'Amendments to Mega Power Policy '09 gives breather to banks'

The extension by five years for complying with the Mega Power Policy 2009 norms will reduce contingent liabilities and free up banking limits to 25 mega power projects, thus granting them a fresh lease of life, says a report.
According to a report by India Ratings and Research (Ind-Ra), this move will also in turn free up banks' potential exposure to the power sector by around 3.50 per cent or Rs 4,000 crore, providing them additional headroom to lend to the power sector.
"This is applicable to 25 mega power projects of around 32,330 MW of coal and gas based power plants which have provisional certificates, but are awaiting the final mega power status," it said.

Ind-Ra said these projects would have needed additional debt or the sponsors may have had to inject additional equity to settle the bank guarantee obligations, which would have devolved in the absence of an extension in timeline as per Mega Power Policy.
"While the extension is likely to provide some comfort in terms of lower finance costs, the lack of long term Power Purchase Agreements (PPA) may prohibit these plants from availing the full benefits under the policy," it said.
The Cabinet Committee on Economic Affairs has extended the timeline available for furnishing the final mega certificates (from the date of receiving provisional mega certificates) to 120 months from the earlier 60 months from the date of import to avail all the benefits under the policy.

Also, tax concession under the amended policy will be in the proportion of the long term PPA tied up, instead of requiring 85 per cent or more long-term tie up.

The proceeds out of the release of bank guarantees, submitted by the generators till the final mega status is received, have to necessarily be utilised towards reduction in project debt by the developer.
It pointed out that most states have become averse to buying power on a long-term basis, since short-term tariffs are more economical.
Ind-Ra expects long-term PPAs to be scarce, given the weak industry demand.
"Extension of the timeline to tie-up long term PPAs in the current challenging market is a breather for all the power plants which have a provisional mega power status but are awaiting the final conformation," Ind-Ra said.

It, however, noted that clarity is still awaited in operationalising the policy, including aspects of reimbursements for taxes paid, treatment of PPAs signed with home states for selling 35 per cent of the power, which are not operationalised, among other details.