of improvements have been made the last few years in India; for example:

• The state-owned Power Finance Corporation (PFC), Life Insurance Corporation

(LIC) and a group of ten banks, including large public sector banks such as the
Punjab National Bank and Oriental Bank of Commerce, are joining hands to
form a consortium for financing power projects, officials involved in the
exercise said. The consortium promises a one-stop shop for all funding
requirements of the power sector, including for reform projects across States.

• In fiscal 1998, the GoI started the Accelerated Generation and Supply Program
(AG&SP), a scheme for providing interest subsidies for projects involving
renovation, modernization and life extension of old thermal and hydro plants,
completion of on-going generation projects, construction of transmission links,
system improvements and including grants for various studies. During fiscal
2002, the scheme was modified to restrict it to renovation and modernization
schemes and generation projects and interest subsidy was reduced from 4% to
3% towards loans to eligible projects. The interest subsidy is passed on to the
utilities over the life of the loans.

However, more improvements are needed. In addition to the above recommendations,

it is essential for India to utilize private sector resources; schemes such as Lease,
Rehabilitate, Own and Transfer (LROT) and funding by ESCOs (Energy Service
Company) should be explored urgently. These could implemented as part of a Public-
Private-Partnership (PPP) concept.

30
 5
Recommendations to Scale-up India’s Renovation and
Modernization Program
As a result of the questionnaire and the workshop (June 11-12, 2009), a number of
important recommendations have emerged. The most critical of these are:

‰ Urgent need to improve further the regulations affecting R&M projects, so that all
reasonable investments can be recovered and incentives be provided to improve
plant efficiency and plant output.

‰ The approval process needs to be streamlined to reduce the time required and the
risks associated with it.

‰ Standardized documents should be developed to cover a number of critical phases

of R&M project planning and implementation including:
– Scope of Consultancy Services
– Bid Documents
– Commercial Contracts

‰ Companies planning R&M projects should be assisted to minimize power supply

issues; one idea is to allocate more power from neighboring States or the Central
Government during the plant downtime.

‰ Bulk tendering should be explored urgently especially for the steam turbines which
are of identical design (210 MW LMZ or Siemens turbines).

‰ The Private-Public-Partnership (PPP) should be explored for R&M projects. The

Lease-Rehabilitate-Operate-Transfer (LROT) seems attractive.

‰ International best practices are important for Indian power companies planning
R&M projects. A tour of plants which have implemented 210 MW LMZ design
plants in Eastern Europe has been proposed by USAID and supported by all
participants.

‰ A significant effort needs to be made to enhance the skills of Indian power

companies to:
(A) Plan and implement R&M projects; also, manage many contractors;
(B) Establish R&M teams in the headquarters;
(C) Establish data monitoring and archiving data systems; and
(D) Improve substantially the way power plants are operated and
maintained.

The assistance of multilateral and bilateral institutions is welcome especially in

standardization of documents, dissemination of best practice experiences from other
countries and innovative financing schemes.

Detailed discussion on these recommendations is presented below.

31
1. Improve regulations affecting R&M projects and streamline approval process

Recovery of all reasonable investments in R&M projects needs to be secured through

appropriate tariff regulations and plant dispatching. The investment should be allowed
to be different for each plant reflecting its own needs and its competitiveness in the
power supply system. Also, the approval process needs to be streamlined as many
organizations (both State and Central Government) are involved. Approval of R&M
projects should be obtained with some certainty before the project is implemented. It is
recommended that a working group be established in collaboration with the Ministry of
Power and the Forum of Regulators to propose specific changes in the regulatory
process. The World Bank has carried out a comprehensive study on the issues affecting
R&M projects which provides a lot of useful information and specific
recommendations on what should be done.

The same working group should consider providing incentives for power companies to
enhance the plant efficiency through R&M projects. Improved efficiency should
benefit both the plant owners and the customers (public). Dispatching rules should
allow plants to take advantage of improved efficiency; also, if certified emission
reductions (CERs) are generated, the plant owners should receive a large part of the
CER revenue.

