Funding IPPs: The latest fad? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Funding IPPs: The latest fad?

Jul 4, 2008

Since the introduction of the Electricity Act, 2003, the Indian power scenario has had a complete makeover through revolutionising reforms and certain other initiatives, which were introduced since then. Also with the widening supply-demand gap and the Government's thrust towards power supply for pan India the opportunities available in the power space have opened up tremendously. These changes and initiatives have encouraged private sector participation in the power sector, especially towards the generation side. The Electricity Act as such has led to the introduction of the concept of independent power producers (IPPs).

Power projects require huge investments for developing generation capacities (average of Rs 40 m per megawatt), making funding a vital part in the process of development. Financing at the initial stage is of paramount importance for beginning work on any kind of project. Once a project receives the financial closure, the work at the site begins. Post 2003, nearly 30 projects in the IPP category have achieved financial closure. However, out of the 22,038 MW proposed installed capacity (of these 30 projects), only 8% has been commissioned till date while the rest are likely to be commissioned by 2012. This delay has been mainly due to the slow construction activities.

Prior to introduction of the Electricity Act, power projects used to be financed through 70:30 debt-equity financing model. However, this concept has witnessed certain changes since then. Investment and finance companies have increased their exposure towards lending corporates for partly funding their power projects.

In a report published by Powerline, the gross credit exposure by commercial banks towards the power sector has risen to 10% in FY07 as compared to 5% in FY99. Further, apart from lending institutions like Power Finance Corporation (PFC), Rural Electrification Corporation (REC) and IDFC many commercial banks, both public and private, have become active in funding power projects.

Largest 5 IPP projects (cost wise) to achieve financial closure since 2003
Project Capacity (MW) Promoter Cost (Rs m) Debt-Equity Expected commission date
Mundra UMPP 4,000 Tata Group 170,000 75-25 Dec-12
Mundra I, II & III 2,640 Adani Group 103,460 85-15, 75-25 Oct-09 & June-11
Teesta III 1,200 Teesta Urja 57,000 80-20 Dec-11
Karcham Wangtoo 1,000 Jaiprakash Assoc. 56,000 70-30 Mar-12
Raj West Power 1,000 JSW Group 50,000 75-25 Dec-09
Source: Powerline

This change in the banks attitude towards the power sector has led to the funding models being stretched up to 75:25 debt-equity ratio. It has even gone upto 80:20 in some cases. This increased portion of debt translates as lenders being more inclined and confident towards funding power projects. Amusingly, a leading infrastructure group has received 100% financing for a certain project, however, at the risk of leveraging its net worth.

Equitymaster requests your view! Post a comment on "Funding IPPs: The latest fad?". Click here!


More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 25, 2020 (Close)