• JULY 4, 2008

Funding IPPs: The latest fad?

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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407