2. Standardized documents

There is broad consensus that standardized documents would be very helpful to Indian
power companies planning R&M projects. While it is recognized that each project
would have unique characteristics and requirements, it is much easier to adopt a
standardized document which reflects lessons learned from past experience in R&M
projects rather than try to develop a document from scratch. Considering that many
plants in India utilize the same standard design, standardized documents should be
more applicable. It is recommended that the following documents are developed:
(A) Guidelines on how to plan and implement R&M projects
(B) Scope of Consultancy Services
(C) Bid Documents
(D) Commercial Contracts

(A) Guidelines on how to plan and implement R&M projects

CEA has developed a draft document providing guidance for planning and
implementing R&M projects. It is recommended that this document be enhanced
further to be more comprehensive in the guidance it provides. This enhancement could
be possibly done under the Technical Assistance (TA) provided to CEA by the World
Bank.

(B) Consultancy Services

It is recommended that a comprehensive document is developed identifying all activities
included in R&M project planning and preparation including a standardized scope of
work for consultant(s). Activities which will be included are:

• Data gathering;
• Plant walk-down’
• Energy audit;
32
 • Pre-R&M performance testing;
• Residual life assessment (RLA);
• Steam Path Audit (SPA);
• Stress analysis of critical piping;
• Potentially non-destructive and destructive evaluation;
• Review of O&M practices; and
• Clear definition of scope of R&M project and post-R&M performance targets.

USAID/ECO-Asia CDCP will take the initiative to contact key stakeholders to develop
(in collaboration with CEA and the World Bank) a guidance document for procuring
consultancy services and planning R&M projects.

C. Bid Documents
Standardized bid documents are difficult to develop mainly because the scope of each
project is likely to be different. However, there are enough common elements in the
210 MW plants to enable one to develop a standard document which could be adjusted
to fit the site-specific requirements. It is understood that GTZ is providing technical
assistance which includes support in standardizing bid documents and commercial
contracts.

D. Commercial Contracts
Standardized contracts would be beneficial as a starting point, even though they would
need to be adjusted to fit the needs of each R&M project. The standardized contracts
should address the following:
• The contract may be an EPC (with one contractor) or multiple contracts; most of
the responders to the questionnaire and participants of the workshop suggest
that multiple contracts are more suitable for R&M projects in India; the steam
turbine in particular is a component which could be tendered separately from
the rest of the plant;
• Two-stage bidding should be considered;
• Clear acceptance test for each contract should be defined;
• The scope of the project, its objectives and the budget should be consistent;
• The contract should balance risks and rewards in a fair way;
• Contracts should deal with price escalation in case the project implementation is
long; and
• The contract should deal with “surprises”; one way to do so is to separate
requirements for a transparent evaluation and the actual scope required for the
R&M project; this could be done by defining part of the scope as firm, but also
request of unit prices for additional scope on as needed basis.

The GTZ technical assistance may support the development of standardized

commercial contracts.

3. Assistance to minimize power supply issues

Considering the widespread lack of adequate power supply in India, it is very difficult
to obtain permit to take a unit out of service to implement an R&M project. Very often,
even though there is initial approval, last minute delays are common creating serious
problems in project implementation. It is recommended that the Central and the State
33
Governments collaborate to allocate more power supply to companies planning R&M
projects.

4. Bulk tendering
Tendering multiple units together should be explored urgently especially for the steam
turbines which are of identical design (210 MW LMZ or Siemens turbines). Also, a
central organization could be established to provide spare parts to power companies.

5. Private sector financing

Participation of the private sector in R&M projects should be explored and encouraged
urgently. Private-Public-Partnership (PPP) Guidelines should be developed and
opportunities should be sought to apply such concept. The Lease-Rehabilitate-Operate-
Transfer (LROT) option may be the most suitable option short-term. ESCo-type
financing may be considered, too.

