New formula for power projects

These estimates would be crucial to ascertain whether any of the beneficiary states have the “spare” financial resources that can be set aside specifically for these ultra mega power projects—failing which the projects, which have a capacity of 4000 mw each, will not take off.

In effect, this payment-security mechanism would be crucial to ensure the viability of the projects. It is these “spare” revenues set aside in escrow accounts and can be tapped by the promoters in case there are delays in getting payments from the state utility.

More than the promoters, this facility is crucial for the lenders to the project as 70 per cent of the money invested in a power venture comes from banks and financial institutions. The spare revenues kept aside for the project would assure lenders that their debt service obligations would be met.

An estimate on the spare revenues that can be set aside in a separate bank account determines the amount of power capacity that can be supported through this facility (or escrow capacity).

Explaining the rationale for adopting this new approach, a senior power ministry official said that the earlier assessments were open to debate as the escrow capacity changed significantly if any of the variables were changed.

The underlying principal adopted for estimating this escrow capacity in the late 1990s was based on an assessment of economic growth in a particular state which then was translated into the growth in the revenue flows from consumers. Added to this, the calculations were also made on the assumption that there would improvements in bill collections.

However, under the new approach, which according to officials is a more complicated exercise, rating agencies would make an assessment of how many consumers (or demand) would mushroom when these projects come on line and sell power.

They also explained that as tariff from these projects would be very competitive, an assessment would also be made on how many consumers would be willing to break away from captive power sources. That way, they would not be repeating the mistakes made in arriving at the escrow capacities.

Provision of escrow cover is one of the crucial instruments being offered to the developers of the ultra mega power projects. Estimates show that assuming the project sells power at Rs 2/unit, the monthly payments towards a single ultra mega power project would be around Rs 180 crore. For four such projects, the beneficiary states would have to have set aside around Rs 700 crore each month.

Estimating “spare” revenues that can be set aside in escrow accounts gained in importance after the Centre put a cap on the counter-guarantees that can be given to IPPs.

However, as IPPs have to deal with cash-strapped state utilities that have their own existing obligations, such as payment of salaries, funds for running their power stations etc, there were serious limitations on the amount of cash they themselves can set aside. It is for this reason no large IPP has ever taken off till date.