Power Today | September 2009

Feature
Power funda

A growing tide of investments and capital has brought fizz into India’s power sector

Against what may seem an unpromising domestic background - and one made worse by the high interest rates and limited liquidity engendered by the global economic situation - the Indian power sector is fizzing with activity, driven by local investors and capital. In July alone, five projects with almost 3,400 MW of capacity costing $ 3.03 billion closed finance after securing $ 2.3 billion of debt.

The projects were among a spate of predominantly coal fired power projects which have secured financial close since April or are set to secure financing in the next few months. And the resurgence of project financing has been paralleled by the massive interest in the initial public offerings of Indian power developers, with the public equity issues of Adani Power and NHPC in July and August, respectively both being massively oversubscribed.

 Indian funding institutions are reducing interest rates and shedding their aversion to lending to the power sector in large part at the prompting of the government. Delhi is worried that the country’s strong economic growth momentum could be derailed by power shortages if new capacity is not built. And the local funding is critical, says an official from the Rural Electrification Corporation, which has funded several generation projects as well as rural electrification schemes, because steep hedging costs are making overseas funds much more expensive than domestic funds.
Typical of traditional locally-financed Indian projects is the 76-MW Phatabyung hydro electric project in Uttarakhand state, on which Lanco Hydro Energies achieved financial close at the end of July. The Lanco Infratech subsidiary secured $ 88.5 million of debt from a consortium of five local banks led by Axis Bank to account for 80 per cent of the $ 110.6 million of capital needed for the project, which is due to be commissioned by December 2011.

 Relatively small, Phatabyung would have been hard to fund at the best of times from international sources, other than by seeking concessional loans from multilateral, bilateral or export credit agencies. And the array of additional risks – among others geophysical, construction, and social - associated with hydroelectric projects would have made international commercial lenders particularly averse.

 But the Indian lenders are also stepping up to the plate to finance the large-scale thermal plants that have typically looked to overseas lenders for their funding. Notable is the
$ 4.25 billion of debt for four power generation and transmission projects secured by the Anil Dhirubhai Ambani Groupled Reliance Power.

 In common with most of the other generating projects currently securing finance, the Reliance Power projects all involve coal firing. While Indian developers and lenders are proving ambitious in terms of the size of the plants they are investing in, they are more cautious about accepting the fuel availability and price risk currently associated with gas-fired plants.

 The projects include a 600 MW facility being developed by Reliance Power through the Rosa Power Company Ltd as the second phase of the Rosa power plant in the Shahjhanpur district of Uttar Pradesh state. They also include funding for the Sasan Power Company’s 3,960 MW Sasan ultra-mega power project, and finance for the 1,500 km western region transmission system being developed by Reliance Power Transmission Ltd.

 At Rosa, for instance, a consortium of 16 local banks led by IDBI Ltd committed $ 425.5 million of debt for the $ 638.3 million Rosa expansion scheme, which is being built under an engineering, procurement and construction contract by China’s Shanghai Electric Company. About 900 MW of the 1,200 MW of final capacity at Rosa will be delivered under a long-term contract to the state-owned Uttar Pradesh Power Corporation while five million metric tone per year of coal from the Central Coalfields Ltd will fuel the project.

 Prior to Rosa, $ 3 billion of debt was secured for the $ 4.12 billion Sasan complex in what remains the largest project finance deal closed to date in India – as well as being the first one to involve a power project integrated with coal mining. And Reliance Power secured another first with the first fully private sector transmission project, with the 400 kv network of transmission lines in Maharashtraand Gujarat states securing $ 206.4 million of debt for the $ 294.6 million project.

 Meanwhile another Reliance company, Vidarbha Industries Power, has secured commitments for more than $ 319.1 million of debt for the 300 MW Butibori coal-fired plant near Nagpur in Maharashtra state, which will supply electricity directly to customers in the Butibori, Hinga and other industrial areas. “The project involves setting up its own transmission and distribution network in the nearby industrial areas, thereby ensuring supply of uninterrupted and quality power,” Reliance Power said.