6. Dissemination of best practice experience

International best practices are important for Indian power companies planning R&M
projects. A tour of plants which have implemented 210 MW LMZ design plants in
Eastern Europe has been proposed by USAID and supported by all participants. It will
tentatively be planned for September-October, 2009. Also, it would be beneficial to
have a “road show” to encourage equipment suppliers and engineering companies to
participate in R&M projects in India. The World Bank and GTZ could assist further in
the dissemination of relevant experience from other countries to India.

7. Substantial enhancement is needed in the skills of power companies

A significant effort is needed to enhance the skills of Indian power companies to:
• Plan and implement R&M projects; also, manage complicated projects with
multiple contractors;
• Establish an R&M team in the headquarters;
• Establish data monitoring and archiving data systems; and
• Improve substantially the way power plants are operated and maintained.

O&M management could and should be part of the R&M project, but all other
enhancements need to be made before R&M projects commence. Evonik is carrying
out a skills assessment and its results should be useful. National institutions such as
NPTI and (PMI – NTPC) may offer full fledged training courses covering all aspects of
best R&M practices for all utilities.

34
 Appendix 1
Thermal Power Plant Rehabilitation
Questionnaire

We would greatly appreciate it if you take some time to address as many of the
questions below with which you are familiar or have some comments to make.

Name of Reviewer and title/designation:

Name of organization:
Telephone number:
Email address:
What is your experience with R&M?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

General Instructions:
1. Please take the space you need to answer the questions with sufficient detail.
2. To the extent possible, please highlight actual examples or challenges faced.
Please note that all responses will be kept confidential.
3. For questions or clarifications; please contact Stratos Tavoulareas:
stratos@cleanenergyasia.net or Bhaskar Natarajan:
Bhaskar@cleanenergyasia.net

General questions

• What are the broad issues affecting R&M projects in India?

‰ Recovery of investments through appropriate dispatching and tariffs;
‰ No incentives for power companies to improve plant efficiency and
reliability;
‰ Difficulty in controlling R&M project scope, schedule and budget;
‰ Limited willingness of suppliers to participate in R&M projects;
‰ Balancing risks and benefits through appropriate contracts (including
performance guarantees) is very challenging;
‰ Planning and implementing R&M projects requires experience is a time-
consuming and resource-intensive activity
‰ There is no adequate expertise within engineering and consulting firms to
support a large R&M program

NOTE: PLEASE DISCUSS THE IMPORTANCE OF EACH OF THE ABOVE IF

RELEVANT AND PROVIDE A COMPARISON IN TERMS OF RELATIVE
IMPORTANCE
_____________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

35
MORE DETAILED QUESTIONS
R&M Project Planning

• What is the best approach to define the scope and the budget of the R&M
project and avoid significant changes as the project is progressing?
__________________________________________________________________
_________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________

• How do you strike the right balance between extensive testing/analysis vs.
controlling project preparation costs and schedule?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
_____________________________________________________________________

• Should you set cut off points to reverse project decisions to proceed with
the project or adjust significantly its scope?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• Are there any criteria which have been adopted/used to determine whether
an R&M project is justified or when to proceed with such a project?
______________________________________________________________________
______________________________________________________________________

• Are there well-qualified engineering and consulting companies in India to

support the country’s R&M program? How do you identify such
organizations?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

36
R&M project schedule

• What budget and schedule should be allocated for planning an R&M

project? Items to be included are: data analysis; performance testing;
component testing (destructive and non-destructive evaluations); techno-
economic analysis comparing feasible alternatives; development of R&M
project scope and investment requirements; etc.

• What are the key factors affecting R&M project schedule?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• What are the critical project milestones and critical path items??

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

R&M design specifications, bidding and contracts

• What is an appropriate schedule and budget contingency?

