The Union power ministry feels the state governments cannot offer escrow account cover to more than 10,000 mw of private power generation in the country.
Ministry officials told Business Standard this escrow limitation would impede private sector entry into power. Unless the financial position of state electricity boards improved, the country would not be able to support private power projects, they added.
This escrow limitation will hit the government's Ninth Plan projections of adding around 18,000 mw to private power generating capacity. Officials pointed out the situation was expected to worsen with NTPC structuring projects on the same lines as independent power producers, which includes power purchase agreements and escrow support from the state electricity boards.
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The states' limited ability to provide escrow cover is largely because electricity boards have to pay their dues as well from the same revenue stream. These include salaries, payments for coal and freight, and operating costs of their own power stations and grids.
The escrow account forms an integral part of the security mechanism that private power promoters seek for selling power to a state electricity board. It is the third circle of security for promoters after direct payments and letters of credit.
The promoter invokes the escrow guarantee only after first two security measures fail. If the escrow arrangement fails too, he can invoke the fourth circle of security, the state government guarantee.
The escrow account is maintained by the government to suit the comfort level sought by the promoter and the project's financier. This varies from one to two months of receivable.
Madhya Pradesh and Tamil Nadu have already said they cannot support more than 4,500 mw of power projects. Institutions refused to fund projects in Madhya Pradesh after the state government shortlisted six projects totaling a capacity of 3000 mw.
The problem of limited escrow support is compounded once mega-projects come on stream. Under the policy being finalised for these projects, the power ministry is planning to use the same projected industrial load that the state governments are using to calculate their escrow capacity.