Reliance Power also said that the project is being developed as a “group captive power plant in which industrial consumers would have a stake. In return, they will receive power at a tariff which is lower than that charged by the state grid.”

The company said that it had received lender commitments “much in excess of the total requirement” for Butibori on July 27. Reliance Power noted that Axis Bank was the lead arranger with the other lenders including the State Bank of India, Union Bank of India, United Bank of India, South Indian Bank, Syndicate Bank, UCO Bank, Allahabad Bank, Dena Bank, Life Insurance Corporation of India, Corporation Bank, Karur Vysya Bank, and the State Bank of Hyderabad.
 The capacity of the Butibori plant is planned to be doubled at a later date. The integrated project includes not only the power plant but also the transmission and distribution lines needed to evacuate and supply the power and a 19 km railway line to transport fuel from Western Coalfields Ltd. The first phase of the project is scheduled to be commissioned by 2012, with all approvals and clearances for the project already in place.

 Reliance Power Chairman Anil Ambani told company shareholders on July 29 that the company was on course to close finance on a similar amount of capacity during what remains of the financial year ending March 2010, “having made significant progress in getting appraisals and sanctions for our Krishnapatnam ultramega power project.”

 In addition, Reliance Power is preparing to begin the financing process for another major project. Following an earlier tariff based international competitive bidding process the com-pany acquired Jharkhand Integrated Power Ltd (JIPL) on August 7.

 JIPL is the special purpose vehicle formed to implement the 3,960 MW Tilaya supercritical coal-fired ultra-mega power project in Jharkhand state. The pithead project has an estimated cost of Rs 200 billion. Reliance Power noted that Tilaiya is the third ultra-mega power project it has won, coming on the heels of Sasan and Krishanapatnam. Tilaya will supply power at a levelised tariff of Rupee 1.77/KWh to 18 electricity suppliers in Delhi (150 MW), Uttar Pradesh (650 MW), Punjab (450 MW), Haryana (200 MW), Rajasthan (250 MW), Madhya Pradesh (200 MW), Gujarat (300 MW), Maharashtra (300 MW), Bihar (500 MW) and Jharkhand (1,000 MW).

 Reliance Power may be one of the biggest and most aggressive Indian private power developers at present, but it is far from alone. For instance in late July the private power developer Coastal Energen Pvt Ltd secured financial close on its 1,200 MW coal-fired IPP project at Tuticorin in Tamil Nadu state. The $ 914.9 million project secured $ 734 million of debt funding from a consortium of 16 local banks and financial institutions led by State Bank of India. The 15 year loan carries a 12 per cent interest rate, with Coastal Energen saying that it plans to expand the plant’s capacity by stages to 4,000 MW.

 And elsewhere Essar Power said on July 30 that it had closed finance on the 1,200-MW Mahan coal-fired project at Singrauli in Madhya Pradesh, which is now planned for completion by 2011. Four lenders led by ICICI have agreed to provide debt for the $ 1.03 billion project on a 3:1 debt-equity ratio basis. Essar Power is currently developing four projects with 6,000 MW of total capacity. Essar Director Anshuman Ruia has said that “we are on course to complete all our power projects by 2012.”

 The spate of July financings did not come unheralded.
 The industrial conglomerate Sterlite Industries said at the end of June that a consortium of 19 lenders led by the State Bank of India had committed to extend $ 1.3 billion of 14 year financing for its 2,400 MW merchant generating plant. The project is being developed by its subsidiary Sterlite Energy Ltd. The project is already at an advanced stage of construction at Jharsuguda in Orissa state. The Sterlite group operates 2,000 MW of captive plant at present and is aiming to own 11,000 MW of captive, IPP and merchant capacity by 2012.