• Should there contingencies change as the project moves from early
planning to final implementation?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• Should you separate scope items which are linked to:

‰ Plant life extension (many of which are essential for safe operation)?
‰ Plant output increase?
‰ Plant efficiency improvement?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

37
 • In the case of plant efficiency improvement scope, would it help to separate
scope which is additional and could contribute to Certified Emission
Reductions (CER)?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• What role (if any) the suppliers should play in early project planning?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• What is the minimum downtime for an R&M project?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• Can R&M be implemented in short annual shut-downs over 2-3 years? If

so, how?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• Design Specifications: What is the most appropriate way to specific the

project?
‰ Performance specifications or design specifications?
‰ Even for items which are clear that they need to be corrected, specifying
the design may limit the supplier’s ability to optimize performance and
may be used as a reason for not achieving guarantees. What is the right
balance between design specification and performance specification?
‰ How do you deal with scope which is highly uncertain?
‰ Two separate objectives should be kept in mind:
ƒ Bid evaluation requires comparison of apples with apples; hence,
it requires firm scope.
ƒ Actual project scope is variable, but it could be handled through
unit price bids.

38
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• Who should be involved in development of design specifications? What is

the role of:
‰ Engineering Dept
‰ Plant engineers including O&M staff
‰ Corporate planning
‰ Outside consultant
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• Bidding as a turn key project or in multiple packages?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• What are the advantages and disadvantages of EPC (Turn-key Engineering

Procurement Construction) vs. EPCM (Engineering Procurement
Construction Management)?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• In the latter case, how many packages?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

39
 • What is the right level of guarantees to be required? How are these
guaranteed levels developed?
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

• How to you manage guarantees in the case of multiple bid packages?

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

Financing R&M projects

• How do you finance an R&M project?

‰ Public sector financing
‰ Potential carbon credit revenue
‰ Loans
‰ The role of private sector financing

40
NOTE: PLEASE DISCUSS MERITS AND DEMERITS OF EACH OF THESE
OPTIONS, PROVIDING ANY REAL-LIFE EXPERIENCE YOU MIGHT HAVE
HAD IN ACCESSING THESE OPTIONS OF FINANCING
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

Recommendations to scale-up India’s R&M Program

• What are the key actions to ensure that India’s R&M program materializes
successfully and contributes to a more competitive and healthy power
sector?
‰ Policy initiatives
‰ Approach to project planning
‰ Specification and bidding
‰ Contractual arrangements
• What is the technical assistance required to support such initiatives?
• Is there a special role for multilateral bank and international agencies-
foreign assistance?

NOTE: PLEASE DISCUSS OF EACH OF ABOVE ISSUES OPTIONS

______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

41
 Appendix 2

WORKSHOP AGENDA
DAY ON E ( IN AUGURAL SESSION ) – JUN E 11, 2009
09:30 AM W elcome USAID ECO-Asia

Key note address, Government of India Ministry of Power

Outline of India’s R&M program for the next decade Central Electricity Authority

Introduction to the event (issues facing R&M and corrective

W orld Bank
actions)

Vote of thanks USAID ECO-Asia

Coffee/T ea Break

11:00 AM India’s R&M Program: A Market Opportunity

Panel Discussion
Topic:
W hat are the key issues for the implementation of India’s R&M program and how can they be
addressed?

Findings of USAID survey on rehabilitation issues, USAID ECO-Asia CDCP

Perspectives of Indian power companies

Perspectives of equipment suppliers

Perspectives of engineering construction companies

Lunch Break

01:30 PM R&M Project Planning

Panel Discussion
Panelists: Evonik Parsons Brinkerhoff, RW E, W orld Bank, W orley Parsons
Topics:
• Retire vs. rehabilitate
• Definition of R&M project scope and investment requirements
• Available methods and tools for evaluation of the r etir e vs. rehabilitate option, and
preparation of a project scope
• Assessments and testing
• Required expertise, budget and schedule
Coffee/T ea Break

