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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.

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