The Indian government's 1990s strategy of bringing in global sponsors to build IPPs was not particularly successful. But its new power programme has much more of a domestic flavour- even though bidding is open to foreign players.
The government is keen to attract significant private capital into its power sector, which is facing a huge demand-supply gap. Badly affected states such as Maharashtra have 19% energy shortages, and this can rise to 27% peak power shortage levels.

This power shortage is holding back industrial growth and corresponding economic development, and the World Bank has estimated that if India is to sustain current GDP growth levels in the 8% to 9% per annum range, it will need to add 160,000MW of generating capacity over the next 10 years.

The basic template will be domestic sponsors raising cash on the stock market, and using this source of funding as the project equity component for competitive bids on a tariff basis. Non-recourse debt packages will then be put in place, comprising development bank funding, plus Export Credit Agency support where available. The balance will be made up of Rupee (Rp) denominated domestic bank loans from Indian institutions, IFC B loans, plus perhaps some small uncovered international debt tranches.

IPP development

"State owned generating companies have historically financed on balance sheet, and have also attracted funding from entities such as the IFC and ADB, but we are now moving into an environment where debt will be non-recourse to privately owned power companies," comments a banker with a European bank in Mumbai.

"Foreign banks may find opportunities in doing the structuring, particularly on the cross-border side where we can add value, but most of the debt is going to be provided by domestic banks, and there could be a shortage of finance given the vast amount of new power plants that are planned," he adds.

"There is capacity being added by state level entities and central public sector entities, and those financings will be done on balance sheet, but there is a second category of power projects being done by private sector companies, and these will typically be done on a project finance basis," says Anjan Ghosh, general manager at rating agency ICRA in Mumbai, which is 28.5% owned by Moody's Investors Service.

"For example the proceeds of the Reliance Power IPO will be used to fund their equity commitments in several SPVs that have been set up for power projects, and they will not be providing any guarantees on the debt side, but will be looking for project debt," says Ghosh.

"There will be a combination of domestic and cross border debt, but on the cross border side much of the lending is likely to be done under the umbrella of the IFC," says Chetan Modi, representative director at Moody's in India. "We have yet to see how much appetite there will be for uncovered bank debt."

"We are in a difficult lending environment globally, with banks cautious on their deployment of capital, but IFC is being fairly aggressive with regard to its overall India exposure, and has targeted power generation as a core sector," says Modi. "The amount of money needed is very significant, and the tenors required are quite long at up to 20 years. Though there is some long tenor financing being provided by Indian banks, the volume available is likely to be quite limited."

Ultra Mega projects

The government has placed a lot of importance upon developing very large power plants, looking for economies of scale to allow private sponsors to enter tariff-based competitive bids and provide cheap electricity to mostly state-owned offtakers. The Ministry of Power and Power Finance Corporation have been working to move these projects forward as quickly as possible.

One important part of the strategy is that state-owned Power Finance Corporation initially sets up shell companies to do the preliminary studies, and get all the necessary land permits, regulatory and environmental clearances. Thus the bidders are entering into projects that look set to move forward quickly, with many of the time consuming and potentially fatally delaying factors already well advanced by the time they put in competitive bids on a tariff basis.
These mega projects are being awarded on a build own operate (BOO) basis. By adding 20,000MW at five locations over a period of 5 to 7 years the government is making a serious dent in its overall targets for new generating capacity.

Each project involves five units of 800MW each, and these are either pit head projects using domestic coal, or coastal projects which will use imported coal. The state electricity boards of the states of Maharashtra, Rajasthan, Tamil Nadu, Kerala and Karnataka have already agreed to off-take all the power generated, under an agreed payment security mechanism stipulated by the Ministry of Power.

The process has already not been without its share of controversy, and one of the projects – Sasan – has seen the original winner disqualified and replaced after lengthy proceedings.

The original winner for the 4,000MW Sasan mega power project in Madhya Pradesh was a consortium including domestic company Lanco and Singaporean partner Globeleq. The nearest bidders were Reliance Energy and state run National Thermal Power Corp.

But after winning the right to develop the project, Globeleq of Singapore sold its 70% stake to Lanco and Jindal Steel. This change in the make-up of the consortium was viewed as being in violation of the terms of the agreement, and led to a series of high level political meetings to decide its fate.

In August 2007 the bid was overturned, and awarded to Reliance Power. Reliance has been moving forward quickly, and is not far from financial close.

Mundra nears close

But the first mega project to reach financial close, sometime over the next few months, is expected to be the Mundra project sponsored by Tata Power Company, part of the Tata conglomerate. Tata Power is already the largest private power generator in India, with generating capacity of 2,300MW, and also owns a transmission company and distribution assets in Delhi. The company is listed on the stock exchange.

