Power project lenders seek a tariff cap at Rs 2-2.50/ unit

The lending community wants to cap power tariff at Rs 2 to Rs 2.50 per unit as a precondition for financial closure for all power projects. The issue is being hotly debated among the lenders as a fallout of the passage of the Electricity Act 2003.

"There is no formal decision on this. However, we are very clear that the main criterion for funding power projects will be tariff. A tariff of over Rs 2.50 per unit may not be acceptable for funding purposes," senior institutional sources said.

In a parallel development, the power ministry has set up a committee consisting of representatives of banks, financial institutions and the ministry to give a push to financial closure of power projects.

The panel consists of representatives from IDBI, ICICI, PFC, IDFC and a representative of the power ministry.

The committee includes State Bank of India managing director Chandan Bhattacharya, IDBI executive director A K Doda, managing director of IDFC Nasser Munjee and A K Kutty, joint secretary in the power ministry, among others.

"The committee meets regularly to discuss issues such as rating of power projects," sources said.

Lenders announced financial closure of at least three projects last week. They are meeting on Monday to take a look at other power projects which are awaiting financial closure.

The Reliance group has recently announced that it will set up a 3,500 mw gas-fired power project at Uttar Pradesh which will generate power at around Rs 2 per unit.

After the passage of the Electricity Act 2003, the monopoly of the state electricity boards (SEBs) over transmission lines has been done away with.

Over a period of time, open access will be allowed in distribution too which will enable power producers to sell directly to the consumers instead of the SEBs.

This is expected to result in the mushrooming of power projects, and in such a competitive scenario, only the low cost producers will survive.

This has prompted the current thinking among lenders. Also, the state electricity regulatory commissions are insisting on merit order despatch i.e. buying the maximum amount of power from the lowest cost producer.

Lenders have also learnt from the bitter experience of the nineties. At that time, the model of funding was based on comfort mechanisms such as a letter of credit besides state and Union government's guarantees.

Despite this, there was hardly any capacity addition in the private sector as the power producers shied away since they had to sell power to SEBs which were in poor financial health.

Further, this led to payment disputes between the power producers and SEBs resulting in reopening of power purchase agreements.

The most famous of these is the Dabhol Power Company, once touted as the example of the largest case of foreign direct investment in the sector.

The company's tariffs at one point touched Rs 7 per unit and this led to a payments dispute with its power purchaser, the Maharashtra State Electricity Board (MSEB).

The board did rescind the power purchase agreement (PPA) and the 784 mw first phase and the near complete 1,444 mw second phase of the project is lying idle. Indian lenders have burnt their fingers with an exposure of around Rs 5,000 crore to the project.

The one jarring note in the current scenario, lenders say, is the recommendation of the N K Singh task force on power which moots a guaranteed rate of return. In such a case, analysts apprehend that the tariff may overshoot the Rs 2.50 mark.