03:30 PM R&M Project Schedule

Panel Discussion
Panelists: Babcock Power, NTPC, RW E, Skoda, W est Bengal Power Development Corporation
Topics:
• Key factors affecting R&M project schedule
• How can overall schedule be reduced?
o Planning requirements
o Design requirements
o Manufacturing
o Installation
o Start-up/performance testing/acceptance
42
• How can the plant downtime be minimized?
• Can R&M be implemented in annual short shut-downs over 2-3 years?
 DAY T W O – JUN E 12, 2009
09:00 AM R&M Design Specifications, Bidding and Contr acts
Panel Discussion
Panelists: EUAS, Turkey - Experiences from Elbistan, W orley Parsons - Experiences from Maritsa East
2 and 3, Bulgaria, and Experiences from Recent Indian R&M Projects
Topics:
• R&M design specifications
• Guarantees
• Procurement approach
• EPC vs. EPCM contracts

Coffee/T ea Break

11:30 AM Financing R&M Projects

Panel Discussion
Panelists: KfW , Power Finance Corporation, W orld Bank
Topics:
• R&M project financing
• Requirements for public sector financing
• Application of incremental and carbon finance instruments available for rehabilitation
projects
• Private sector financing

Lunch Break

02:00 PM Recommendat ions to Scale U p India’s R&M Program (W r ap-Up)

Summary of Conclusions and Recommendations on:

• Policies
• Project planning
• Scope definition and specifications
• Procurement practices
• Contractual arrangements
• Technical support

                                                          

43
 Appendix 3

List of Participants

Brune Poirson S.C. Angrish

AFD Energo Engineering Projects Ltd.

Vishwa Mohan H.S. Bedi

BHEL Energo Engineering Projects Ltd.

Yogesh Kumar Priyaranjan Sinha

BHEL Energo Engineering Projects Ltd.

A.K. Gupta Boben Anto

CEA Evonik Energy Services India Ltd.

Rakesh Nath A.K. Sarna

CEA Evonik Energy Services India Ltd.

N.S. Mondal Prahalad Rao

CEA Evonik Energy Services India Ltd.

Bhai Lal S. Choudhuri

CEA Evonik Energy Services India Ltd.

S.C.Shrivastava J.T. Verghese

CERC Evonik Energy Services India Ltd.

Pankaj Batra Rakesh Mishra

CERC Evonik Energy Services India Ltd.

Veerachamy R.K.Arora
Cethar Group Haryana Power Generation Corporation

Nidhi Dhir Keiji Katai

CQC JICA

Jyotsna Goel Keiji Makino

CQC JCOAL

Abijeet Das P Ramana Reddy

DVC KfW Development Bank

Sandeep Sinha Busso Alvensleben

DVC KfW Development Bank
44
A.G.Telang Akhil Agarwal
Mahagenco NTPC

G.J.Girase Pradeep Singh Baghel

Mahagenco NTPC

Jayant Kawale Navdeep Jha

MoP NTPC

Girish Pradhan Rajeev Srivastava

MoP NTPC

Sanjay Garg Harmeet Singh

MoP NTPC

M.S. Rana V.K.Madhok

MPPGCL Panipat

P.K.Sinha S.K.Murthy
NASL Parsons B

N.K.Srivastava Brain Allan

NTPC Parsons B

Sanjay Pande A.K.Jain

NTPC PFC

Anubhav Dahiya Puneet Jain

NTPC PFC

U.K.Srivastava Shubhranshu Patnaik

NTPC Price Waterhouse Coopers

Dheerendra Singh Sanjeev Bhatiya

NTPC Price Waterhouse Coopers

V.Ramesh Sayantan Banerjee

NTPC Price Waterhouse Coopers

T.P.Mazumdar D.S.Chawla
NTPC Protos Engg. Co. Pvt. Ltd.