In August 2007 Tata signed an EPC contract with Toshiba Corporation for the supply of five 800MW steam turbine generators. Tata had already signed a deal with Doosan Heavy Industries & Construction of Korea for the supply and installation of boilers.

The project company, Coastal Gujarat Power Limited, has power purchase agreements (PPAs) with seven state owned distribution licensees for all the output. Since Mundra is a port city this is one of the so called coastal projects using imported coal (mainly from Indonesia) as opposed to the pit head projects using domestic coal.

The power will be sold via long term 25 year take-or-pay PPAs, sold at a levelised tariff of Rp2.26 per kWh, which is competitive compared to the current prices of bulk power typical in India.

The total project cost is estimated at the equivalent of $4.14 billion, and IFC is expected to come in with an A Loan of up to $450 million. IFC is also willing to take equity stakes in Indian projects, and in the case of Mundra this could amount to $50 million. In addition a B Loan syndication of around $300 million is also likely.

Outside of the mega projects, Tata recently completed the financing package for the 1,050MW Maithon Right Bank Thermal Project. Maithon Power Limited is a joint venture with Damodar Valley Corporation (DVC), which is a state owned entity promoting rural electrification, as well as being involved in irrigation, flood control and other activities.

The greenfield coal fired Maithon project is being funded with 30% equity and 70% debt, and domestic lenders are given comfort by the role of the DVC. The debt financing featured State Bank of India Capital Markets as sole financial adviser and arranger, and State Bank of India itself took the largest exposure.

A total of 17 banks, including Canara Bank, Dena Bank, Indian Overseas Bank, Oriental Bank of Commerce, and Punjab & Sind Bank, were involved in the syndication, which was oversubscribed.

In yet another area of activity, Tata Power Company has a joint venture with Tata Steel which is setting up captive power plants supplying power and steam needed for blast furnaces and other power requirements.

Some state owned companies are also installing their own captive power plants. Last September Neyveli Lignite Corp announced that it plans to expand its power generation capacity significantly from only 2,490MW at present to 11,900MW.

Reliance Power

The other private sector company set to be one of the biggest players in the power market is Reliance Power, which in January completed the biggest ever Indian IPO, raising $2.75 billion.

Company chairman Anil Ambabi said at the time that the proceeds will be used to set up subsidiaries, not only limited to coal and gas but also in the wind power and nuclear power sectors.

The company has 13 projects under development, totalling 28,000MW, which constitutes one of the largest portfolios of power generation assets under development anywhere in the world. The total investment cost will be around $28 billion.

The 13 projects are diversified by geographic location, offtakers, fuel type, and source of fuel. They include seven coal fired plants, two gas fired, and four hydro-electric plants in six states.

As part of its expansion plans Reliance is looking at acquiring mines in Indonesia and Australia for the supply of coal to the Krishnapatnam project.

Having won the Sasan mega project last summer after Lanco was disqualified, Reliance soon followed this up in November by winning the bidding process for Krishnapatnam, which is another 4,000MW project, this time located in Andhra Pradesh. Reliance won out by quoting a tariff of Rp2.33 per kWh.

And it is still in the running for other mega projects. The Ministry of Power has said that it will not prevent one bidder from developing more than two projects, but will instead look to stringent performance guarantees in order to minimise the possibility of developers defaulting and projects getting stuck.

The main focus is on coal, which dominates power generation in India, though there are also seventeen nuclear reactors producing around 3.1% of total installed load base. There is also around 14,000MW of gas fired capacity, and 34,000MW of hydro capacity, and hydro is currently another major area of focus for the government.

Central public sector entities include National Hydroelectric Power Corporation (NHPC) and National Thermal Power Corporation (NTPC) which operate various plants that sell to State Electricity Boards (SEBs).

With regard to the possible participation of foreign sponsors, the long running 1990s saga of the Enron Dhabol project still casts a shadow over the market. "The market still feels the Enron effect and a lot of deals never happened after multinationals left," says a banker. But he notes that the era of large global sponsors aggressively bidding on plants has gone for the time being, while cheap international bank debt is also off the table for the moment, at least for a country such as India.

Thus the new model of having strong, well capitalised domestic players such as Reliance and Tata sponsoring deals, with some ECA support from turbine manufacturers and IFC tranches, with the rest provided by Indian banks, looks like a suitable mode.

Completion risk still needs to be fully assessed in this new environment. As one consultant based in Mumbai notes, "some of the projects have moved forward quite quickly towards financial close, but sponsors now need to demonstrate that they can complete projects on time."