Another financing success had been reported at the end of May 2009 by the private power developer GMR Energy. The company said that its subsidiary GMR Kamalanga Energy Ltd had closed finance on its 1,050 MW coal-fired project in Orissa state. The total capital outlay for the project is estimated to be $ 965.95 million with $ 724.5 million of debt having been tied up with 13 domestic banks. IDFC Ltd is the sole arranger of the funds and is also contributing 20 per cent of the $ 241.4 million of equity. Nor is the spate of July financings expected to be a flash in the pan.
 Apart from Reliance Power’s plans to finance 8,000 MW of capacity at two ultra-mega projects, a whole series of other developers are looking to secure finance for projects in the near term. For instance GVK Power and Infrastructure expects to reach financial close in September on the 540 MW Goindwal project in Punjab state. The ceremonial start of construction occurred in June after the signing of a power purchase agreement with the Punjab State Electricity Board in late May. GVK has already negotiated a term sheet based on developing the project on an 80/20 debt to equity basis, with the debt funds currently being finalised with banks, according to a company official. He added that the project is scheduled to be completed within 39 months of financial close, with the boiler-turbine package having already been awarded to the central government-owned equipment manufacturer Bharat Heavy Electricals Ltd, and the balance of plant package having gone to Punj Lloyd. GVK raised $152.5 million in July through the placement of shares with qualified institutional investors, a day after it had said that it hoped to secure $ 638 million of proceeds through the overall share issue. This will help finance some of its ongoing projects and add new projects to the company’s development pipeline, it said.

The biggest Indian power producer, the listed but central government-controlled NTPC Ltd, has said that it has tied up most of the $ 3.76 billion of debt needed for its projects in the fiscal year to March 2010. Taking into account the company’s investments in joint venture projects, capital expenditure totaling $ 5.21 billion is planned for a year when 3,300 MW of new capacity is scheduled to be commissioned. Meanwhile in an announcement that may be seen as starkly symbolic of the changing fortunes of the Indian power sector, the Hinduja Power Co. Ltd has said that it expects to arrange $ 877 million of debt by October for a 1,000 MW project it is developing in Andhra Pradesh state. The project has an estimated cost of $ 1.17 billion. The significance of the project is that it is one of the eight original fast-track projects identified by the government in the early 1990s at the start of the country’s first move to private power generation. But various issues, including problems relating to fuel supply, funding and power sales arrangements, prevented the scheme from getting off the ground at that time. It is not of course certain that all the projects involved in the current charge towards private power generation in India will succeed.

While most of the projects discussed above seem likely to be implemented, not all of the vast number of planned facilities following behind them are certain to proceed smoothly. Fueling, power sales and other issues - most notably the limited pool of corporate and project financing
funds available in the Indian lending market – represent substantial obstacles to the pipeline of projects. Nor will the current tranche of projects necessarily be trouble free once implemented. This, if anything, was the key message from India’s first dalliance with private power in the 1990s. That said, India’s power developers and financiers have learnt from the previous, generally bitter experience. Hence the interest in captive plants such as Butibori and similar projects based on sales to creditworthy customers – these have more robust prospects than those developed on the basis of sales to the local, and usually cashstrapped, state power utility. So too the interest in winning large scale projects, such as the ultra mega schemes, which attempt to mitigate commercial risks by signing up a large and regionally diverse number of offtakers.
The ultra-mega and other high profile national projects may also benefit from the government’s desire that they should succeed, although government support through sovereign guarantees, comfort letters and the like proved to offer less than resilient safeguards in the 1990s. The shift from a political to economic basis for private power investment is in fact the key factor which differentiates the current IPP program from that of the 1990s, and may indicate a much happier outcome.

Most of today’s Indian power investors and lenders seem to have learned the lesson that the best defense against owning a failed project is to build plants with robust technical and economic fundamentals that ensure low cost power - rather than constructing elaborate ring fences of rigid project agreements to defend high-priced power that may be legally binding but are likely to be ultimately unsuccessful.

Source: Plalts Power in Asia report, August 2009

 

 

 




 

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