N.A.Ramakrishnan V.T.Sathyanathan
NTPC RILEY POWER (CETHAR GROUP)

45
Egbert Reinartz P.K. Chaukrabarty
RWE Power International WBPDCL (Kolaghat & Bhangel)

Jiri Rivola Boris Ivanov

Skoda Worley Parsons

Pavel Kuch Masaki Takahashi

Skoda Power World Bank

Satbir Singh Malik Natalia Kulichenko

Skoda Power Pvt. Ltd. World Bank

Ranjith Nair Mikul Bahtia

Skoda Power Pvt. Ltd. World Bank

T.L.P.Raju C.Subramaniam
Sokeo Power private Ltd. World Bank

Y.P.Abbi Sunil Khosla

TERE World Bank

S.Padmanaban Salman Zaheer

USAID World Bank

Stratos Tavoulareas Sushil Bahl

USAID ECO-Asia World Bank

Pradeep Tharakan Salman Zaheer

USAID ECO-Asia World Bank

Sneha Bajpai Kwawu Mensan Gaba

USAID ECO-Asia World Bank

Bhaskar Natarajan Eviko Koshijima

USAID ECO-Asia CDCP World Bank

Swati Lal Harriette Peters

USAID ECO-Asia CDCP World Bank

Mani Khurana
World Bank

46
 Appendix 4

Comments on Contracting Methods for Power Projects

by Worley Parsons Inc.

The following comments are presented as a guide for initiating Power Projects.

Introduction
The implementation of a power plant project is a major undertaking. The contracting
method should empower the Owner and his agents to ensure that these issues are
addressed and the power plant’s interests are protected during the entire engineering,
procurement and construction process. Determining the correct form of construction
contract to pursue can have a great effect on the cost and risk associated with the
construction project. It is generally accepted that the cost of construction varies
inversely with the amount of business risk the “owner / financers” are willing to accept.
The less business risk the owner wishes to assume, the higher the cost of construction
and management.

The two most common types of construction contacts are EPC “turn-key” and EPCM.
Each of these methods have variations that can be adapted to each project as needed;
example (EPCC Engineering, Procurement, Construction, and Commissioning), etc.

EPC/ EPCM Definition & Comparison

EPC (Engineering, Procurement and Construction): means a company or consortium of
companies is contracted to provide engineering, procurement and construction services
by the owner. This is also known as Design & Construct style contracts, where the
project is largely Contractor managed and the cost risk and control are weighted
towards the Contractor and away from the Owner. The EPC contractor has direct
contracts with the construction contractors.

EPCM (Engineering, Procurement and Construction Management): means the company

is contracted to provide engineering, procurement and construction management
services. Other companies are contracted by the Owner directly to provide construction
services and they are usually managed by the EPCM contractor on the Owner's behalf.
The project is largely Owner managed and the cost risk and control is weighted towards
the Owner.

The following lists many of the major differences between how EPC and EPCM type
contracts address various issues. The way each of these issues is handled can be
modified during contract negotiations to suit the situation and overall goals of the
project.

Equipment Supply Contracts

EPC: Negotiated & Signed solely between EPC contractor & Supplier
EPCM: Negotiated & signed between Owner and Supplier /with EPCM contractor’s
advice and assistance

47
On-Site Construction Contracts
EPC: Negotiated & Signed solely between EPC contractor & Supplier

EPCM: Negotiated & signed between Owner and Contractor /with EPCM contractor’s
advise and assistance

Supplier Selection
EPC: Suppliers chosen solely by EPC contractor with minimal input from Owner

EPCM: Suppliers chosen by mutual agreement of Owner and EPCM contractor

Scope of Supply
EPC: Contract only as good as the original project specifications presented during
bidding process. Changes to specifications / scope of supply after awarding of contract
can be expensive, due to EPC contractor’s sole contract with Owner, and the Owner’s
inability to engage in the process of developing competition, and setting requirements
by obtaining multiple quotations from independent contractors / suppliers.

EPCM: Owners can modify project specifications with little or no trouble. Owner, with
the assistance of the EPCM contractor can negotiate independent contracts with
suppliers / vendors at any time due to the fact that project is under multiple
(independent) contracts and not one all encompassing contract.

Equipment Supply Warranties

EPC: Warranties negotiated by Suppliers & EPC contractor and issued to EPC
Contractor directly. Warranty to Owner from EPC contractor is negotiated separately
between Owner and EPC Contractor and issued to Owner by EPC Contractor.

EPCM: Warranties negotiated individually with each supplier by Owner with EPCM
contractor’s advice. Issued directly to Owner from the suppliers and contractors. One
inherent issue is that overall plant warranties generally are in place for a period of one,
or perhaps two years. Problems involving quality of materials or component integrity
often surface after this period. When an owner is “excluded” from close scrutiny of the
entire design, fabrications and installation process, some issues may be overlooked.
Under EPCM, there is a common motivation in the implementation and enforcement of
quality.

Process Warranties
EPC: Warranties negotiated by Suppliers & EPC contractor and issued to EPC
Contractor directly. Warranty to Owner from EPC contractor is negotiated separately
between Owner and EPC Contractor and issued to Owner by EPC Contractor (Usually
in the form of a performance Bond).

EPCM: Warranties negotiated individually with each supplier by Owner with EPCM
contractor’s advice. Issued directly to Owner from the suppliers and contractors
(Usually in the form of a Performance Bond). The comments above regarding the
motivation of the parties, also applies to process warranties.

48
Construction Site Safety (Covered by General Liability Insurance, Workman’s
Compensation, Accident, etc.)

EPC: Site Safety solely the responsibility of the EPC contractor and sub contractors; in
accordance with Contractual Agreements.

EPCM: Site safety is monitored by EPCM contractor but site safety is the legal
responsibility of Owner and Sub Contractors; in accordance with Contractual
Agreements.

Permitting (Environmental, Construction, etc.)

EPC: Permitting is the responsibility of the EPC contractor with the exception of
permits that are required by law to be issued in the name of the Owner of the project.

EPCM: Permits are issued to the Owner directly with EPCM contractor assisting in
filing the necessary paperwork.

Project Budget Cost Overruns

EPC: The cost risks for a project are borne by the EPC contractor. Any cost overruns,
for equipment and/or services within the EPC contractor’s scope of supply, are for his
own account and can not be passed onto Owner unless “change conditions” occur or
contractual agreements to the contrary. Under an EPC contract, advantage may be
taken of any required scope changes, to obtain additional payments.

EPCM: The cost risks for a project are borne by the Owner. Any cost overruns, for
equipment and/or services are for the Owner account (with the exception of fixed price
supply contracts) i.e. Final equipment pricing bids/ on site cost higher than originally
budgeted.

Project Budget Cost Savings

EPC: The cost risks for a project are borne by the EPC contractor. Any cost savings, for
equipment and/or services within the EPC contractor’s scope of supply, are for his own
account and are not passed onto Owner unless contractual agreements to the contrary;
as a result, there is a high motivation to save money by precisely meeting the scope,
and not necessarily recommending any improvements to the design or construction of
the plant.

EPCM: The cost risks for a project are borne by the Owner. Any cost savings, for
equipment and/or services are for the Owner account i.e., Equipment/Services bids are
returned lower than budgeted.

Project Day-to-Day Expenses

EPC: The day-to-day expenses for the project, within the EPC contractor’s scope of
supply are borne by the EPC contractor, and only reported as may be required by the
contract.

49
EPCM: The day-to-day expenses for the project are borne by the Owner but are
managed and administered by the EPCM contractor (up to pre-determined quantities,
without Owner’s need for intervention). Usually a small fund is established by Owner
for day-to-day expenses.

Project Financing
EPC: Project Financing is usually accomplished by substantial down payment by
Owner to EPC contractor and the remainder of the fees issued with Irrevocable Letter
of Credit (with partial payments) from Owner to EPC Contractor. This requires Owner
to have all financing in place at the onset of the Project so as to secure letter of credit
(LC). The EPC contractor is usually in a quite good positive cash flow position.

EPCM: Project Financing can be any combination of down payments, open accounts,
and Irrevocable Letters of Credit from Owner to suppliers / contractors; whatever
method is negotiated during contract negotiations. EPCM contractor will assist in all
negotiations on Owner’s behalf. This allows Owner to have partial financing in place
at the onset of the Project with the remainder available as needed, dependant on
contractual requirements.

Legal Cost
EPC: Legal Costs are low for Owner. Owner usually negotiates only one detailed
supply contract with EPC contractor. EPC contractor must negotiate individual
contracts with suppliers / vendors. EPC contractor’s legal costs are high due to
multiple contracts.

In the event of legal action is taken, Owner must sue EPC contractor, who in turn must
bring legal action against appropriate suppliers / contractors (Usually a longer and more
expensive process than EPCM legal actions).

EPCM: Legal Costs are higher for Owner. Owner/ EPCM contractor negotiate multiple
supply contracts directly with suppliers/ contractors.

In the event of legal action is taken, Owner must bring legal action against individual
suppliers/ contractors (Usually a shorter process than for EPC).

Administration
EPC: Owner’s administration costs are low with an EPC contract. Only minimal staff
(management, QC, legal, etc.) needed to administer/monitor project. This may have
negative effect on project “ownership” feeling within Owner’s organization (Hands
off).

EPCM: Owner’s administration costs are higher with EPCM contracts. Substantial
staffing levels needed to assist/compliment EPCM contractor in administering/
monitoring project. Promotes “ownership” feeling within Owner’s organization, and
Owner actually participates in the details of project. Project staff often transferred to
operational staff after project completion.

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Both EPC and EPCM contracting types are prevalent within the construction industry.
The method that is best for a particular project depends on the level of risk the Owner
of a project is willing to accept, budget constraints, and the Owner’s organization core
competencies.

EPC contracting tends to be more expensive to the Owner, due to the shift of project
risk away from the Owner to the EPC Contractor. A project may cost 25% to 40%
more at completion for a project using an EPC rather than an EPCM style of
contracting. This is due in large part to the project’s risk being more evenly distributed
between the Owner and contracts/ suppliers for EPCM, and the important fact that in a
time of economic uncertainty, the EPC bidder must incorporate large margins simply to
cover uncertainty. Under EPCM, the margins are absent, and the “remainder” of the
margins can be equitably shared.

Construction contracting trends have been leaning towards the EPCM style of
contracting and away from EPC contracting for several reasons, even though both
methods have their place in business today. Some of the advantages of EPCM style of
construction contracting include:
ƒ Lower Overall Cost in exchange for acceptance of greater risk;
ƒ Staff’s Sense of Ownership due to greater project involvement;
ƒ More Control over Process and greater ability to influence design and
construction and mitigate impact on existing plant operations;
ƒ Better for less-defined projects with anticipated scope changes;
ƒ Less Legal Litigation (Identify issues early and remedy situation before larger
problems arise) and lower legal costs;
ƒ Owner’s Financing Flexibility; and
ƒ Better suited for “first introduction” of a technology.

EPC contracting has it place in the construction industry. Under certain situations, this
type of construction contracting may be appropriate. Some of the advantages of EPC
style of construction contracting include:
ƒ One point of Contact;
ƒ “Hands off” approach to project;
ƒ Minimal Owner’s Staffing Requirements;
ƒ Minimal Legal Risk (albeit higher cost); and
ƒ Best for very well-defined projects with Detailed Engineering Complete before
EPC Contractor selected (Minimal Unknowns).

As stated before, these construction contract methods can be tailored to the individual
projects / owner’s needs. Some companies can go as far as breaking up each portion of
the EPC/ EPCM (Engineering, Procurement, Construction / Construction Management)
to separate companies. One company can do the engineering; another can do the
procurement, while still another can do the construction / project management). Each
company must decide for themselves, with the advice of legal and financial counsels, as
to which method of construction contracting is best for their particular project and
situation.

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